Rule 497(b)
Registration No. 33-42466
<PAGE>
Prospectus Part A Dated October 28, 1999
MUNICIPAL SECURITIES TRUST
SERIES 53
- --------------------------------------------------------------------------------
The Trust is a unit investment trust designated Series 53
("Municipal Trust") with an underlying portfolio of long-term tax-exempt bonds
issued by or on behalf of states, municipalities and public authorities, and was
formed to preserve capital and to provide interest income (including, where
applicable, earned original issue discount) which, in the opinions of bond
counsel to the respective issuers, is, with certain exceptions, currently exempt
from regular Federal income tax (including where applicable earned original
discount) under existing law but may be subject to state and local taxes. There
can be no assurance that the Trust's objectives will be achieved. Although the
Supreme Court has determined that Congress has the authority to subject interest
on bonds such as the Bonds in the Trust to regular federal income taxation,
existing law excludes such interest from regular federal income tax. Such
interest income may, however, be subject to the federal corporate alternative
minimum tax and to state and local taxes. (See "Description of Portfolio" in
this Part A for a description of those Bonds which pay interest income subject
to the federal individual alternative minimum tax.) In addition, capital gains
are subject to tax. (See "Tax Status" and "The Trust--Portfolio" in Part B of
this Prospectus.) The Sponsors are Reich & Tang Distributors, Inc. and Gruntal &
Co., L.L.C. (sometimes referred to as the "Sponsor" or the "Sponsors"). The
value of the Units of the Trust will fluctuate with the value of the underlying
bonds. Minimum purchase: 1 Unit.
This Prospectus consists of two parts. Part A contains the Summary
of Essential Information as of June 30, 1999 (the "Evaluation Date"), a summary
of certain specific information regarding the Trust and audited financial
statements of the Trust, including the related portfolio, as of the Evaluation
Date. Part B of this Prospectus contains a general summary of the Trust. Part A
of this Prospectus may not be distributed unless accompanied by Part B.
Investors should retain both parts of this Prospectus for future reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
THE TRUST. The Trust seeks to achieve its investment objectives
through investment in a fixed, diversified portfolio of long-term bonds (the
"Bonds") issued by or on behalf of states, municipalities and public
authorities. All of the Bonds in the Trust were rated "A" or better by Standard
& Poor's Corporation or Moody's Investors Service, Inc. at the time originally
deposited in the Trust. For a discussion of the significance of such ratings see
"Description of Bond Ratings" in Part B of this Prospectus and for a list of
ratings on the Evaluation Date see the "Portfolio".
Some of the Bonds in the Portfolio may be "Zero Coupon Bonds", which
are original issue discount bonds that provide for payment at maturity at par
value, but do not provide for the payment of any current interest. Some of the
Bonds in the portfolio may have been purchased at an aggregate premium over par.
Some of the Bonds in the Trust have been issued
143633.1
<PAGE>
with optional refunding or refinancing provisions ("Refunded Bonds") whereby the
issuer of the Bond has the right to call such Bond prior to its stated maturity
date (and other than pursuant to sinking fund provisions) and to issue new bonds
("Refunding Bonds") in order to finance the redemption. Issuers typically
utilize refunding calls in order to take advantage of lower interest rates in
the marketplace. Some of these Refunded Bonds may be called for redemption
pursuant to pre-refunding provisions ("Pre-Refunded Bonds") whereby the proceeds
from the issue of the Refunding Bonds are typically invested in government
securities in escrow for the benefit of the holders of the Pre-Refunded Bonds
until the refunding call date. Usually, Pre-Refunded Bonds will bear a triple-A
rating because of this escrow. The issuers of Pre-Refunded Bonds must call such
Bonds on their refunding call date. Therefore, as of such date, the Trust will
receive the call price for such bonds but will cease receiving interest income
with respect to them. For a list of those Bonds which are Pre-Refunded Bonds, if
any, as of the Evaluation Date, see "Notes to Financial Statements" in this Part
A. The payment of interest and preservation of capital are, of course, dependent
upon the continuing ability of the issuers of the Bonds to meet their
obligations.
Investment in the Trust should be made with an understanding of the
risks which an investment in long-term fixed rate obligations may entail,
including the risk that the value of the underlying portfolio will decline with
increases in interest rates, and that the value of Zero Coupon Bonds is subject
to greater fluctuations than coupon bonds in response to changes in interest
rates. A Trust designated as a long-term trust must have a dollar-weighted
average portfolio maturity of more than ten years.
Each Unit in the Trust represents a 1/3481st undivided interest in
the principal and net income of the Trust. The principal amount of Bonds
deposited in the Trust per Unit is reflected in the Summary of Essential
Information. (See "The Trust--Organization" in Part B of this Prospectus.) The
Units being offered hereby are issued and outstanding Units which have been
purchased by the Sponsors in the secondary market.
PUBLIC OFFERING PRICE. The secondary market Public Offering Price of
each Unit is equal to the aggregate bid price of the Bonds in the Trust divided
by the number of Units outstanding, plus a sales charge of 4.5% of the Public
Offering Price, which is the same as 4.712% of the net amount invested in Bonds
per Unit. The sales charge for secondary market purchases is based upon the
number of years remaining to maturity of each bond in the Trust's portfolio.
(See "Public Offering" in Part B of this Prospectus.) In addition, accrued
interest to expected date of settlement is added to the Public Offering Price.
If Units had been purchased on the Evaluation Date, the Public Offering Price
per Unit would have been $950.46 plus accrued interest of $9.60 under the
monthly distribution plan, $14.07 under the semi-annual distribution plan and
$41.23 under the annual distribution plan, for a total of $960.06, $964.53 and
$991.69, respectively. The Public Offering Price per Unit can vary on a daily
basis in accordance with fluctuations in the aggregate bid price of the Bonds.
(See the "Summary of Essential Information" and "Public Offering--Offering
Price" in Part B of this Prospectus.)
ESTIMATED LONG TERM RETURN AND ESTIMATED CURRENT RETURN. Units of
each Trust are offered to investors on a "dollar price" basis (using the
computation method described under "Public Offering--Offering Price" in Part B)
as distinguished from a "yield price" basis often used in offerings of tax
exempt bonds (involving the lesser of the yield as computed to maturity of bonds
or to an earlier redemption date). Since they are offered on a dollar price
basis, the rate of return on an investment in Units of each Trust is
A-2
143633.1
<PAGE>
measured in terms of "Estimated Current Return" and "Estimated Long Term
Return".
Estimated Long Term Return is calculated by: (1) computing the yield
to maturity or to an earlier call date (whichever results in a lower yield) for
each Bond in the Trust's portfolio in accordance with accepted bond practices,
which practices take into account not only the interest payable on the Bond but
also the amortization of premiums or accretion of discounts, if any; (2)
calculating the average of the yields for the Bonds in the Trust's portfolio by
weighing each Bond's yield by the market value of the Bond and by the amount of
time remaining to the date to which the Bond is priced (thus creating an average
yield for the portfolio of the Trust); and (3) reducing the average yield for
the portfolio of the Trust in order to reflect estimated fees and expenses of
the Trust and the maximum sales charge paid by investors. The resulting
Estimated Long Term Return represents a measure of the return to investors
earned over the estimated life of the Trust. (For the Estimated Long Term Return
to Certificateholders under the monthly, semi-annual and annual distribution
plans, see "Summary of Essential Information".)
Estimated Current Return is a measure of the Trust's cash flow.
Estimated Current Return is computed by dividing the Estimated Net Annual
Interest Income per Unit by the Public Offering Price per Unit. In contrast to
the Estimated Long Term Return, the Estimated Current Return does not take into
account the amortization of premium or accretion of discount, if any, on the
Bonds in the portfolio of the Trust. Moreover, because interest rates on Bonds
purchased at a premium are generally higher than current interest rates on newly
issued bonds of a similar type with comparable rating, the Estimated Current
Return per Unit may be affected adversely if such Bonds are redeemed prior to
their maturity.
The Estimated Net Annual Interest Income per Unit of the Trust will
vary with changes in the fees and expenses of the Trustee and the Evaluator
applicable to the Trust and with the redemption, maturity, sale or other
disposition of the Bonds in the Trust. The Public Offering Price will vary with
changes in the bid prices of the Bonds. Therefore, there is no assurance that
the present Estimated Current Return or Estimated Long Term Return will be
realized in the future. (For the Estimated Current Return to Certificateholders
under the monthly, semi-annual and annual distribution plans, see "Summary of
Essential Information". See "Estimated Long Term Return and Estimated Current
Return" in Part B of this Prospectus.)
A schedule of cash flow projections is available from the Sponsors
upon request.
DISTRIBUTIONS. Distributions of interest income, less expenses, will
be made by the Trust either monthly, semi-annually or annually depending upon
the plan of distribution applicable to the Unit purchased. A purchaser of a Unit
in the secondary market will initially receive distributions in accordance with
the plan selected by the prior owner of such Unit and may thereafter change the
plan as provided in "Interest and Principal Distributions" in Part B of this
Prospectus. Distributions of principal, if any, will be made semi-annually on
June 15 and December 15 of each year. (See "Rights of
Certificateholders--Interest and Principal Distributions" in Part B of this
Prospectus. For estimated monthly, semi-annual and annual interest
distributions, see "Summary of Essential Information".)
A-3
143633.1
<PAGE>
MARKET FOR UNITS. The Sponsors, although not obligated to do so,
intend to maintain a market for the Units at prices based upon the aggregate bid
price of the Bonds in the portfolio of the Trust. The Secondary Market
repurchase price is based on the aggregate bid price of the Bonds in the Trust
portfolio, and the reoffer price is based on the aggregate bid price of the
Bonds plus a sales charge of 4.5% of the Public Offering Price (4.712% of the
net amount invested) plus net accrued interest. If such a market is not
maintained, a Certificateholder will be able to redeem his or her Units with the
Trustee at a price also based upon the aggregate bid price of the Bonds. (See
"Sponsor Repurchase" and "Public Offering--Offering Price" in Part B of this
Prospectus.)
A-4
143633.1
<PAGE>
MUNICIPAL SECURITIES TRUST
SERIES 53
SUMMARY OF ESSENTIAL INFORMATION AS OF JUNE 30, 1999
<TABLE>
<S> <C>
Date of Deposit*: November 19, 1992 Weighted Average Life to Maturity:
Principal Amount of Bonds.... $3,150,000 17.0 Years.
Number of Units ............. 3,481 Minimum Value of Trust:
Fractional Undivided Inter- Trust may be terminated if value
est in Trust per Unit ...... 1/3481 of Trust is less than $1,600,000
Principal Amount of in principal amount of Bonds.
Bonds per Unit ............. $904.91 Mandatory Termination Date:
Secondary Market Public The earlier of December 31, 2041
Offering Price** or the disposition of the last
Aggregate Bid Price Bond in the Trust.
of Bonds in Trust ......... $3,159,970+++ Trustee***: The Chase Manhattan
Divided by 3,481 Units ..... $907.78 Bank.
Plus Sales Charge of 4.5% Trustee's Annual Fee: Monthly
of Public Offering Price... $42.68 plan $1.10 per $1,000; semi-annual
Public Offering Price plan $.63 per $1,000; and annual
per Unit .................. $950.46+ plan is $.36 per $1,000.
Redemption and Sponsors' Evaluator: Kenny S&P Evaluation
Repurchase Price Services.
per Unit ................... $907.78+ Evaluator's Fee for Each
+++ Evaluation: Minimum of $8 plus
+++ $.25 per each issue of Bonds in
excess of 50 issues (treating
Excess of Secondary Market separate maturities as separate
Public Offering Price issues).
over Redemption and Sponsors: Reich & Tang
Sponsor's Repurchase Distributors, Inc. and Gruntal &
Price per Unit ............. $42.68++++ Co., L.L.C.
Difference between Public Sponsors' Annual Fee: Maximum of
Offering Price per Unit $.25 per $1,000 principal amount
and Principal Amount per of Bonds (see "Trust Expenses and
Unit Premium/(Discount) .... $45.55 Charges" in Part B of this
Evaluation Time: 4:00 p.m. Prospectus).
New York Time.
Minimum Principal Distribution:
$1.00 per Unit.
</TABLE>
PER UNIT INFORMATION BASED UPON INTEREST DISTRIBUTION PLAN ELECTED
Monthly Semi-Annual Annual
Option Option Option
------ ------ ------
Gross annual interest income# ......... $54.79 $54.79 $54.79
Less estimated annual fees and
expenses ............................ 2.15 1.68 1.58
Estimated net annual interest ------ ------ ------
income (cash)# ...................... $52.64 $53.11 $53.21
Estimated interest distribution# ...... 4.39 26.56 53.21
Estimated daily interest accrual# ..... .1462 .1475 .1478
Estimated current return#++ ........... 5.54% 5.59% 5.60%
Estimated long term return++ .......... 3.39% 3.44% 3.45%
Record dates .......................... 1st of Dec. 1 and Dec. 1
each month June 1
Interest distribution dates ........... 15th of Dec. 15 and Dec. 15
each month June 15
A-5
143633.1
<PAGE>
Footnotes to Summary of Essential Information
* The Date of Deposit is the date on which the Trust Agreement was signed
and the deposit of the Bonds with the Trustee made.
** The proceeds from securities distributable as of June 30, 1999 may be
reported in the Summary of Essential Information as if they had been
distributed as of year-end.
*** The Trustee maintains its principal executive office at 270 Park Avenue,
New York, New York 10017 and its unit investment trust office at 4 New
York Plaza, New York, New York 10004 (tel. no.: 1-800-882-9898). For
information regarding redemption by the Trustee, see "Trustee Redemption"
in Part B of this Prospectus.
+ Plus accrued interest to expected date of settlement (approximately three
business days after purchase) of $9.60 monthly, $14.07 semi-annually and
$41.23 annually.
++ The estimated current return and estimated long term return are increased
for transactions entitled to a discount (see "Employee Discounts" in Part
B of this Prospectus), and are higher under the semi-annual and annual
options due to lower Trustee's fees and expenses.
+++ Based solely upon the bid side evaluation of the underlying Bonds
(including, where applicable, undistributed cash in the principal
account). Upon tender for redemption, the price to be paid will be
calculated as described under "Trustee Redemption" in Part B of this
Prospectus.
++++ See "Comparison of Public Offering Price, Sponsors' Repurchase Price and
Redemption Price" in Part B of this Prospectus.
# Does not include income accrual from original issue discount bonds, if
any.
FINANCIAL AND STATISTICAL INFORMATION
Selected data for each Unit outstanding for the periods listed below:
Distribu-
Distributions of Interest tions of
During the Period (per Unit) Principal
---------------------------- During
Net Asset* Semi- the
Units Out- Value Monthly Annual Annual Period
Period Ended standing Per Unit Option Option Option (Per Unit)
- ------------ -------- -------- ------ ------ ------ ----------
June 30, 1997 $3,722 $939.27 $55.01 $55.51 $54.75 $ 2.07
June 30, 1998 3,595 951.42 55.57 55.11 54.67 7.18
June 30, 1999 3,481 921.64 53.85 54.11 54.38 15.08
- -----------------------
* Net Asset Value per Unit is calculated by dividing net assets as disclosed
in the "Statement of Net Assets" by the number of Units outstanding as of
the date of the Statement of Net Assets. See Note 5 of Notes to Financial
Statements for a description of the components of Net Assets.
A-6
143633.1
<PAGE>
INFORMATION REGARDING THE TRUST
AS OF JUNE 30, 1999
DESCRIPTION OF PORTFOLIO*
The portfolio of the Trust consists of 8 issues representing
obligations of issuers located in 6 states. The Sponsors have not participated
as a sole underwriter or manager, co-manager or member of an underwriting
syndicate from which any of the initial aggregate principal amount of the Bonds
were acquired. Approximately 14.6% of the Bonds are obligations of state and
local housing authorities; approximately 31.7% are hospital revenue bonds; none
are issued in connection with the financing of nuclear generating facilities;
and approximately 9.5% are "mortgage subsidy" bonds. All of the Bonds in the
Trust are subject to redemption prior to their stated maturity dates pursuant to
sinking fund or optional call provisions. The Bonds may also be subject to other
calls, which may be permitted or required by events which cannot be predicted
(such as destruction, condemnation, termination of a contract, or receipt of
excess or unanticipated revenues). None of the Bonds are general obligation
bonds. Eight issues representing $3,150,000 of the principal amount of the Bonds
are payable from the income of a specific project or authority and are not
supported by the issuer's power to levy taxes. The portfolio is divided for
purpose of issue as follows: Hospital 2, Multi-Family Housing 1, Nursing Home 1,
Pollution Facility 1, Single Family Mortgage Revenue 1, Toll Road 1 and
Transportation 1. For an explanation of the significance of these factors see
"The Trust--Portfolio" in Part B of this Prospectus.
As of June 30, 1999, $220,000 (approximately 7.0% of the aggregate
principal amount of the Bonds) were original issue discount bonds. Of these
original issue discount bonds, $220,000 (approximately 7.0% of the aggregate
principal amount of the Bonds) are Zero Coupon Bonds. Zero Coupon Bonds do not
provide for the payment of any current interest and provide for payment at
maturity at par value unless sooner sold or redeemed. The market value of Zero
Coupon Bonds is subject to greater fluctuations than coupon bonds in response to
changes in interest rates. Approximately 68.9% of the aggregate principal amount
of the Bonds in the Trust were purchased at a "market" discount from par value
at maturity, approximately 9.5% were purchased at a premium and approximately
14.6% were purchased at par. For an explanation of the significance of these
factors see "Discount and Zero Coupon Bonds" in Part B of this Prospectus.
None of the Bonds in the Trust are subject to the federal
individual alternative minimum tax under the Tax Reform Act of 1986. See "Tax
Status" in Part B of this Prospectus.
- ----------------------
* Changes in the Trust Portfolio: From July 1, 1999 to September 15,
1999, $40,000 of the principal amount of the Bond in portfolio no. 5 was
called and $55,000 of the principal amount of the Bond in portfolio no.
4a was sold and are no longer contained in the Trust. 141 Units
were redeemed from the Trust.
A-7
143633.1
<PAGE>
Report of Independent Accountants
To the Sponsor, Trustee and Certificateholders of
Municipal Securities Trust, Series 53
In our opinion, the accompanying statement of net assets, including the
portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Municipal Securities Trust, Series
53 (the "Trust") at June 30, 1999, the results of its operations and the changes
in its net assets for each of the three years in the period then ended and the
financial highlights for each of the four years in the period then ended, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Trust's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at June
30, 1999 by correspondence with the Trustee, provide a reasonable basis for the
opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
Boston, MA
September 15, 1999
<PAGE>
<TABLE>
<CAPTION>
Municipal Securities Trust, Series 53
Portfolio
June 30, 1999
- -------------------------------------------------------------------------------------------------------
Redemption
Aggregate Coupon Feature(2)(4)
Portfolio Principal Name of Issuer and Ratings Rate/ S.F. -Sinking Fund Market
No. Amount Title of Bonds (1) Date(s) of Ref. - Refunding Value (3)
Maturity (2)
<S> <C> <C> <C> <C> <C> <C> <C>
1 $500,000 Il. Hlth. Facs. A2* 6.800% 1/01/16 @ 100 S.F. $536,865
Auth. Rev. Bonds 1/01/2022 1/01/02 @ 102 Ref.
(Alexian Bros. Med.
Center Inc. Prjt.)
Series 1992 A
2 370,000 Il. State Toll Hwy. A+ 6.375 1/01/13 @ 100 S.F. 399,837
Auth. Toll. Hwy. 1/01/2015 1/01/03 @ 102 Ref.
Priority Rev. Bonds
1992 Series A
3 460,000 Village of Aa* 6.700 5/01/07 @ 100 S.F. 480,033
Streamwood Il. 11/01/2028 1/01/01 @ 103 Ref.
Multi-Fam. Hsg.
Rev. Bonds (FHA
Insrd. Mtg.
Loan-Southgate
Manors Prjt.)
Series 1992
4a 125,000 In. Trans. Finc. Aaa* 6.250 11/01/12 @ 100 S.F. 134,864
Auth. Arpt. Facs. 11/01/2016 11/01/02 @ 102 Ref.
Lease Rev. Bonds
1992 Series A
4b 215,000 In. Trans. Finc. A1* 6.250 11/01/12 @ 100 S.F. 228,023
Auth. Arpt. Facs. 11/01/2016 11/01/02 @ 102 Ref.
Lease Rev. Bonds
Series A
5 300,000 N.M. Mtg. Finc. AA 6.900 1/01/13 @ 100 S.F. 314,706
Auth. Hosp. Sngle. 7/01/2024 7/01/02 @ 102 Ref.
Fam. Mtg. Purch.
Rfndg. Sr. Bonds
1992 Series A
6 460,000 Richland Cnty. S.C. A1* 6.550 No Sinking Fund 491,036
Poll. Cntrl. Rev. 11/01/2020 11/01/02 @ 102 Ref.
Rfndg. Bonds (Union
Camp Corp. Prjt.)
Series 1992C
7 500,000 Wisc. Hlth. & Ed. A2* 6.600 8/15/12 @ 100 S.F. 525,470
Facs. Auth. (Mercy 8/15/2022 8/15/02 @ 102 Ref.
Hosp. of
Janesville) Rev.
Bonds
8 220,000 Savannah Ga. Econ. Aaa* 0.000 No Sinking Fund 51,086
Dev. Auth. Rev. 12/01/2021 None
Bonds (Southern
Care Corp. Fac.)
Series 1991C
------------
------------
$3,150,000 Total Investments (Cost (3) $2,950,847) $3,161,920
============ ============
See accompanying footnotes to portfolio and notes to financial statements.
</TABLE>
<PAGE>
Municipal Securities Trust, Series 53
Footnotes to Portfolio
- --------------------------------------------------------------------------------
(1) All ratings are by Kenny S&P Evaluation Services, a business unit of
J.J. Kenny Company, Inc., a subsidiary of The McGraw-Hill Companies,
Inc., except for those identified by an asterisk (*) which are by
Moody's Investors Service, Inc. A brief description of the ratings
symbols and their meanings is set forth under "Description of Bond
Ratings" in Part B of the Prospectus.
(2) See "The Trust -- Portfolio" in Part B of the Prospectus for an
explanation of redemption features. See "Tax Status" in Part B of the
Prospectus for a statement of the Federal tax consequences to a
Certificateholder upon the sale, redemption or maturity of a bond.
(3) At June 30, 1999, the net unrealized appreciation of all bonds was
comprised of the following:
Gross unrealized appreciation $211,073
Gross unrealized depreciation --
-----------------
Net unrealized appreciation $211,073
=================
(4) The Bonds may also be subject to other calls, which may be permitted or
required by events which cannot be predicted (such as destruction,
condemnation, termination of a contract, or receipt of excess or
unanticipated revenues).
The accompanying notes form an integral part of the financial statements.
<PAGE>
Municipal Securities Trust, Series 53
Statement of Net Assets
June 30, 1999
- --------------------------------------------------------------------------------
Investments in Securities,
at Market Value (Cost $2,950,847) $ 3,161,920
--------------
Other Assets
Accrued Interest 64,772
--------------
Total Other Assets 64,772
--------------
Liabilities
Advance from Trustee 18,446
--------------
Total Liabilities 18,446
--------------
Excess of Other Assets over Total Liabilities 46,326
--------------
Net Assets (3,481 Units of Fractional Undivided
Interest Outstanding, $921.64 per Unit) $ 3,208,246
==============
The accompanying notes form an integral part of the financial statements.
<PAGE>
<TABLE>
<CAPTION>
Municipal Securities Trust, Series 53
Statement of Operations
- -----------------------------------------------------------------------------------------------
For the Years Ended June 30,
1999 1998 1997
<S> <C> <C> <C>
Investment Income
Interest $ 200,889 $ 211,282 $ 224,174
----------- ----------- ----------
Expenses
Trustee's Fees 5,409 5,795 5,612
Evaluator's Fee 2,249 2,369 2,182
Sponsor's Advisory Fee 848 892 901
----------- ----------- ----------
Total Expenses 8,506 9,056 8,695
----------- ----------- ----------
Net Investment Income 192,383 202,226 215,479
----------- ----------- ----------
Realized and Unrealized Gain (Loss)
Realized Gain on
Investments 5,564 15,238 9,014
Unrealized Appreciation
(Depreciation) on Investments (57,953) 54,689 80,360
----------- ----------- ----------
Net Gain (Loss) on Investments (52,389) 69,927 89,374
----------- ----------- ----------
Net Increase
in Net Assets
Resulting From Operations $ 139,994 $ 272,153 $ 304,853
=========== =========== ==========
The accompanying notes form an integral part of the financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Municipal Securities Trust, Series 53
Statement of Changes in Net Assets
- -----------------------------------------------------------------------------------------------
For the Years Ended June 30,
1999 1998 1997
Operations
<S> <C> <C> <C>
Net Investment Income $ 192,383 $ 202,226 $ 215,479
Realized Gain
on Investments 5,564 15,238 9,014
Unrealized Appreciation
(Depreciation) on Investments (57,953) 54,689 80,360
------------ ------------ ------------
Net Increase in
Net Assets Resulting
From Operations 139,994 272,153 304,853
------------ ------------ ------------
Distributions to Certificateholders
Investment Income 190,695 200,566 213,736
Principal 52,813 26,191 7,705
Redemptions
Interest 1,375 1,688 2,283
Principal 107,205 119,343 175,178
------------ ------------ ------------
Total Distributions
and Redemptions 352,088 347,788 398,902
------------ ------------ ------------
Total (Decrease) (212,094) (75,635) (94,049)
Net Assets
Beginning of Year 3,420,340 3,495,975 3,590,024
------------ ------------ ------------
End of Year (Including
Undistributed Net Investment
Income of $63,537, $63,224
and $63,252, Respectively) $ 3,208,246 $ 3,420,340 $ 3,495,975
============ ============ ============
The accompanying notes form an integral part of the financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Municipal Securities Trust, Series 53
Financial Highlights
- -----------------------------------------------------------------------------------------------------
Selected data for a unit of the Trust outstanding: *
For the years ended June 30,
1999 1998 1997 1996
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year** $ 951.42 $ 939.27 $ 917.46 $ 985.71
---------- ---------- ---------- ----------
Interest Income 56.78 57.74 58.72 57.90
Expenses (2.40) (2.47) (2.28) (2.14)
---------- ---------- ---------- ----------
Net Investment Income 54.38 55.27 56.44 55.76
---------- ---------- ---------- ----------
Net Gain or Loss on Investments(1) (14.94) 19.31 23.97 10.13
---------- ---------- ---------- ----------
Total from Investment Operations 39.44 74.58 80.41 65.89
---------- ---------- ---------- ----------
Less Distributions
to Certificateholders
Income 53.90 54.81 55.99 55.24
Principal 14.93 7.16 2.01 78.70
for Redemptions
Interest .39 .46 .60 .20
---------- ---------- ---------- ----------
Total Distributions 69.22 62.43 58.60 134.14
---------- ---------- ---------- ----------
Net Asset Value, End of Year** $ 921.64 $ 951.42 $ 939.27 $ 917.46
========== ========== ========== ==========
(1) Net gain or loss on investments is a result of changes in outstanding units
since July 1, 1998, 1997, 1996 and 1995, respectively, and the dates of net
gain and loss on investments.
- --------------------
* Unless otherwise stated, based upon average units outstanding during the
year of 3,538 ([3,595 + 3,481]/2) for 1999, 3,659 ([3,722 + 3,595]/2) for
1998, 3,818 ([3,913 + 3,722]/2) for 1997 and of 3,936 ([3,958 + 3,913]/2)
for 1996.
** Based upon actual units outstanding
The accompanying notes form an integral part of the financial statements.
</TABLE>
<PAGE>
Municipal Securities Trust, Series 53
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. Organization
Municipal Securities Trust, Series 53, (the "Trust") was organized on
November 19, 1992 by Bear, Stearns & Co. Inc. and Gruntal & Co., LLC
under the laws of the State of New York by a Trust Indenture and
Agreement, and is registered under the Investment Company Act of 1940.
The Trust was formed to preserve capital and to provide interest income.
Effective September 28, 1995, Reich & Tang Distributors, Inc. ("Reich &
Tang") has become the successor sponsor (the "Sponsor") to certain of
the unit investment trusts previously sponsored by Bear, Stearns & Co.
Inc. As successor Sponsor, Reich & Tang has assumed all of the
obligations and rights of Bear, Stearns & Co. Inc., the previous
sponsor.
2. Summary of Significant Accounting Policies
The following is a summary of significant accounting policies
consistently followed by the Trust in preparation of its financial
statements. The policies are in conformity with generally accepted
accounting principles ("GAAP"). The preparation of financial statements
in accordance with GAAP requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the
financial statements. Actual amounts could differ from those estimates.
Interest Income
Interest income is recorded on the accrual basis. The discount on the
zero-coupon bonds is accreted by the interest method over the respective
lives of the bonds. The accretion of such discount is included in
interest income; however, it is not distributed until realized in cash
upon maturity or sale of the respective bonds.
Security Valuation
Investments are carried at market value which is determined by Kenny S&P
Evaluation Services, a business unit of J.J. Kenny Company, Inc., a
subsidiary of The McGraw-Hill Companies, Inc. The market value of the
portfolio is based upon the bid prices for the bonds at the end of the
year, which approximates the fair value of the security at that date,
except that the market value on the date of deposit represents the cost
to the Trust based on the offering prices for investments at that date.
The difference between cost (including accumulated accretion of original
issue discount on zero-coupon bonds) and market value is reflected as
unrealized appreciation (depreciation) of investments. Securities
transactions are recorded on the trade date. Realized gains (losses)
from securities transactions are determined on the basis of average cost
of the securities sold or redeemed.
<PAGE>
Municipal Securities Trust, Series 53
Notes to Financial Statements
- --------------------------------------------------------------------------------
3. Income Taxes
No provision for federal income taxes has been made in the accompanying
financial statements because the Trust intends to continue to qualify
for the tax treatment applicable to Grantor Trusts under the Internal
Revenue Code. Under existing law, if the Trust so qualifies, it will not
be subject to federal income tax on net income and capital gains that
are distributed to unitholders.
4. Trust Administration
The Chase Manhattan Bank (the "Trustee") has custody of assets and
responsibility for the accounting records and financial statements of
the Trust and is responsible for establishing and maintaining a system
of internal control related thereto. The Trustee is also responsible for
all estimates of expenses and accruals reflected in the Trust's
financial statements.
The Trust Indenture and Agreement provides for interest distributions as
often as monthly (depending upon the distribution plan elected by the
Certificateholders).
The Trust Indenture and Agreement further requires that principal
received from the disposition of bonds, other than those bonds sold in
connection with the redemption of units, be distributed to
Certificateholders.
The Trust Indenture and Agreement also requires the Trust to redeem
units tendered. For the years ended June 30, 1999, 1998 and 1997, 114,
127 and 191 units were redeemed, respectively.
The Trust pays an annual fee for trustee services rendered by the
Trustee that ranges from $.36 to $1.10 per $1,000 of outstanding
investment principal. In addition, a minimum fee of $8.00 is paid to a
service bureau for each portfolio valuation. A maximum fee of $.25 per
$1,000 of outstanding investment principal is paid to the Sponsor. For
the years ended June 30, 1999, 1998 and 1997, the "Trustee's Fees" are
comprised of Trustee fees of $3,290, $3,668 and $3,373 and other
expenses of $2,119, $2,127 and $2,239, respectively. The other expenses
include professional, printing and miscellaneous fees.
<PAGE>
Municipal Securities Trust, Series 53
Notes to Financial Statements
- --------------------------------------------------------------------------------
5. Net Assets
At June 30, 1999, the net assets of the Trust represented the interest
of Certificateholders as follows:
Original cost to Certificateholders $ 3,995,388
Less Initial Gross Underwriting Commission 195,774
---------------
3,799,614
Accumulated Cost of Securities Sold,
Matured or Called (865,990)
Net Unrealized Appreciation 211,073
Undistributed Net Investment Income 63,537
Undistributed Proceeds From Investments 12
---------------
Total $ 3,208,246
===============
The original cost to Certificateholders, less the initial gross
underwriting commission, represents the aggregate initial public
offering price net of the applicable sales charge on 4,000 units of
fractional undivided interest of the Trust as of the date of deposit.
Undistributed net investment income includes accumulated accretion of
original issue discount of $17,223.
6. Concentration of Credit Risk
Since the Trust invests a portion of its assets in municipal bonds, it
may be affected by economic and political developments in the
municipalities. Certain debt obligations held by the Trust may be
entitled to the benefit of insurance, standby letters of credit or other
guarantees of banks or other financial institutions.
Note: Part B of This Prospectus May Not Be
Distributed Unless Accompanied by Part A.
Please Read and Retain Both Parts
of the Prospectus for Future Reference.
MUNICIPAL SECURITIES TRUST
MULTI-STATE SERIES
(Multiplier Portfolio)
Prospectus Part B
Dated: October 28, 1999
THE TRUST
---------
Organization. "Municipal Securities Trust," Multi-State Series (the
"Trust") consists of several separate "unit investment trusts," which may
include California Trust, New York Trust and/or Virginia Trust (collectively,
the "State Trusts") designated as set forth in Part A. The State Trusts were
created under the laws of the State of New York pursuant to the Trust Indenture
and Agreement* (collectively, the "Trust Agreement"), dated the Date of Deposit,
among Reich & Tang Distributors, Inc., as Sponsor, or depending on the
particular Trust, among Reich & Tang Distributors, Inc. and Gruntal & Co.,
L.L.C., as Co-Sponsors (the Sponsors or Co-Sponsors, if applicable, are referred
to herein as the "Sponsor"), Kenny S&P Evaluation Services, a business unit of
J.J. Kenny Company, Inc., a subsidiary of The McGraw-Hill Companies, as
Evaluator, and The Chase Manhattan Bank, as Trustee. The name of the Trustee for
a particular State Trust is contained in the "Summary of Essential Information"
in Part A. For a description of the Trustee for a particular State Trust, see
"Trust Administration--The Trustee." Each State Trust will be administered as a
distinct entity with separate certificates, expenses, books and records.
On the Date of Deposit the Sponsor deposited with the Trustee
long-term bonds, including delivery statements relating to contracts for the
purchase of certain such bonds (the "Bonds"), and cash or irrevocable letters of
credit issued by a major commercial bank in the amount required for such
purchases. Thereafter, the Trustee, in exchange for the Bonds so deposited,
delivered to the Sponsor the Certificates evidencing the ownership of all Units
of the State Trusts. The Trust consists of the interest-bearing bonds described
under "The Trust" in Part A of this Prospectus, the interest on which is, in the
opinions of bond counsel to the respective issuers given at the time of original
delivery of the Bonds, exempt from regular Federal income tax under existing
law.
Each "Unit" outstanding on the Evaluation Date represented an
undivided interest or pro rata share in the principal and interest of each
- --------
* References in this Prospectus to the Trust Agreement are qualified in
their entirety by the respective Trust Indentures and Agreements which are
incorporated herein by reference.
82600.11
<PAGE>
State Trust in the ratio of one Unit to the principal amount of Bonds in such
State Trust on such date as specified in Part A of this Prospectus. To the
extent that any Units of a State Trust are redeemed by the Trustee, the
fractional undivided interest or pro rata share in such State Trust represented
by each unredeemed Unit of such State Trust will increase, although the actual
interest in such State Trust represented by such fraction will remain unchanged.
Units will remain outstanding until redeemed upon tender to the Trustee by
Certificateholders, which may include the Sponsor, or until the termination of
the Trust Agreement.
Objectives. Each State Trust is one of a series of similar but
separate unit investment trusts formed by the Sponsor which offers investors the
opportunity to participate in a portfolio of long-term tax-exempt bonds, which
may include deep "market" discount and original issue discount bonds, with a
greater diversification than they might be able to acquire themselves. The
objectives of each State Trust are to preserve capital and to provide interest
income which, in the opinions of bond counsel to the respective issuers given at
the time of original delivery of the Bonds, is, with certain exceptions,
currently exempt from regular Federal income tax and from present income taxes
of the State for which such Trust is named for residents thereof. Such interest
income may, however, be subject to the federal alternative minimum tax and to
state and local taxes in other jurisdictions. Investors should be aware that
there is no assurance the State Trusts' objectives will be achieved because
these objectives are dependent on the continuing ability of the issuers of the
Bonds to meet their interest and principal payment requirements, on the
continuing satisfaction of the conditions required for the exemptions of
interest thereon from regular Federal income tax and on the market value of the
Bonds, which can be affected by fluctuations in interest rates and other
factors.
Since disposition of Units prior to final liquidation of a State Trust
may result in an investor receiving less than the amount paid for such Units
(see "Comparison of Public Offering Price, Sponsor's Repurchase Price and
Redemption Price"), the purchase of a Unit should be looked upon as a long-term
investment. The State Trusts are not designed to be complete investment
programs.
The Portfolios--General. All of the Bonds in the State Trusts were
rated "A" or better by Standard & Poor's Ratings Services, A Division of The
McGraw-Hill Companies ("Standard & Poor's") or Moody's Investors Service, Inc.
("Moody's") at the time originally deposited in the State Trust. For a list of
the ratings of each Bond on the Evaluation Date, see each "Portfolio" in Part A
of this Prospectus.
For information regarding (i) the number of issues in each State
Trust, (ii) the range of fixed maturity of the Bonds, (iii) the number of issues
payable from the income of a specific project or authority and (iv) the number
of issues constituting general obligations of a government entity, see "The
Trust" and "Description of Portfolio" for each State Trust in Part A of this
Prospectus.
When selecting Bonds for the State Trusts, the following factors,
among others, were considered by the Sponsor on the Date of Deposit: (i) the
quality of the Bonds and whether such Bonds were rated "A" or better by Standard
& Poor's or Moody's, (ii) the yield and price of the Bonds relative to other
tax-exempt securities of comparable quality and maturity, (iii) income to the
Certificateholders of the State Trusts, (iv) the diversification of each State
Trust's portfolio, as to purpose of issue and location of issuer, taking into
account the availability in the market of
82600.11
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<PAGE>
issues which meet such State Trust's quality, rating, yield and price
criteria and (v)the existence of "market" discount and original issue discount.
Subsequent to the Evaluation Date, a Bond may cease to be rated or its rating
may be reduced below that specified above. Neither event requires an elimination
of such Bond from a State Trust but may be considered in the Sponsor's
determination to direct the Trustee to dispose of the Bond. See "Portfolio
Supervision." For an interpretation of the bond ratings, see "Description of
Bond Ratings."
Housing Bonds. Some of the aggregate principal amount of the Bonds may
consist of obligations of state and local housing authorities whose revenues are
primarily derived from mortgage loans to rental housing projects for low to
moderate income families. Since such obligations are usually not general
obligations of a particular state or municipality and are generally payable
primarily or solely from rents and other fees, adverse economic developments
including failure or inability to increase rentals, fluctuations of interest
rates, and increasing construction and operating costs may reduce revenues
available to pay existing obligations. See "Description of Portfolio" in Part A
for the amount of housing bonds contained therein.
Hospital Revenue Bonds. Some of the aggregate principal amount of the
Bonds may consist of hospital revenue bonds. Ratings of hospital bonds are often
initially based on feasibility studies which contain projections of occupancy
levels, revenues and expenses. Actual experience may vary considerably from such
projections. A hospital's gross receipts and net income will be affected by
future events and conditions including, among other things, demand for hospital
services and the ability of the hospital to provide them, physicians' confidence
in hospital management capability, economic developments in the service area,
competition, actions by insurers and governmental agencies and the increased
cost and possible unavailability of malpractice insurance. Additionally, a major
portion of hospital revenue typically is derived from third-party payors and
government programs such as Medicare and Medicaid. Both private third-party
payors and government programs have undertaken cost containment measures
designed to limit payments. Furthermore, government programs are subject to
statutory and regulatory changes, retroactive rate adjustments, administrative
rulings and government funding restrictions, all of which may materially
decrease the rate of program payments for health care facilities. There can be
no assurance that payments under governmental programs will remain at levels
comparable to present levels or will, in the future, be sufficient to cover the
costs allocable to patients participating in such programs. In addition, there
can be no assurance that a particular hospital or other health care facility
will continue to meet the requirements for participation in such programs.
The health care delivery system is undergoing considerable alteration
and consolidation. Consistent with that trend, the ownership or management of a
hospital or health care facility may change, which could result in (i) an early
redemption of bonds, (ii) alteration of the facilities financed by the Bonds or
which secure the Bonds, (iii) a change in the tax exempt status of the Bonds or
(iv) an inability to produce revenues sufficient to make timely payment of debt
service on the Bonds. Future legislation or changes in the areas noted above,
among other things, would affect all hospitals to varying degrees and,
accordingly, any adverse change in these areas may affect the ability of such
issuers to make payment of principal and interest on such bonds. See
"Description of Portfolio" in Part A for the amount of hospital revenue bonds
contained therein.
Nuclear Power Facility Bonds. Certain Bonds may have been issued
in connection with the financing of nuclear generating facilities. Electric
82600.11
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<PAGE>
utilities which own or operate nuclear power plants are exposed to risks
inherent in the nuclear industry. These risks include exposure to new
requirements resulting from extensive federal and state regulatory oversight,
public controversy, decommissioning costs, and spent fuel and radioactive waste
disposal issues. While nuclear power construction risks are no longer of
paramount concern, the emerging issue is radioactive waste disposal. In
addition, nuclear plants typically require substantial capital additions and
modifications throughout their operating lives to meet safety, environmental,
operational and regulatory requirements and to replace and upgrade various plant
systems. The high degree of regulatory monitoring and controls imposed on
nuclear plants could cause a plant to be out of service or on limited service
for long periods. When a nuclear facility owned by an investor-owned utility or
a state or local municipality is out of service or operating on a limited
service basis, the utility operator or its owners may be liable for the recovery
of replacement power costs. Risks of substantial liability also arise from the
operation of nuclear facilities and from the use, handling, and possible
radioactive emissions associated with nuclear fuel. Insurance may not cover all
types or amounts of loss which may be experienced in connection with the
ownership and operation of a nuclear plant and severe financial consequences
could result from a significant accident or occurrence. The Nuclear Regulatory
Commission has promulgated regulations mandating the establishment of funded
reserves to assure financial capability for the eventual decommissioning of
licensed nuclear facilities. These funds are to be accrued from revenues in
amounts currently estimated to be sufficient to pay for decommissioning costs.
The Sponsor is unable to predict whether any such actions or whether any such
proposals or litigation, if enacted or instituted, will have an adverse impact
on the revenues available to pay the debt service on the Bonds in the portfolio
issued to finance such nuclear projects. See "Description of Portfolio" in Part
A for the amount of bonds issued to finance nuclear generating facilities
contained therein.
Mortgage Subsidy Bonds. Certain Bonds may be "mortgage subsidy bonds"
which are obligations of which all or a significant portion of the proceeds are
to be used directly or indirectly for mortgages on owner-occupied residences.
Section 103A of the Internal Revenue Code of 1954 provided as a general rule
that interest on "mortgage subsidy bonds" will not be exempt from Federal income
tax. An exception is provided for certain "qualified mortgage bonds." Qualified
mortgage bonds are bonds that are used to finance owner-occupied residences and
that meet numerous statutory requirements. These requirements include certain
residency, ownership, purchase price and target area requirements, ceiling
residency, ownership, purchase price and target area requirements, ceiling
amounts for state and local issuers, arbitrage restrictions and (for bonds
issued after December 31, 1984) certain information reporting, certification,
public hearing and policy statement requirements. In the opinions of bond
counsel to the issuing governmental authorities, interest on all the Bonds in a
Trust that might be deemed "mortgage subsidy bonds" will be exempt from Federal
income tax when issued. See "Description of Portfolio" in Part A for the amount
of mortgage subsidy Bonds contained therein.
Mortgage Revenue Bonds. Certain Bonds may be "mortgage revenue bonds."
Under the Internal Revenue Code of 1986, as amended (the "Code") (and under
similar provisions of the prior tax law), "mortgage revenue bonds" are
obligations the proceeds of which are used to finance owner-occupied residences
under programs which meet numerous statutory requirements relating to residency,
ownership, purchase price and target area requirements, ceiling amounts for
state and local issuers, arbitrage restrictions, and certain information
reporting certification, and public hearing requirements. There can be no
assurance that additional federal legislation will not be introduced
82600.11
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<PAGE>
or that existing legislation will not be further amended, revised, or enacted
after delivery of these Bonds or that certain required future actions
will be taken by the issuing governmental authorities, which action or failure
to act could cause interest on the Bonds to be subject to Federal income tax. If
any portion of the Bonds proceeds are not committed for the purpose of the
issue, Bonds in such amount could be subject to earlier mandatory redemption at
par, including issues of Zero Coupon Bonds (see "Discount and Zero Coupon
Bonds"). See "Description of Portfolio" in Part A for the amount of mortgage
revenue bonds contained therein.
Private Activity Bonds. The portfolio of the Trust may contain other
Bonds which are "private activity bonds" (often called Industrial Revenue Bonds
("IRBs") if issued prior to 1987) which would be primarily of two types: (i)
Bonds for a publicly owned facility which a private entity may have a right to
use or manage to some degree, such as an airport, seaport facility or water
system and (ii)facilities deemed owned or beneficially owned by a private entity
but which were financed with tax-exempt bonds of a public issuer, such as a
manufacturing facility or a pollution control facility. In the case of the first
type, bonds are generally payable from a designated source of revenues derived
from the facility and may further receive the benefit of the legal or moral
obligation of one or more political subdivisions or taxing jurisdictions. In
most cases of project financing of the first type, receipts or revenues of the
issuer are derived from the project or the operator or from the unexpended
proceeds of the bonds. Such revenues include user fees, service charges, rental
and lease payments, and mortgage and other loan payments.
The second type of issue will generally finance projects which are
owned by or for the benefit of, and are operated by, corporate entities.
Ordinarily, such private activity bonds are not general obligations of
governmental entities and are not backed by the taxing power of such entities,
and are solely dependent upon the creditworthiness of the corporate user of the
project or corporate guarantor.
The private activity bonds in the Trust have generally been issued
under bond resolutions, agreements or trust indentures pursuant to which the
revenues and receipts payable under the issuer's arrangements with the users or
the corporate operator of a particular project have been assigned and pledged to
the holders of the private activity bonds. In certain cases, a mortgage on the
underlying project has been assigned to the holders of the private activity
bonds or a trustee as additional security. In addition, private activity bonds
are frequently directly guaranteed by the corporate operator of the project or
by another affiliated company. See "Description of Portfolio" in Part A for the
amount of private activity bonds contained therein.
Litigation. Litigation challenging the validity under state
constitutions of present systems of financing public education has been
initiated in a number of states. Decisions in some states have been reached
holding such school financing in violation of state constitutions. In addition,
legislation to effect changes in public school financing has been introduced in
a number of states. The Sponsor is unable to predict the outcome of the pending
litigation and legislation in this area and what effect, if any, resulting
change in the sources of funds, including proceeds from property taxes applied
to the support of public schools, may have on the school bonds in the State
Trusts.
Legal Proceedings Involving the Trusts. The Sponsor has not been
notified or made aware of any litigation pending with respect to any Bonds
82600.11
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<PAGE>
which might reasonably be expected to have a material effect on the State
Trusts other than that which is discussed under "The State Trusts" herein.
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. At any time after the date of this Prospectus, litigation may be
instituted on a variety of grounds with respect to the Bonds in the State
Trusts. The Sponsor is unable to predict whether any such litigation may be
instituted or, if instituted, whether it will have a material adverse effect on
a State Trust.
Other Factors. The Bonds in the State Trusts, despite their optional
redemption provisions which generally do not take effect until 10 years after
the original issuance dates of such bonds (often referred to as "ten year call
protection"), do contain provisions which require the issuer to redeem such
obligations at par from unused proceeds of the issue within a stated period. In
recent periods of declining interest rates there have been increased redemptions
of bonds, particularly housing bonds, pursuant to such redemption provisions. In
addition, the Bonds in the State Trusts are also subject to mandatory redemption
in whole or in part at par at any time that voluntary or involuntary prepayments
of principal on the underlying collateral are made to the trustee for such bonds
or that the collateral is sold by the bond issuer. Prepayments of principal tend
to be greater in periods of declining interest rates; it is possible that such
prepayments could be sufficient to cause a bond to be redeemed substantially
prior to its stated maturity date, earliest call date or sinking fund redemption
date.
The Bonds may also be subject to other calls, which may be permitted
or required by events which cannot be predicted (such as destruction,
condemnation, or termination of a contract).
In 1976 the federal bankruptcy laws were amended so that an authorized
municipal debtor could more easily seek federal court protection to assist in
reorganizing its debts so long as certain requirements were met. Historically,
very few financially troubled municipalities have sought court assistance for
reorganizing their debts; notwithstanding, the Sponsors are unable to predict to
what extent financially troubled municipalities may seek court assistance in
reorganizing their debts in the future and, therefore, what effect, if any, the
applicable federal bankruptcy law provisions will have on the State Trusts.
The State Trusts may also include "moral obligation" bonds. Under
statutes applicable to such bonds, if an issuer is unable to meet its
obligations, the repayment of such bonds becomes a moral commitment but not a
legal obligation of the state or municipality in question. See "Portfolio" and
"Information Regarding the State Trust" for each State Trust in Part A of this
Prospectus for the amount of moral obligation bonds contained in each State
Trust's portfolio.
Certain of the Bonds in the State Trusts are subject to redemption
prior to their stated maturity dates pursuant to sinking fund or call
provisions. A sinking fund is a reserve fund appropriated specifically toward
the retirement of a debt. A callable bond is one which is subject to redemption
or refunding prior to maturity at the option of the issuer. A refunding is a
method by which a bond is redeemed at or before maturity from the proceeds of a
new issue of bonds. In general, call provisions are more likely to be exercised
when the offering side evaluation of a bond is at a premium over par than when
it is at a discount from par. A listing of the sinking fund and call provisions,
if any, with respect to each of the Bonds in
82600.11
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<PAGE>
each State Trust is contained under the "Portfolio" for such State Trust
in Part A of this Prospectus. Certificateholders will realize a gain or
loss on the early redemption of such Bonds, depending upon whether the price of
such Bonds is at a discount from or at a premium over par at the time the
Certificateholders purchase their Units.
Neither the Sponsor nor the Trustee shall be liable in any way for any
default, failure or defect in any of the Bonds. Because certain of the Bonds
from time to time may be redeemed or will mature in accordance with their terms
or may be sold under certain circumstances, no assurance can be given that the
State Trusts will retain their present size and composition for any length of
time. The proceeds from the sale of a Bond in a State Trust or from the exercise
of any redemption or call provision will be distributed to Certificateholders of
such State Trust, except to the extent such proceeds are applied to meet
redemptions of Units. See "Trustee Redemption."
Puerto Rico Bonds. Certain of the Bonds in the Trust may be general
obligations and/or revenue bonds of issuers located in Puerto Rico. such bonds
will be affected by general economic conditions in Puerto Rico. The economy of
Puerto Rico is fully integrated with that of the mainland United States. During
fiscal year 1998, approximately 90% of Puerto Rico's exports were to the United
States mainland, which was also the source of 61% of Puerto Rico's imports. In
fiscal 1998, Puerto Rico experienced a $8.5 billion positive adjusted
merchandise trade balance. The dominant section of the Puerto Rico economy are
manufacturing and services. Gross product in fiscal 1993 was $25.1 billion
($24.5 billion in 1992 prices) and gross product in fiscal 1997 was $32.1
billion ($27.7 billion in 1992 prices). This represents an increase in gross
product of 27.7% from fiscal 1993 to 1997 (13.0% in 1992 prices). According to
the Labor Department's Household Employment survey, during fiscal 1998, total
employment increased 0.8% over fiscal 1997. The preliminary figures of gross
product for fiscal 1998, released in November 1998, was $34.7 billion ($28.5
billion in 1992 prices). This represents an increase of 8.1% (3.1% in 1992
prices) over fiscal 1997. This preliminary growth rate is 0.1% above the
original base line forecast for fiscal 1998. The Planning Board's gross product
forecast for fiscal 1999, made in February 1998, projected an increase of 2.7%
over fiscal 1998. according to the Labor Department's Household Employment
Survey, during the first five months of fiscal 1999, compared to 1,138,400 over
the same period in fiscal 1998. The seasonally adjusted unemployment rate for
November 1998 was 13.3%.
Discount and Zero Coupon Bonds. The State Trust portfolios may contain
original issue discount bonds. The original issue discount, which is the
difference between the initial purchase price of the Bonds and the face value,
is deemed to accrue on a daily basis and the accrued portion will be treated as
tax-exempt interest income for regular Federal income tax purposes. Upon sale or
redemption, any gain realized that is in excess of the earned portion of
original issue discount will be taxable as capital gain. See "Tax Status." The
current value of an original issue discount bond reflects the present value of
its face amount at maturity. The market value tends to increase more slowly in
early years and in greater increments as the Bonds approach maturity. Of these
original issue discount bonds, a portion of the aggregate principal amount of
the Bonds in each State Trust may be Zero Coupon Bonds. Zero Coupon Bonds do not
provide for the payment of any current interest and provide for payment at
maturity at face value unless sooner sold or redeemed. The market value of Zero
Coupon Bonds is subject to greater fluctuations than coupon bonds in response to
changes in interest rates. Zero Coupon Bonds generally are subject to redemption
at compound accredited value based on par value at maturity. Because the issuer
is not obligated to make
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current interest payments, Zero Coupon Bonds may be less likely to be redeemed
than coupon bonds issued at a similar interest rate. See "Description
of Portfolios" in Part A for the aggregate principal amount of original issue
discount bonds in each State Trust's portfolio.
The State Trust portfolios may also contain Bonds that were purchased
at deep "market" discount from par value at maturity. This is because the coupon
interest rates on the discount Bonds at the time they were purchased and
deposited in the State Trusts were lower than the current market interest rates
for newly issued bonds of comparable rating and type. At the time of issuance,
the discount Bonds were for the most part issued at then current coupon interest
rates. The current returns (coupon interest income as a percentage of market
price) of discount bonds will be lower than the current returns 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. Under the provisions of the Internal Revenue Code in
effect on the date of this Prospectus, any income attributable to market
discount will be taxable but will not be realized until maturity, redemption or
sale of the Bonds or Units. However, the Administration's Fiscal Year 2000
Budget proposals would require accrual basis taxpayers to accrue market discount
income with respect to obligations acquired after the date that the proposal is
enacted. Gain on the disposition of a Bond purchased at a market discount
generally will be treated as ordinary income, rather than capital gain, to the
extent of accrued market discount. 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 the bonds will decrease; and if interest rates decline, the
value of the bonds will increase. The discount does not necessarily indicate a
lack of market confidence in the issuer.
Year 2000 Issue. The Trust, like other businesses and entities, could
be adversely affected if the computer systems used by the Sponsor and Trustee or
other service providers to the Trust do not properly process and calculate
date-related information and data from and after January 1, 2000. This is
commonly known as the "Year 2000 Problem." The Sponsor and Trustee are taking
steps that they believe are reasonably designed to address the Year 2000 Problem
with respect to computer systems that they use and to obtain reasonable
assurances that comparable steps are being taken by the Trusts' other service
providers. However, there can be no assurance that the Year 2000 Problem will be
properly or timely resolved as to avoid any adverse impact to the Trust. At this
time, it is generally believed that municipal issuers may be more vulnerable to
Year 2000 issues or problems than will other issuers.
THE STATE TRUSTS
The Sponsor believes the information summarized below describes some
of the more significant events relating to the State Trusts. Sources of such
information are the official statements of the issuers located in the states of
the State Trusts which have been issued in connection with debt offerings by
such states, as well as other publicly available documents and information.
While the Sponsor has not independently verified such information, it has no
reason to believe it is not correct in all material respects.
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California Trust
California Economy: 1995-96 through 1997-99 Fiscal Years
The state's financial condition improved markedly during the 1995- 96,
1996-97 and 1997-99 fiscal years, with a combination of better than expected
revenues, slowdown in growth of social welfare programs, and continued spending
restraint based on the actions taken in earlier years. The state's cash position
also improved, and no external deficit borrowing has occurred over the end of
the last four fiscal years.
The economy grew strongly during these fiscal years, and as a result,
the General Fund took in substantially greater tax revenues (around $2.2 billion
in 1995-96, $1.6 billion in 1996-97, $2.4 billion in 1997-98 and $1.0 billion in
1998-99) than were initially planned when the budgets were enacted. These
additional funds were largely directed to school spending as mandated by
Proposition 98, and to make up shortfalls from reduced federal health and
welfare aid in 1995-96 and 1996-97 and particularly in 1998-99 to fund new
program incentives. The accumulated budget deficit from the recession years was
finally eliminated.
1998-99 Fiscal Year Budget
The following were major features of the 1998 Budget Act and certain
additional fiscal bills enacted before the end of the legislative session:
1. The most significant feature of the 1998-99 budget was agreement on
a total of $1.4 billion of tax cuts. The central element was a bill which
provided for a phased-in reduction of the Vehicle License Fee ("VLF"). Since the
VLF is transferred to cities and counties under existing law, the bill provided
for the General Fund to replace the lost revenues. Starting on January 1, 1999,
the VLF has been reduced by 25 percent, at a cost to the General Fund of
approximately $500 million in the 1998-99 fiscal year and about $1 billion
annually thereafter.
In addition to the cut in VLF, the 1998-99 budget included both
temporary and permanent increases in the personal income tax dependent credit
($612 million General Fund cost in 1998-99, but less in future years), a
nonrefundable renters tax credit ($133 million), and various targeted business
tax credits ($106 million).
2. Proposition 98 funding for K-14 schools was increased by $1.7
billion in General Fund moneys over revised 1997-98 levels, over $300 million
higher than the minimum Proposition 98 guarantee. Of the 1998-99 funds, major
new programs included money for instructional and library materials, deferred
maintenance, support for increasing the school year to 180 days and reduction of
class sizes in Grade 9. The Budget also included $250 million as repayment of
prior years' loans to schools, as part of the settlement of the California
Teachers' Association v. Gould lawsuit.
3. Funding for higher education increased substantially above the
actual 1997-98 level. General Fund support was increased by $340 million (15.6
percent) for the University of California and $267 million (14.1 percent) for
the California State University system. In addition, Community Colleges funding
increased by $300 million (6.6 percent).
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4. The Budget included increased funding for health, welfare and
social services programs. A 4.9 percent grant increase was included in the basic
welfare grants, the first increase in those grants in 9 years.
5. Funding for the judiciary and criminal justice programs increased
by 11 percent over 1997-98, primarily to reflect increased state support for
local trial courts and rising prison population.
6. Major legislation enacted after the 1998 Budget Act included new
funding for resources projects, a share of the purchase of the Headwaters
Forest, funding for the infrastructure and Economic Development Bank ($50
million) and funding for the construction of local jails. The state realized
savings of $433 million from a reduction in the state's contribution to the
State Teachers' Retirement System in 1998-99.
The May Revision to the 1999-2000 Governor's Budget (hereafter
shortened to "1990-00"), released on May 14, 1999 (the "1999 May Revision"),
reported that stronger than expected economic conditions in the State for the
latter part of 1998 and into 1999 would produce total 1998-99 General Fund
revenues of about $57.9 billion, almost $1.0 billion above the 1998 Budget Act
estimates and $1.6 billion above the initial estimates in the January 1999-2000
Governor's Budget. The 1999 May Revision projects 1998-99 General Fund
expenditures of $58.6 billion, about $400 million higher than the January
1999-2000 Governor's Budget estimate. Some of this additional revenue will be
directed to K-14 schools pursuant to Proposition 98. The 1999 May Revision
projected a balance in the Special Fund for Economic Uncertainties (the
"SFEU")at June 30, 1999, of approximately $1.9 billion, $1.3 billion higher than
estimated in January.
1999-00 Budget
On January 8, 1999, Governor Davis released his proposed budget for
fiscal year 1999-2000 (the "January Governor's Budget"). The January Governor's
Budget generally reported that General Fund revenues for fiscal year 1998-99 and
fiscal year 1999-00 would be lower than earlier projections (primarily due to
the overseas economic downturn), while some caseloads would be higher than
earlier projections. The January Governor's Budget was designed to meet ongoing
caseloads and basic inflation adjustments, and included certain new programs.
The January Governor's Budget proposed $60.5 billion of general fund
expenditures in fiscal year 1999-00, with a $415 million SFEU reserve at June
30, 2000.
The 1999 May Revision showed an additional $4.3 billion of revenues
for combined fiscal years 1998-99 and 1999-00. The completion of the 1999 Budget
Act occurred in a timely fashion. The final Budget Bill was adopted by the
Legislature on June 16, 1999, and was signed by the Governor on June 29, 1999
(the "1999 Budget Act"), meeting the Constitutional deadline for budget
enactment for only the second time in the 1990's.
The final 1999 Budget Act estimated General Fund revenues and
transfers of $63.0 billion, and contained expenditures totaling $63.7 billion
after the Governor used his line-item veto to reduce the legislative Budget Bill
expenditures by $581 million (both General Fund and Special Fund). The 1999
Budget Act also contained expenditures of $16.1 billion from special funds and
$1.5 billion from bond funds. The Administration estimated that the SFEU would
have a balance at June 30, 2000, of about $881 million. Not included in this
amount was an additional $300 million which (after the Governor's vetoes) was
"set aside" to provide funds for employee salary increases (to be negotiated in
bargaining with employee unions), and for
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litigation reserves. The 1999 Budget Act anticipates normal cash flow borrowing
during the fiscal year.
The principal features of the 1999 Budget Act include the following:
1. Proposition 98 funding for K-12 schools was increased by $1.6
billion in General Fund moneys over revised 1998-99 levels, $108.6 million
higher than the minimum Proposition 98 guarantee. Of the 1999-00 funds, major
new programs included money for reading improvement, new textbooks, school
safety, improving teacher quality, funding teacher bonuses, providing greater
accountability for school performance, increasing preschool and after school
care programs and funding deferred maintenance of school facilities. The Budget
also includes $310 million as repayment of prior years' loans to schools, as
part of the settlement of the California Teachers' Association v. Gould lawsuit.
2. Funding for higher education increased substantially above the
actual 1998-99 level. General Fund support was increased by $184 million (7.3
percent) for the University of California and $126 million (5.9 percent) for the
California State University system. In addition, Community Colleges funding
increased by $324.3 million (6.6 percent). As a result, undergraduate fees at UC
and CSU will be reduced for the second consecutive year, and the per-unit charge
at Community Colleges will be reduced by $1.
3. The Budget included increased funding of nearly $600 million for
health and human services.
4. About $800 million from the general fund will be directed toward
infrastructure costs, including $425 million in additional funding for the
Infrastructure Bank, initial planning costs for a new prison in the Central
Valley, additional equipment for train and ferry service, and payment of
deferred maintenance for state parks.
5. The Legislature enacted a one-year additional reduction of
10 percent of the VLF for calendar year 2000, at a General Fund cost of about
$250 million in each of fiscal year 1999-00 and 2000-01 to make up lost funding
to local governments. Conversion of this one-time reduction to a permanent cut
will remain subject to the revenue tests in the legislation adopted last year.
Several other targeted tax cuts, primarily for businesses, were also approved,
at a cost of $54 million in 1990-00.
6. A one-time appropriation of $150 million, to be split between
cities and counties, was made to offset property tax shifts during the early
1990's. Additionally, an ongoing $50 million was appropriated as a subvention to
cities for jail booking or processing fees charged by counties when an
individual arrested by city personnel is taken to a county detention facility.
Future Budgets
It cannot be predicted what actions will be taken in the future by the
State Legislature and the Governor to deal with changing state revenues and
expenditures. The state budget will be affected by national and state economic
conditions and other factors.
THE FOREGOING DISCUSSION IS BASED ON OFFICIAL STATEMENTS AND OTHER
INFORMATION PROVIDED BY THE STATE OF CALIFORNIA. THE STATE HAS INDICATED THAT
ITS DISCUSSION OF BUDGETARY INFORMATION IS BASED ON ESTIMATES AND PROJECTIONS
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OF REVENUES AND EXPENDITURES FOR THE CURRENT FISCAL YEAR AND MUST NOT BE
CONSTRUED AS STATEMENTS OF FACT; THE ESTIMATES AND PROJECTIONS ARE BASED UPON
VARIOUS ASSUMPTIONS THAT MAY BE AFFECTED BY NUMEROUS FACTORS, INCLUDING FUTURE
ECONOMIC CONDITIONS IN THE STATE AND THE NATION, AND THERE CAN BE NO ASSURANCE
THAT THE ESTIMATES WILL BE ACHIEVED.
Voter Initiative: Proposition 218
"Proposition 218" or the "Right to Vote on Taxes Act" (the
"Proposition") was approved by the California electorate at the November, 1996
general election. Officially titled "Voter Approval For Local Government Taxes,
Limitation on Fees, Assessments and Charges Initiative Constitutional
Amendment," the Act was approved by a majority of the voters voting at the
election and adds Articles XIIIC and XIIID to the California Constitution.
The Proposition, among other things, requires local governments to
follow certain procedures in imposing or increasing any fee or charge as
defined. "Fee" or "charge" is defined to mean "any levy other than an ad valorem
tax, a special tax or an assessment imposed by an agency upon a parcel or upon a
person as an incident of property ownership, including user fees or charges for
a property related service."
The procedure required by the Proposition to impose or increase any
fee or charge include a public hearing upon the proposed fee or charge and the
opportunity to present written protests by the owners of the parcels subject to
the proposed fee or charge. If written protests against the proposed fee or
charge are presented by a majority of owners of the identified parcels, the
local government shall not impose the fee or charge.
The Proposition further provides as follows:
"Except for fees or charges for sewer, water, and refuse collection
services, no property related fee or charge shall be imposed or increased unless
and until such fee or charge is submitted and approved by a majority vote of the
property owners of the property subject to the fee or charge or, at the option
of the agency, by a two-thirds vote of the electorate residing in the affected
area."
Additionally, the Proposition provides, with respect to standby
charges, as follows:
"No fee or charge may be imposed for a service unless that service is
actually used by, or immediately available to, the owner of the property in
question. Fees or charges based on potential or future use of a service are not
permitted. Standby charges, whether characterized as charges or assessments,
shall be classified as assessments and shall not be imposed without compliance
with Section 4 of this Article."
The Proposition provides that beginning July 1, 1997, all fees or
charges shall comply with the Proposition's requirements.
The Proposition is silent with respect to future increases of pre-
existing fees or charges that are pledged to payment of indebtedness or
obligations previously incurred by the local government. Presumably, the
Proposition cannot preempt outstanding contractual obligations protected by the
contract impairment clause of the federal constitution. However, with respect to
any given situation or case, litigation may be the method that will settle any
question concerning the authority of a local government to increase
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fees or charges outside of the strictures of the Proposition in order to meet
contractual obligations.
Proposition 218 also contains a new provision subjecting "matters
of reducing or repealing any local tax, assessments and charges" to the
initiative power. This means that no city or local agency revenue source is safe
from reduction or repeal pursuant to the initiative process.
Litigation concerning various elements of the Proposition may
ultimately ensue and clarifying legislation may be enacted.
Voter Initiative: Proposition 2
At the November 1998 elections voters approved Proposition 2. This
proposition requires the General Fund to repay loans made from certain
transportation special accounts (such as the State Highway Account) at least
once per fiscal year, or up to 30 days after adoption of the annual budget act.
Since the General Fund may reborrow from the transportation accounts soon after
the annual repayment is made, the proposition is not expected to have any
adverse impact on the State's cash flow.
Future Initiatives
Articles XIIIA, XIIIB, XIIIC and XIIID were each adopted as measures
that qualified for the ballot pursuant to the State's initiative process. From
time to time, other initiative measures could be adopted that could affect
revenues of the State or public agencies within the State.
State Appropriations Limit
The state is subject to an annual appropriations limit imposed by
Article XIIIB of the State Constitution (the "Appropriations Limit"), and is
prohibited from spending "appropriations subject to limitation" in excess of the
Appropriations Limit. The Appropriations Limit does not restrict appropriation
to pay debt service on voter-authorized bonds. Article XIIIB, originally adopted
in 1979, was modified substantially by Propositions 98 and 111 in 1988 and 1990,
respectively. "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 the other fees to
the extent that such proceeds exceed the reasonable cost of providing the
regulation, product or service. The Appropriations Limit is based on the limit
for the prior year, adjusted annually for certain changes, and is tested over
consecutive two-year periods. Any excess of the aggregate proceeds of taxes
received over such two-year period above the combined Appropriation Limits for
those two years is divided equally between transfers to K-12 districts and
refunds to taxpayers.
Exempted from the Appropriations Limit are debt service costs of
certain bonds, court or federally mandated costs, and, pursuant to Proposition
111, qualified capital outlay projects and appropriations or revenues derived
from any increase in gasoline taxes and motor vehicle weight fees above January
1, 1990 levels. Some recent initiatives were structured to create new tax
revenues dedicated to specific uses and expressly exempted from the Article
XIIIB limits. The Appropriations Limit may also be exceeded in cases of
emergency arising from civil disturbance or natural disaster declared by the
Governor and approved by two-thirds of the Legislature. If not so declared and
approved, the Appropriations Limit for the next three years must be reduced by
the amount of the excess.
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Article XIIIB, as amended by Proposition 98 on November 8, 1988, also
establishes a minimum level of state funding for school and community college
districts and requires that excess revenues up to a certain limit be transferred
to schools and community college districts instead of returned to the taxpayers.
Determination of the minimum level of funding is based on several tests set
forth in Proposition 98. During fiscal year 1991-1992 revenues were smaller than
expected, thus reducing the payment owed to schools in 1991-1992 under alternate
"test" provisions. In response to the changing revenue situation, and to fully
fund the Proposition 98 guarantee in the 1991- 1992 and 1992-1993 fiscal years
without exceeding it, the Legislature enacted legislation to reduce 1991-92
appropriations. The amount budgeted to schools, but which exceeded the reduced
appropriation, was treated as a non-Proposition 98 short-term loan in 1991-92.
As part of the 1992-93 Budget, $1.083 billion of the amount budgeted to K-12
schools was designated to "repay" the prior year loan, thereby reducing cash
outlays in 1992-93 by that amount. To maintain per-average daily attendance
("ADA") funding, the 1992-93 Budget included loans to schools and to community
colleges, to be repaid from future Proposition 98 entitlements. The 1993-94
Budget also provided new loans to K- 12 schools and community colleges to
maintain ADA funding. These loans have been combined with the 1992-93 fiscal
year loans into one loan of $1.760 billion, to be repaid from future years'
Proposition 98 entitlements, and conditioned upon maintaining current funding
levels per pupil at K-12 schools.
A Sacramento County Superior Court in California Teachers'
Association, et al. v. Gould, et al., ruled that the 1992-93 loans to K-12
schools and community colleges violate Proposition 98. As part of the
negotiations leading to the 1995-96 Budget Act, an oral agreement was reached to
settle this case. The parties reached a final settlement of the case in July,
1996. The settlement required adoption of legislation satisfactory to the
parties to implement its terms.
The settlement provided, among other things, that both the State and
K-12 schools share in the repayment of prior years' emergency loans to schools.
Of the total $1.76 billion in loans, the state was obligated to repay $935
million by forgiveness of the amount owed, while schools were required to repay
$825 million. The state's share of the repayment is reflected as expenditures
above the current Proposition 98 base calculation. The schools' share of the
repayment counts as appropriations toward satisfying the Proposition 98
guarantee, or from "below" the current base. Repayments are spread over the
eight-year period beginning 1994-95 through 2001-02.
Because of the complexities of Article XIIIB, the ambiguities and
possible inconsistencies in its terms, the applicability of its exceptions and
exemptions and the impossibility of predicting future appropriations, the
Sponsor cannot predict the impact of this or related legislation on the bonds in
the Trust Portfolio. Other Constitutional amendments affecting state and local
taxes and appropriations have been proposed from time to time. If any such
initiatives are adopted, the state could be pressured to provide additional
financial assistance to local governments or appropriate revenues as mandated by
such initiatives. Propositions such as Proposition 98 and others that may be
adopted in the future, may place increasing pressure on the state's budget over
future years, potentially reducing resources available for other state programs,
especially to the extent that the Article XIIIB spending limit would restrain
the State's ability to fund other such programs by raising taxes.
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State Indebtedness
As of August 1, 1999, the state had over $19.7 billion aggregate
principal amount of its general obligation bonds outstanding. General obligation
bond authorizations in an aggregate amount of approximately $12.7 billion
remained unissued as of August 1, 1999.
At the November 3, 1998 election, voters approved a bond measure
("Proposition 1A")totaling $9.2 billion for public school construction and
renovation, and for higher education facilities. Not more than half the total
bond authorization from Proposition 1A can be issued (including bonds in the
form of commercial paper)before June 30, 2000. Proposition 1A also encourages
the Treasurer to sell the bonds in a manner such that the ratio of State debt
service to General Fund does not exceed 6 percent.
As of August 1, 1999 the State Finance Committees had authorized the
issuance of approximately $4.6 billion of general obligation commercial paper
notes, but as of that date only $687 million aggregate principal amount of which
was issued and outstanding. The State also builds and acquires capital
facilities through the use of lease purchase borrowing. As of August 1, 1999,
the State had approximately $6.7 billion of outstanding General Fund- supported
lease-purchase debt. The State had $6,669,299,397 General Fund- supported
lease-purchase debt outstanding at August 1, 1999. The State Public Works Board,
which is authorized to sell lease revenue bonds, had $2,035,434,000 authorized
and unissued as of August 1, 1999. Also, as of that date certain joint powers
authorities were authorized to issue approximately $69,500,000 of revenue bonds
to be secured by State leases.
In addition to the general obligation bonds, State agencies and
authorities had approximately $26 billion aggregate principal amount of revenue
bonds and notes outstanding as of April 1, 1998. Revenue bonds represent both
obligations payable from state revenue-producing enterprises and projects, which
are not payable from the General Fund, and conduit obligations payable only from
revenues paid by private users of facilities financed by such revenue bonds.
Such enterprises and projects include transportation projects, various public
works projects, educational facilities (including the California State
University and University of California systems), housing, health facilities and
pollution control facilities.
Litigation
The state is a party to numerous legal proceedings. In addition, the
state is involved in certain other legal proceedings that, if decided against
the state, might require the State to make significant future expenditures or
impair future revenue sources. Examples of such cases include whether certain
state property tax shifts from counties to school districts should be reimbursed
by the state; whether the State Controller may make payments from the State
Treasury in the absence of a state budget; damages claimed against the state for
flooding in 1986 and 1997; the claim for retroactive increased out-patient
Medi-Cal reimbursement rates; claimed costs for pollution clean-up; a challenge
to the appropriation of Cigarette and Tobacco Products Surtax Fund for disease
research; a suit to compel changes in early screening procedures for children
with mental health needs; and the validity of certain corporate tax deductions.
Other cases that could significantly impact revenue or expenditures involve
payments for certain transfers among various funds of appropriations in 1993
through 1995; reimbursement payments owed to and claimed by certain school
districts; and payments potentially due related to the AFDC-Foster Care program.
Because of the prospective nature of these proceedings, it is not presently
possible to
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predict the outcome of such litigation or estimate the potential impact on the
ability of the state to pay the debt service on its obligation.
Ratings
During 1999, the following ratings have been received from Moody's
Investors Service ("Moody's"), Standard & Poor's Rating Services ("S&P") and
Fitch IBCA Inc. ("Fitch"):
Fitch Moody's S&P
Insured Bonds AAA Aaa AAA
All Other Bonds A Con. Al Ap
Any explanation of the significance of such ratings may be obtained only
from the rating agency furnishing such ratings. There is no assurance that
such ratings will continue for any given period of time or that they will not be
revised downward or withdrawn entirely if, in the judgment of the particular
rating agency, circumstances so warrant.
Local Governments
The primary units of local government in California are the counties,
ranging in population from 1,200 in Alpine County to over 9,600,000 in Los
Angeles County. Counties are responsible for the provision of many basic
services, including indigent health care, welfare, jails and public safety in
unincorporated areas. There are also about 470 incorporated cities, and
thousands of other special districts formed for education, utility and other
services. The fiscal condition of local governments has been constrained since
the enactment of "Proposition 13" in 1978, which reduced and limited the future
growth of property taxes, and limited the ability of local governments to impose
"special taxes" (those devoted to a specific purpose) without two-thirds voter
approval. Counties, in particular, have had fewer options to raise revenues than
many other local government entities, and have been required to maintain many
services.
In the aftermath of Proposition 13, the State provided aid to local
governments from the General Fund to make up some of the loss of property tax
moneys, including taking over the principal responsibility for funding K-12
schools and community colleges. During the recession, the Legislature eliminated
most of the remaining components of post-Proposition 13 aid to local government
entities other than K-14 education districts by requiring cities and counties to
transfer some of their property tax revenues to school districts. However, the
Legislature also provided additional funding sources (such as sales taxes) and
reduced certain mandates for local services. Since then the State has also
provided additional funding to counties and cities through such programs as
health and welfare realignment, welfare reform, trial court restructuring, an
annual program supporting local public safety departments, and various other
measures. In his 1999-00 Budget Proposal, the Governor has proposed a review and
"accounting" of state -- local fiscal relationships, with the goal of ultimately
restoring local government finances to an equivalent fiscal condition to the
period prior to the 1991-93 recession -- induced tax shifts. Litigation has been
brought challenging the legality of the property tax shifts from counties to
schools.
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Historically, funding for the state's trial court system was divided
between the state and the counties. However, Chapter 850, Statutes of 1997,
implemented a restructuring of the state's trial court funding system. Funding
for the courts, with the exception of costs for facilities, local judicial
benefits, and revenue collection, was consolidated at the state level. The
county contribution for both their general fund and fine and penalty amounts is
capped at the 1994-95 level and becomes part of the Trial Court Trust Fund,
which supports all trial court operations. The state assumed responsibility for
future growth in trial court funding. The consolidation of funding is intended
to streamline the operation of the courts, provide a dedicated revenue source,
and relieve fiscal pressure on the counties. Beginning in 1998-99, the county
general fund contribution for court operations is reduced by $300 million, and
cities will retain $62 million in fine and penalty revenue previously remitted
to the State; the General Fund reimbursed the $362 million revenue loss to the
Trial Court Trust Fund. The 1999 Budget Act includes funds to further reduce the
county general fund contribution by an additional $96 million by reducing by 100
percent the contributions of the next 18 smallest counties and reducing by 10
percent the general fund contribution of the remaining 21 counties.
The entire statewide welfare system has been changed in response to
the change in federal welfare law enacted in 1996. Under the California Work
Opportunity and Responsibility to Kids("CalWORKs") program, counties are given
flexibility to develop their own plans, consistent with the state law, to
implement the program and to administer many of its elements, and their costs
for administrative and supportive services are capped at the 1996-97 levels.
Counties are also given financial incentives if, at the individual county level
or statewide, the CalWORKs program produces savings associated with specified
standards. Counties will still be required to provide "general assistance" aid
to certain persons who cannot obtain welfare from other programs.
The 1999 Budget Act proposes expenditures which will continue to meet,
but not exceed, the federally-required $2.9 billion combined State and country
maintenance-of-effort (MOE) requirement. Total CalWORKs-related expenditures are
estimated to be $7.3 billion for 1998-99 and $7.3 billion for 1999-00, including
child care transfer amounts for the Department of Education.
The Sponsor believes the information summarized above describes some
of the more significant aspects relating to the California Trust. The sources of
such information are Preliminary Official Statements and Official Statements
relating to the State's general obligation bonds and the State's revenue
anticipation notes, or obligations of other issuers located in the State of
California, or other publicly available documents. Although the Sponsor has not
independently verified this information, it has no reason to believe that such
information is not correct in all material respects.
New York Trust
Special Factors Affecting New York. The information set forth below is
derived from the official statements and/or preliminary drafts of official
statements prepared in connection with the issuance of State and City municipal
bonds. The Fund has not independently verified this information.
Economic Trends
Over the long term, the State of New York (the "State") and the City
of New York (the "City") face serious economic problems. The City accounts for
approximately 41% of the State's population and personal income, and the City's
financial health affects the State in numerous ways. The State
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historically has been one of the wealthiest states in the nation. For decades,
however, the State has grown more slowly than the nation as a whole,
gradually eroding its relative economic affluence. Statewide, urban centers have
experienced significant changes involving migration of the more affluent to the
suburbs and an influx of generally less affluent residents. Regionally, the
older Northeast cities have suffered because of the relative success that the
South and the West have had in attracting people and business. The City has also
had to face greater competition as other major cities have developed financial
and business capabilities which make them less dependent on the specialized
services traditionally available almost exclusively in the City.
The State has for many years had a very high State and local tax
burden relative to other states. The State and its localities have used these
taxes to develop and maintain their transportation networks, public schools and
colleges, public health systems, other social services and recreational
facilities. Despite these benefits, the burden of State and local taxation, in
combination with the many other causes of regional economic dislocation, has
contributed to the decisions of some businesses and individuals to relocate
outside, or not locate within, the State.
Notwithstanding the numerous initiatives that the State and its
localities may take to encourage economic growth and achieve balanced budgets,
reductions in Federal spending could materially and adversely affect the
financial condition and budget projections of the State and its localities.
New York City
The City, with a population of approximately 7.4 million, is an
international center of business and culture. Its non-manufacturing economy is
broadly based, with the banking and securities, life insurance, communications,
publishing, fashion design, retailing and construction industries accounting for
a significant portion of the City's total employment earnings. Additionally, the
City is the nation's leading tourist destination. The City's manufacturing
activity is conducted primarily in apparel and printing.
For each of the 1981 through 1998 fiscal years, the City had an
operating surplus, before discretionary transfers, and achieved balanced
operating results as reported in accordance with then applicable generally
accepted accounting principles ("GAAP"), after discretionary transfers. The City
has been required to close substantial gaps between forecast revenues and
forecast expenditures in order to maintain balanced operating results. There can
be no assurance that the City will continue to maintain balanced operating
results as required by State law without tax or other revenue increases or
reductions in City services or entitlement programs, which could adversely
affect the City's economic base.
As required by 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 and outlines proposed gap-
closing programs for years with projected budget gaps. The City's current
financial plan projects a surplus in each of the 1999 and 2000 fiscal years,
before discretionary transfers, and budget gaps for each of the 2001, 2002 and
2003 fiscal years. This pattern of current year surplus operating results and
projected subsequent year budget gaps has been consistent through the entire
period since 1982, during which the City has achieved surplus operating results,
before discretionary transfers, for each fiscal year.
The City depends on aid from the State both to enable the City to
balance its budget and to meet its cash requirements. There can be no
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assurance that there will not be reductions in State aid to the City from
amounts currently projected; that State budgets will be adopted by the
April 1 statutory deadline, or interim appropriations enacted; or that any such
reductions or delays will not have adverse effects on the City's cash flow or
expenditures. In addition, the Federal budget negotiation process could result
in a reduction in or a delay in the receipt of Federal grants which could have
additional adverse effects on the City's cash flow or revenues.
The Mayor is responsible for preparing the City's financial plan,
including the City's current financial plan for the 2000 through 2003 fiscal
years (the "2000-2003 Financial Plan" or "Financial Plan"). The City's
projections set forth in the Financial Plan are based on various assumptions and
contingencies which are uncertain and which may not materialize. Such
assumptions and contingencies include the condition of the regional and local
economies, the provision of State and Federal aid and the impact on City
revenues and expenditures of any future Federal or State policies affecting the
City.
Implementation of the Financial Plan is dependent upon the City's
ability to market its securities successfully. The City's financing program for
fiscal years 1999 through 2003 contemplates the issuance of $10.091 billion of
the general obligation bonds and $5.340 billion of bonds to be issued by the New
York City Transitional Finance Authority (the "Finance Authority") to finance
City capital projects. In addition, it is currently expected that approximately
$2.8 billion of bonds will be issued by the Tobacco Settlement Asset
Securitization Corporation ("TSASC") and paid from revenues received pursuant to
a settlement of litigation with the leading cigarette companies. The Finance
Authority and TSASC were created as part of the City's effort to assist in
keeping the City's indebtedness within the forecast level of the constitutional
restrictions on the amount of debt the City is authorized to incur. If TSASC is
not able to issue bonds in the amount expected, the City will need to find
another source of financing or substantially curtail or halt its capital
program. In addition, the City issues revenue and tax anticipation notes to
finance its seasonal working capital requirements. The success of projected
public sales of City bonds and notes, New York City Municipal Water Finance
Authority ("Water Authority") bonds and Finance Authority bonds will be subject
to prevailing market conditions. The City's planned capital and operating
expenditures are dependent upon the sale of its general obligation bonds and
notes, and the Water Authority, Finance Authority and TSASC bonds. Future
developments concerning the City and public discussion of such developments, as
well as prevailing market conditions, may affect the market for outstanding City
general obligation bonds and notes.
For the 1998 fiscal year, the City had an operating surplus, before
discretionary and other transfers, and achieved balanced operating results,
after discretionary and other transfers, in accordance with GAAP. The 1998
fiscal years is the eighteenth year that the City has achieved an operating
surplus, before discretionary and other transfers, balanced operating results,
after discretionary and other transfers.
The most recent quarterly modification to the City's financial plan
for the 1999 fiscal year, submitted to the New York State Financial Control
Board (the "Control Board") on June 14, 1999 (the "1999 Modification"), projects
a balanced budget in accordance with GAAP for the 1999 fiscal year.
On June 14, 1999, the City released the Financial Plan for the 2000 to
2003 fiscal years, which relates to the City and certain entities which receive
funds from the City. The Financial Plan reflects changes as a result of the
City's expense and capital budgets for the fiscal year 2000,
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which were adopted on June 7, 1999. The Financial Plan projects revenues and
expenditures for the 2000 fiscal year balanced in accordance with GAAP and
projects gaps of $1.8 billion, $1.9 billion and $1.8 billion for fiscal
years 2001 through 2003, respectively.
Changes since adoption of the City's Expense Budget for the 1999
fiscal year in June 1998, prior to the financial plan submitted to the Control
Board on June 26, 1998 include: (i) an increase in projected tax revenues of
$976 million, $813 million, $558 million, $417 million and $1.4 billion in
fiscal years 1999 through 2003, respectively; (ii) $300 million, $250 million,
$300 million and $300 million of projected resources in fiscal years 2000
through 2003, respectively, from the receipt by the City of funds from the
settlement of litigation with the leading cigarette companies; (iii) a reduction
in the assumed collection of $350 million of projected rent payments for the
City's airports to $210 million and a delay in the receipt of such payments from
fiscal year 2000 to fiscal year 2001; (iv) anticipated proceeds from the
proposed sale of the Coliseum in fiscal year 2001 totaling $345 million; and (v)
net increases in spending of $638 million, $691 million, $679 million and $1.0
billion in fiscal years 2000 through 2003, including spending for Medicaid,
education initiatives, anti-smoking programs, employee fringe benefit costs, and
other agency programs. The 1999 Modification and the 2000- 2003 Financial Plan
includes a proposed discretionary transfer in the 1999 fiscal year of $2.6
billion to pay debt service due in fiscal year 2000, for budget stabilization
purposes, a proposed discretionary transfer in fiscal year 2000 to pay debt
service due in fiscal year 2001 totaling $429 million, and a proposed
discretionary transfer in fiscal year 2001 to pay debt service due to fiscal
year 2002 totaling $345 million.
In addition, the Financial Plan sets forth gap-closing actions to
eliminate a previously projected gap for the 2000 fiscal year and to reduce
projected gaps for fiscal years 2001 through 2003. The gap-closing actions for
the 2000 through 2003 fiscal years include: (i) additional agency actions
totaling $605 million, $486 million, $409 million and $397 million for fiscal
years 2000 through 2003, respectively; (ii) additional Federal aid of $75
million in each of fiscal years 2000 through 2003, which include the proposed
restoration of $25 million of Federal revenue sharing and $50 million of
increased Federal Medicaid aid; and (iii) additional State actions totaling
approximately $125 million in each of fiscal years 2000 through 2003, including
Medicaid cost containment initiatives proposed in the Governor's Executive
Budget for State fiscal year 1999-2000, which would reduce expenditures by the
City by approximately $50 million in each of fiscal years 2000 through 2003, and
proposals by the City that the State enact tort reform legislation, increase
revenue sharing payments and expand State funding for low income uninsured
disabled children. The Financial Plan also reflects a tax reduction program,
which includes the elimination of the City's non-resident earning tax, the
proposed extension of current tax reductions for owners of cooperative and
condominium apartments and a proposed income tax credit for low wage earners.
The Financial Plan assumes: (i) approval by the Governor and the State
Legislature of the extension of the 14% personal income tax surcharge, which is
scheduled to expire on December 31, 1999, and which is projected to provide
revenue of $572 million, $585 million, $600 million and $638 million in the 2000
through 2003 fiscal years, respectively; (ii) collection of projected rent
payments for the City's airports, totaling $365 million, $185 million and $155
million in the 2001 through 2003 fiscal years, respectively, a substantial
portion of which may depend on the successful completion of negotiations with
the Port Authority of New York and New Jersey or the enforcement of the City's
rights under the existing leases through pending legal action; (iii) State and
Federal approval of the State and Federal gap- closing actions proposed by the
City in the Financial Plan; and (iv) receipt
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of the tobacco settlement funds providing revenues or expenditure offsets in
annual amounts ranging between $250 million and $300 million. The Financial Plan
provides no additional wage increases for City employees after their contracts
expire in fiscal years 2000 and 2001. In addition, the economic and financial
condition of the City may be affected by various financial, social, economic and
political factors which could have a material effect on the City.
On June 7, 1999, the City Council adopted a budget for fiscal year
2000. The adopted budget includes lower estimated debt service expenditures in
fiscal year 2000 resulting from a $456 million increase, from $2.1 billion to
$2.6 billion, in the proposed discretionary transfer in the 1999 fiscal year to
pay debt service due in fiscal year 2000. The $456 million increase in the
discretionary transfer reflects increased tax revenues and decreased
expenditures in the 1999 fiscal year. The adopted budget also includes $220
million of spending initiatives proposed by the City Council, other increased
spending and the net cost of revised tax reduction proposals, which reflect the
repeal of all of the City non-resident earnings tax and elimination of certain
of the previously proposed tax reduction initiatives.
On July 16, 1998, Standard & Poor's revised its rating of City bond
upward from BBB+ to A-. Moody's rating of City bonds was revised in February
1998 to A3 from Baal. On March 8, 1999, Fitch revised its rating of City bonds
upward to A. Moody's, Standard & Poor's and Fitch currently rate the City's
outstanding general obligation bonds A3, A- and A, respectively.
New York State and its Authorities
The State ended the 1998-1999 fiscal year in balance on a cash basis
for the 1998-1999 fiscal year, with a reported closing balance in the General
Fund of $892 million, after reserving a projected $1.8 billion surplus for use
in future years. The Governor's Executive Budget projects balance on a cash
basis for the 1999-2000 fiscal year, with a closing balance in the General Fund
of $2.5 billion, including a projected reserve of $1.79 billion for use in
fiscal years 2000-2001 and 2001-2002. Subsequently, as a result of revisions to
national and State economic forecasts, the State Division of the Budget has
revised its estimate of receipts for the 1999-2000 fiscal year to include an
additional $150 million in receipts. The Legislature and the State Comptroller
will review the Governor's Executive Budget and are expected to comment on it.
The State Assembly and the State Senate have each adopted budget resolutions
which provide an outline of intended spending and revenue changes to the
1999-2000 Executive Budget which, the Division of the Budget believes, would, if
enacted, increase the size of the State's future budget gaps. There can be no
assurance that the Legislature will enact the Executive Budget into law, or that
the State's adopted budget projections will not differ materially and adversely
from the projections set forth in the Executive Budget. Depending on the amount
of State aid provided to localities, and whether the Medicaid cost containment
initiatives proposed in the Executive Budget are approved by the State, the City
might be required to make substantial additional changes in its Financial Plan.
The State budget for the State's 1999-2000 fiscal year was not adopted by the
statutory deadline of April 1, 1999. However, legislation making interim
appropriations has been enacted. A prolonged delay in the adoption of the
State's budget beyond the statutory April 1st deadline without continuing
interim appropriations could delay the projected receipt by the City of State
aid.
The State Financial Plan for the 1999-2000 fiscal year, which reflects
the 1999-2000 Executive Budget, contains projections of a potential imbalance in
the 2000-2001 fiscal year of $1.14 billion and in the 2001-2002 fiscal year of
$2.07 billion, assuming implementation of the 1999-2000 Executive Budget
recommendations, the application of the $1.79 billion reserve fund and
implementation of $500 million of unspecified efficiency initiatives
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and other actions in each of the 2000-2001 and 2001-2002 fiscal years,
respectively. The Executive Budget identifies various risks, including either a
financial market or broader economic correction during the period which could
adversely affect these projections.
Standard & Poor's rates the State's general obligation bonds A, and
Moody's rates the State's general obligation bonds A2. On August 28 1997,
Standard & Poor's revised its rating on the State's general obligation bonds
from A- to A.
Litigation
A number of court actions have been brought involving State finances.
The court actions in which the State is a defendant generally involve State
programs and miscellaneous tort, real property, and contract claims. While the
ultimate outcome and fiscal impact, if any, on the State of those proceedings
and claims are not currently predictable, adverse determinations in certain of
them might have a material adverse effect upon the State's ability to carry out
the 1999 Modification and 2000-2003 Financial Plan.
The City has estimated that its potential future liability on account
of outstanding claims against it as of June 30, 1998 amounted to approximately
$3.5 billion.
Virginia Trust
Virginia Risk Factors. Investors should be aware of certain factors
that might affect the financial condition of issuers of Virginia municipal
securities.
Bonds in the Virginia Trust may include primarily debt obligations of
the subdivisions of the Commonwealth of Virginia issued to obtain funds for
various public purposes, including the construction of a wide range of public
facilities such as airports, bridges, highways, schools, streets and water and
sewer works. Other purposes for which bonds may be issued include the obtaining
of funds to lend to public or private institutions for the construction of
facilities such as educational, hospital, housing, and solid waste disposal
facilities. The latter are generally payable from private sources which, in
varying degrees, may depend on local economic conditions, but are not
necessarily affected by the ability of the Commonwealth of Virginia and its
political subdivisions to pay their debts. Therefore, the general risk factors
as to the credit of the State or its political subdivision discussed herein may
not be relevant to the Virginia Trust.
To the extent bonds of the Commonwealth of Virginia are included in
the Virginia Issues, information on the financial condition of the Commonwealth
is noted. The Constitution of Virginia limits the ability of the Commonwealth to
create debt. The Constitution requires a balanced budget. The Commonwealth has
maintained a high level of fiscal stability for many years due in large part to
conservative financial operations and diverse sources of revenue. The economy of
the Commonwealth of Virginia is based primarily on manufacturing, the government
sector (including defense), agriculture, mining and tourism. Defense
installations are concentrated in Northern Virginia, the location of the
Pentagon, and the Hampton Roads area, including the Cities of Newport News,
Hampton, Norfolk and Virginia Beach, the locations of, among other
installations, the Army Transportation Center (Ft. Eustis), the Langley Air
Force Base, Norfolk Naval Base and the Oceana Naval Air Station, respectively.
Any substantial reductions in defense spending
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generally or in particular areas, including base closings, could adversely
affect the state and local economies.
The Commonwealth currently has a Standard & Poor's rating of AAA and a
Moody's rating of Aaa on its general obligation bonds. There can be no assurance
that the economic conditions on which these ratings are based will continue or
that particular bond issues may not be adversely affected by changes in economic
or political conditions. Further, the credit of the Commonwealth is not material
to the ability of political subdivisions and private entities to make payments
on the obligations described below.
General obligations of cities, towns and counties in Virginia are
payable from the general revenues of the entity, including ad valorem tax
revenues on property within the jurisdiction. The obligation to levy taxes could
be enforced by mandamus, but such a remedy may be impracticable and difficult to
enforce. Under section 15.2-2659 of the Code of Virginia of 1950, as amended, a
holder of any general obligation bond in default may file an affidavit setting
forth such default with the Governor. If, after investigating, the Governor
determines that such default exists, he is directed to order the State
Comptroller to withhold State funds appropriated and payable to the entity and
apply the amount so withheld to unpaid principal and interest. The Commonwealth,
however, has no obligation to provide any additional funds necessary to pay such
principal and interest.
Revenue bonds issued by Virginia political subdivisions include (i)
revenue bonds payable exclusively from revenue producing governmental
enterprises and (ii) industrial revenue bonds, college and hospital revenue
bonds and other "private activity bonds" which are essentially non-governmental
debt issues and which are payable exclusively by private entities such as
non-profit organizations and business concerns of all sizes. State and local
governments have no obligation to provide for payment of such private activity
bonds and in many cases would be legally prohibited from doing so. The value of
such private activity bonds may be affected by a wide variety of factors
relevant to particular localities or industries, including economic developments
outside of Virginia.
Virginia municipal securities that are lease obligations are
customarily subject to "non-appropriation" clauses which allow the municipality,
or other public entity, to terminate its lease obligations if moneys to make the
lease payments are not appropriated for that purpose. See "Objectives". Legal
principles may restrict the enforcement of provisions in lease financing
limiting the municipal issuer's ability to utilize property similar to that
leased in the event that debt service is not appropriated.
PUBLIC OFFERING
Offering Price. The secondary market Public Offering Price per Unit of
each Trust is computed by adding a sales charge to the aggregate bid price of
the Bonds in such Trust divided by the number of Units thereof outstanding. The
method used by the Evaluator for computing the sales charge for secondary market
purchases shall be based upon the number of years remaining to maturity of each
Bond in the portfolio. Bonds will be deemed to mature on their stated maturity
dates unless bonds have been called for redemption, funds have been placed in
escrow to redeem them on an earlier call date or are subject to a "mandatory
put," in which case the maturity will be deemed to be such other date.
The table below sets forth the various sales charges based on the
length of maturity of each Bond:
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As Percent of Public
Time to Maturity Offering Price
less than 6 months 0%
6 mos. to 1 year 1%
over 1 yr. to 2 yrs. 1 1/2%
over 2 yrs. to 4 yrs. 2 1/2%
over 4 yrs. to 8 yrs. 3 1/2%
over 8 yrs. to 15 yrs. 4 1/2%
over 15 years 5 1/2%
A proportionate share of accrued interest on the Bonds to the expected
date of settlement for the Units is added to the Public Offering Price. Accrued
interest is the accumulated and unpaid interest on Bonds from the last day on
which interest was paid and is initially accounted for daily by each Trust at
the daily rate set forth under "Summary of Essential Information" for each Trust
in Part A of this Prospectus. This daily rate is net of estimated fees and
expenses. The secondary market Public Offering Price can vary on a daily basis
from the amount stated on the cover of Part A of this Prospectus in accordance
with fluctuations in the prices of the Bonds. The price to be paid by each
investor will be computed on the basis of an evaluation made as of the day the
Units are purchased. The aggregate bid price evaluation of the Bonds is
determined in the manner set forth under "Trustee Redemption."
The Evaluator may obtain current prices for the Bonds from investment
dealers or brokers (including the Sponsors) that customarily deal in tax-exempt
obligations or from any other reporting service or source of information which
the Evaluator deems appropriate.
Accrued Interest. An amount of accrued interest which represents
accumulated unpaid or uncollected interest on a bond from the last day on which
interest was paid thereon will be added to the Public Offering Price and paid by
the Certificateholder at the time Units are purchased. Since each Trust normally
receives the interest on the Bonds twice a year and the interest on the Bonds is
accrued on a daily basis (this daily rate is net of estimated fees and
expenses), each Trust will always have an amount of interest earned but
uncollected by, or unpaid to, the Trustee. A Certificateholder will not recover
his proportionate share of accrued interest until the Units of a Trust are sold
or redeemed, or such Trust is terminated. At that time, the Certificateholder
will receive his proportionate share of the accrued interest computed to the
settlement date in the case of sale or termination and to the date of tender in
the case of redemption.
Employee Discounts. Employees (and their families) of Reich & Tang
Distributors, Inc. (and its affiliates) and of any underwriter of any Trust,
pursuant to employee benefit arrangements, may purchase Units of a State Trust
at a price equal to the bid side evaluation of the underlying securities in such
State Trust divided by the number of Units outstanding plus a reduced sales
charge. Such arrangements result in less selling effort and selling expenses
than sales to employee groups of other companies. Resales or transfers of Units
purchased under the employee benefit arrangements may only
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be made through the Sponsor's secondary market, so long as it is being
maintained.
Distribution of Units. Certain banks and thrifts will make Units of
the Trust available to their customers on an agency basis. A portion of the
sales charge paid by their customers is retained by or remitted to the banks.
Under the Glass-Steagall Act, banks are prohibited from underwriting Units;
however, the Glass-Steagall Act does permit certain agency transactions and the
banking regulators have indicated that these particular agency transactions are
permitted under such Act. In addition, state securities laws on this issue may
differ from the interpretations of federal law expressed herein and banks and
financial institutions may be required to register as dealers pursuant to state
law.
The Sponsor intends to qualify the Units of each State Trust for sale
in only the State for which such Trust is named and certain other states through
dealers who are members of the National Association of Securities Dealers, Inc.
Units may be sold to dealers at prices which represent a concession of up to
$33.00 per Unit, subject to the Sponsor's right to change the dealers'
concession from time to time. In addition, for transactions of 1,000,000 Units
or more, the Sponsor intends to negotiate the applicable sales charge and such
charge will be disclosed to any such purchaser. Such Units may then be
distributed to the public by the dealers at the Public Offering Price then in
effect. The Sponsor reserves the right to reject, in whole or in part, any order
for the purchase of Units. The Sponsor reserves the right to change the
discounts from time to time.
Sponsor's Profits. The Sponsor will receive a gross commission on all
Units sold in the secondary market equal to the applicable sales charge in each
transaction (see "Offering Price"). In addition, in maintaining a market for the
Units (see "Sponsor Repurchase"), the Sponsor will realize profits or sustain
losses in the amount of any difference between the price at which it buys Units
and the price at which it resells such Units.
Comparison of Public Offering Price, Sponsor's Repurchase Price and
Redemption Price. The secondary market Public Offering Price of Units of each
State Trust will be determined on the basis of the current bid prices of the
Bonds in such State Trust plus the applicable sales charge. Value at which Units
may be resold in the secondary market or redeemed will be determined on the
basis of the current bid prices of such Bonds without any sales charge. On the
Evaluation Date, the Public Offering Price per Unit of each State Trust (based
on the bid price of the Bonds in such State Trust plus the sales charge) each
exceeded the Repurchase and Redemption Price per Unit (based upon the bid price
of the Bonds in each State Trust without the sales charge) by the amounts shown
under "Summary of Essential Information" for each State Trust in Part A of this
Prospectus. For this reason, among others (including fluctuations in the market
prices of such Bonds and the fact that the Public Offering Price includes the
applicable sales charge), the amount realized by a Certificateholder upon any
redemption of Units may be less than the price paid for such Units.
ESTIMATED LONG TERM RETURN AND ESTIMATED CURRENT RETURN
The rate of return on an investment in Units of each Trust is measured
in terms of "Estimated Current Return" and "Estimated Long Term Return".
Estimated Long Term Return is calculated by: (i) computing the yield
to maturity or to an earlier call date (whichever results in a lower yield) for
each Bond in a Trust's portfolio in accordance with accepted bond
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practices, which practices take into account not only the interest payable
on the Bond but also the amortization of premiums or accretion of discounts,
if any; (ii) calculating the average of the yields for the Bonds in
each Trust's portfolio by weighing each Bond's yield by the market value of the
Bond and by the amount of time remaining to the date to which the Bond is priced
(thus creating an average yield for the portfolio of each Trust); and (iii)
reducing the average yield for the portfolio of each Trust in order to reflect
estimated fees and expenses of that Trust and the maximum sales charge paid by
Certificateholders. The resulting Estimated Long Term Return represents a
measure of the return to Certificateholders earned over the estimated life of
each Trust. The Estimated Long Term Return as of the day prior to the Evaluation
Date is stated for each Trust under "Summary of Essential Information" in Part
A.
Estimated Current Return is computed by dividing the Estimated Net
Annual Interest Income per Unit by the Public Offering Price per Unit. In
contrast to the Estimated Long Term Return, the Estimated Current Return does
not take into account the amortization of premium or accretion of discount, if
any, on the Bonds in the portfolios of each Trust. Moreover, because interest
rates on Bonds purchased at a premium are generally higher than current interest
rates on newly issued bonds of a similar type with comparable rating, the
Estimated Current Return per Unit may be affected adversely if such Bonds are
redeemed prior to their maturity. On the day prior to the Evaluation Date, the
Estimated Net Annual Interest Income per Unit divided by the Public Offering
Price resulted in the Estimated Current Return stated for each Trust under
"Summary of Essential Information" in Part A.
The Estimated Net Annual Interest Income per Unit of each Trust will
vary with changes in the fees and expenses of the Trustee and the Evaluator
applicable to each Trust and with the redemption, maturity, sale or other
disposition of the Bonds in each Trust. The Public Offering Price will vary with
changes in the bid prices of the Bonds. Therefore, there is no assurance that
the present Estimated Current Return or Estimated Long Term Return will be
realized in the future.
A schedule of cash flow projections is available from the Sponsor upon
request.
RIGHTS OF CERTIFICATEHOLDERS
Certificates. Ownership of Units of each State Trust is evidenced by
registered Certificates executed by the Trustee and the Sponsor. Certificates
may be issued in denominations of one or more Units and will bear appropriate
notations on their faces indicating which plan of distribution has been selected
by the Certificateholder. Certificates are transferable by presentation and
surrender to the Trustee properly endorsed and/or accompanied by a written
instrument or instrument of transfer. Although no such charge is presently made
or contemplated, the Trustee may require a Certificateholder to pay $2.00 for
each Certificate reissued or transferred and any governmental charge that may be
imposed in connection with each such transfer or interchange. Mutilated,
destroyed, stolen or lost Certificates will be replaced upon delivery of
satisfactory indemnity and payment of expenses incurred.
Interest and Principal Distributions. Interest received by each State
Trust is credited by the Trustee to the Interest Account of such Trust and a
deduction is made to reimburse the Trustee without interest for any amounts
previously advanced. Proceeds representing principal received by each State
Trust from the maturity, redemption, sale or other disposition of Bonds are
credited to the Principal Account of such State Trust.
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Distributions to each Certificateholder of each State Trust from the
Interest Account of such State Trust are computed as of the close of business on
each Record Date for the following Payment Date and consist of an amount
substantially equal to one-twelfth, one-half or all of such Certificateholder's
pro rata share of the Estimated Net Annual Interest Income in such Interest
Account, depending upon the applicable plan of distribution. Distributions from
the Principal Account of each State Trust will be computed as of each
semi-annual Record Date, and will be made to the Certificateholders of such
State Trust on or shortly after the next semi-annual Payment Date. Proceeds
representing principal received from the disposition of any of the Bonds between
a Record Date and a Payment Date which are not used for redemptions of Units
will be held in the appropriate Principal Account and not distributed until the
second succeeding semi-annual Payment Date. No distributions will be made to
Certificateholders electing to participate in the Total Reinvestment Plan,
except as provided thereunder. Persons who purchase Units between a Record Date
and a Payment Date will receive their first distribution on the second Payment
Date after such purchase.
Because interest payments are not received by the State Trust at a
constant rate throughout the year, interest distributions may be more or less
than the amount credited to the Interest Account as of a given Record Date. For
the purpose of minimizing fluctuations in the distributions from the Interest
Account, the Trustee will advance sufficient funds as may be necessary to
provide interest distributions of approximately equal amounts. The Trustee shall
be reimbursed, without interest, for these advances to the Interest Account.
Funds which are available for future distributions, investment in the Total
Reinvestment Plan, payments of expenses and redemptions are in accounts which
are non-interest bearing to Certificateholders and are available for use by the
Trustee pursuant to normal banking procedures.
As of the first day of each month, the Trustee will deduct from the
Interest Account and, to the extent funds are not sufficient therein, from the
Principal Account, amounts necessary to pay the expenses of the Trust (as
determined on the basis set forth under "Trust Expenses and Charges"). The
Trustee also may withdraw from said accounts such amounts, if any, as it deems
necessary to establish a reserve for any applicable taxes or other governmental
charges that may be payable out of the Trust. Amounts so withdrawn shall not be
considered a part of the Trust's assets until such time as the Trustee shall
return all or any part of such amounts to the appropriate accounts. In addition,
the Trustee may withdraw from the Interest and Principal Accounts such amounts
as may be necessary to cover redemptions of Units by the Trustee.
The estimated monthly, semi-annual or annual interest distribution
per Unit of each State Trust initially will be in the amounts shown under
"Summary of Essential Information" in Part A and will change and be reduced as
Bonds mature or are redeemed, exchanged or sold, or as expenses of each State
Trust fluctuate. No distribution need be made from a Principal Account until the
balance therein is an amount sufficient to distribute $1.00 per Unit.
Distribution Elections. Interest is distributed monthly, semi-
annually or annually, depending upon the distribution applicable to the Unit
Purchased. Record Dates for interest distributions will be the first day of each
month for monthly distributions, the first day of each June and December for
semi-annual distributions and the first day of each December for annual
distributions. Payment Dates will be the fifteenth day of each month following
the respective Record Dates. Certificateholders purchasing Units in the
secondary market will initially receive distributions in accordance with the
election of the prior owner. Every October each Certificateholder may change his
distribution election by notifying the Trustee in writing of such
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change between October 1 and November 1 of each year.(Certificateholders
deciding to change their election should contact the Trustee by calling the
number listed on the back cover hereof for information regarding
the procedures that must be followed in connection with this written
notification of the change of election.) Failure to notify the Trustee on or
before November 1 of each year will result in a continuation of the plan for the
following 12 months.
Records. The Trustee shall furnish Certificateholders, in connection
with each distribution, a statement of the amount of interest, if any, and the
amount of other receipts, if any, which are being distributed, expressed in each
case as a dollar amount per Unit. Within a reasonable time after the end of each
calendar year, the Trustee will furnish to each person who at any time during
the calendar year was a Certificateholder of record of a State Trust, a
statement showing (i) as to the Interest Account of such State Trust: interest
received (including any earned original issue discount and amounts representing
interest received upon any disposition of Bonds and earned original discount, if
any), amounts paid for redemption of Units, if any, deductions for applicable
taxes and fees and expenses of such State Trust, and the balance remaining after
such distributions and deductions, expressed both as a total dollar amount and
as a dollar amount representing the pro rata share of each Unit outstanding on
the last business day of such calendar year; (ii) as to such State Trust's
Principal Account: the dates of disposition of any Bonds and the net proceeds
received therefrom (including any unearned original issue discount but excluding
any portion representing accrued interest), deductions for payments of
applicable taxes and fees and expenses of such State Trust, amounts paid for
redemption of Units, if any, and the balance remaining after such distributions
and deductions, expressed both as a total dollar amount and as a dollar amount
representing the pro rata share of each Unit outstanding on the last business
day of such calendar year; (iii) a list of the Bonds held in such State Trust
and the number of Units thereof outstanding on the last business day of such
calendar year; (iv) the Redemption Price per Unit of such State Trust based upon
the last computation thereof made during such calendar year; and (v) amounts
actually distributed to Certificateholders of such State Trust during such
calendar year from the Interest and Principal Accounts, separately stated,
expressed both as total dollar amounts and as dollar amounts representing the
pro rata share of each Unit outstanding on the last business day of such
calendar year.
The Trustee shall keep available for inspection by Certificateholders,
at all reasonable times during usual business hours, books of record and account
of its transactions as Trustee, including records of the names and addresses of
Certificateholders, Certificates issued or held, a current list of Bonds in the
portfolio and a copy of the Trust Agreement.
TAX STATUS
All Bonds acquired by the State Trusts were accompanied by copies of
opinions of bond counsel to the issuing governmental authorities given at the
time of original delivery of the Bonds to the effect that the interest thereon
is exempt from regular Federal income tax and from the respective State income
taxes. Such interest may, however, be subject to the federal alternative minimum
tax and to state and local taxes in other jurisdictions. Neither the Sponsor nor
the Trustee nor their respective counsel have made any review of the proceedings
relating to the issuance of the Bonds or the bases for such opinions and express
no opinion as to these matters, and neither the Trustee nor the Sponsor nor
their respective counsel have made an independent examination or verification
that the federal income tax status of the Bonds has not been altered since the
time of the original delivery of those opinions.
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In rendering the opinion set forth below, counsel has examined the
Agreement, the final form of Prospectus dated the date hereof and the documents
referred to therein, among others, and has relied on the validity of said
documents and the accuracy and completeness of the facts set forth therein.
In the opinion of Battle Fowler LLP, counsel for the Sponsor,
under existing law:
The State Trusts will be classified as a grantor trust and not as
associations taxable as corporations for federal income tax purposes under
the Internal Revenue Code of 1986 (the "Code"). Income received by each
State Trust that consists of interest excludable from federal gross income
under the Code will be excludable from the federal gross income of the
Certificateholders of such State Trust.
Each Certificateholder of a State Trust will be considered the owner
of a pro rata portion of the assets of that State Trust. Thus, each
Certificateholder of a State Trust will be considered to have received its
pro rata share of Bond interest when it is received by the State Trust, and
the entire amount of net income distributable to Certificateholders of a
State Trust that is exempt from federal income tax when received by that
State Trust will constitute tax-exempt income when received by the
Certificateholders.
Gain realized on sale or redemption of the Bonds or on sale of a Unit
is, however, includible in gross income for federal income tax purposes,
generally as capital gain. Such gain does not include any amount received
in respect to accrued interest, earned original issue discount and accrued
market discount. Gain on the disposition of a Bond or a Unit purchased at a
market discount generally will be treated as ordinary income, rather than
capital gain, to the extent of accrued market discount. Such gain may be
long- or short-term gain depending on the holding period of the Bond or the
Unit, assuming that the Bond or Unit is held as a capital asset. Capital
losses are deductible to the extent of capital gains; in addition, up to
$3,000 of capital losses of non-corporate Certificateholders ($1,500 for
married persons filing separately) may be deducted against ordinary income.
Capital assets held by individuals will qualify for long-term capital gain
treatment if held for more than one year and will be subject to a reduced
tax rate of 20% rather than the regular maximum tax rate of 39.6%.
Each Certificateholder of a State Trust will realize taxable gain or
loss when that State Trust disposes of a Bond (whether by sale, exchange,
redemption or payment at maturity), as if the Certificateholder had
directly disposed of its pro rata share of such Bond. The gain or loss is
measured by the difference between (i) the tax cost of such pro rata share
and (ii) the amount received therefor. The Certificateholder's tax cost for
each Bond is determined by allocating the total tax cost of each Unit among
all the Bonds held in the State Trust (in accordance with the portion of
the State Trust comprised by each Bond). In order to determine the amount
of taxable gain or loss, the Certificateholder's amount received is
similarly allocated at that time. The Certificateholder may exclude from
the amount received any amounts that represent accrued interest or the
earned portion of any original issue discount but may not exclude amounts
attributable to market discount. Thus, when a Bond is disposed of by State
Trust at a gain, taxable gain will equal the difference between (i) the
amount received and (ii) the amount paid plus any accrued original issue
discount. Gain on the disposition of a Bond purchased at a market discount
generally will be treated as ordinary
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income, rather than capital gain, to the extent of accrued market
discount. No deduction is allowed for the amortization of bond premium on
tax-exempt bonds, such as the Bonds, in computing regular federal income
tax.
Discount generally accrues based on the principle of compounding of
accrued interest, not on a straight-line or ratable method, with the result
that the amount of earned original issue discount is less in the earlier
years and more in the later years of a bond term. The tax basis of a
discount bond is increased by the amount of accrued, tax-exempt original
issue discount thus determined. This method of calculation will produce
higher capital gains (or lower losses) to a Certificateholder, as compared
to the results produced by the straight-line method of accounting for
original issue discount, upon an early disposition of a Bond by a State
Trust or of a Unit by a Certificateholder.
A Certificateholder may also realize taxable income or loss when a
Unit of a State Trust is sold or redeemed. The amount received is allocated
among all the Bonds in that State Trust in the same manner as when the
State Trust disposes of Bonds, and the Certificateholder may exclude
accrued interest and the earned portion of any original issue discount (but
not amounts attributable to market discount). The return of a
Certificateholder's tax cost is otherwise a tax-free return of capital.
A portion of Social Security benefits is includible in gross income
for taxpayers whose modified adjusted gross income combined with a portion
of their Social Security benefits exceeds a base amount. The base amount is
$25,000 for an individual, $32,000 for a married couple filing a joint
return and zero for married persons filing separate returns. Interest on
tax-exempt bonds is to be added to adjusted gross income for purposes of
computing the amount of Social Security benefits that are includible in
gross income and determining whether an individual's income exceeds the
base amount above which a portion of the benefits would be subject to tax.
Corporate Certificateholders are required to include in federal
corporate alternative minimum taxable income 75% of the amount by which the
adjusted current earnings (which will include tax-exempt interest) of the
corporation exceeds alternative minimum taxable income (determined without
regard to this item). In addition, in certain cases, Subchapter S
corporations with accumulated earnings and profits from Subchapter C years
will be subject to a minimum tax on excess passive investment income which
includes tax-exempt interest.
Under federal law, interest on Bonds in each State Trust issued by
authority of the Government of Puerto Rico is exempt from regular Federal
income tax and state and local income taxes in the United States and Puerto
Rico.
The State Trusts are not subject to the New York State Franchise Tax
on Business Corporations or the New York City General Corporation Tax.
Battle Fowler LLP is also of the opinion that under the personal
income tax laws of the State and City of New York, the income of each State
Trust will be treated as the income of the Certificateholders. Interest on
the Bonds that is exempt from tax under the laws of the State and City of
New York when received by the New York Trust will retain its status as
tax-exempt interest of the Certificateholders. In addition, non-residents
of New York
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City will not be subject to the City personal income tax on gains derived with
respect to their Units. Non-residents of New York State will not be subject to
New York State personal income tax on such gains unless the Units are employed
in a business, trade or occupation carried on in New York State. A New York
State or New York City resident should determine its basis and holding period
for its Units in the same manner for New York State and New York City tax
purposes as for federal tax purposes. For corporations doing business in New
York State, interest earned on state and municipal obligations that are exempt
from federal income tax, including obligations of New York State, its political
subdivisions and instrumentalities, must be included in calculating New York
State and New York City entire net income for purposes of computing New York
State and New York City franchise (income) tax.
The exemption of interest on municipal obligations for federal income
tax purposes does not necessarily result in exemption under the income tax laws
of any state or local government. The laws of such states and local governments
vary with respect to the taxation of such obligations. See "Rights of
Certificateholders" in this Part B.
In the opinion of Brown & Wood LLP, special counsel to the Sponsor for
California tax matters, under existing California law applicable to individuals
who are California residents:
The California Trust will not be treated as an association taxable as
a corporation, and the income of the California Trust will be treated as
the income of the Certificateholders. Accordingly, interest on Bonds
received by the California Trust that is exempt from personal income taxes
imposed by or under the authority of the State of California will be
treated for California income tax purposes in the same manner as if
received directly by the Certificateholders.
Each Certificateholder of the California Trust will recognize gain or
loss when the California Trust disposes of a Bond (whether by sale,
exchange, redemption or payment at maturity) or upon the
Certificateholder's sale or other disposition of a Unit. The amount of gain
or loss for California income tax purposes will generally be calculated
pursuant to the Internal Revenue Code of 1986, as amended, certain
provisions of which are incorporated by reference under California law.
In the opinion of Hunton & Williams, special counsel to the
Sponsors for Virginia tax matters, under existing Virginia law applicable to
individuals who are Virginia residents and assuming that the Virginia Trust is a
grantor trust under the grantor trust rules of Sections 671-679 of the Code:
The Virginia Trust will be taxable as a grantor trust for Virginia
income tax purposes with the result that income of the Virginia Trust will
be treated as income of the Certificateholders of the Virginia Trust.
Consequently, the Virginia Trust will not be subject to any income or
corporate franchise tax imposed by the Commonwealth of Virginia, or its
subdivisions, agencies or instrumentalities.
Interest on the Bonds in the Virginia Trust that is exempt from
Virginia income tax when received by the Virginia Trust will retain its tax
exempt status in the hands of the Certificateholders of the Virginia Trust.
A Certificateholder of the Virginia Trust will realize a taxable event
when the Virginia Trust disposes of a Bond (whether by sale, exchange,
redemption or payment at maturity) or when the Certificateholder redeems or
sells his Units, and taxable gain for
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Federal income tax purposes may result in taxable gain for Virginia
income tax purposes. Certain Bonds, however, may have been issued under
Acts of the Virginia General Assembly which provide that all income from
such Bond, including any profit from the sale thereof, shall be free from
all taxation by the Commonwealth of Virginia. To the extent that any such
profit is exempt from Virginia income tax, any such profit received by the
Virginia Trust will retain its tax exempt status in the hands of the
Certificateholders of the Virginia Trust.
In the case of Bonds that are industrial revenue bonds ("IRBs") or
certain types of private activity bonds, the opinions of bond counsel to the
respective issuing authorities indicate that interest on such Bonds is exempt
from regular federal income tax. However, interest on such Bonds will not be
exempt from regular federal income tax for any period during which such Bonds
are held by a substantial user of the facilities financed by the proceeds of
such Bonds or by a related person thereof within the meaning of the Code.
Therefore, interest on any such Bonds allocable to a Certificateholder who is
such a substantial user or related person thereof will not be tax-exempt.
Furthermore, in the case of IRBs that qualify for the small issue exemption, the
small issue exemption will not be available or will be lost if, at any time
during the three-year period beginning on the later of the date the facilities
are placed in service or the date of issue, all outstanding tax-exempt IRBs,
together with a proportionate share of any present issue, of an owner or
principal user (or related person) of the facilities exceeds $40,000,000. In the
case of IRBs issued under the $10,000,000 small issue exemption, interest on
such IRBs will become taxable if the face amount of such IRBs plus certain
capital expenditures exceeds $10,000,000.
In addition, a Bond can lose its tax-exempt status as a result of
other subsequent but unforeseeable events such as prohibited arbitrage
activities by the issuer of the Bond or the failure of the Bond to continue to
satisfy the conditions required for the exemption of interest thereon from
regular federal income tax. No investigation has been made as to the current or
future owners or users of the facilities financed by the Bonds, the amount of
such persons' outstanding tax-exempt IRBs, or the facilities themselves, and no
assurance can be given that future events will not affect the tax-exempt status
of the Bonds. Investors should consult their tax advisors for advice with
respect to the effect of these provisions on their particular tax situation.
Interest on indebtedness incurred or continued to purchase or carry
the Units is not deductible for regular federal income tax purposes. In
addition, under rules used by the Internal Revenue Service for determining when
borrowed funds are considered used for the purpose of purchasing or carrying
particular assets, the purchase of Units may be considered to have been made
with borrowed funds even though the borrowed funds are not directly traceable to
the purchase of Units. Also, in the case of certain financial institutions that
acquire Units, in general no deduction is allowed for interest expense allocable
to the Units.
From time to time, proposals have been introduced before Congress to
restrict or eliminate the federal income tax exemption for interest on debt
obligations similar to the Bonds in the State Trusts, and it can be expected
that similar proposals may be introduced in the future. In particular, Congress
may consider the adoption of some form of flat tax which could have an adverse
impact on the value of tax-exempt bonds.
In South Carolina v. Baker, the U.S. Supreme Court held that the
federal government may constitutionally require states to register bonds they
issue and subject the interest on such bonds to federal income tax if not
registered, and that there is no constitutional prohibition against the
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federal government's taxing the interest earned on state or other municipal
bonds. The Supreme Court decision affirms the authority of the Federal
government to regulate and control bonds such as the Bonds in the Trust and to
tax interest on such bonds in the future. The decision does not, however, affect
the current exemption from taxation of the interest earned on the Bonds in the
Trust in accordance with Section 103 of the Code.
The opinions of bond counsel to the issuing governmental authorities
to the effect that interest on the Bonds is exempt from regular federal income
tax may be limited to law existing at the time the Bonds were issued, and may
not apply to the extent that future changes in law, regulations or
interpretations affect such Bonds. Investors are advised to consult their own
tax advisors for advice with respect to the effect of any legislative changes.
LIQUIDITY
Sponsor Repurchase. The Sponsor, although not obligated to do so,
intends to maintain a secondary market for the Units of each State Trust and
continuously to offer to repurchase the Units of the Trusts. The Sponsor's
secondary market repurchase price will be based on the aggregate bid price of
the Bonds in each State Trust portfolio, determined by the Evaluator on a daily
basis, and will be the same as the redemption price. (See "Trustee Redemption.")
Certificateholders who wish to dispose of their Units should inquire of the
Sponsor as to current market prices prior to making a tender for redemption. The
Sponsor may discontinue repurchases of Units of a State Trust if the supply of
Units exceeds demand, or for other business reasons. The date of repurchase is
deemed to be the date on which Certificates representing Units of a State Trust
are physically received in proper form by the Sponsor, Reich & Tang
Distributors, Inc., 600 Fifth Avenue, New York, N.Y. 10020. Units received after
4:00 p.m., New York Time, will be deemed to have been repurchased on the next
business day. In the event a market is not maintained for the Units of a State
Trust, a Certificateholder may be able to dispose of Units only by tendering
them to the Trustee for redemption.
Prospectuses relating to certain other bond trusts indicate an
intention by the Sponsor, subject to change, to repurchase units of those funds
on the basis of a price higher than the bid prices of the Bonds in the Trusts.
Consequently, depending upon the prices actually paid, the secondary market
repurchase price of other trusts may be computed on a somewhat more favorable
basis than the repurchase price offered by the Sponsor for Units of these State
Trusts, although in all bond trusts, the purchase price per unit depends
primarily on the value of the bonds in the trust portfolio.
Units purchased by the Sponsor in the secondary market may be
re-offered for sale by the Sponsor at a price based on the aggregate bid price
of the Bonds in a State Trust plus the applicable sales charge plus net accrued
interest. Any Units that are purchased by the Sponsor in the secondary market
also may be redeemed by the Sponsor if it determines such redemption to be in
its best interest.
The Sponsor may, under certain circumstances, as a service to
Certificateholders, elect to purchase any Units tendered to the Trustee for
redemption (see "Trustee Redemption"). For example, if in order to meet
redemptions of Units the Trustee must dispose of Bonds, and if such disposition
cannot be made by the redemption date (seven calendar days after tender), the
Sponsor may elect to purchase such Units. Such purchase shall be made by payment
to the Certificateholder not later than the close of business on the redemption
date of an amount equal to the Redemption Price on the date of tender.
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Trustee Redemption. Units may also be tendered to the Trustee for
redemption at its corporate trust office as set forth in Part A of this
Prospectus, upon proper delivery of Certificates representing such Units and
payment of any relevant tax. At the present time there are no specific taxes
related to the redemption of Units. No redemption fee will be charged by the
Sponsor or the Trustee. Units redeemed by the Trustee will be canceled.
Certificates representing Units to be redeemed must be delivered to
the Trustee and must be properly endorsed or accompanied by proper instruments
of transfer with signature guaranteed (or by providing satisfactory indemnity,
as in the case of lost, stolen or mutilated Certificates). Thus, redemptions of
Units cannot be effected until Certificates representing such Units have been
delivered by the person seeking redemption. (See "Certificates.")
Certificateholders must sign exactly as their names appear on the faces of their
Certificates. In certain instances the Trustee may require additional documents
such as, but not limited to, trust instruments, certificates of death,
appointments as executor or administrator or certificates of corporate
authority.
Within three business days following a tender for redemption, the
Certificateholder will be entitled to receive in cash an amount for each Unit
tendered equal to the Redemption Price per Unit computed as of the Evaluation
Time on the date of tender. The "date of tender" is deemed to be the date on
which Units are received by the Trustee, except that, with respect to Units
received after the close of trading on the New York Stock Exchange, the date of
tender is the next day on which such Exchange is open for trading, and such
Units will be deemed to have been tendered to the Trustee on such day for
redemption at the Redemption Price computed on that day.
Accrued interest paid on redemption shall be withdrawn from the
appropriate Interest Account, or, if the balance therein is insufficient, from
the appropriate Principal Account. All other amounts paid on redemption shall be
withdrawn from the appropriate Principal Account. The Trustee is empowered to
sell Bonds in order to make funds available for redemptions. Such sales, if
required, could result in a sale of Bonds by the Trustee at a loss. To the
extent Bonds in a State Trust are sold, the size and diversity of such Trust
will be reduced.
The Redemption Price per Unit of a State Trust is the pro rata share
of each Unit in such State Trust determined by the Trustee on the basis of (i)
the cash on hand in such Trust or monies in the process of being collected, (ii)
the value of the Bonds in such State Trust based on the bid prices of such Bonds
and (iii) interest accrued thereon, less (a) amounts representing taxes or other
governmental charges payable out of such State Trust, (b) the accrued expenses
of such State Trust and (c) cash allocated for distribution to
Certificateholders of record of such State Trust as of the business day prior to
the evaluation being made. The Evaluator may determine the value of the Bonds in
such State Trust for purposes of redemption (i) 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 State Trust, (ii) on the basis of bid
prices for bonds comparable to any Bonds for which bid prices are not available,
(iii) by determining the value of the Bonds by appraisal, or (iv) by any
combination of the above.
The Trustee is irrevocably authorized in its discretion, if the
Sponsor does not elect to purchase a Unit tendered for redemption or if the
Sponsor tenders a Unit for redemption, in lieu of redeeming such Unit, to sell
such Unit in the over-the-counter market for the account of the tendering
Certificateholder at prices which will return to the Certificateholder an amount
in cash, net after deducting brokerage commissions, transfer taxes and other
charges, equal to or in excess of the Redemption Price for such Unit.
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The Trustee will pay the net proceeds of any such sale to the Certificateholder
on the day he would otherwise be entitled to receive payment of the Redemption
Price.
The Trustee reserves the right to suspend the right of redemption and
to postpone the date of payment of the Redemption Price per Unit for any period
during which the New York Stock Exchange is closed, other than customary weekend
and holiday closings, or trading on that Exchange is restricted or during which
(as determined by the Securities and Exchange Commission) an emergency exists as
a result of which disposal or evaluation of the Bonds is not reasonably
practicable, or for such other periods as the Securities and Exchange Commission
may by order permit. The Trustee and the Sponsor are not liable to any person or
in any way for any loss or damage which may result from any such suspension or
postponement.
A Certificateholder who wishes to dispose of his Units should inquire
of his bank or broker in order to determine if there is a current secondary
market price in excess of the Redemption Price.
TRUST ADMINISTRATION
Portfolio Supervision. The Sponsor may direct the Trustee to dispose
of Bonds in a State Trust upon (i) default in payment of principal or interest
on such Bonds, (ii) institution of certain legal proceedings with respect to the
issuers of such Bonds, (iii) default under other documents adversely affecting
debt service on such Bonds, (iv) default in payment of principal or interest on
other obligations of the same issuer or guarantor, (v) with respect to revenue
Bonds, decline in revenues and income of any facility or project below the
estimated levels calculated by proper officials charged with the construction or
operation of such facility or project, or (vi) decline in price or the
occurrence of other market or credit factors that in the opinion of the Sponsor
would make the retention of such Bonds in such State Trust detrimental to the
interests of the Certificateholders. If a default in the payment of principal or
interest on any of the Bonds occurs and if the Sponsor fails to instruct the
Trustee to sell or hold such Bonds, the Trust Agreement provides that the
Trustee may sell such Bonds.
The Sponsor is authorized by the Trust Agreement to direct the Trustee
to accept or reject certain plans for the refunding or refinancing of any of the
Bonds. Any bonds received in exchange or substitution will be held by the
Trustee subject to the terms and conditions of the Trust Agreement to the same
extent as the Bonds originally deposited. Within five days after such deposit in
a State Trust, notice of such exchange and deposit shall be given by the Trustee
to each Certificateholder of such Trust registered on the books of the Trustee,
including an identification of the Bonds eliminated and the Bonds substituted
therefor. Except as previously stated in the discussion regarding Failed Bonds,
the acquisition by a State Trust of any securities other than the Bonds
initially deposited is prohibited.
Trust Agreement, Amendment and Termination. The Trust Agreement may be
amended by the Trustee, the Sponsor and the Evaluator without the consent of any
of the Certificateholders: (i) to cure any ambiguity or to correct or supplement
any provision which may be defective or inconsistent; (ii) to change any
provision thereof as may be required by the Securities and Exchange Commission
or any successor governmental agency; or (iii) to make such other provisions in
regard to matters arising thereunder as shall not adversely affect the interests
of the Certificateholders.
The Trust Agreement may also be amended in any respect, or performance
of any of the provisions thereof may be waived, with the consent
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of the holders of Certificates evidencing 66-2/3% of the Units then outstanding
of each State Trust affected by such amendment for the purpose of
modifying the rights of Certificateholders; provided that no such amendment or
waiver shall reduce any Certificateholder's interest in a State Trust without
his consent or reduce the percentage of Units required to consent to any such
amendment or waiver without the consent of the holders of all Certificates. The
Trust Agreement may not be amended, without the consent of the holders of all
Certificates in a State Trust then outstanding, to increase the number of Units
issuable by such State Trust or to permit the acquisition of any bonds in
addition to or in substitution for those initially deposited in such State
Trust, except in accordance with the provisions of the Trust Agreement. The
Trustee shall promptly notify Certificateholders, in writing, of the substance
of any such amendment.
The Trust Agreement provides that each State Trust shall terminate
upon the maturity, redemption or other disposition, as the case may be, of the
last of the Bonds held in such State Trust, but in no event is it to continue
beyond the end of the calendar year preceding the fiftieth anniversary of the
execution of the Trust Agreement. If the value of a State Trust shall be less
than the minimum amount set forth under "Summary of Essential Information in
Part A" for such State Trust, the Trustee may, in its discretion, and shall when
so directed by the Sponsor, terminate such State Trust. Each State Trust may
also be terminated at any time with the consent of the holders of Certificates
representing 100% of the Units of such State Trust then outstanding. In the
event of termination of a State Trust, written notice thereof will be sent by
the Trustee to all Certificateholders of such State Trust. Within a reasonable
period after termination, the Trustee must sell any Bonds remaining in the
terminated State Trust, and, after paying all expenses and charges incurred by
such State Trust, distribute to each Certificateholder thereof, upon surrender
for cancellation of his Certificate for Units, his pro rata share of the
Interest and Principal Accounts of such State Trust.
The Sponsors. The Sponsor, Reich & Tang Distributors, Inc. ("Reich &
Tang"), a Delaware corporation, is engaged in the brokerage business and is a
member of the National Association of Securities Dealers, Inc. Reich & Tang is
also a registered investment adviser. Reich & Tang maintains its principal
business offices at 600 Fifth Avenue, New York, New York 10020. The sole
shareholder of the Sponsor, Reich & Tang Asset Management, Inc. ("RTAM Inc.") is
wholly owned by NEIC Holdings, Inc. which, effective December 29, 1997, was
wholly owned by NEIC Operating Partnership, L.P. ("NEICOP"). Subsequently, on
March 31, 1998, NEICOP changed its name to Nvest Companies, L.P. ("Nvest"). The
general partners of Nvest are Nvest Corporation and Nvest, L.P. Nvest, L.P. is
owned approximately 99% by public unitholders and its general partner is Nvest
Corporation. Nvest, with a principal place of business at 399 Boylston Street,
Boston, MA 02116, is a holding company of firms engaged in the securities and
investment advisory business. These affiliates in the aggregate are investment
advisors or managers to over 80 registered investment companies. Reich & Tang is
Sponsor (and Co-Sponsor, as the case may be) for numerous series of unit
investment trusts, including New York Municipal Trust, Series 1 (and Subsequent
Series), Municipal Securities Trust, Series 1 (and Subsequent Series), 1st
Discount Series (and Subsequent Series), Multi-State Series 1 (and Subsequent
Series), Mortgage Securities Trust, Series 1 (and Subsequent Series), Insured
Municipal Securities Trust, Series 1 (and Subsequent Series) and 5th Discount
Series (and Subsequent Series), Equity Securities Trust, Series 1, Signature
Series, Gabelli Communications Income Trust (and Subsequent Series) Schwab
Trusts and McLaughlin, Piven, Vogel Family of Trusts.
For certain other Trusts as set forth in the "Summary of Essential
Information" in Part A, the Sponsors are Reich & Tang and Gruntal & Co.,
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L.L.C., both of whom have entered into an Agreement Among Co-Sponsors
pursuant to which both parties have agreed to act as Co-Sponsors for the Trust.
Reich & Tang has been appointed by Gruntal & Co., L.L.C. as agent for purposes
of taking any action required or permitted to be taken by the Sponsor under the
Trust Agreement. If the Sponsors are unable to agree with respect to action to
be taken jointly by them under the Trust Agreement and they cannot agree as to
which Sponsor shall act as sole Sponsor, then Reich & Tang shall act as sole
Sponsor. If one of the Sponsors fails to perform its duties under the Trust
Agreement or becomes incapable of acting or becomes bankrupt or its affairs are
taken over by public authorities, that Sponsor may be discharged under the Trust
Agreement and a new Sponsor may be appointed or the remaining Sponsor may
continue to act as Sponsor.
Gruntal & Co., L.L.C., a Delaware limited liability company, operates
a regional securities broker/dealer from its main office in New York City and
branch offices in nine states. The firm is very active in the marketing of
investment companies and has signed dealer agreements with many mutual fund
groups. Further, through its Syndicate Department, Gruntal & Co., L.L.C. has
underwritten a large number of Closed-End Funds and has been Co-Manager on the
following offerings: Cigna High Income Shares; Dreyfus New York Municipal
Income, Inc.; Franklin Principal Maturity Trust and Van Kampen Merritt Limited
Term High Income Trust. The Sponsor is liable for the performance of its
obligations arising from its responsibilities under the Trust Agreement, but
will be under no liability to Certificateholders for taking any action, or
refraining from taking any action, in good faith pursuant to the Trust
Agreement, or for errors in judgment except in cases of its own willful
misfeasance, bad faith, gross negligence or reckless disregard of its
obligations and duties.
The information included herein is only for the purpose of informing
investors as to the financial responsibility of the Sponsor and its ability to
carry out its contractual obligations. The Sponsor will be under no liability to
Certificateholders for taking any action, or refraining from taking any action,
in good faith pursuant to the Trust Agreement, or for errors in judgment except
in cases of its own willful misfeasance, bad faith, gross negligence or reckless
disregard of its obligations and duties.
The Sponsor may resign at any time by delivering to the Trustee an
instrument of resignation executed by the Sponsor.
If at any time the Sponsor shall resign or fail to perform any of its
duties under the Trust Agreement or becomes incapable of acting or becomes
bankrupt or its affairs are taken over by public authorities, then the Trustee
may either (i) appoint a successor Sponsor; (ii) terminate the Trust Agreement
and liquidate the Trust; or (iii) continue to act as Trustee without terminating
the Trust Agreement. Any successor Sponsor appointed by the Trustee shall be
satisfactory to the Trustee and, at the time of appointment, shall have a net
worth of at least $1,000,000.
The Trustee. For certain of the State Trusts, as set forth in the
"Summary of Essential Information" in Part A, the Trustee is The Chase Manhattan
Bank with its principal executive office located at 270 Park Avenue, New York,
New York 10017 (800) 428-8890 and its unit investment trust office at 4 New York
Plaza, New York, New York 10004. The Trustee is subject to supervision by the
Superintendent of Banks of the State of New York, the Federal Deposit Insurance
Corporation and the Board of Governors of the Federal Reserve System.
The Trustee must be a banking corporation organized under the laws of
the United States or any state which is authorized under such laws to exercise
corporate trust powers and must have at all times an aggregate
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capital, surplus and undivided profits of not less than $5,000,000. The duties
of the Trustee are primarily ministerial in nature. The Trustee did not
participate in the selection of Securities for the portfolio of the Trust.
The Trustee shall not be liable or responsible in any way for taking
any action, or for refraining from taking any action, in good faith pursuant to
the Trust Agreement, or for errors in judgment; or for any disposition of any
moneys, Bonds or Certificates in accordance with the Trust Agreement, except in
cases of its own willful misfeasance, bad faith, gross negligence or reckless
disregard of its obligations and duties; provided, however, that the Trustee
shall not in any event be liable or responsible for any evaluation made by the
Evaluator. In addition, the Trustee shall not be liable for any taxes or other
governmental charges imposed upon or in respect of the Bonds or the Trusts which
it may be required to pay under current or future law of the United States or
any other taxing authority having jurisdiction. The Trustee shall not be liable
for depreciation or loss incurred by reason of the sale by the Trustee of any of
the Bonds pursuant to the Trust Agreement.
For further information relating to the responsibilities of the
Trustee under the Trust Agreement, reference is made to the material set forth
under "Rights of Certificateholders."
The Trustee may resign by executing an instrument in writing and
filing the same with the Sponsor, and mailing a copy of a notice of resignation
to all Certificateholders. In such an event, the Sponsor is obligated to appoint
a successor Trustee as soon as possible. In addition, if the Trustee becomes
incapable of acting or becomes bankrupt or its affairs are taken over by public
authorities, the Sponsor may remove the Trustee and appoint a successor as
provided in the Trust Agreement. Notice of such removal and appointment shall be
mailed to each Certificateholder by the Sponsor. If upon resignation of the
Trustee no successor has been appointed and has accepted the appointment within
thirty days after notification, the retiring Trustee may apply to a court of
competent jurisdiction for the appointment of a successor. The resignation or
removal of the Trustee becomes effective only when the successor Trustee accepts
its appointment as such or when a court of competent jurisdiction appoints a
successor Trustee. Upon execution of a written acceptance of such appointment by
such successor Trustee, all the rights, powers, duties and obligations of the
original Trustee shall vest in the successor.
Any corporation into which the Trustee may be merged or with which it
may be consolidated, or any corporation resulting from any merger or
consolidation to which the Trustee shall be a party, shall be the successor
Trustee. The Trustee must always be a banking corporation organized under the
laws of the United States or any state and have at all times an aggregate
capital, surplus and undivided profits of not less than $2,500,000.
The Evaluator. The Evaluator is Kenny S&P Evaluation Services, a
business unit of J. J. Kenny Company, Inc., a subsidiary of The McGraw-Hill
Companies, Inc. with main offices located at 65 Broadway, New York, New York
10006. The Evaluator is a wholly-owned subsidiary of McGraw-Hill, Inc. The
Evaluator is a registered investment advisor and also provides financial
information services.
The Trustee, the Sponsor and Certificateholders may rely on any
evaluation furnished by the Evaluator and shall have no responsibility for the
accuracy thereof. Determinations by the Evaluator under the Trust Agreement
shall be made in good faith upon the basis of the best information available to
it, provided, however, that the Evaluator shall be under no liability to the
Trustee, the Sponsor, or Certificateholders for errors in judgment, except
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in cases of its own willful misfeasance, bad faith, gross negligence or reckless
disregard of its obligations and duties.
The Evaluator may resign or may be removed by the Sponsor and Trustee,
and the Sponsor and the Trustee are to use their best efforts to appoint a
satisfactory successor. Such resignation or removal shall become effective upon
the acceptance of appointment by the successor Evaluator. If upon resignation of
the Evaluator no successor has accepted appointment within thirty days after
notice of resignation, the retiring Evaluator may apply to a court of competent
jurisdiction for the appointment of a successor.
TRUST EXPENSES AND CHARGES
At no cost to the State Trusts, the Sponsor has borne the expenses of
creating and establishing the State Trusts, including the cost of initial
preparation and execution of the Trust Agreement, registration of the State
Trusts and the Units under the Investment Company Act of 1940 and the Securities
Act of 1933, preparation and printing of the Certificates, legal and auditing
expenses, advertising and selling expenses, initial fees and expenses of the
Trustee and other out-of-pocket expenses. The fees of the Evaluator, however,
incurred during the initial public offering, are paid directly by the Trustee.
The Sponsor will not charge the State Trust a fee for its services as
such. See "Sponsor's Profits."
The Trustee will receive for its ordinary recurring services to each
State Trust an annual fee in the amount set forth under "Summary of Essential
Information" in Part A. For a discussion of the services performed by the
Trustee pursuant to its obligations under the Trust Agreement, see "Trust
Administration" and "Rights of Certificateholders."
The Evaluator will receive for each daily evaluation of the Bonds in
the Trust a fee in the amount set forth under "Summary of Essential Information"
in Part A, which fee shall be allocated pro rata among each State Trust.
The Trustee's and Evaluator's fees applicable to a State Trust are
payable monthly as of the Record Date from such State Trust's Interest Account
to the extent funds are available and then from such Trust's Principal Account.
Both fees may be increased without approval of the Certificateholders by amounts
not exceeding proportionate increases in consumer prices for services as
measured by the United States Department of Labor's Consumer Price Index
entitled "All Services Less Rent."
The following additional charges are or may be incurred by any or all
of the State Trusts: (i) all expenses (including counsel and auditing fees) of
the Trustee incurred in connection with its activities under the Trust
Agreement, including the expenses and costs of any action undertaken by the
Trustee to protect a State Trust and the rights and interests of the
Certificateholders; (ii) fees of the Trustee for any extraordinary services
performed under the Trust Agreement; (iii) indemnification of the Trustee for
any loss or liability accruing to it without gross negligence, bad faith or
willful misconduct on its part, arising out of or in connection with its
acceptance or administration of a State Trust; (iv) indemnification of the
Sponsor for any loss, liabilities and expenses incurred in acting as Sponsor of
a State Trust without gross negligence, bad faith or willful misconduct on its
part; and (v) all taxes and other governmental charges imposed upon the Bonds or
any part of a State Trust (no such taxes or charges are being levied, made or,
to the knowledge of the Sponsor, contemplated). The above expenses,
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including the Trustee's fees, when paid by or owing to the Trustee,
are secured by a first lien on the State Trust to which such expenses are
allocable. In addition, the Trustee is empowered to sell Bonds of a State Trust
in order to make funds available to pay all expenses of such State Trust.
Unless the Sponsor otherwise directs, the accounts of the Trust shall
be audited not less than annually by independent public accountants selected by
the Sponsor. The expenses of the audit shall be an expense of the Trust. So long
as the Sponsor maintains a secondary market, the Sponsor will bear any audit
expense which exceeds $.50 per 1,000 Units. Certificateholders covered by the
audit during the year may receive a copy of the audited financials upon request.
EXCHANGE PRIVILEGE AND CONVERSION OFFER
Certificateholders will be able to elect to exchange any or all of
their Units of this Trust for Units of one or more of any available series of
Equity Securities Trust, Insured Municipal Securities Trust, Municipal
Securities Trust, New York Municipal Trust or Mortgage Securities Trust (the
"Exchange Trusts") subject to a reduced sales charge as set forth in the
prospectus of the Exchange Trust (the "Exchange Privilege"). Unit owners of any
registered unit investment trust for which there is no active secondary market
in the units of such trust (a "Redemption Trust") will be able to elect to
redeem such units and apply the proceeds of the redemption to the purchase of
available Units of one or more series of an Exchange Trust (the "Conversion
Trusts") at the Public Offering Price for units of the Conversion Trust subject
to a reduced sales charge as set forth in the prospectus of the Conversion Trust
(the "Conversion Offer"). Under the Exchange Privilege, the Sponsor's repurchase
price during the initial offering period of the Units being surrendered will be
based on the market value of the Securities in the Trust portfolio or on the
aggregate offer price of the Bonds in the other Trust Portfolios; and, after the
initial offering period has been completed, will be based on the aggregate bid
price of the securities in the particular Trust portfolio. Under the Conversion
Offer, units of the Redemption Trust must be tendered to the trustee of such
trust for redemption at the redemption price determined as set forth in the
relevant Redemption Trust's prospectus. Units in an Exchange or Conversion Trust
will be sold to the Certificateholder at a price based on the aggregate offer
price of the securities in the Exchange or Conversion trust portfolio (or for
units of Equity Securities Trust, based on the market value of the underlying
securities in the trust portfolio) during the initial public offering period of
the Exchange or Conversion Trust; and after the initial public offering period
has been completed, based on the aggregate bid price of the securities in the
Exchange or Conversion Trust Portfolio if its initial offering has been
completed plus accrued interest (or for units of Equity Securities Trust, based
on the market value of the underlying securities in the trust portfolio) and a
reduced sales charge.
Except for Certificateholders who wish to exercise the Exchange
Privilege or Conversion Offer within the first five months of their purchase of
Units of the Exchange or Redemption Trust, any purchaser who purchases Units
under the Exchange Privilege or Conversion Offer will pay a lower sales charge
than that which would be paid for the Units by a new investor. For
Certificateholders who wish to exercise the Exchange Privilege or Conversion
Offer within the first five months of their purchase of Units of the Exchange or
Redemption Trust, the sales charge applicable to the purchase of units of an
Exchange or Conversion Trust shall be the greater of (i) the reduced sales
charge or (ii) an amount which when coupled with the sales charge paid by the
Certificateholder upon his original purchase of Units of the Exchange or
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Redemption Trust would equal the sales charge applicable in the direct purchase
of units of an Exchange Trust.
In order to exercise the Exchange Privilege the Sponsor must be
maintaining a secondary market in the units of the available Exchange Trust. The
Conversion Offer is limited only to unit owners of any Redemption Trust.
Exercise of the Exchange Privilege and the Conversion Offer by
Certificateholders is subject to the following additional conditions: (i) at the
time of the Certificateholder's election to participate in the Exchange
Privilege or Conversion Offer, there must be units of the Exchange or Conversion
Trust available for sale, either under the initial primary distribution or in
the Sponsor's secondary market, (ii) exchanges will be effected in whole units
only, (iii) Units of the Mortgage Securities Trust may only be acquired in
blocks of 1,000 Units and (iv) Units of the Equity Securities Trust may only be
acquired in blocks of 100 Units. Certificate holders will not be permitted to
advance any funds in excess of their redemption in order to complete the
exchange. Any excess proceeds received from a Certificateholder for exchange or
from units being redeemed per conversion will be remitted to such
Certificateholder.
The Sponsor reserves the right to suspend, modify or terminate the
Exchange Privilege and/or the Conversion Offer. The Sponsor will provide
Certificateholders of the Trust with 60 days' prior written notice of any
termination or material amendment to the Exchange Privilege and/or the
Conversion Offer, provided that no notice need be given if (i) the only material
effect of an amendment is to reduce or eliminate the sales charge payable at the
time of the exchange, to add one or more series of the Trust eligible for the
Exchange Privilege or the Conversion Offer, to add any new unit investment trust
sponsored by Reich & Tang or a sponsor controlled by or under common control
with Reich & Tang, or to delete a series which has been terminated from
eligibility for the Exchange Privilege and/or the Conversion Offer, (ii) there
is a suspension of the redemption of units of an Exchange or Conversion Trust
under Section 22(e) of the Investment Company Act of 1940, or (iii) an Exchange
Trust temporarily delays or ceases the sale of its units because it is unable to
invest amounts effectively in accordance with its investment objectives,
policies and restrictions. During the 60-day notice period prior to the
termination or material amendment of the Exchange Privilege described above, the
Sponsor will continue to maintain a secondary market in the units of all
Exchange Trusts that could be acquired by the affected Certificateholders.
Certificateholders may, during this 60-day period, exercise the Exchange
Privilege in accordance with its terms then in effect.
To exercise the Exchange Privilege, a Certificateholder should notify
the Sponsor of his desire to exercise his Exchange Privilege. To exercise the
Conversion Offer, a unit owner of a Redemption Trust should notify his retail
broker of his desire to redeem his Redemption Trust Units and use the proceeds
from the redemption to purchase Units of one or more of the Conversion Trusts.
If Units of a designated, outstanding series of an Exchange or Conversion Trust
are at the time available for sale and such Units may lawfully be sold in the
state in which the Certificateholder is a resident, the Certificateholder will
be provided with a current prospectus or prospectuses relating to each Exchange
or Conversion Trust in which he indicates an interest. He may then select the
Trust or Trusts into which he desires to invest the proceeds from his sale of
Units. The exchange transaction will operate in a manner essentially identical
to a secondary market transaction except that units may be purchased at a
reduced sales charge. The conversion transaction will be handled entirely
through the unit owner's retail broker. The retail broker must tender the units
to the trustee of the Redemption Trust for redemption and then apply the
proceeds to the redemption toward the purchase of units of a Conversion Trust at
a price based
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on the aggregate offer or bid side evaluation per Unit of the Conversion Trust,
depending on which price is applicable, plus accrued interest
and the applicable sales charge. The certificates must be surrendered to the
broker at the time the redemption order is placed and the broker must specify to
the Sponsor that the purchase of Conversion Trust Units is being made pursuant
to the Conversion Offer. The unit owner's broker will be entitled to retain a
portion of the sales charge.
Tax Consequences of the Exchange Privilege and the Conversion Offer. A
surrender of Units pursuant to the Exchange Privilege or the Conversion Offer
will constitute a taxable event to the Certificateholder under the Internal
Revenue Code. The Certificateholder will realize a tax gain or loss that will be
of a long- or short-term capital or ordinary income nature dependent on the
length of time the Units have been held and other factors. (See "Tax Status".) A
Certificateholder's tax basis in the Units acquired pursuant to the Exchange
Privilege or Conversion Offer will be equal to the purchase price of such Units.
Investors should consult their own tax advisors as to the tax consequences to
them of exchanging or redeeming units and participating in the Exchange
Privilege or Conversion Offer.
OTHER MATTERS
Legal Opinions. The legality of the Units originally offered and
certain matters relating to federal and New York tax law have been passed upon
by Battle Fowler LLP, 75 East 55th Street, New York, New York 10022, or Berger
Steingut Tarnoff & Stern, 600 Madison Avenue, New York, New York 10022, as
counsel for the Sponsor. Certain matters relating to California tax law have
been passed upon by Brown & Wood LLP, as special California counsel to the
Sponsor. Certain matters relating to Virginia tax law have been passed upon by
Hunton & Williams, as special Virginia counsel to the Sponsor. Carter, Ledyard &
Milburn, Two Wall Street, New York, New York 10005 have acted as counsel for The
Chase Manhattan Bank.
Independent Accountants. The financial statements of the Trusts for
the years ended June 30, 1997, 1998 and 1999 included in Part A of this
Prospectus have been examined by PricewaterhouseCoopers LLP, independent
accountants. The financial statements have been so included in reliance on their
report given upon the authority of said firm as experts in accounting and
auditing.
Performance Information. Total returns, average annualized returns or
cumulative returns for various periods of this Trust may be included from time
to time in advertisements, sales literature and reports to current or
prospective investors. Total return shows changes in Unit price during the
period plus reinvestment of dividends and capital gains, divided by the original
public offering price as of the date of calculation. Average annualized returns
show the average return for stated periods of longer than a year. Sales material
may also include an illustration of the cumulative results of like annual
investments during an accumulation period and like annual withdrawals during a
distribution period. Figures for actual portfolios will reflect all applicable
expenses and, unless otherwise stated, the maximum sales charge. No provision is
made for any income taxes payable. Returns may also be shown on a combined
basis. Trust performance may be compared to performance on a total return basis
of the Dow Jones Industrial Average, the S&P 500 Composite Price Stock Index, or
performance data from Lipper Analytical Services, Inc. and Morningstar
Publications, Inc. or from publications such as Money, The New York Times, U.S.
News and World Report, Business Week, Forbes or Fortune. As with other
performance data, performance comparisons should not be considered
representative of a Trust's relative performance for any future period.
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DESCRIPTION OF BOND RATINGS*
Standard & Poor's Ratings Services. A brief description of the
applicable Standard & Poor's Corporation rating symbols and their meanings is as
follows:
A Standard & Poor's corporate or municipal bond rating is a current
assessment of the creditworthiness of an obligor with respect to a specific debt
obligation. This assessment of creditworthiness may take into consideration
obligors such as guarantors, insurers, or lessees.
The bond rating is not a recommendation to purchase or sell a
security, inasmuch as it does not comment as to market price.
The ratings are based on current information furnished to Standard &
Poor's by the issuer and obtained by Standard & Poor's from other sources it
considers reliable. The ratings may be changed, suspended or withdrawn as a
result of changes in, or unavailability of, such information.
The ratings are based, in varying degrees, on the following
considerations:
(i)Likelihood of default-capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with the
terms of the obligation.
(ii)Nature of and provisions of the obligation.
(iii)Protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
AAA -- This is the highest rating assigned by Standard & Poor's to a
debt obligation and indicates an extremely strong capacity to pay principal and
interest.
AA -- Bonds rated AA also qualify as high-quality debt obligations.
Capacity to pay principal and interest is very strong, and they differ from AAA
issues only in small degrees.
A -- Bonds rated A have a strong capacity to pay principal and
interest, although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions.
BBB -- Bonds rated BBB are regarded as having an adequate capacity to
pay principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.
Plus (+) or Minus (-): To provide more detailed indications of credit
quality, the ratings from "AA" to "BB" may be modified by the addition of a plus
or minus sign to show relative standing within the major rating categories.
- --------
* As described by the rating agencies.
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Provisional Ratings -- (Prov.) following a rating indicates the rating
is provisional, which assumes the successful completion of the project being
financed by the issuance of the bonds being rated and indicates that payment of
debt service requirements is largely or entirely dependent upon the successful
and timely completion of the project. This rating, however, while addressing
credit quality subsequent to completion, makes no comment on the likelihood of,
or the risk of default upon failure of, such completion. Accordingly, the
investor should exercise his own judgment with respect to such likelihood and
risk.
Moody's Investors Service. A brief description of the applicable
Moody's Investors Service, Inc.'s rating symbols and their meanings is as
follows:
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.
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 which make
the long term risks appear somewhat larger than in Aaa securities.
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.
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.
Those bonds in the A and Baa group which Moody's believes possess the
strongest investment attributes are designated by the symbol A 1 and Baa 1.
Other A bonds comprise the balance of the group. These rankings (i) designate
the bonds which offer the maximum in security within their quality group, (ii)
designate bonds which can be bought for possible upgrading in quality and (iii)
additionally afford the investor an opportunity to gauge more precisely the
relative attractiveness of offerings in the market place.
Moody's applies numerical modifiers, 1, 2, and 3 in each generic
rating classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating 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 debt
obligations secured by (i) earnings of projects under construction,
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(ii) earnings of projects unseasoned in operating experience, (iii)
rentals which begin when facilities are completed, or (iv) payments to which
some other limiting condition attaches. Rating denotes probable credit stature
upon completion of construction or elimination of basis of condition.
NR: Indicates that no rating has been requested, that there is insufficient
information on which to base a rating or that S&P does not rate a particular
type of obligation as a matter of policy.
* * *
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<TABLE>
<CAPTION>
INDEX * * *
MUNICIPAL SECURITIES TRUST
Title Page MULTI-STATE SERIES
<S> <C> <C>
Summary of Essential Information............. A-5 (A Unit Investment Trust)
Financial and Statistical Information........ A-6
Information Regarding the Trust.............. A-7 Prospectus
----------
Audit and Financial Information.............. F-1
Dated: October 28, 1999
The Trust.................................... 1
The State Trusts............................. 8 Sponsor:
Public Offering.............................. 23
Estimated Long Term Return and Estimated Reich & Tang Distributors,
Current Return............................. 25 Inc.
Rights of Certificateholders................. 26 600 Fifth Avenue
Tax Status................................... 28 New York, N.Y. 10020
Liquidity.................................... 33 212-830-5200
Trust Administration......................... 35
Trust Expenses and Charges................... 39 (and for certain Trusts:)
Exchange Privilege and Conversion Offer...... 40 Gruntal & Co., L.L.C.
Other Matters................................ 42 One Liberty Plaza
Description of Bond Ratings.................. 43 New York, New York 10006
(212) 267-8800
Parts A and B of this Prospectus do
not contain all of the information set forth in Trustee:
the registration statement and exhibits relating
thereto, filed with the Securities and Exchange The Chase Manhattan Bank
Commission, Washington, D.C., under the 4 New York Plaza
Securities Act of 1933, and to which reference is New York, N.Y. 10004
made. 800-882-9898
Evaluator:
Kenny S&P Evaluation
Services
65 Broadway
New York, N.Y. 10006
</TABLE>
This Prospectus does not constitute an offer to sell, or a
solicitation of any offer to buy securities in any state to any person to whom
it is not lawful to make such offer in such state.
* * *
No person is authorized to give any information or to make any
representations not contained in Parts A and B of this Prospectus; and any
information or representation not contained herein must not be relied upon as
having been authorized by the Trust, the Trustee, the Evaluator, or the Sponsor.
The Trust is registered as a unit investment trust under the Investment Company
Act of 1940. Such registration does not imply that the Trust or any of its Units
have been guaranteed, sponsored, recommended or approved by the United States or
any state or any agency or officer thereof.
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