Rule 497(b)
Registration No. 33-50901
Prospectus Part A Dated October 31, 1997
MUNICIPAL SECURITIES TRUST
MULTI-STATE SERIES 44
(MULTIPLIER PORTFOLIO)
The Trust consists of 2 separate unit investment trusts
designated California Trust and Virginia Trust (the "State Trusts"). Each State
Trust contains 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. There can be no assurance that the Trusts' investment 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
federal income tax. In addition, in the opinion of counsel to the Sponsor, the
interest income of each State Trust is exempt, to the extent indicated, from
state and local taxes when held by residents of the state where the issuers of
the Bonds in such State Trust are located. Such interest income may, however, be
subject to the federal corporate alternative minimum tax and to state and local
taxes in other jurisdictions. (See "Description of Portfolios" 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 Portfolios--General.") The Sponsor is
Reich & Tang Distributors L.P. 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 including descriptive material relating to each
State Trust as of June 30, 1997 (the "Evaluation Date"), a summary of certain
specific information regarding each State trust and audited financial statements
of each State Trust, including the related portfolio, as of the Evaluation Date.
Part B of this Prospectus contains a general summary of the State Trusts. Part A
of this Prospectus may not be distributed unless accompanied by Part B.
Investors should read and retain both parts of this Prospectus for future
reference.
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Principal Secondary Market
Number of Amount of Offering Price
Units Bonds per Unit (06/30/97)
California Trust 2,065 $2,055,000 $978.09
Virginia Trust 3,000 $2,950,000 $982.54
- -------------------------------------------------------------------------------
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 the State for which such Trust is
named and political subdivisions, municipalities and public authorities thereof
and of Puerto Rico and its public authorities. All of the Bonds in each State
Trust were rated "A" or better by Standard & Poor's Corporation or Moody's
Investors Service, Inc. at the time originally deposited in the State Trusts.
For a discussion of the significance of such ratings, see "Description of Bond
217547.1
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Ratings" in Part B of this Prospectus and for a list of ratings on the
Evaluation Date see the "Portfolio".
The State Trusts contain bonds that were acquired at prices
which resulted in the portfolios as a whole being purchased at a deep discount
from par value. The portfolio may also include bonds issued at a substantial
original issue discount, some of which may be Zero Coupon Bonds that provide for
payment at maturity at par value, but do not provide for the payment of current
interest. 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. Some of the Bonds in the portfolio may
have been purchased at an aggregate premium over par. (See "Tax Status" in Part
B of this Prospectus.) Some of the Bonds in the Trust have been issued 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 ("PreRefunded 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 debt obligations may
entail, including the risk that the value of the underlying portfolio will
decline with increases in interest rates, and that the value of Zero Coupon
Bonds is subject to greater fluctuation than coupon bonds in response to such
changes in interest rates. A Trust designated as a long-term trust must have a
dollar-weighted average portfolio maturity of more than ten years.
Each Unit represents a fractional undivided interest in the
principal and net income of each State Trust. The principal amount of Bonds
deposited in such State Trust per Unit is reflected in the Summary of Essential
Information. Each State Trust will be administered as a distinct entity with
separate certificates, expenses, books and records. (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 Sponsor
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 5.5% of the Public Offering
Price, or 5.820% 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 the expected date of
settlement is added to the Public Offering Price. If Units of the California
Trust had been purchased on the Evaluation Date, the Public Offering Price per
Unit would have been $978.09 plus accrued interest of $8.76 under the monthly
distribution plan, $12.82 under the semi-annual distribution plan and $39.36
under the annual distribution plan, for a total of $986.85, $990.91 and
$1,017.45, respectively. If Units of the Virginia Trust had been purchased on
the Evaluation Date, the Public Offering Price per Unit would have been $982.54
plus accrued interest of $8.10 under the monthly distribution plan, $12.28 under
the semi-annual distribution plan and $37.39 under the annual distribution plan,
for a total of $990.64, $994.82
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217547.1
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and $1,019.93, 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 "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 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
Sponsor 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 actually receive distributions
in accordance with the distribution plan chosen by the prior owner of such Unit
and may thereafter change the plan as provided under "Interest and Principal
Distributions" in Part B of this Prospectus. Distributions of principal, if
any, will be made semi-annually on June 15 and December 15 of each year. (See
"Rights of Certificateholders--Interest and Principal Distributions" in Part B
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217547.1
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of this Prospectus. For estimated monthly, semi-annual and annual interest
distributions, see "Summary of Essential Information.")
MARKET FOR UNITS. The Sponsor, although not obligated to do
so, intends to maintain a secondary market for the Units at prices based on the
aggregate bid price of the Bonds in the Trust portfolio. 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 5.5% of the Public Offering Price (5.820% of the
net amount invested) plus net accrued interest. If a market is not maintained, a
Certificateholder will be able to redeem his or her Units with the Trustee at a
price also based on the aggregate bid price of the Bonds. (See "Sponsor
Repurchase" and "Public Offering--Offering Price" in Part B of this Prospectus.)
TOTAL REINVESTMENT PLAN. Certificateholders under the
semi-annual and annual plans of distribution have the opportunity to have all
their regular interest distributions, and principal distributions, if any,
reinvested in available series of "Insured Municipal Securities Trust" or
"Municipal Securities Trust." (See "Total Reinvestment Plan" in Part B of this
Prospectus.) The Plan is not designed to be acomplete investment program.
For additional information regarding the Public Offering Price
and Estimated Current Return and Estimated Long Term Return for Units of each
State Trust, descriptions of interest and principal distributions, repurchase
and redemption of Units and other essential information regarding the Trusts,
please refer to the Summary of Essential Information for the particular State
Trust on one of the immediately succeeding pages.
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217547.1
<PAGE>
MUNICIPAL SECURITIES TRUST
MULTI-STATE SERIES 44
CALIFORNIA TRUST
SUMMARY OF ESSENTIAL INFORMATION AS OF JUNE 30, 1997
<TABLE>
<S> <C>
Date of Deposit*: December 9, 1993 Minimum Principal Distribution:
Principal Amount of Bonds . $2,055,000 $1.00 per Unit.
Number of Units ........... 2,065 Weighted Average Life to
Fractional Undivided Inter- Maturity: 22.58 Years.
est in Trust per Unit ... 1/2065 Minimum Value of Trust:
Principal Amount of Trust may be terminated if
Bonds per Unit .......... $995.16 value of Trust is less than
Secondary Market Public $1,000,000 in principal amount
Offering Price** of Bonds.
Aggregate Bid Price Mandatory Termination Date:
of Bonds in Trust ...... $1,908,684.10+++ The earlier of December 31,
Divided by 2,065 Units .. $924.30 2043 or the disposition of the
Plus Sales Charge of last Bond in the Trust.
5.5% of Public Trustee***: The Chase Manhattan
Offering Price.......... $53.79 Bank.
Public Offering Price Trustee's Annual Fee: Monthly
per Unit ............... $978.09+ plan $1.10 per $1,000; semi-
Redemption and Sponsor's annual plan $.63 per $1,000;
Repurchase Price and annual plan is $.36 per
per Unit ................ $924.30+ $1,000.
+++ Evaluator: Kenny S&P Evaluation
++++ Services.
Excess of Secondary Market Evaluator's Fee for Each
Public Offering Price Evaluation: Minimum of $7.50
over Redemption and plus $.25 per each issue of
Sponsor's Repurchase Bonds in excess of 50 issues
Price per Unit .......... $53.79++++ (treating separate maturities
Difference between Public as separate issues).
Offering Price per Unit Sponsor: Reich & Tang
and Principal Amount per Distributors L.P.
Unit Premium/(Discount).. $(17.07) Sponsor's Annual Fee: Maximum of
Evaluation Time: 4:00 p.m. $.25 per $1,000 principal
New York Time. amount of Bonds (see "Trust
Expenses and Charges" in
Part B of this Prospectus).
</TABLE>
PER UNIT INFORMATION BASED UPON INTEREST DISTRIBUTION PLAN ELECTED
<TABLE>
<CAPTION>
Monthly Semi-Annual Annual
Option Option Option
<S> <C> <C> <C>
Gross annual interest income# ......... $51.25 $51.25 $51.25
Less estimated annual fees and
expenses ............................ 2.97 2.64 ----
Estimated net annual interest ______ ______ ______
income (cash)# ...................... $48.28 $48.61 $51.25
Estimated interest distribution# ...... 4.02 24.30 51.25
Estimated daily interest accrual# ..... .1341 .1350 .1423
Estimated current return#++ ........... 4.94% 4.97% 5.24%
Estimated long term return++ .......... 5.01% 5.05% 5.07%
Record dates .......................... 1st of Dec. 1 and Dec. 1
each month June 1
Interest distribution dates ........... 15th of Dec. 15 and Dec. 15
each month June 15
</TABLE>
A-5
217547.1
<PAGE>
MUNICIPAL SECURITIES TRUST
MULTI-STATE SERIES 44
VIRGINIA TRUST
SUMMARY OF ESSENTIAL INFORMATION AS OF JUNE 30, 1997
<TABLE>
<S> <C>
Date of Deposit*: December 9, 1993 Minimum Principal Distribution:
Principal Amount of Bonds . $2,950,000 $1.00 per Unit.
Number of Units ........... 3,000 Weighted Average Life to
Fractional Undivided Inter- Maturity: 23.3 Years.
est in Trust per Unit .... 1/3000 Minimum Value of Trust:
Principal Amount of Trust may be terminated if
Bonds per Unit ........... $983.34 value of Trust is less than
Secondary Market Public $1,200,000 in principal amount
Offering Price** of Bonds.
Aggregate Bid Price Mandatory Termination Date:
of Bonds in Trust ....... $2,785,487+++ The earlier of December 31,
Divided by 3,000 Units.... $928.50 2043 or the disposition of the
Plus Sales Charge of 5.5% last Bond in the Trust.
of Public Offering Price. $54.04 Trustee***: The Chase Manhattan
Public Offering Price Bank.
per Unit ................ $982.54+ Trustee's Annual Fee: Monthly
Redemption and Sponsor's plan $1.10 per $1,000; semi-
Repurchase Price annual plan $.63 per $1,000;
per Unit ................. $928.50+ and annual plan is $.36 per
+++ $1,000.
++++ Evaluator: Kenny S&P Evaluation
Excess of Secondary Market Services.
Public Offering Price Evaluator's Fee for Each
over Redemption and Evaluation: Minimum of $7.50
Sponsor's Repurchase plus $.25 per each issue of
Price per Unit ........... $54.04++++ Bonds in excess of 50 issues
Difference between Public (treating separate maturities
Offering Price per Unit as separate issues).
and Principal Amount per Sponsor: Reich & Tang
Unit Premium/(Discount) .. $(.80) Distributors L.P.
Evaluation Time: 4:00 p.m. Sponsor's Annual Fee: Maximum of
New York Time. $.25 per $1,000 principal
amount of Bonds (see "Trust
Expenses and Charges" in Part B
of this Prospectus).
</TABLE>
PER UNIT INFORMATION BASED UPON INTEREST DISTRIBUTION PLAN ELECTED
<TABLE>
<CAPTION>
Monthly Semi-Annual Annual
Option Option Option
<S> <C> <C> <C>
Gross annual interest income# ......... $52.09 $52.09 $52.09
Less estimated annual fees and
expenses ............................ 2.41 1.93 1.98
Estimated net annual interest _____ _____ _____
income (cash)# ...................... $49.68 $50.16 $50.11
Estimated interest distribution# ...... 4.14 25.08 50.11
Estimated daily interest accrual# ..... .1380 .1393 .1391
Estimated current return#++ ........... 5.06% 5.10% 5.10%
Estimated long term return++ ........... 5.08% 5.13% 5.12%
Record dates .......................... 1st of Dec. 1 and Dec. 1
each month June 1
Interest distribution dates ........... 15th of Dec. 15 and Dec. 15
each month June 15
</TABLE>
A-6
217547.1
<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.
** For information regarding offering price per unit and applicable sales
charge under the Total Reinvestment Plan, see "Total Reinvestment Plan"
in Part B of this Prospectus.
Certain amounts distributable as of June 30, 1997 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 $8.76 monthly, $12.82
semi-annually and $39.36 annually for the California Trust and $8.10
monthly, $12.28 semi-annually and $37.39 annually for the Virginia
Trust.
++ The estimated current return and estimated long term return are
increased for transactions entitled to a discount (see "Employee
Discounts" in Part B of this Prospectus), and are higher under the
semi-annual and annual options due to lower Trustee's fees and
expenses.
+++ Based solely upon the bid side evaluation of the underlying Bonds
(including, where applicable, undistributed cash from the principal
account). Upon tender for redemption, the price to be paid will be
calculated as described under "Trustee Redemption" in Part B of this
Prospectus.
++++ See "Comparison of Public Offering Price, Sponsor's Repurchase Price
and Redemption Price" in Part B of this Prospectus.
# Does not include accrual from original issue discount bonds, if any.
FINANCIAL AND STATISTICAL INFORMATION
Selected data for each Unit outstanding for the periods listed below:
<TABLE>
<CAPTION>
Distribu-
tions of
Distributions of Interest Principal
During the Period (per Unit) During
Net Asset* Semi- the
Units Out- Value Monthly Annual Annual Period
Period Ended standing Per Unit Option Option Option (Per Unit)
- ------------ ---------- ---------- ------- ------ ------ ----------
California Trust
<S> <C> <C> <C> <C> <C> <C>
June 30, 1995 2,473 $868.49 $49.55 $49.91 -0- $4.00
June 30, 1996 2,543 899.72 49.51 49.78 -0- -0-
June 30, 1997 2,065 936.56 49.80 50.14 $52.06 8.25
Virginia Trust
June 30, 1995 3,000 $899.78 $50.52 $51.08 $38.52 -0-
June 30, 1996 3,000 921.03 51.11 51.63 -0- -0-
June 30, 1997 3,000 940.55 50.10 50.64 50.53 $16.83
</TABLE>
- --------
* Net Asset Value per Unit is calculated by dividing net assets as
disclosed in the "Statement of Net Assets" by the number of Units
outstanding as of the date of the Statement of Net Assets. See Note 5
of Notes to Financial Statements for a description of the components of
Net Assets.
A-7
217547.1
<PAGE>
INFORMATION REGARDING THE TRUSTS
AS OF JUNE 30, 1997
DESCRIPTION OF PORTFOLIOS
California Trust
Each Unit in the California Trust consists of a 1/2065th
undivided interest in the principal and net income of the Trust in the ratio of
one Unit for each $995.16 of principal amount of the Bonds currently held in the
Trust. The Sponsor has 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. The portfolio of the
California Trust consists of 10 issues of 10 issuers located in California. None
of the Bonds are obligations of state and local housing authorities;
approximately 12.2% are hospital revenue bonds; and none were issued in
connection with the financing of nuclear generating facilities. One issue
comprising approximately 10% of the aggregate principal amount of the Bonds is a
mortgage subsidy bond. All of the Bonds 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
issues representing the aggregate principal amount of the Bonds are general
obligation bonds. Ten issues representing $2,055,000 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: Apartments 1, Civic Center 1, Education 2, Hospital
2, Housing 1, Improvement Facility 1, Tax Allocation 1 and Transportation 1. For
an explanation of the significance of these factors see "The State
Trusts-Portfolios" in Part B of this Prospectus.
As of June 30, 1997, $1,490,000 (approximately 72.2% of the
aggregate principal amount of the Bonds) were original issue discount bonds. Of
these original issue discount bonds, $100,000 (approximately 4.9% of the
aggregate principal amount of the Bonds) were 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 17.8% of the aggregate
principal amount of the Bonds in the Trust were purchased at a "market" discount
from par value at maturity, none were purchased at a premium and approximately
10% were purchased at par. For an explanation of the significance of these
factors see "The Portfolios--Discount and Zero Coupon Bonds" in Part B of this
Prospectus.
None of the Bonds in the California 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.
Virginia Trust
Each Unit in the Virginia Trust consists of a 1/3000th
undivided interest in the principal and net income of the Trust in the ratio of
one Unit for each $983.34 of principal amount of the Bonds currently held in the
Trust. The Sponsor has 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. The portfolio of the
Virginia Trust consists of 12 issues of 10 issuers located in Virginia and 2 in
Puerto Rico. Approximately 10.2% of the Bonds are obligations of state and local
housing authorities; approximately 27.1% are hospital revenue bonds; and none
were issued in connection with the financing of nuclear generating facilities.
Two issues comprising approximately 10.2% of the aggregate principal amount of
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217547.1
<PAGE>
the Bonds are mortgage subsidy bonds. All of the Bonds 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). One issue representing $250,000 of the principal amount of the Bonds
is a general obligation bond. All 11 of the remaining issues representing
$2,700,000 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: Bridge &
Tunnel Authority 1, Educational Facility 1, Electric 1, Highway 1, Hospital 4,
Housing 1, Multi-Family 1 and Water Revenue 1. For an explanation of the
significance of these factors see "The State Trusts--Portfolios" in Part B of
this Prospectus.
As of June 30, 1997, $950,000 (approximately 32.2% of the
aggregate principal amount of the Bonds) were original issue discount bonds. Of
these original issue discount bonds, $150,000 (approximately 5.1% of the
aggregate principal amount of the Bonds) were 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 5.7% of the aggregate
principal amount of the Bonds in the Trust were purchased at a "market" discount
from par value at maturity, approximately 57% were purchased at a premium and
approximately 5.1% were purchased at par. For an explanation of the significance
of these factors see "The Portfolios--Discount and Zero Coupon Bonds" in Part B
of this Prospectus.
None of the Bonds in the Virginia 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.
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217547.1
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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 31, 1997
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 L.P., as Sponsor, or depending on the particular
Trust, among Reich & Tang Distributors L.P. 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.
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<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 corporate 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 Bonds 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: (a) the
quality of the Bonds and whether such Bonds were rated "A" or better by Standard
& Poor's or Moody's, (b) the yield and price of the Bonds relative to other
tax-exempt securities of comparable quality and maturity, (c) income to the
Certificateholders of the State Trusts, (d) 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 issues which meet such State
-2-
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<PAGE>
Trust's quality, rating, yield and price criteria and (e) 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
utilities which own or operate nuclear power plants are exposed to risks
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<PAGE>
inherent in the nuclear industry. These risks include exposure to new
requirements resulting from extensive federal and state regulatory oversight,
public controversy, decommissioning costs, and spent fuel and radioactive waste
disposal issues. While nuclear power construction risks are no longer of
paramount concern, the emerging issue is radioactive waste disposal. In
addition, nuclear plants typically require substantial capital additions and
modifications throughout their operating lives to meet safety, environmental,
operational and regulatory requirements and to replace and upgrade various plant
systems. The high degree of regulatory monitoring and controls imposed on
nuclear plants could cause a plant to be out of service or on limited service
for long periods. When a nuclear facility owned by an investor-owned utility or
a state or local municipality is out of service or operating on a limited
service basis, the utility operator or its owners may be liable for the recovery
of replacement power costs. Risks of substantial liability also arise from the
operation of nuclear facilities and from the use, handling, and possible
radioactive emissions associated with nuclear fuel. Insurance may not cover all
types or amounts of loss which may be experienced in connection with the
ownership and operation of a nuclear plant and severe financial consequences
could result from a significant accident or occurrence. The Nuclear Regulatory
Commission has promulgated regulations mandating the establishment of funded
reserves to assure financial capability for the eventual decommissioning of
licensed nuclear facilities. These funds are to be accrued from revenues in
amounts currently estimated to be sufficient to pay for decommissioning costs.
The Sponsor is unable to predict whether any such actions or whether any such
proposals or litigation, if enacted or instituted, will have an adverse impact
on the revenues available to pay the debt service on the Bonds in the portfolio
issued to finance such nuclear projects. See "Description of Portfolio" in Part
A for the amount of bonds issued to finance nuclear generating facilities
contained therein.
Mortgage Subsidy Bonds. Certain Bonds may be "mortgage subsidy
----------------------
bonds" which are obligations of which all or a significant portion of the
proceeds are to be used directly or indirectly for mortgages on owner-occupied
residences. Section 103A of the Internal Revenue Code of 1954, as amended,
provided as a general rule that interest on "mortgage subsidy bonds" will not 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 or that
existing legislation will not be further amended, revised, or enacted
-4-
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<PAGE>
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: (1)
Bonds for a publicly owned facility which a private entity may have a right to
use or manage to some degree, such as an airport, seaport facility or water
system and (2) facilities deemed owned or beneficially owned by a private entity
but which were financed with tax-exempt bonds of a public issuer, such as a
manufacturing facility or a pollution control facility. In the case of the first
type, bonds are generally payable from a designated source of revenues derived
from the facility and may further receive the benefit of the legal or moral
obligation of one or more political subdivisions or taxing jurisdictions. In
most cases of project financing of the first type, receipts or revenues of the
issuer are derived from the project or the operator or from the unexpended
proceeds of the bonds. Such revenues include user fees, service charges, rental
and lease payments, and mortgage and other loan payments.
The second type of issue will generally finance projects which are
owned by or for the benefit of, and are operated by, corporate entities.
Ordinarily, such private activity bonds are not general obligations of
governmental entities and are not backed by the taxing power of such entities,
and are solely dependent upon the creditworthiness of the corporate user of the
project or corporate guarantor.
The private activity bonds in the Trust have generally been issued
under bond resolutions, agreements or trust indentures pursuant to which the
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 which
might reasonably be expected to have a material effect on the State
-5-
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<PAGE>
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 each State Trust is contained under
the "Portfolio" for such State Trust in
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<PAGE>
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 which will be
affected by general economic conditions in Puerto Rico. The economy of Puerto
Rico is closely integrated with that of the mainland United States. During
fiscal year 1995, approximately 89% of Puerto Rico's exports were to the United
States mainland, which was also the source of 65% of Puerto Rico's imports. In
fiscal 1995, Puerto Rico experienced a $4.6 billion positive adjusted trade
balance. The economy of Puerto Rico is dominated by the manufacturing and
service sectors. The manufacturing sector has experienced a basic change over
the years as a result of increased emphasis on higher wage, high technology
industries such as pharmaceuticals, electronics, computers, microprocessors,
professional and scientific instruments, and certain high technology machinery
and equipment. The service sector, including finance, insurance and real estate,
wholesale and retail trade, and hotel and related services, also plays a major
role in the economy. It ranks second only to manufacturing in contribution to
the gross domestic product and leads all sectors in providing employment. In
recent years, the service sector has experienced significant growth in response
to and paralleling the expansion of the manufacturing sector. Since fiscal 1985,
personal income, both aggregate and per capita, has increased consistently in
each fiscal year. In fiscal 1995, aggregate personal income was $27.0 billion
($22.5 billion in 1987 prices) and personal income per capita was $7,296 ($6,074
in 1987 prices). Personal income includes transfer payments to individuals in
Puerto Rico under various social programs. Total federal payments to Puerto
Rico, which include many types in addition to federal transfer payments, are
lower on a per capita basis in Puerto Rico than in any state. Transfer payments
to individuals in fiscal 1995 were $5.9 billion, of which $4.0 billion, or
67.6%, represent entitlement to individuals who had previously performed
services or made contributions under programs such as Social Security, Veterans
Benefits and Medicare. The number of persons employed in Puerto Rico during
fiscal 1996 averaged 1,092,300, an increase of 3.9% over fiscal 1995. The
unemployment rate in Puerto Rico for fiscal 1996 remained the same. The Puerto
Rico Planning Board's most recent gross product forecast for fiscal 1997, made
in February 1996, showed an increase of 2.7%. The Planning Board's Economic
Activity Index, a composite index for thirteen economic indicators, increased
1.6% for fiscal 1996 compared to fiscal 1995, and 2.0% for fiscal 1995, compared
to fiscal 1994. During the first three months of fiscal 1997 the Index decreased
0.9% compared to the same period of fiscal 1996, which period showed an increase
of 1.7% over the same period of fiscal 1995. Growth in the Puerto Rico economy
in fiscal 1997 depends on several factors, including the state of the United
States economy and the relative stability in the price of oil imports, the
exchange value of the U.S. dollar, the level of federal transfers and the cost
of borrowing.
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<PAGE>
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 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. 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.
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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<PAGE>
California Trust
California Economy. California's economy is the largest among the 50
------------------
states and one of the largest in the world. This diversified economy has major
components in agriculture, manufacturing, high technology, trade, entertainment,
tourism, construction and services.
After suffering through a severe recession, California's economy has
been on a steady recovery since the start of 1994. More than 300,000 nonfarm
jobs were added in the State in 1996, while personal income grew by more than
$55 billion. California's economic expansion is being fueled by strong growth in
high-technology industries, including computer software, electronics
manufacturing and motion picture production, all of which have offset the
recession-related losses which were heaviest in aerospace and defense-related
industries (which accounted for two-thirds of the job losses), finance and
insurance.
California's July 1, 1996 population of 32.7 million represented
over 12% of the United States' population and is concentrated in metropolitan
areas. As of the April 1, 1990 census, 96% resided in the 23 Metropolitan
Statistical Areas in the State. As of July 1, 1994, the 5-county Los Angeles
area accounted for 48% of the State's population with 15.6 million residents,
and the 10-county San Francisco Bay Area represented 21 percent, with a
population of 6.6 million.
California has a large and diverse labor force. The following table
presents civilian labor force data for the resident population, age 16 and over,
for the years 1991 to 1996.
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<PAGE>
LABOR FORCE
1991-96
<TABLE>
<CAPTION>
Labor Force Trends (thousands) Unemployment Rate
------------------------------------------------------------ ------------------------------
Labor United
Year Force Employment Unemployment California States
- ---- ----- ---------- ------------ ---------- ------
<S> <C> <C> <C> <C> <C>
1991................ 15,118 13,978 1,141 7.5 6.7
1992................ 15,335 13,939 1,396 9.1 7.4
1993................ 15,205 13,995 1,410 9.2 6.8
1994................ 15,462 14,133 1,329 8.6 6.1
1995................ 15,416 14,206 1,201 7.8 5.6
1996................ 15,508 14,383 1,125 7.3 5.4
</TABLE>
- --------------------
SOURCE: State of California, Employment Development Department.
The following table shows California's nonagricultural employment
distribution and growth for 1980 to 1990 and 1996.
Payroll Employment By Major Sector
1980, 1990 and 1996
<TABLE>
<CAPTION>
Employment % Distribution
(thousands) of Employment
---------------------------------------- ------------------------------------------------
Industry Sector 1980 1990 1996 1980 1990 1996
--------------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Mining.................... 44 39 29 0.4 0.3 0.2
Construction.............. 428 605 516 4.3 4.8 4.1
Manufacturing
Nondurable 639 721 713 6.5 5.7 5.6
goods............ 615 686 482 6.2 5.4 3.8
High 764 690 605 7.8 5.5 4.7
Technology.......
Other Durable
Goods............
Transportation and
Utilities........ 546 624 639 5.5 4.9 5.0
Wholesale and Retail
Trade............ 2,267 3,002 3,000 23.0 23.7 23.5
Finance, Insurance
and Real Estate.. 623 825 735 6.3 6.5 5.8
Services.................. 2,159 3,395 3,896 21.9 26.8 30.6
Government
Federal.......... 334 362 304 3.4 2.9 2.4
State and Local.. 1,430 1,713 1,808 14.5 13.5 14.2
----- ----- ----- ---- ---- ----
TOTAL............ 9,849 12,662 12,746 100 100 100
===== ====== ====== === === ===
</TABLE>
- --------------------------
SOURCE: State of California, Employment Development Department and State
of California, Department of Finance.
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<PAGE>
The State.
---------
Fiscal Years Prior to 1995-96. The State's budget problems in recent
years have been caused by a combination of external economic conditions and a
structural imbalance in that the largest General Fund Programs--K-14 education,
health, welfare and corrections -- were increasing faster than the revenue base,
driven by the State's rapid population growth. These pressures are expected to
continue as population trends maintain strong demand for health and welfare
services, as the school age population continues to grow, and as the State's
corrections program responds to a "Three Strikes" law enacted in 1994, which
requires mandatory life prison terms for certain third-time felony offenders.
As a result of these factors and others, and especially because a
severe recession between 1990-94 reduced revenues and increased expenditures for
social welfare programs, from the late 1980's until 1992-93, the State had a
period of budget imbalance. During this period, expenditures exceeded revenues
in four out of six years, and the State accumulated and sustained a budget
deficit in its budget reserve, the Special Fund for Economic Uncertainties
("SFEU") approaching $2.8 billion at its peak at June 30, 1993. Starting in the
1990-91 Fiscal Year and for each fiscal year thereafter, each budget required
multibillion dollar actions to bring projected revenues and expenditures into
balance. The Legislature and Governor agreed on the following principal steps to
produce Budget Acts in the years 1991-92 to 1994-95, although not all these
actions were taken in each year:
o significant cuts in health and welfare program expenditures;
o transfers of program responsibilities and funding from the State to
local governments (referred to as "realignment"), coupled with some reduction in
mandates on local government;
o transfer of about $3.6 billion in local property tax revenues from
cities, counties, redevelopment agencies and some other districts to local
school districts, thereby reducing State funding for schools under Proposition
98;
o reduction in growth of support for higher education programs,
coupled with increases in student fees, through the 1994-95 Fiscal Year;
o maintenance of the minimum Proposition 98 funding guarantee for K-14
schools, and the disbursement of additional funds to keep a constant level of
about $4,200 per K-12 pupil through the 1993-94 Fiscal Year;
o revenue increases (particularly in the 1991-92 Fiscal Year
budget), most of which were for a short duration;
o increased reliance on aid from the federal government to offset the
costs of incarcerating, educating and providing health and welfare services to
illegal immigrants, although during this time frame most of the additional aid
requested by the Administration was not received; and
o various one-time adjustments and accounting changes.
Despite these budget actions, as noted, the effects of the recession
led to large, unanticipated deficits in the budget reserve, the SFEU, as
compared to projected positive balances. By the 1993-94 Fiscal Year, the
accumulated deficit was so large that it was impractical to budget to
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retire it in one year, so a two-year program was implemented, using the issuance
of revenue anticipation warrants to carry a portion of the deficit over the end
of the fiscal year. When the economy failed to recover sufficiently in 1993-94,
a second two-year plan was implemented in 1994-95, again using cross-fiscal year
revenue anticipation warrants to partly finance the deficit into the 1995-96
fiscal year.
Another consequence of the accumulated budget deficits, together
with other factors such as disbursement of funds to local school districts
"borrowed" from future fiscal years and hence not shown in the annual budget,
was to significantly reduce the State's cash resources available to pay its
ongoing obligations. When the Legislature and the Governor failed to adopt a
budget for the 1992-93 Fiscal Year by July 1, 1992, which would have allowed the
State to carry out its normal annual cash flow borrowing to replenish its cash
reserves, the State Controller issued registered warrants to pay a variety of
obligations representing prior years' or continuing appropriations, and mandates
from court orders. Available funds were used to make constitutionally-mandated
payments, such as debt service on bonds and warrants. Between July 1 and
September 4, 1992, when the budget was adopted, the State Controller issued a
total of approximately $3.8 billion of registered warrants.
During the past several fiscal years, the State was forced to rely
increasingly on external debt markets to meet its cash needs, as a succession of
notes and revenue anticipation warrants were issued in the period from June 1992
to July 1994, often needed to pay previously maturing notes or warrants. These
borrowings were used also in part to spread out the repayment of the accumulated
budget deficit over the end of a fiscal year, as noted earlier. The last and
largest of these borrowings was $4.0 billion of revenue anticipation warrants
which were issued in July 1994 and matured on April 25, 1996.
1995-96 Fiscal Year. The 1995-96 Budget Act was signed by the
Governor on August 3, 1995, 34 days after the start of the fiscal year. The
Budget Act projected General Fund revenues and transfers of $44.1 billion, a
3.5% increase from the prior year. Expenditures were budgeted at $43.4 billion,
a 4% increase. The Budget Act also projected Special Fund revenues of $12.7
billion and appropriated Special Fund expenditures of $13.0 billion.
Final data for the 1995-96 Fiscal Year showed revenues and transfers
of $46.1 billion, some $2 billion over the original fiscal year estimate, which
was attributed to the strong economic recovery. Expenditures also increased to
an estimated $45.4 billion, as a result of the requirement to expend revenues
for schools under Proposition 98, and, among other things, failure of the
federal government to enact welfare reform during the fiscal year and to budget
new aid for illegal immigrant costs, both of which had been counted on to allow
reductions in State costs. The Special Fund for Economic Uncertainties had a
small negative balance of about $87 million at June 30, 1996, all but
eliminating the accumulated budget deficit from the early 1990's. Available
internal borrowable resources (available cash, after payment of all obligations
due) on June 30, 1996 was about $3.8 billion, representing a significant
improvement in the State's cash position, and ending the need for deficit
borrowing over the end of the fiscal year. The State's improved cash position
allowed it to repay the $4.0 billion Revenue Anticipation Warrant issue on April
25, 1996, and to issue only $2.0 billion of revenue anticipation notes during
the fiscal year, which matured on June 28, 1996.
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The 1995-96 Budget Act included substantial additional funding under
Proposition 98 for schools and community colleges (about $1.0 billion General
Fund and $1.2 billion total above 1994-95 levels). Because of higher than
projected revenues in 1994-95, an additional $561 million ($92 per K-12 ADA) was
appropriated to the 1994-95 Proposition 98 entitlement. A large part of this was
a block grant of about $50 per pupil for any one-time purpose. For the first
time in several years, a full 2.7% cost of living allowance was funded. The
budget was based on the settlement of the CTA v. Gould litigation. Cuts in
health and welfare costs totaled about $220 million, almost $700 million less
than had been anticipated, because of the failure by the federal government to
approve certain of these actions in a timely manner. The federal government also
failed to appropriate all but $31 million of an anticipated $500 million in new
federal aid for incarceration and health care costs of illegal immigrants.
Funding from the General Fund for the University of California was increased by
$106 million and for the California State University system by $97 million, with
no increases in student fees.
1996-97 Fiscal Year. The 1996-97 Budget Act was signed by the
Governor on July 15, 1996, along with various implementing bills. The Governor
vetoed about $82 million of appropriations (both General Fund and Special Fund).
With the signing of the Budget Act, the State implemented its regular cash flow
borrowing program with the issuance of $3.0 billion of Revenue Anticipation
Notes to mature on June 30, 1997. The Budget Act appropriated a modest budget
reserve in the SFEU of $305 million, as of June 30, 1997. The Department of
Finance projected that, on June 30, 1997, the State's available internal
borrowable (cash) resources will be $2.9 billion, after payment of all
obligations due by that date, so that no cross-fiscal year borrowing will be
needed.
Revenues -- The legislature rejected the Governor's proposed 15% cut
in personal income taxes (to be phased over three years), but did approve a 5%
cut in bank and corporation taxes, to be effective for income years starting on
January 1, 1997. As a result, revenues for the Fiscal Year were estimated to
total $47.643 billion, a 3.3% increase over the final estimated 1995-96
revenues. Special Fund revenues were estimated to be $13.3 billion.
Expenditures -- The Budget Act contained General Fund appropriations
totaling $47.251 billion, a 4.0% increase over the final estimated 1995-96
expenditures. Special Fund expenditures were budgeted at $12.6 billion.
The following are principal features of the 1996-97 Budget Act:
1. Proposition 98 funding for schools and community college
districts increased by almost $1.6 billion (General Fund) and $1.65 billion
total above revised 1995-96 levels. Almost half of this money was budgeted to
fund class-size reductions in kindergarten and grades 1-3. Also, for the second
year in a row, the full cost of living allowance (3.2 percent) was funded. The
Proposition 98 increases have brought K-12 expenditures to almost $4,800 per
pupil (also called per ADA, or Average Daily Attendance), an almost 15% increase
over the level prevailing during the recession years. Community colleges will
receive an increase in funding of $157 million for 1996-97 out of this $1.6
billion total.
Because of the higher than projected revenues in 1995-96, an
additional $1.1 billion ($190 per K-12 ADA and $145 million for community
colleges) was appropriated and retroactively applied towards the 1995-96
Proposition 98 guarantee, bringing K-12 expenditures in that year to over $4,600
per ADA. These new funds were appropriated for a variety of purposes,
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including block grants, allocations for each school site, facilities for class
size reduction, and a reading initiative. Similar retroactive increases totaling
$230 million, based on final figures on revenues and State population growth,
were made to the 1991-92 and the 1994-95 Proposition 98 guarantees, most of
which was allocated to each school site.
2. The Budget Act assumed savings of approximately $660 million in
health and welfare costs which required changes in federal law, including
federal welfare reform. The Budget Act further assumed federal law changes in
August 1996 which would allow welfare cash grant levels to be reduced by October
1, 1996. These cuts totaled approximately $163 million of the anticipated $660
million savings. See "Federal Welfare Reform" below.
3. A 4.9% increase in funding for the University of California ($130
million General Fund) and the California State University system ($101 million
General Fund), with no increases in student fees, maintaining the second year of
the Governor's four-year "Compact" with the State's higher education units.
4. The Budget Act assumed the federal government will provide
approximately $700 million in new aid for incarceration and health care costs of
illegal immigrants. These funds reduce appropriations in these categories that
would otherwise have to be paid from the General Fund. (For purposes of cash
flow projections, the Department of Finance expects $540 million of this amount
to be received during the 1996-97 fiscal year.)
5. General Fund support for the Department of Corrections was
increased by about 7% over the prior year, reflecting estimates of increased
prison population.
6. With respect to aid to local governments, the principal new
programs included in the Budget Act are $100 million in grants to cities and
counties for law enforcement purposes, and budgeted $50 million for competitive
grants to local governments for programs to combat juvenile crime.
On January 9, 1997, the Governor released his proposed budget for
the 1997-98 Fiscal Year (the "Proposed Budget"). The Proposed Budget estimated
general fund revenues and transfers in 1997-98 of $50.7 billion, a 4.6% increase
from revised 1996-97 figures. The Governor proposes expenditures of $50.3
billion, a 3.9% increase from 1996-97. The Proposed Budget projected a balance
in the SFEU of $553 million on June 30, 1998.
At the time of the May Revision, released on May 14, 1997, the
Department of Finance increased its revenue estimate for the upcoming fiscal
year by $1.3 billion, in response to the continued strong growth in the State's
economy. Budget negotiations continued into the summer, with major issues to be
resolved including final agreement on State welfare reform, increase in State
employee salaries and consideration of a tax cut proposed by the Governor.
In May 1997, action was taken by the California Supreme Court in an
ongoing lawsuit, PERS v. Wilson, which made final a judgment against the State
requiring an immediate payment from the General Fund to the Public Employees
Retirement Fund ("PERF") to make up certain deferrals in annual retirement fund
contributions which had been legislated in earlier years for budget savings, and
which the courts found to be unconstitutional. On July 30, 1997, following a
direction from the Governor, the Controller transferred $1.235 billion from the
General Fund to the PERF in satisfaction
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of the judgment, representing the principal amount of the improperly deferred
payments from 1995-96 and 1996-97.
Fiscal Year 1997-98 Budget Act. Once the pension payment eliminated
essentially all the "increased" revenue in the budget, final agreement was
reached within a few weeks on the welfare package and the remainder of the
budget. The Legislature passed the Budget Bill on August 11, 1997, along with
numerous related bills to implement its provisions. Agreement was not finally
reached, however, on one aspect of the budget plan, concerning the Governor's
proposal for a comprehensive educational testing program.
On August 18, 1997, the Governor signed the Budget Act, but vetoed
about $314 million of specific spending items, primarily in health and welfare
and education areas from both the General Fund and Special Funds. The Governor
announced that he was prepared to restore about $200 million of education
spending upon satisfactory completion of legislation on the education testing
program.
The Budget Act anticipates General Fund revenues and transfers of
$52.5 billion (a 6.8% increase over the final 1996-97 amount), and expenditures
of $52.8 billion (an 8.0% increase from the 1996-97 levels). On a budgetary
basis, the budget reserve (SFEU) is projected to decrease from $408 million at
June 30, 1997 to $112 million at June 30, 1998. (The expenditure figure assumes
restoration of $200 million of vetoed funding.) The Budget Act also includes
Special Fund expenditures of $14.4 billion (as against estimated Special Fund
revenues of $14.0 billion), and $2.1 billion of expenditures from various Bond
Funds. The State has implemented its normal annual cash flow borrowing program,
issuing $3 billion of notes which mature on June 30, 1998.
The following are major features of the 1997-98 Budget Act:
1. For the second year in a row, the Budget contains a large
increase in funding for K-14 education under Proposition 98, reflecting strong
revenues which have exceeded initial budgeted amounts. Part of the nearly $1.75
billion in increased spending is allocated to prior fiscal years. Funds are
provided to fully pay for the cost-of-living increase component of Proposition
98, and to extend class size reduction and reading initiatives.
2. The Budget Act reflects the $1.235 billion pension case judgment
payment, and brings funding of the State's pension contribution back to the
quarterly basis which existed prior to the deferral actions which were
invalidated by the courts. There is no provision for any additional payments
relating to this court case.
3. Continuing the third year of a four-year "compact" which the
Administration has made with higher education units, funding from the General
Fund for the University of California and California State University has
increased by about 6% ($121 million and $107 million, respectively), and there
was no increase in student fees.
4. Because of the effect of the pension payment, most other State
programs were continued at 1996-97 levels.
5. Health and welfare costs are contained, continuing generally the
grant levels from prior years, as part of the initial implementation of the new
CalWORKs program.
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6. Unlike prior years, this Budget Act does not depend on federal
budget actions. About $300 million in federal funds, already included in the
federal FY 1997 and 1998 budgets, are included in the Budget Act, to offset
incarceration costs for illegal aliens.
7. The Budget Act contains no tax increases, and no tax reductions.
The Renters Tax Credit was suspended for another year, saving approximately $500
million.
Federal Welfare Reform. Following enactment of the 1996-97 Budget
Act, Congress passed and the President signed (on August 22, 1996) the Personal
Responsibility and Work Opportunity Act of 1996 (the "Law") making a fundamental
reform of the current welfare system. Among many provisions, the Law includes:
(i) conversion of Aid to Families with Dependent Children from an entitlement
program to a block grant titled Temporary Assistance for Needy Families (TANF),
with lifetime time limits on TANF recipients, work requirements and other
changes; (ii) provisions denying certain federal welfare and public benefits to
legal non-citizens, allowing states to elect to deny additional benefits
(including TANF) to legal non-citizens, and generally denying almost all
benefits to illegal immigrants; and (iii) changes in the Food Stamp program,
including reducing maximum benefits and imposing work requirements.
As part of the 1997-98 Budget Act legislative package, the State
Legislature and Governor agreed on a comprehensive reform of the State's public
assistance programs to implement the new federal Law. The new basic State
welfare program is called California Work Opportunity and Responsibility to Kids
Act ("CalWORKs"), which replaces the former Aid to Families with Dependent
Children (AFDC) and Greater Avenues to Independence (GAIN) programs effective
January 1, 1998. Consistent with the federal Law, CalWORKs contains new time
limits on receipt of welfare aid, both lifetime as well as for any current time
on aid. The centerpiece of CalWORKs is the linkage of eligibility to work
participation requirements. Administration of the new Welfare-to-Work programs
will be largely at the county level, and counties are given financial incentives
for success in this program.
Although the longer-term impact of the new federal Law and CalWORKs
cannot be determined until there has been some experience, the State does not
presently anticipate that these new programs will have any adverse financial
impact on the General Fund. Overall TANF grants from the federal government are
expected to equal or exceed the amounts the State would have received under the
old AFDC program.
Local Governments. The primary units of local government in
-----------------
California are the counties, ranging in population from 1,300 (Alpine) to over
9,000,000 (Los Angeles). Counties are responsible for the provision of many
basic services, including indigent health care, welfare, courts, jails and
public safety in unincorporated areas. There are also about 480 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 other 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. The entire statewide welfare system will be changed in
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response to the change in federal welfare law enacted in 1996. It is not yet
known how the final system will affect county finances. Under current law,
counties are required to provide "general assistance" aid to certain persons who
cannot obtain welfare from other programs, but this mandate may be eliminated as
part of the overhaul.
In the aftermath of Proposition 13, the State provided aid from the
General Fund to make up some of the loss of property tax moneys, including
taking over the principal responsibility for funding local K-12 schools and
community colleges. Under the pressure of the recent recession, the Legislation
has eliminated the remnants of this post-Proposition 13 aid to entities other
than K-14 education districts, although it has also provided additional funding
sources (such as sales taxes) and reduced mandates for local services. Many
counties continue to be under severe fiscal stress. While such stress has in
recent years most often been experienced by smaller, rural counties, larger
urban counties, such as Los Angeles, have also been affected. Orange County
implemented significant reductions in services and personnel, and continues to
face fiscal constraints in the aftermath of its bankruptcy, which had been
caused by large investment losses in its pooled investment funds.
On November 5, 1996, voters approved Proposition 218, entitled the
"Right to Vote on Taxes Act," which incorporates new Articles XIIIC and XIIID
into the California Constitution. These new provisions enact limitations on the
ability of local government agencies to impose or raise various taxes, fees,
charges and assessments without voter approval. Certain "general taxes" imposed
after January 1, 1995 must be approved by voters in order to remain in effect.
In addition, Article XIIIC clarifies the right of local voters to reduce taxes,
fees, assessments or charges through local initiatives.
Proposition 218 does not affect the State or its ability to levy or
collect taxes. There are a number of ambiguities concerning the Proposition and
its impact on local governments and their bonded debt which will require
interpretation by the courts or the Legislature. The Legislative Analyst
estimated that enactment of Proposition 218 would reduce local government
revenues statewide by over $100 million a year, and that over time revenues to
local government would be reduced by several hundred million dollars a year
under this Proposition.
In May 1996, a taxpayer filed an action (the "Rider Case") against
the City of San Diego ("San Diego") and the San Diego Convention Center
Expansion Authority (the "Authority") challenging the validity of a lease
revenue financing involving a lease having features similar to the leases
commonly used in California lease-based financings such as certificates of
participation. In the Rider Case, the plaintiffs maintain that voter approval is
required for the San Diego lease (a) since the lease constituted indebtedness
prohibited by Article XVI, Section 18 of the California Constitution without a
two-thirds vote of the electorate, and (b) since San Diego was prohibited under
its charter from issuing bonds without a two-thirds vote of the electorate, and
the power of the Authority, a joint powers' authority, one of the members of
which is San Diego, to issue bonds is no greater than the power of San Diego. In
response to San Diego's motion for summary judgment, the trial court rejected
the plaintiffs' arguments and ruled that the lease was constitutionally valid
and that the Authority's related lease revenue bonds did not require voter
approval. The plaintiffs appealed the matter to the Court of Appeals for the
Fourth District, which likewise affirmed the validity of the lease and of the
lease revenue bond financing arrangements. The plaintiffs then filed a petition
for review with the California State Supreme Court, and, on April 2, 1997, the
California Supreme
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Court granted the plaintiffs' petition for review. No decision from the State
Supreme Court is expected until sometime during the 1998 calendar year.
Constitutional and Statutory Limitations; Recent Initiatives;
------------------------------------------------------------
Pending Litigation. Article XIIIA of the California Constitution (which resulted
- ------------------
from the voter-approved Proposition 13 in 1978) limits the taxing powers of
California public agencies. Article XIIIA provides that the maximum ad valorem
tax on real property cannot exceed 1% of the "full cash value" of the property,
and effectively prohibits the levying of any other ad valorem property tax for
general purposes. However, on May 3, 1986, Proposition 46, an amendment to
Article XIIIA, was approved by the voters of the State of California, creating a
new exemption under Article XIIIA permitting an increase in ad valorem taxes on
real property in excess of 1% for bonded indebtedness approved by two-thirds of
the voters voting on the proposed indebtedness. "Full cash value" is defined as
"the County Assessor's valuation of real property as shown on the 1975-76 tax
bill under "full cash value" or, thereafter, the appraised value of real
property when purchased, newly constructed, or a change in ownership has
occurred after the 1975 assessment." The "full cash value" is subject to annual
adjustment to reflect increases (not to exceed 2%) or decreases in the consumer
price index or comparable local data, or to reflect reductions in property value
caused by damage, destruction or other factors.
Article XIIIB of the California Constitution limits the amount of
appropriations of the State and of local governments to the amount of
appropriations of the entity for the prior year, adjusted for changes in the
cost of living, population and the services that the local government has
financial responsibility for providing. To the extent the revenues of the state
and/or local government exceed its appropriations, the excess revenues must be
rebated to the public either directly or through a tax decrease. Expenditures
for voter-approved debt services are not included in the appropriations limit.
Proposition 98. In 1988, California voters approved an initiative
--------------
known as Proposition 98. This initiative amends Article XIIIB to require that
(i) the California legislature establish a prudent state reserve fund in an
amount as it shall deem reasonable and necessary and (ii) revenues in excess of
amounts permitted to be spent and which would otherwise be returned pursuant to
Article XIIIB by revision of tax rates or fee schedules, be transferred and
allocated (up to a maximum of 40%) to the State School Fund and be expended
solely for purposes of instructional improvement and accountability. Proposition
98 also amends Article XVI to require that the State of California provide a
minimum level of funding for public schools and community colleges. Commencing
with the 1988-89 fiscal year, money to be applied by the State for the support
of school districts and community college districts shall not be less than the
greater of: (i) the amount which, as a percentage of the State general fund
revenues which may be appropriated pursuant to Article XIIIB, equals the
percentage of such State general fund revenues appropriated for school districts
and community college districts, respectively, in fiscal year 1986-87 or (ii)
the amount required to ensure that the total allocations to school districts and
community college districts from the State general fund proceeds of taxes
appropriated pursuant to Article XIIIB and allocated local proceeds of taxes
shall not be less than the total amount from these sources in the prior year,
adjusted for increases in enrollment and adjusted for changes in the costs of
living pursuant to the provisions of Article XIIIB. The initiative permits the
enactment of legislation, by a two-thirds vote, to suspend the minimum funding
requirement for one year. As a result of Proposition 98, funds that the State
might
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otherwise make available to its political subdivisions may be allocated instead
to satisfy such minimum funding level.
During the recent recession, General Fund revenues for several years
were less than originally projected, so that the original Proposition 98
appropriations turned out to be higher than the minimum percentage provided in
the law. The Legislature responded to these developments by designating the
"extra" Proposition 98 payments in one year as a "loan" from future years'
Proposition 98 entitlements, and also intended that the "extra" payments would
not be included in the Proposition 98 "base" for calculating future years'
entitlements. By implementing these actions, per-pupil funding from Proposition
98 sources stayed almost constant at approximately $4,220 from Fiscal Year
1991-92 to Fiscal Year 1993-94.
In 1992, a lawsuit was filed, called California Teachers'
Association v. Gould, which challenged the validity of these off-budget loans.
As part of the negotiations leading to the 1995-96 Budget Act, an oral agreement
was reached to settle this case. The settlement required adoption of legislation
satisfactory to the parties to implement its terms, which has occurred. The
court gave final approval of the settlement in late July, 1996.
The settlement provides, among other things, that both the State and
K-14 schools share in the repayment of prior years' emergency loans to schools.
Of the total $1.76 billion in loans, the State will repay $935 million by
forgiveness of the amount owed, while schools will repay $825 million. The State
share of the repayment will be reflected as an appropriation above the current
Proposition 98 base calculation. The schools' share of the repayment will count
as appropriations that count toward satisfying the Proposition 98 guarantee, or
from "below" the current base. Repayments are spread over the eight-year period
of 1994-95 through 2001-02 to mitigate any adverse fiscal impact. The Director
of Finance has certified that a settlement has occurred, allowing approximately
$377 million in appropriations from the 1995-96 Fiscal Year to schools to be
disbursed in Fall 1996.
Proposition 187. On November 8, 1994, the voters in California
---------------
approved Proposition 187, an initiative statute ("Proposition 187"). Proposition
187 specifically prohibits funding by the State of social service, health care
services and public school education for the benefit of any person not verified
as either a United States citizen or a person legally admitted to the Untied
States. Among the provisions in Proposition 187 pertaining to public school
education, the measure requires, commencing January 1, 1995, that every school
district in the State verify the legal status of every child enrolling in the
district for the first time. By January 1, 1996, each school district must also
verify the legal status of children already enrolled in the district and of all
parents or guardians of all students. If the district "reasonably suspects" that
a student, parent or guardian is not legally in the United States, that district
must report the student to the United States Immigration and Naturalization
Service and certain other parties. The measure also prohibits a school district
from providing education to a student it does not verify as either a United
States citizen or a person legally admitted to the United States. The State
Legislative Analyst estimates that verification costs could be in the tens of
millions of dollars on a statewide level (including verification costs incurred
by other local governments) with first-year costs potentially in excess of $100
million.
The reporting requirements may violate the Family Educational Rights
and Privacy Act ("FERPA"), which generally prohibits schools that receive
federal funds from disclosing information in student records without
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parental consent. Compliance with FERPA is a condition of receiving federal
education funds, which total $2.3 billion annually to California school
districts. The Secretary of the United States Department of Education has
indicated that the reporting requirement in Proposition 17 could jeopardize the
ability of school districts to receive these funds.
Opponents of Proposition 187 have filed at least eight lawsuits
challenging the constitutionality and validity of the measure. On November 2,
1995, a United States District Court judge struck down the central provision of
Proposition 187 by ruling that parts of Proposition 187 conflict with federal
power over immigration. An appeal has been filed. It cannot be predicted what
the nature or outcome of such appeal will be or the ultimate fiscal impact of
Proposition 187.
Article XIIIA, Article XIIIB, Article XIIIC and Article XIIID and a
number of propositions have been adopted pursuant to California's constitutional
initiative process. From time to time, other initiative measures could be
adopted by California voters. The adoption of any such initiatives may cause
California issuers to receive reduced revenues, or to increase expenditures, or
both.
Pending Litigation. The State is involved in a lawsuit, Thomas Hayes
------------------
v. Commission on State Mandates, related to state-mandated costs. The action
involves an appeal by the Director of Finance from a 1984 decision by the State
Board of Control, (now succeeded by the Commission on State Mandates
(Commission)). The Board of Control decided in favor of local school districts'
claims for reimbursement for special education programs for handicapped
students. The case was then brought to the trial court by the State and later
remanded to the Commission for redetermination. The Commission has since
expanded the claim to include supplemental claims filed by seven other
educational institutions; the issuance of a final consolidated decision is
anticipated sometime after September 1996. To date, the Legislature has not
appropriated funds. The liability to the State, if all potentially eligible
school districts pursue timely claims, has been estimated by the Department of
Finance at over $1 billion.
In the Yuba River flood litigation in which the State is a defendant
in a coordinated action, the trial court has found liability in inverse
condemnation and awarded damages of $500,000 to 12 sample plaintiffs. Potential
liability to the remaining 3,000 plaintiffs, from claims filed, ranges from $800
million to $1.5 billion. The appellate court affirmed the trial court finding
and the State is pursuing its remaining appellate remedies. Damages have yet to
be determined for all but the 12 sample plaintiffs.
The State is involved in a lawsuit related to contamination at the
Stringfellow toxic waste site. In United States, People of the State of
California v. J.B. Stringfellow, Jr., et al., the State is seeking recovery for
past costs of cleanup of the site, a declaration that the defendants are jointly
and severally liable for future costs, and an injunction ordering completion of
the cleanup. However, the defendants have filed a counterclaim against the State
for alleged negligent acts. Because the State is the present owner of the site,
the State may be found liable. Present estimates of the cleanup range from $200
million to $800 million.
In Jernigan & Burleson v. State, filed in federal district court,
the prison inmate plaintiffs claim they are entitled to minimum wages while
working for the Prison Industry Authority. The inmates claim the State has
violated the Fair Labor Standards Act. The district court has ruled that the
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inmates are not employees and the Ninth Circuit Court of Appeals has affirmed
that ruling. The plaintiffs have petitioned for a rehearing.
The State is a defendant in California State Employees Association
v. Wilson, where the petitioners are challenging several budget appropriations
in the 1994 and 1995 Budget Acts. The appropriations mandate the transfer of
funds from the State Highway Account to the General Fund to reimburse the
General Fund for debt service costs on two rail bond measures. The petitioners
contend that the transfers violate the bond acts themselves and are requesting
the monies be returned. The loss to the State's General Fund could be up to $227
million.
In a similar case, Professional Engineers in California Government
v. Wilson, the petitioners are challenging several appropriations in the 1993,
1994, and 1995 Budget Acts. The appropriations mandate the transfer of
approximately $262 million from the State Highway Account and $113 million from
the Motor Vehicle Account to the General Fund and appropriate approximately $6
million from the State Highway Account to fund a highway-grade crossing program
administered by the Public Utilities Commission. Petitioners contend that the
transfers violate several constitutional provisions and request that the moneys
be returned to the State Highway Account and Motor Vehicle Account.
The State is a defendant in the case of Kurt Hathaway, et al. v.
Wilson, et al., where the plaintiffs are challenging the legality of various
budget action transfers and appropriations from particular special funds for
years ended June 30, 1995, and June 30, 1996. The plaintiffs allege that the
transfers and appropriations are contrary to the substantive law establishing
the funds and providing for interest accruals to the fund, violate the single
subject requirement of the State Constitution, and is an invalid "special law."
Plaintiffs seek to have monies totaling approximately $335 million returned to
the special funds.
The State is a defendant in two related cases, Beno vs. Sullivan
("Beno") and Welch vs. Anderson ("Welch"), concerning reductions in Aid to
Families with Dependent Children (AFDC) grant payments. In the Beno case,
plaintiffs seek to invalidate AFDC grant reductions, and in the Welch case
plaintiffs contend that AFDC grant reductions are not authorized by state law.
The Beno case concerns the total grant reductions while the Welch case concerns
the period of time the State did not have a waiver for those reductions. The
State's potential liability for retroactive AFDC grant reductions is estimated
at $831 million if the plaintiffs are awarded the full amount in both cases.
In the case of Board of Administration, California Public Employees'
Retirement System, et al. v. Pete Wilson, Governor, et al., plaintiffs
challenged the constitutionality of legislation which deferred payment of the
State's employer contribution to the Public Employees' Retirement System
beginning in Fiscal Year 1992-93. On January 11, 1995, the Sacramento County
Superior Court entered a judgment finding that the legislation
unconstitutionally impaired the vested contract rights of PERS members. The
judgment provides for issuance of a writ of mandate directing State defendants
to disregard the provisions of the legislation, to implement the statute
governing employer contributions that existed before the changes in the
legislation found to be unconstitutional, and to transfer to PERS the
contributions that are unpaid to date. On February 19, 1997, the State Court of
Appeals affirmed the decision of the Superior Court. The 1993-94 and 1994-95
transfers to PERS were made pursuant to the legislation deferring payment. The
transfers to PERS which have not yet been made, but which would
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be required under the judgment, total approximately $900 million, representing
the transfers for 1995-96 and for a portion of the 1996-97 fiscal year. This
amount does not include any interest that may be awarded. The State defendants
intend to seek review of the decision by the State Supreme Court.
Other California issuers are subject to litigation which may in the
event of an adverse ruling affect the finances of such issuer.
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 New York State and New
York City municipal bonds. The Sponsors have not independently verified this
information.
Economic Trends. Over the long term, the State of New York (the
"State") and the City of New York (the "City") face serious potential economic
problems. The City accounts for approximately 41% of the State's population and
personal income, and the City's financial health affects the State in numerous
ways. The State historically has been one of the wealthiest states in the
nation. For decades, however, the State has grown more slowly than the nation as
a whole, gradually eroding its relative economic affluence. Statewide, urban
centers have experienced significant changes involving migration of the more
affluent to the suburbs and an influx of generally less affluent residents.
Regionally, the older Northeast cities have suffered because of the relative
success that the South and the West have had in attracting people and business.
The City has also had to face greater competition as other major cities have
developed financial and business capabilities which make them less dependent on
the specialized services traditionally available almost exclusively in the City.
The State has for many years had a very high State and local tax
burden relative to other states. The State and its localities have used these
taxes to develop and maintain their transportation networks, public schools and
colleges, public health systems, other social services and recreational
facilities. Despite these benefits, the burden of State and local taxation, in
combination with the many other causes of regional economic dislocation, has
contributed to the decisions of some businesses and individuals to relocate
outside, or not locate within, the State.
Notwithstanding the numerous initiatives that the State and its
localities may take to encourage economic growth and achieve balanced budgets,
reductions in Federal spending could materially and adversely affect the
financial condition and budget projections of the State and its localities.
New York City. The City, with a population of approximately 7.3
million, is an international center of business and culture. Its
non-manufacturing economy is broadly based, with the banking and securities,
life insurance, communications, publishing, fashion design, retailing and
construction industries accounting for a significant portion of the City's total
employment earnings. Additionally, the City is the nation's leading tourist
destination. The City's manufacturing activity is conducted primarily in apparel
and printing.
The national economic downturn which began in July 1990 adversely
affected the local economy, which had been declining since late 1989. As a
result, the City experienced job losses in 1990 and 1991 and real Gross City
Product ("GCP") fell in those two years. Beginning in calendar year 1992, the
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improvement in the national economy helped stabilize conditions in the City.
Employment losses moderated toward year-end and real GCP increased, boosted by
strong wage gains. After noticeable improvements in the City's economy during
calendar year 1994, economic growth slowed in calendar year 1995, and thereafter
improved during calendar year 1996, reflecting improved securities industry
earnings and employment in other sectors. The City's current four-year financial
plan assumes that moderate economic growth will continue through calendar year
2000, with moderating job growth and wage increases.
For each of the 1981 through 1996 fiscal years, the City achieved
balanced operating results as reported in accordance with generally accepted
accounting principles ("GAAP"). The City was required to close substantial
budget gaps in recent years in order to maintain balanced operating results.
There can be no assurance that the City will continue to maintain a balanced
budget as required by State law without additional tax or other revenue
increases or reductions in City services, which could adversely affect the
City's economic base.
Pursuant to the laws of the State, the City prepares an annual
four-year financial plan, which is reviewed and revised on a quarterly basis and
which includes the City's capital, revenue and expense projections and outlines
proposed gap-closing programs for years with projected budget gaps. The City's
current four-year financial plan projects substantial budget gaps for each of
the 1998 through 2000 fiscal years. The City is required to submit its financial
plans to review bodies, including the New York State Financial Control Board
("Control Board").
The City depends on the State for State aid both to enable the City
to balance its budget and to meet its cash requirements. There can be no
assurance that there will not be reductions in State aid to the City from
amounts currently projected or that State budgets in future fiscal years will be
adopted by the April 1 statutory deadline and that such reductions or delays
will not have adverse effects on the City's cash flow or expenditures. In
addition, the Federal Budget negotiation process could result in a reduction in
or a delay in the receipt of Federal grants in the City's 1997 fiscal year which
could have additional adverse effects on the City's cash flow or revenues.
The Mayor is responsible for preparing the City's four-year
financial plan, including the City's current financial plan for the 1997 through
2000 fiscal years (the "1997-2000 Financial Plan" or "Financial Plan"). The
City's projections set forth in the Financial Plan are based on various
assumptions and contingencies which are uncertain and which may not materialize.
Changes in major assumptions could significantly affect the City's ability to
balance its budget as required by State law and to meet its annual cash flow and
financing requirements. Such assumptions and contingencies include the condition
of the regional and local economies, the impact on real estate tax revenues of
the real estate market, wage increases for City employees consistent with those
assumed in the Financial Plan, employment growth, the ability to implement
proposed reductions in City personnel and other cost reduction initiatives,
which may require in certain cases the cooperation of the City's municipal
unions, the ability of the New York City Health and Hospitals Corporation
("HHC") and the Board of Education ("BOE") to take actions to offset reduced
revenues, the ability to complete revenue generating transactions and provision
of State and Federal aid and mandate relief and the impact on City revenues of
proposals for Federal and State welfare reform and any future legislation
affecting Medicare or other entitlements.
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Implementation of the Financial Plan is also dependent upon the
City's ability to market its securities successfully. The City's financing
program for fiscal years 1998 through 2000 contemplates the issuance of $4.2
billion of general obligation bonds and $4.2 billion of bonds to be issued by
the proposed New York City Infrastructure Finance Authority ("Finance
Authority") to finance City capital projects. The Finance Authority was created
as part of the City's effort to assist in keeping the City's indebtedness within
the forecast level of the constitutional restrictions on the amount of debt the
City is authorized to incur. In addition, the City issues revenue and tax
anticipation notes to finance its seasonal working capital requirements. The
success of projected public sales of City bonds and notes, New York Municipal
Water Finance Authority ("Water Authority") bonds and Finance Authority bonds
will be subject to prevailing market conditions, and no assurance can be given
that such sales will be completed. If the City were unable to sell its general
obligation bonds and notes or the Water Authority or the Finance Authority were
unable to sell its bonds, the City would be prevented from meeting its planned
capital and operating expenditures. Future developments concerning the City and
public discussion of such developments, as well as prevailing market conditions,
may affect the market for outstanding City general obligation bonds and notes.
The City has announced that it expects to sell approximately $200 to
$300 million of tax-exempt fixed rate bonds for capital purposes, on the basis
of competitive bids, in May or June 1997. In addition, depending on market
conditions, the City may sell approximately $875 million of tax-exempt fixed
rate bonds before the end of June 1997, most of which are expected to be used in
connection with a current refunding of certain outstanding City bonds.
The City's operating results for the 1996 fiscal year were balanced
in accordance with GAAP, after taking into account a discretionary transfer of
$224 million, the sixteenth consecutive year of GAAP balanced results. On
January 30, 1997, the City submitted to the Control Board the Financial Plan for
the 1997 through 2000 fiscal years, which relates to the City, the BOE and the
City University of New York ("CUNY"). The Financial Plan is a modification to
the financial plan submitted to the Control Board on June 21, 1996 (the "June
Financial Plan").
The June Financial Plan identified actions to close a previously
projected gap of approximately $2.6 billion for the 1997 fiscal year. The
proposed actions in the June Financial Plan for the 1997 fiscal year included
(i) agency actions totaling $1.2 billion; (ii) a revised tax reduction program
which would increase projected tax revenues by $369 million due to the four year
extension of the 12.5% personal income tax surcharge and other actions; (iii)
savings resulting from cost containment in entitlement programs to reduce City
expenditures and additional proposed State aid of $75 million; (iv) the assumed
receipt of revenues relating to rent payments for the City's airports, which are
currently the subject of a dispute with the Port Authority of New York and New
Jersey (the "Port Authority"); (v) the sale of the City's television station for
$207 million; and (vi) pension costs savings totaling $134 million resulting
from a proposed increase in the earnings assumption for pension assets from 8.5%
to 8.75%. In March 1997, the 12.5% personal income tax surcharge was extended to
December 31, 1998.
The 1997-2000 Financial Plan published on January 30, 1997 projects
revenues and expenditures for 1997 and 1998 fiscal years balanced in accordance
with GAAP, and projects gaps of $1.9 billion and $2.7 billion for the 1999 and
2000 fiscal years, respectively. Changes in forecast revenues and expenditures
since the June Financial Plan include (i) an increase in
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projected tax revenues of $571 million, $207 million, $73 million and $56
million in fiscal years 1997 through 2000, respectively; (ii) a delay in the
assumed receipt of $304 million relating to projected rent payments for the City
airports from the 1997 fiscal year to the 1998 and 1999 fiscal years, and a $34
million reduction in assumed State and Federal aid for the 1997 Fiscal year;
(iii) an approximately $200 million to $300 million increase in projected
overtime and other expenditures in each of the fiscal years 1997 through 2000;
(iv) a $250 million increase in expenditures for BOE in the 1997 and 1998 fiscal
years for school text books and other initiatives, to be funded by savings from
the refunding of outstanding indebtedness of the Municipal Assistance
Corporation for the City of New York; (v) a reduction in projected pension costs
of $34 million, $50 million, $49 million and $47 million in fiscal years 1997
through 2000, respectively; and (vi) debt service savings of $44 million in the
1998 fiscal year resulting from the refunding of outstanding City bonds
consummated in the 1997 fiscal year.
In addition, the Financial Plan sets forth gap-closing actions to
eliminate a previously projected gap of $1.4 billion for the 1998 fiscal year,
and to reduce projected gaps for the 1999 and 2000 fiscal years. The gap-closing
actions for the 1998 through 2000 fiscal years include (i) additional agency
actions totaling $558 million, $488 million and $600 million in fiscal years
1998 through 2000; (ii) the prepayment in the 1997 fiscal year of $391 million
of debt service due in the 1998 fiscal year for $125 million; (iii) the proposed
sale of various assets including the U.N. Plaza Hotel in the 1998 fiscal year;
(iv) additional State aid of $210 million in the 1998 fiscal year and $85
million in each of the 1999 and 2000 fiscal years, including a proposal that the
State accelerate a $142 million revenue sharing payment to the City from March
1999; and (v) entitlement savings of $415 million in the 1998 fiscal year and
$364 million in each of the 1999 and 2000 fiscal years, which would result from
reductions in Medicaid spending for health care providers, reimbursement limits
and the State making available to the City $77 million of additional Federal
block grant aid, as proposed in the Governor's 1997-1998 Executive Budget on
January 14, 1997. The Financial Plan does not reflect the subsequent amendment
of the 1997-1998 Executive Budget by the Governor to restore part of the
proposed reductions in Medicaid spending for health care providers, which might
reduce the projected entitlement savings for the City, depending upon the method
by which such restoration is implemented. The gap-closing actions are partially
offset by a proposed tax reduction program totaling $250 million, $463 million
and $518 million in the 1998 through 2000 fiscal years, respectively, including
the proposed elimination of the 4% City sales tax on clothing items under $500
as of December 1, 1997, which is subject to State legislative approval.
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, 1997 and is projected to provide
revenue of $169 million, $504 million and $534 million in the 1998 through 2000
fiscal years, respectively, and of the extension of the 12.5% personal income
tax surcharge, which is scheduled to expire on December 31, 1998 and is
projected to provide revenue of $190 million and $528 million in the 1999 and
2000 fiscal years, respectively; (ii) collection of the projected rent payments
for the City's airports, totaling $270 million and $180 million in the 1998 and
1999 fiscal years, respectively, which may depend on the successful completion
of negotiations with the Port Authority or the enforcement of the City's rights
under the existing leases through pending legal actions; (iii) the ability of
HHC and BOE to identify actions to offset substantial City and State revenue
reductions and the receipt by BOE of additional State aid; and (iv) State
approval of the cost containment initiatives and State aid proposed by the City
as gap-closing actions for the
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1998 fiscal year, and $115 million in additional State aid which is assumed in
the Financial Plan but not provided for in the Governor's 1997-1998 Executive
Budget. The Financial Plan does not reflect any increased costs which the City
might incur as a result of welfare legislation recently enacted by Congress or
legislation proposed by the Governor, which would, if enacted, implement such
Federal welfare legislation, but does assume the entitlement savings and
additional Federal aid for localities provided in the Governor's 1997-1998
Executive Budget. Moreover, certain proposed entitlement cost containment and
other initiatives have been previously considered and rejected by the State
Legislature. The nature and extent of the impact on the City of the State
budget, when adopted, is uncertain, and no assurance can be given that the State
actions included in the State adopted budget may not have a significant adverse
impact on the City's budget and its Financial Plan. It can be expected that the
proposals contained in the Financial Plan to close the previously projected
budget gap for the 1998 fiscal year will engender substantial public debate
which will continue through the time the budget is scheduled to be adopted in
June 1997. Accordingly, the Financial Plan may be changed significantly by the
time the budget for the 1998 fiscal year is adopted. In addition, the economic
and financial condition of the City may be affected by various financial,
social, economic and political factors which could have a material effect on the
City.
The projections for the 1997 through 2000 fiscal years reflect the
costs of the settlements with the United Federation of Teachers ("UFT") and a
coalition of unions headed by District Council 37 of the American Federation of
State, County and Municipal Employees, which together represent approximately
two-thirds of the City's workforce, and assume that the City will reach
agreement with its remaining municipal unions under terms which are generally
consistent with such settlements. The settlement provides for a wage freeze in
the first two years, followed by a cumulative effective wage increase of 11% by
the end of the five year period covered by the proposed agreements, ending in
fiscal years 2000 and 2001. Additional benefit increases would raise the total
cumulative effective increase to 13% above present costs. Costs associated with
similar settlements for all City-funded employees would total $49 million, $459
million and $1.2 billion in the 1997, 1998 and 1999 fiscal years, respectively,
and exceed $2 billion in each fiscal year after the 1999 fiscal year. There can
be no assurance that the City will reach an agreement with the unions that have
not yet reached a settlement with the City on the terms contained in the
Financial Plan.
In the event of a collective bargaining impasse, the terms of wage
settlements could be determined through statutory impasse procedures, which can
impose a binding settlement except in the case of collective bargaining with the
UFT, which may be subject to non-binding arbitration. On January 23, 1996, the
City requested the Office of Collective Bargaining to declare an impasse against
the Patrolmen's Benevolent Association ("PBA") and the Uniformed Firefighters
Association ("UFA"). However, on April 7, 1997, the City reached a tentative
settlement with the UFA covering a 65-month period from January 1, 1995 to May
31, 2000. At the request of both the City and the PBA, the City's Office of
Collective Bargaining declared an impasse between the City and the PBA on
January 30, 1997. However, while the parties prepare for the impasse proceeding,
negotiations are continuing, which may eliminate the need for such a proceeding.
On July 10, 1995, Standard & Poor's revised downward its rating on
City general obligation bonds from A- to BBB+ and removed City bonds from
CreditWatch. Standard & Poor's stated that "structural budgetary balance remains
elusive because of persistent softness in the City's economy, highlighted by
weak job growth and a growing dependence on the historically
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volatile financial services sector". Other factors identified by Standard &
Poor's in lowering its rating on City bonds included a trend of using one-time
measures, including debt refinancings, to close projected budget gaps,
dependence on unratified labor savings to help balance the Financial Plan,
optimistic projections of additional federal and State aid or mandate relief, a
history of cash flow difficulties caused by State budget delays and continued
high debt levels.
On March 1, 1996, Moody's stated that the rating for City general
obligation bonds remains under review pending the outcome of the adoption of the
City's budget for the 1997 fiscal year, and, in light of the status of the
debate on public assistance and Medicaid reform; the enactment of a State
budget, upon which major assumptions regarding State aid are dependent, which
may be extensively delayed; and the seasoning of the City's economy with regard
to its strength and direction in the face of a potential national economic
slowdown. Since July 15, 1993, Fitch Investors Service, L.P. ("Fitch") has rated
City bonds A-. On February 28, 1996, Fitch placed the City's general obligation
bonds on FitchAlert with negative implications. On November 5, 1996, Fitch
removed the City's general obligation bonds from FitchAlert, although Fitch
stated that the outlook remains negative.
New York State and its Authorities. The State's current fiscal year
commenced on April 1, 1996, and ends on March 31, 1997, and is referred to
herein as the State's 1996-97 fiscal year. The State's budget for the 1996-97
fiscal year was enacted by the Legislature on July 13, 1996, more than three
months after the start of the fiscal year. The State Financial Plan for the
1996-97 fiscal year was formulated on July 25, 1996 and is based on the State's
budget as enacted by the Legislature and signed into law by the Governor, as
well as actual results for the first quarter of the current fiscal year. The
State's prior fiscal year commenced on April 1, 1995, and ended on March 31,
1996, and is referred to herein as the State's 1995-96 fiscal year.
The State closed projected budget gaps of $5.0 billion and $3.9
billion for its 1995-96 and 1996-97 fiscal years, respectively. The 1997-98 gap
was projected at $1.44 billion, based on the Governor's proposed budget of
December 1995. As a result of changes made in the enacted budget, that gap is
now expected to be larger. However, the gap is not expected to be as large as
those faced in the prior two fiscal years. The Governor has indicated that he
will propose to close any potential imbalance primarily through General Fund
expenditure reductions and without increases in taxes or deferrals of scheduled
tax reductions.
The State issued its first update to the cash-basis 1996-97 State
Financial Plan (the "Mid-Year Update") on October 25, 1996. The Mid-Year Update
reflects a balanced 1996-97 State Financial Plan, with a reserve for
contingencies in the General Fund of $300 million. This reserve will be utilized
to help offset a variety of potential risks and other unexpected contingencies
that the State may face during the balance of the 1996-97 fiscal year.
The State Financial Plan is based on a June 1996 projection by DOB
of national and State economic activity. The national economy has resumed a more
robust rate of growth after a "soft landing" in 1995, with over 11 million jobs
added nationally since early 1992. The State economy has continued to expand,
but growth remains somewhat slower than in the nation. Although the State has
added approximately 240,000 jobs since late 1992, employment growth in the State
has been hindered during recent years by significant cutbacks in the computer
and instrument manufacturing, utility,
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defense, and banking industries. Government downsizing has also moderated
these job gains.
In its Mid-Year Update the State revised its forecast of national
and State economic activity through the end of calendar year 1997 to reflect the
stronger-than-expected growth in the first half of 1996. The national economic
forecast has been changed slightly from the initial forecast on which the
original 1996-97 State Financial Plan was based. The revised forecast projects
real Gross Domestic Product growth in the nation of 2.5% for 1996 and 2.4% in
1997. The inflation rate is expected to be 3.0% in 1996 and 2.9% in 1997. The
annual rate of job growth is expected to slow gradually to about 1.8% in 1997,
down from 2.2% in 1996. Growth in personal income and wages is expected to slow
accordingly.
The State economic forecast has been changed slightly from the one
formulated with the July 1996-97 State Financial Plan. Moderate growth is
projected to continue through the second half of 1996, with employment, wages
and incomes continuing their modest rise. Personal income is projected to
increase by 5.2% in 1996 and 4.7% in 1997, reflecting robust projected wage
growth fueled in part by financial sector bonus payments. Overall employment
growth will continue as a modest rate, reflecting the slowdown in the national
economy, continued spending restraint in government, and restructuring in the
health care and financial sectors.
The forecast for continued moderate growth, and any resultant impact
on the State's 1996-97 Financial Plan, contains some uncertainties.
Stronger-than-expected gains in employment could lead to a significant
improvement in consumption spending. Investments could also remain robust.
Conversely, the prospect of a continuing deadlock on federal budget deficit
reduction or fears of excessively rapid economic growth could create upward
pressures on interest rates. In addition, the State economic forecast could
over- or underestimate the level of future bonus payments or inflation growth,
resulting in forecasted average wage growth that could differ significantly from
actual growth. Similarly, the State forecast could fail to correctly account for
expected declines in government and banking employment and the direction of
employment change that is likely to accompany telecommunications deregulation.
The DOB believes that its projections of receipts and disbursements
relating to the current State Financial Plan, and the assumptions on which they
are based, are reasonable. Actual results, however, could differ materially and
adversely from the projections set forth below, and those projections may be
changed materially and adversely from time to time.
The economic and financial condition of the State may be affected by
various financial, social, economic and political factors. Those factors can be
very complex, may vary from fiscal year to fiscal year, and are frequently the
result of actions taken not only by the State and its agencies and
instrumentalities, but also by entities, such as the Federal government, that
are not under the control of the State. Because of the uncertainty and
unpredictability of changes in these factors, their impact cannot be fully
included in the assumptions underlying the State's projections. There can be no
assurance that the State economy will not experience results that are worse than
predicted, with corresponding material and adverse effects on the State's
financial projections.
The General Fund is the principal operating fund of the State and is
used to account for all financial transactions, except those required to be
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accounted for in another fund. It is the State's largest fund and receives
almost all State taxes and other resources not dedicated to particular purposes.
In the State's 1996-97 fiscal year, the General Fund is expected to account for
approximately 47% of total governmental-fund receipts and 71% of total
governmental-fund disbursements. General Fund moneys are also transferred to
other funds, primarily to support certain capital projects and debt service
payments in other fund types.
The General Fund is projected to be balanced on a cash basis for the
1996-97 fiscal year. Actual receipts through the first two quarters of the
1996-97 State fiscal year reflect stronger-than-expected growth in most taxes,
with actual receipts exceeding expectations by $276 million. Based on the
revised economic outlook and actual receipts for the first six months of
1996-97, projected General Fund receipts for the 1996-97 State fiscal year have
been increased by $420 million. Most of this projected increase is in the yield
of the personal income tax ($241 million), with additional increases now
expected in business taxes ($124 million) and other tax receipts ($49 million).
Projected collections from user taxes and fees have been revised downward
slightly ($5 million). Revisions were also made to both miscellaneous receipts
and in transfers from other funds (an $11 million combined projected increase).
Disbursements through the first six months of the fiscal year were
$415 million less than projected, primarily because of delays in processing
payments following delayed enactment of the State budget. As a result, no
savings are included in the Mid-Year Update from this slower-than-expected
spending. Projections of 1996-97 General Fund disbursements are increased by
$120 million, since increased General Fund disbursements for education are
required to replace a projected decrease in lottery receipts. This modification
is shown in the form of an increased transfer of General Fund monies to the
Lottery Fund in the Special Revenue fund type. The projected closing fund
balance in the General Fund of $337 million reflects a balance of $252 million
in the Tax Stabilization Reserve Fund (following a payment of $15 million during
the current fiscal year) and a deposit of $85 million to the Contingency Reserve
Fund.
On January 13, 1992, Standard & Poor's reduced its ratings on the
State's general obligation bonds from A to A- and, in addition, reduced its
ratings on the State's moral obligation, lease purchase, guaranteed and
contractual obligation debt. Standard & Poor's also continued its negative
rating outlook assessment on State general obligation debt. On April 26, 1993,
Standard & Poor's revised the rating outlook assessment to stable. On February
14, 1994, Standard & Poor's raised its outlook to positive and, on August 5,
1996, confirmed its A- rating. On January 6, 1992, Moody's reduced its ratings
on outstanding limited-liability State lease purchase and contractual
obligations from A to Baa1. On July 26, 1996, Moody's reconfirmed its A rating
on the State's general obligation long-term indebtedness.
Litigation. The court actions in which the State is a defendant
generally involve State programs and miscellaneous tort, real property, and
contract claims. While the ultimate outcome and fiscal impact, if any, on the
State of those proceedings and claims are not currently predictable, adverse
determinations in certain of them might have a material adverse effect upon the
State's ability to maintain a balanced 1996-97 State Financial Plan.
The claims involving the City other than routine litigation
incidental to the performance of their governmental and other functions and
certain other litigation arise out of alleged constitutional violations, torts,
breaches of contract and other violations of law and condemnation
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proceedings. While the ultimate outcome and fiscal impact, if any, on the City
of those proceedings and claims are not currently predictable, adverse
determinations in certain of them might have a material adverse effect upon the
City's ability to carry out the 1997-2000 Financial Plan. The City has estimated
that its potential future liability on account of outstanding claims against it
as of June 30, 1996 amounted to approximately $2.8 billion.
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. The Federal Base
Closing Commission has ordered that a number of military facilities in Virginia
be closed or reduced. As a result of recessionary conditions. In 1995 Motorola
and IBM each announced the location of major manufacturing facilities in
Virginia. The Commonwealth ended the fiscal year on June 30, 1995, with general
fund revenues exceeding budget projections by $64.9 million. The preliminary
unaudited results for the fiscal year 1995 show a general fund balance of $350.7
million.
In Davis v. Michigan (decided March 28, 1989), the United States
Supreme Court ruled unconstitutional Michigan's statute exempting from state
income tax the retirement benefits paid by the state and local governments and
not exempting retirement benefits paid by the federal government. In Harper v.
Virginia Department of Taxation (decided June 18, 1993), the United States
Supreme Court held, in a suit involving claims for refunds by Federal retirees
living in Virginia that Virginia State income tax Statutes violated the
principles of Davis v. Michigan, but remanded for further relief so long as the
relief was consistent with Federal due process. If the courts ultimately rule
that the Commonwealth must make full refunds of taxes imposed prior to Davis v.
Michigan, the State has estimated that the potential financial impact on the
Commonwealth based on its review of claims for refunds by federal pensioners
(including interest payable calculated as of December 31, 1993) would be
approximately $700 million. The Governor and General Assembly of Virginia
authorized a settlement of $340 million, plus interest, payable into
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a special trust fund in amounts of $60 million in 1994 and $70 million in each
of the years 1995 through 1998. Approximately 91% of the retirees accepted the
settlement. During the 1995 session of the General Assembly, legislation was
passed authorizing participating in the settlement for certain retirees who
failed to meet the original deadline. The original principal amount of the
claims of the retirees opting out of the settlement has been estimated by the
Commonwealth to be in excess of $47,000.000. On September 15, 1995, the Supreme
Court of Virginia entered its final judgment in the Harper case and ordered full
refunds with statutory interest. The Commonwealth has estimated that the
potential cost of refunding all Virginia income taxes paid on federal government
pensions for taxable years 1985, 1986, 1987 and 1988 to federal government
pensioners who opted out of the settlement is approximately $78.4 million,
including interest earnings, as of September 18, 1995.
The Governor proposed a plan to the General Assembly to eliminate or
reduce parole for persons convicted of violent crime. In that connection he
proposed the issuance of bonds to finance part of the cost of additional prisons
that would result from the program. The General Assembly approved part of the
plan, with bonds to be issued by the Virginia Public Building Authority or other
entities and leased to the Commonwealth.
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 15.1-227.61 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 (1)
revenue bonds payable exclusively from revenue producing governmental
enterprises and (2) industrial revenue bonds, college and hospital revenue bonds
and other "private activity bonds" which are essentially non-governmental debt
issues and which are payable exclusively by private entities such as non-profit
organizations and business concerns of all sizes. State and local governments
have no obligation to provide for payment of such private activity bonds and in
many cases would be legally prohibited from doing so. The value of such private
activity bonds may be affected by a wide variety of factors relevant to
particular localities or industries, including economic developments outside of
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
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lease financing limiting the municipal issuer's ability to utilize property
similar to that leased in the event that debt service is not appropriated.
Recent amendments to Chapter 9 of the United States Bankruptcy Code,
which applies to bankruptcies by political subdivision, limit the filing under
that chapter to political subdivisions that have been specifically authorized to
do so under applicable state law. The Sponsors are not aware of any statute in
Virginia that gives any such authorization to political subdivisions in
Virginia. Bonds payable exclusively by private entities may be subject to the
provisions of the United States Bankruptcy Code other than Chapter 9.
Virginia municipal issuers have generally not been required to
provide ongoing information about their finances and operations to holders of
their debt obligations, although a number of cities, counties and other issuers
prepare annual reports. Virginia political subdivisions that sell bonds after
July 3, 1995, will be subject to Rule 15c2-12 of the Securities and Exchange
Commission that requires continuing disclosure, including annual audited
financial statements, with respect to those obligations, unless exempted by the
Rule.
Although revenue obligations of the Commonwealth or its political
subdivisions may be payable from a specific project or source, including lease
rentals, there can be no assurance that future economic difficulties and the
resulting impact on Commonwealth and local government finances will not
adversely affect the market value of the portfolio of the Fund or the ability of
the respective obligors to make timely payments of principal and interest on
such obligations.
The Sponsors believe the information summarized above describes some
of the more significant events relating to the Virginia Trust. Sources of such
information are the official statements of the issuers located in the
Commonwealth of Virginia, as well as other publicly available documents and
information. While the Sponsors have not independently verified such
information, they have no reason to believe it is not correct in all material
respects.
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 L.P. (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.
Participants in the "Total Reinvestment Plan" can designate a broker
as the recipient of a dealer concession (see "Total Reinvestment Plan").
Comparison of Public Offering Price, Sponsor's Repurchase Price and
-------------------------------------------------------------------
Redemption Price. The secondary market Public Offering Price of Units 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.
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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: (1) computing the yield
to maturity or to an earlier call date (whichever results in a lower yield) for
each Bond in a Trust's portfolio in accordance with accepted bond practices,
which practices take into account not only the interest payable on the Bond but
also the amortization of premiums or accretion of discounts, if any; (2)
calculating the average of the yields for the Bonds in each Trust's portfolio by
weighing each Bond's yield by the market value of the Bond and by the amount of
time remaining to the date to which the Bond is priced (thus creating an average
yield for the portfolio of each Trust); and (3) reducing the average yield for
the portfolio of each Trust in order to reflect estimated fees and expenses of
that Trust and the maximum sales charge paid by 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
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<PAGE>
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.
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
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"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 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 (a) 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; (b) 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; (c) 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; (d) the Redemption Price per Unit of such State Trust based upon
the last computation thereof made during such calendar year; and (e) 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.
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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 corporate
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.
In rendering the opinion set forth below, counsel has examined the
Agreement, the final form of Prospectus dated the date hereof (the "Prospectus")
and the documents referred to therein, among others, and has relied on the
validity of said documents and the accuracy and completeness of the facts set
forth therein.
In the opinion of Battle Fowler LLP, counsel for the Sponsor, under
existing law:
The State Trusts are not associations taxable as corporations for
federal income tax purposes under the Internal Revenue Code of 1986 (the
"Code"), and income received by 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 that State Trust under Section 676(a) of the
Code. Thus, each Certificateholder of a State Trust will be considered to
have received his 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 (other than any earned original issue discount) 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, although gain on the disposition of a Bond or a Unit
purchased at a market discount generally will be treated as ordinary
income, rather than capital gain, to the extent of accrued market
discount. (It should be noted in this connection that such gain does not
include any amounts received in respect of accrued interest.) Such gain
may be mid-, long- or short-term gain depending on the facts and
circumstances. Capital losses are deductible to the extent of capital
gains; in addition, up to $3,000 of capital losses of non-corporate
Certificateholders may be deducted against ordinary income. Capital assets
held by individuals will qualify for mid-term or long-term capital gain
treatment if held for more than 12 months or more than 18 months,
respectively, and will be subject to reduced tax rates of 28% and 20%,
respectively, rather than the "regular" maximum tax rate of 39.6%.
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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 his pro rata share of such Bond. The gain or loss is
measured by the difference between (i) the tax cost of such pro rata share
and (ii) the amount received therefor. 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 original issue discount (limited, in the case of Bonds issued after
June 8, 1980, to the portion earned from the date of acquisition to the
date of disposition). Gain on the disposition of a Bond purchased at a
market discount generally will be treated as ordinary income, rather than
capital gain, to the extent of accrued market discount. No deduction is
allowed for the amortization of bond premium on tax-exempt bonds, such as
the Bonds, in computing regular federal income tax.
Discount generally accrues based on the principle of compounding of
accrued interest, not on a straight-line or ratable method, with the
result that the amount of earned original issue discount is less in the
earlier years and more in the later years of a bond term. The tax basis of
a discount bond is increased by the amount of accrued, tax-exempt original
issue discount thus determined. This method of calculation will produce
higher capital gains (or lower losses) to a 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 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
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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.
Messrs. Battle Fowler LLP are 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 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 his basis and holding period
for his Units in the same manner for New York State and New York City tax
purposes as for federal tax purposes. For corporations doing business in New
York State, interest earned on state and municipal obligations that are exempt
from federal income tax, including obligations of New York State, its political
subdivisions and instrumentalities, must be included in calculating New York
State and New York City entire net income for purposes of 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,
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<PAGE>
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 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,
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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 South Carolina v. Baker, the U.S. Supreme Court held that the
federal government may constitutionally require states to register bonds they
issue and subject the interest on such bonds to federal income tax if not
registered, and that there is no constitutional prohibition against the federal
government's taxing the interest earned on state or other municipal bonds. The
Supreme Court decision affirms the authority of the federal government to
regulate and control bonds such as the Bonds in the Trust and to tax interest on
such bonds in the future. The decision does not, however, affect the current
exemption from taxation of the interest earned on the Bonds in the Trust in
accordance with Section 103 of the Code.
The opinions of bond counsel 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
L.P., 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.
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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.
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
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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 (1) on the basis of current bid
prices of the Bonds obtained from dealers or brokers who customarily deal in
bonds comparable to those held by such State Trust, (2) on the basis of bid
prices for bonds comparable to any Bonds for which bid prices are not available,
(3) by determining the value of the Bonds by appraisal, or (4) by any
combination of the above.
The 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. 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.
TOTAL REINVESTMENT PLAN
-----------------------
Under the Total Reinvestment Plan (the "Plan"), semi-annual and
annual Certificateholders may elect to have all interest and principal
distributions, if any, with respect to their Units reinvested either in units
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of various series of "Municipal Securities Trust"* which will have been created
shortly before each semi-annual or annual Payment Date (a "Primary Series") or,
if units of a Primary Series are not available, in units of a previously formed
series of the Trust which have been repurchased by the Sponsor in the secondary
market, including the Units being offered hereby (a "Secondary Series") (Primary
Series and Secondary Series are hereafter collectively referred to as "Available
Series"). June 15 and December 15 of each year in the case of semi-annual
Certificateholders and December 15 of each year in the case of annual
Certificateholders are "Plan Reinvestment Dates."
Under the Plan (subject to compliance with applicable blue sky
laws), fractional units ("Plan Units") will be purchased from the Sponsor at a
price equal to the aggregate offering price per Unit of the bonds in the
Available Series portfolio during the initial offering of the Available Series
or at the aggregate bid price per Unit of the Available Series if its initial
offering has been completed, plus a sales charge equal to 3.627% of the net
amount invested in such bonds or 3-1/2% of the Reinvestment Price per Plan Unit,
plus accrued interest, divided by one hundred (the "Reinvestment Price per Plan
Unit"). All Plan Units will be sold at this reduced sales charge of 3-1/2% in
comparison to the regular sales charge levied on primary and secondary market
sales of Units in any series of "Municipal Securities Trust." Participants in
the Plan will have the opportunity to designate, in the Authorization Form for
the Plan, the name of a broker to whom the Sponsor will allocate a sales
commission of 1-1/2% of the Reinvestment Price per Plan Unit, payable out of the
3-1/2% sales charge. If no such designation is made, the Sponsor will retain the
sales commission.
Under the Plan, the entire amount of a participant's income and
principal distributions will be reinvested. For example, a Certificateholder who
is entitled to receive $130.50 interest income from the Trust would acquire
13.05 Plan Units assuming that the Reinvestment Price per Plan Unit, plus
accrued interest, approximated $10 (Ten Dollars).
A semi-annual or annual Certificateholder may join the Plan at the
time he invests in Units of the State Trust or any time thereafter by delivering
to the Trustee an Authorization Form which is available from brokers or the
Sponsor. In order that distributions may be reinvested on a particular Plan
Reinvestment Date, the Authorization Form must be received by the Trustee not
later than the 15th day of the month preceding such date. Authorization Forms
not received in time for a particular Plan Reinvestment Date will be valid only
for the second succeeding Plan Reinvestment Date. Similarly, a participant may
withdraw from the program at any time by notifying the Trustee (see below).
However, if written confirmation of withdrawal is not given to the Trustee prior
to a particular distribution, the participant will be deemed to have elected to
participate in the Plan with respect to that particular distribution and his
withdrawal would become effective for the next succeeding distribution.
- ---------------
* Certificateholders of a particular State Trust of the Multi-State Trust
who participate in the Plan will have reinvestments made in Units from the
same State Trust of a similar Multi-State Trust if such Units are
available. If no such Units are available for reinvestment, distributions
to Certificateholders will be reinvested in Units of regular series of
Municipal Securities Trust, the income earned on which may not be exempt
from state and local income taxes.
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Once delivered to the Trustee, an Authorization Form will constitute
a valid election to participate in the Plan with respect to Units purchased in
the Trust (and with respect to Plan Units purchased with the distributions from
the Units purchased in the State Trust) for each subsequent distribution as long
as the Certificateholder continues to participate in the Plan. However, if an
Available Series should materially differ from the Trust in the opinion of the
Sponsor, the authorization will be voided and participants will be provided with
both a notice of the material change and a new Authorization Form which would
have to be returned to the Trustee before the Certificateholder would again be
able to participate in the Plan. The Sponsor anticipates that a material
difference which would result in a voided authorization would include such facts
as the inclusion of bonds in the Available Series portfolio, the interest income
on which was not exempt from all Federal income tax, or the inclusion of bonds
which were not rated "A" or better by either Standard & Poor's Corporation or
Moody's Investors Service, Inc. on the date such bonds were initially deposited
in the Available Series portfolio.
The Sponsor has the option at any time to use units of a Secondary
Series to fulfill the requirements of the Plan in the event units of a Primary
Series are not available either because a Primary Series is not then in
existence or because the registration statement relating thereto is not declared
effective in sufficient time to distribute final prospectuses to Plan
participants (see below). It should be noted that there is no assurance that the
quality and diversification of the Bonds in any Available Series or the
estimated current return thereon will be similar to that of this Trust.
It is the Sponsor's intention that Plan Units will be offered on or
about each semi-annual and annual Record Date for determining who is eligible to
receive distributions on the related Payment Date. Such Record Dates are June 1
and December 1 of each year for semi-annual Certificateholders, and December 1
of each year for annual Certificateholders. On each Record Date the Sponsor will
send a current Prospectus relating to the Available Series being offered for the
next Plan Reinvestment Date along with a letter which reminds each participant
that Plan Units are being purchased for him as part of the Plan unless he
notifies the Trustee in writing by that Plan Reinvestment Date that he no longer
wishes to participate in the Plan. In the event a Primary Series has not been
declared effective in sufficient time to distribute a final Prospectus relating
thereto and there is no Secondary Series as to which a registration statement is
currently effective, it is the Sponsor's intention to suspend the Plan and
distribute to each participant his regular semi-annual or annual distribution.
If the Plan is so suspended, it will resume in effect with the next Plan
Reinvestment Date, assuming units of an Available Series are then being offered.
To aid a participant who might desire to withdraw either from the
Plan or from a particular distribution, the Trustee has established a toll free
number (see below) for participants to use for notification of withdrawal, which
must be confirmed in writing prior to the Plan Reinvestment Date. Should the
Trustee be so notified, it will make the appropriate cash disbursement. Unless
the withdrawing participant specifically indicates in his written confirmation
that (a) he wishes to withdraw from the Plan for that particular distribution
only, or (b) he wishes to withdraw from the Plan for less than all units of each
series of "Municipal Securities Trust" which he might then own (and specifically
identifies which series are to continue in the Plan), he will be deemed to have
withdrawn completely from the Plan in all respects. Once a participant withdraws
completely, he will only be allowed to again participate in the Plan by
submitting a new Authorization Form. A sale or redemption of a portion of a
participant's Plan Units will not constitute a
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<PAGE>
withdrawal from the Plan with respect to the remaining Plan Units owned by such
participant.
Unless a Certificateholder notifies the Trustee in writing to the
contrary, each semi-annual and annual Certificateholder who has acquired Plan
Units will be deemed to have elected the semi-annual and annual plan of
distribution, respectively, and to participate in the Plan with respect to
distributions made in connection with such Plan Units. (Should the Available
Series from which Plan Units are purchased for the account of an annual
Certificateholder fail to have an annual distribution plan, such
Certificateholder will be deemed to have elected the semi-annual plan of
distribution, and to participate in the Plan with respect to distributions made,
in connection with such Plan Units.) A participant who subsequently desires to
have distributions made with respect to Plan Units delivered to him in cash may
withdraw from the Plan with respect to such Plan Units and remain in the Plan
with respect to units acquired other than through the Plan. Assuming a
participant has his distributions made with respect to Plan Units reinvested,
all such distributions will be accumulated with distributions generated from the
Units of the Trust used to purchase such additional Plan Units. However,
distributions related to units in other series of "Municipal Securities Trust"
will not be accumulated with the foregoing distributions for Plan purchases.
Thus, if a person owns units in more than one series of "Municipal Securities
Trust" (which are not the result of purchases under the Plan), distributions
with respect thereto will not be aggregated for purchases under the Plan.
Although not obligated to do so, the Sponsor intends to maintain a
market for the Plan Units and continuously to offer to purchase Plan Units at
prices based upon the aggregate offering price of the Bonds in the Available
Series portfolio during the initial offering of the Available Series, or at the
aggregate bid price of the Bonds of the Available Series of its initial offering
has been completed. The Sponsor may discontinue such purchases at any time. The
aggregate bid price of the underlying bonds may be expected to be less than the
aggregate offering price. In the event that a market is not maintained for Plan
Units, a participant desiring to dispose of his Plan Units may be able to do so
only by tendering such Plan Units to the Trustee for redemption at the
Redemption Price of the full units in the Available Series corresponding to such
Plan Units, which is based upon the aggregate bid price of the underlying bonds
as described in the "Municipal Securities Trust" Prospectus for the Available
Series in question. If a participant wishes to dispose of his Plan Units, he
should inquire of the Sponsor as to current market prices prior to making a
tender for redemption to the Trustee.
Any participant may tender his Plan Units for redemption to the
Available Series Trust. Participants may redeem Plan Units by making a written
request to the Trustee at the address set forth in Part A, on the Redemption
Form supplied by the Trustee. The redemption price per Plan Unit will be
determined as set forth in the "Municipal Securities Trust" Prospectus of the
Available Series from which such Plan Unit was purchased following receipt of
the request and adjusted to reflect the fact that it relates to a Plan Unit.
There is no charge for the redemption of Plan Units.
The Trust Agreement requires that the Trustee notify the Sponsor of
any tender of Plan Units for redemption. So long as the Sponsor is maintaining a
bid in the secondary market, the Sponsor will purchase any Plan Units tendered
to the Trustee for redemption by making payment therefor to the
Certificateholder in an amount not less than the redemption price for such Plan
Units on the date of tender not later than the day on which such Plan Units
otherwise would have been redeemed by the Trustee.
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Participants in the Plan will not receive individual certificates
for their Plan Units unless the amount of Plan Units accumulated represents the
principal amount of bonds per Unit for the Available Series and, in such case, a
written request for certificates is made to the Trustee. All Plan Units will be
accounted for by the Trustee on a book entry system. Each time Plan Units are
purchased under the Plan, a participant will receive a confirmation stating his
cost, number of Units purchased and estimated current return. Questions
regarding a participant's statements should be directed to the Trustee by
calling the Trustee at the number set forth under "Summary of Essential
Information" in Part A of this Prospectus.
All expenses relating to the operation of the Plan are borne by the
Sponsor. Both the Sponsor and the Trustee reserve the right to suspend, modify
or terminate the Plan at any time for any reason, including the right to suspend
the Plan if the Sponsor is unable or unwilling to establish a Primary Series or
is unable to provide Secondary Series Units. All participants will receive
notice of any such suspension, modification or termination.
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: (1) to cure any ambiguity or to correct or
supplement any provision which may be defective or inconsistent; (2) to change
any provision thereof as may be required by the Securities and Exchange
Commission or any successor governmental agency; or (3) to make such other
provisions in regard to matters arising thereunder as shall not adversely affect
the interests of the Certificateholders.
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The Trust Agreement may also be amended in any respect, or
performance of any of the provisions thereof may be waived, with the consent of
the holders of Certificates evidencing 66-2/3% of the Units then outstanding 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 L.P. ("Reich &
------------
Tang") (successor to the Unit Investment Trust Division of Bear, Stearns & Co.,
Inc.), a Delaware limited partnership, is engaged in the brokerage business and
is a member of the National Association of Securities Dealers, Inc. Reich & Tang
is also a registered investment adviser. Reich & Tang maintains its principal
business offices at 600 Fifth Avenue, New York, New York 10020. Reich & Tang
Asset Management L.P. ("RTAM LP"), a registered investment adviser, having its
principal place of business at 399 Boylston Street, Boston, MA 02116, is the 99%
limited partner of the Sponsor. RTAM LP is 99.5% owned by New England Investment
Companies, LP ("NEIC LP") and Reich & Tang Asset Management, Inc., a wholly
owned subsidiary of NEIC LP, owns the remaining .5% interest of RTAM LP and is
its general partner. NEIC LP's general partner is New England Investment
Companies, Inc. ("NEIC"), a holding company offering a broad array of investment
styles across a wide range of asset categories through twelve subsidiaries,
divisions and affiliates offering a wide array of investment styles and products
to institutional clients. These affiliates in the aggregate are investment
advisers or managers to over 43 registered investment companies. Reich & Tang is
the successor sponsor 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), 5th Discount Series (and
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Subsequent Series), and Equity Securities Trust, Series 1, Signature Series,
Gabelli Communications Income Trust (and Subsequent Series).
On August 30, 1996, the merger of New England Mutual Life Insurance
Company and Metropolitan Life Insurance Company ("MetLife") became effective,
with MetLife being the continuing company. RTAM LP remains a wholly-owned
subsidiary of NEIC LP, but its sole general partner is now an indirect
subsidiary of MetLife. Also, MetLife New England Holdings, Inc., a wholly-owned
subsidiary of MetLife, owns 51% of the outstanding limited partnership interest
of NEIC LP. MetLife is a mutual life insurance company with assets of $298
billion at December 31, 1996. It is the second largest life insurance company in
the United States in terms of total assets. MetLife provides a wide range of
insurance and investment products and services to individuals and groups and is
the leader among United States life insurance companies in terms of total life
insurance in force, which exceeded $1.6 trillion at December 31, 1996 for
MetLife and its insurance affiliates. MetLife and its affiliates provide
insurance or other financial services to approximately 36 million people
worldwide.
For certain other Trusts as set forth in the "Summary of Essential
Information" in Part A, the Sponsors are Reich & Tang and Gruntal & Co., L.L.C.,
both of whom have entered into an Agreement Among Co-Sponsors pursuant to which
both parties have agreed to act as Co-Sponsors for the Trust. Reich & Tang has
been appointed by Gruntal & Co., L.L.C. as agent for purposes of taking any
action required or permitted to be taken by the Sponsor under the Trust
Agreement. If the Sponsors are unable to agree with respect to action to be
taken jointly by them under the Trust Agreement and they cannot agree as to
which Sponsor shall act as sole Sponsor, then Reich & Tang shall act as sole
Sponsor. If one of the Sponsors fails to perform its duties under the Trust
Agreement or becomes incapable of acting or becomes bankrupt or its affairs are
taken over by public authorities, that Sponsor may be discharged under the Trust
Agreement and a new Sponsor may be appointed or the remaining Sponsor may
continue to act as Sponsor.
Gruntal & Co., L.L.C., a Delaware limited liability company,
operates a regional securities broker/dealer from its main office in New York
City and branch offices in nine states. The firm is very active in the marketing
of investment companies and has signed dealer agreements with many mutual fund
groups. Further, through its Syndicate Department, Gruntal & Co., L.L.C. has
underwritten a large number of Closed-End Funds and has been Co-Manager on the
following offerings: Cigna High Income Shares; Dreyfus New York Municipal
Income, Inc.; Franklin Principal Maturity Trust and Van Kampen Merritt Limited
Term High Income Trust. The Sponsor is liable for the performance of its
obligations arising from its responsibilities under the Trust Agreement, but
will be under no liability to Certificateholders for taking any action, or
refraining from taking any action, in good faith pursuant to the Trust
Agreement, or for errors in judgment except in cases of its own willful
misfeasance, bad faith, gross negligence or reckless disregard of its
obligations and duties.
The information included herein is only for the purpose of informing
investors as to the financial responsibility of the Sponsor and its ability to
carry out its contractual obligations. The Sponsor will be under no liability to
Certificateholders for taking any action, or refraining from taking any action,
in good faith pursuant to the Trust Agreement, or for errors in judgment except
in cases of its own wilful misfeasance, bad faith, gross negligence or reckless
disregard of its obligations and duties.
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<PAGE>
The Sponsor may resign at any time by delivering to the Trustee an
instrument of resignation executed by the Sponsor.
If at any time the Sponsor shall resign or fail to perform any of
its duties under the Trust Agreement or becomes incapable of acting or becomes
bankrupt or its affairs are taken over by public authorities, then the Trustee
may either (a) appoint a successor Sponsor; (b) terminate the Trust Agreement
and liquidate the Trust; or (c) continue to act as Trustee without terminating
the Trust Agreement. Any successor Sponsor appointed by the Trustee shall be
satisfactory to the Trustee and, at the time of appointment, shall have a net
worth of at least $1,000,000.
The Trustee. For certain of the 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 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
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<PAGE>
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 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.
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<PAGE>
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: 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; fees of the Trustee for any extraordinary services performed
under the Trust Agreement; indemnification of the Trustee for any loss or
liability accruing to it without gross negligence, bad faith or willful
misconduct on its part, arising out of or in connection with its acceptance or
administration of a State Trust; 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 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, 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
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<PAGE>
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
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.
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<PAGE>
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 on the aggregate offer or bid side evaluation
per Unit of the Conversion Trust, depending on which price is applicable, plus
accrued interest and the applicable sales charge. The certificates must be
surrendered to the broker at the time the redemption order is placed and the
broker must specify to the Sponsor that the purchase of Conversion Trust Units
is being made pursuant to the Conversion Offer. The unit owner's broker will be
entitled to retail a portion of the sales charge.
Tax Consequences of the Exchange Privilege and the Conversion Offer.
A surrender of Units pursuant to the Exchange Privilege or the Conversion Offer
will constitute a "taxable event" to the Certificateholder under the Internal
Revenue Code. The Certificateholder will realize a tax gain or loss that will be
of a long-, mid- or short-term capital or ordinary income nature dependent on
the length of time the Units have been held and other factors. (See "Tax
Status".) A Certificateholder's tax basis in the Units acquired pursuant to the
Exchange Privilege or Conversion Offer will be equal to the purchase price of
such Units. Investors should consult their own
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<PAGE>
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 year ended June 30, 1997 included in Part A of this Prospectus have been
examined by Price Waterhouse LLP, independent accountants. The financial
statements have been so included in reliance on their report given upon the
authority of said firm as experts in accounting and auditing. KPMG Peat Marwick
LLP has consented to the incorporation by reference of their report on the
statements of operations and changes in net assets for the Trusts included in
Part A of this Prospectus for the period ended June 30, 1995.
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 (1) designate
the bonds which offer the maximum in security within their quality group, (2)
designate bonds which can be bought for possible upgrading in quality and (3)
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.
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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 (a) earnings of projects under construction, (b) earnings
of projects unseasoned in operating experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Rating denotes probable credit stature upon completion of construction
or elimination of basis of condition.
* * *
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FOR USE WITH MUNICIPAL SECURITIES TRUST
---------------------------------------
MULTISTATE SERIES 12-46
-----------------------
================================================================================
AUTHORIZATION FOR INVESTMENT IN MUNICIPAL SECURITIES TRUST,
MULTI-STATE SERIES ____
TRP PLAN - TOTAL REINVESTMENT PLAN
I hereby elect to participate in the TRP Plan and am the owner of ____ units of
__________ Trust.
I hereby authorize The Chase Manhattan Bank, Trustee, to pay all semi-annual or
annual distributions of interest and principal (if any) with respect to such
units to The Chase Manhattan Bank, as TRP Plan Agent, who shall immediately
invest the distributions in units of the available series of The State Trust
above or, if unavailable, of other available series of regular Municipal
Securities Trust.
The foregoing authorization is subject in Date ____________, 19__
all respects to the terms and conditions of
participation set forth in the prospectus
relating to such available series.
- ------------------------------------ ------------------------------------
Registered Holder (print) Registered Holder (print)
- ------------------------------------ ------------------------------------
Registered Holder Signature Registered Holder Signature
signatures if joint tenancy)
My Brokerage Firm's Name________________________________________________
Street Address__________________________________________________________
City, State and Zip Code________________________________________________
Salesman's Name ___________________ Salesman's No.______________________
================================================================================
UNIT HOLDERS NEED ONLY DATE AND SIGN THIS FORM.
MAIL TO YOUR BROKER
OR
THE CHASE MANHATTAN BANK
ATTN: THE UIT REINVESTMENT UNIT A
4 NEW YORK PLAZA
NEW YORK, NEW YORK 10004
82600.7
<PAGE>
<TABLE>
<CAPTION>
INDEX * * *
-----
MUNICIPAL SECURITIES TRUST
Title Page MULTI-STATE SERIES
- ----- ----
<S> <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 31, 1997
The Trust........................................................... 1
The State Trusts.................................................... 8 Sponsor:
Public Offering..................................................... 32
Estimated Long Term Return and Estimated Reich & Tang Distributors L.P.
Current Return.................................................... 35 600 Fifth Avenue
Rights of Certificateholders........................................ 35 New York, N.Y. 10020
Tax Status.......................................................... 38 212-830-5200
Liquidity........................................................... 42
Total Reinvestment Plan............................................. 44 (and for certain Trusts:)
Trust Administration................................................ 48 Gruntal & Co., L.L.C.
Trust Expenses and Charges.......................................... 52 14 Wall Street
Exchange Privilege and Conversion Offer............................. 53 New York, New York 10005
Other Matters....................................................... 56 (212) 267-8800
Description of Bond Ratings......................................... 57
Trustee:
Parts A and B of this Prospectus do not contain all of the
information set forth in the registration statement and exhibits relating thereto, The Chase Manhattan Bank
filed with the Securities and Exchange Commission, Washington, D.C., under 4 New York Plaza
the Securities Act of 1933, and to which reference is made. New York, N.Y. 10004
800-882-9898
Evaluator:
Kenny S&P Evaluation Services
65 Broadway
New York, N.Y. 10006
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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.
82600.7
