File No. 33-60115
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
POST-EFFECTIVE
AMENDMENT NO. 4
TO
FORM S-6
For Registration Under the Securities Act of 1933 of Securities
of Unit Investment Trusts Registered on Form N-8B-2
FIRST TRUST TAX-EXEMPT TRUST, SERIES 4
(Exact Name of Trust)
NIKE SECURITIES L.P.
(Exact Name of Depositor)
1001 Warrenville Road
Lisle, Illinois 60532
(Complete address of Depositor's principal executive offices)
NIKE SECURITIES L.P. CHAPMAN AND CUTLER
Attn: James A. Bowen Attn: Eric F. Fess
1001 Warrenville Road 111 West Monroe Street
Lisle, Illinois 60532 Chicago, Illinois 60603
(Name and complete address of agents for service)
It is proposed that this filing will become effective (check
appropriate box)
: : immediately upon filing pursuant to paragraph (b)
: x : June 30, 1999
: : 60 days after filing pursuant to paragraph (a)
: : on (date) pursuant to paragraph (a) of rule (485 or 486)
<PAGE>
FIRST TRUST TAX-EXEMPT TRUST, SERIES 4
Colorado Insured Series 4 - 233,819 Units
Oregon Insured Series 3 - 223,263 Units
PROSPECTUS - Part One
Dated June 29, 1999
Note: Part One of this Prospectus may not be distributed unless accompanied
by Part Two of this Prospectus .
In the opinion of counsel, interest income to the Trusts and to Unit holders,
with certain exceptions, is exempt under existing law from all Federal income
taxes. In addition, the interest income is, in the opinion of Special
Counsel, exempt to the extent indicated from state and local income taxes.
Capital gains, if any are subject to Federal and state tax.
THE TRUSTS
First Trust Tax Exempt Trust, Series 4 (the "Fund") consists of the underlying
unit investment trusts set forth above (each a "Trust", and collectively, the
"Trusts"). Each Trust consists of a fixed portfolio of interest-bearing
obligations issued by or on behalf of municipalities and other governmental
authorities within the states, counties municipalities, authorities and
political subdivisions thereof, the interest on which is, in the opinion of
recognized bond counsel to the issuing governmental authorities, exempt from
all Federal income taxes and to the extent indicated from state and local
income taxes under existing law. At February 28, 1999, each Unit represented
a 1/233,819 and 1/223,263 undivided interest, for Colorado Insured Series 4
("Colorado Insured") and Oregon Insured Series 3 ("Oregon Insured"),
respectively, in the principal and net income of each Trust (see "The Trusts"
in Part Two of this Prospectus).
The Units being offered by this Prospectus are issued and outstanding Units
which have been purchased by the Distributor in the secondary market or from
the Trustee after having been tendered for redemption. The profit or loss
resulting from the sale of Units will accrue to the Distributor. No proceeds
from the sale of Units will be received by the Trust.
PUBLIC OFFERING PRICE
The Public Offering Price of the Units is equal to the net assets of the Trust
divided by the number of Units outstanding, plus a sales charge of 5.50% of
the Public Offering Price (5.820% of the amount invested). At February 28,
1999, the Public Offering Price per Unit was $10.83 for Colorado Insured and
$10.88 for Oregon Insured, respectively (see "Public Offering" in Part Two of
this Prospectus).
Please retain all parts of this Prospectus for future reference.
______________________________________________________________________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
___________________________________________________________________________
NIKE SECURITIES, L.P.
SPONSOR
<PAGE>
ESTIMATED CURRENT RETURN AND ESTIMATED LONG-TERM RETURN
Estimated Current Return to Unit holders as of February 28, 1999 was 4.75% for
Colorado Insured and 4.59% for Oregon Insured. Estimated Long-Term Return to
Unit holders as of February 28, 1999 was 4.22% for Colorado Insured and 3.30%
for Oregon Insured. Estimated Current Return is calculated by dividing the
Estimated Net Annual Interest Income per Unit by the Public Offering Price.
Estimated Long-Term Return is calculated by using a formula which (1) takes
into consideration and determines and factors in the relative weightings of
the market values, yields (which take into account the amortization of
premiums and the accretion of discounts) and estimated retirements of all of
the Bonds in the Trust and (2) takes into account a compounding factor and the
expense and sales charge associated with each Unit of the Trust. Since the
market values and the estimated retirements of the Bonds and the expenses of
the Trust will change, there is no assurance that the present Estimated
Current Return and Estimated Long-Term Return indicated above will be realized
in the future. Estimated Current Return and Estimated Long-Term Return are
expected to differ because the calculation of the Estimated Long-Term Return
reflects the estimated date and amount of principal returned while the
Estimated Current Return calculations include only Net Annual Interest Income
and Public Offering Price. The above figures are based on estimated per Unit
cash flows. Estimated cash flows will vary with changes in fees and expenses,
with changes in current interest rates, and with the principal prepayment,
redemption, maturity, call, exchange or sale of the underlying Bonds. See
"Estimated Current Return and Estimated Long-Term Return" in Part Two of this
Prospectus.
<PAGE>
FIRST TRUST TAX-EXEMPT TRUST, SERIES 4
Summary of Essential Information As of February 28, 1999
Sponsor: Nike Securities, L.P.
Evaluator: First Trust Advisors, L.P.
Trustee: The Chase Manhattan Bank
<TABLE>
<CAPTION>
Colorado Oregon
Insured Insured
Series 4 Series 3
<S> <C> <C>
Principal Amount (Par Value) of Bonds (1) $2,335,000 $2,180,000
Number of Units 233,819 223,263
Fractional Undivided Interest in the Trust per Unit 1/233,819 1/223,263
Principal Amount (Par Value) of Bonds per Unit $9.986 $9.764
Public Offering Price:
Net Assets $2,392,651 $2,295,668
Net Asset Value per Unit $10.23 $10.28
Sales Charge 5.50% (5.820% of the Net Asset Value)
per Unit (2) $.60 $.60
Public Offering Price per Unit (2)(3) $10.83 $10.88
Redemption Price per Unit (3)(4) $10.23 $10.28
Excess of Public Offering Price per Unit Over
Redemption Price per Unit $.60 $.60
Minimum Value of the Trust under which Trust
Agreement may be terminated $600,000 $477,000
Minimum Principal Distribution 1.00 per 100 Units
First Settlement Date July 25, 1995
Mandatory Termination Date December 31, 2045
Calculation of Estimated Net Annual Unit Income:
Estimated Annual Interest Income per Unit $.543831 $.533761
Less: Estimated Annual Expense per Unit $.029799 $.034585
________ ________
Estimated Net Annual Interest Income per Unit $.514032 $.499176
Estimated Normal Monthly Distribution per Unit (5) $.042836 $.041598
Estimated Daily Rate of Net Interest Accrual per
Unit $.001429 $.001387
Estimated Current Return Based on Public Offering
Price (2)(5)(6) 4.75% 4.59%
Estimated Long-Term Return (2)(5)(6) 4.22% 3.30%
Trustee's Initial Annual Fee per $1,000 principal
amount of Bonds $2.20 $2.17
Evaluator's Annual Fee per Unit $.0025 $.0025
Sponsor's Annual Fee per Unit $.0030 $.0030
Record Dates: First day of each month
Distribution Dates: Fifteenth day of each month
</TABLE>
<PAGE>
Evaluations for purpose of sale, purchase or redemption of Units are made as
of the close of trading of the New York Stock Exchange (normally 4:00 P.M.
Eastern Standard Time) next following receipt of an order for a sale or
purchase of Units or receipt by the Trustee of Units tendered for redemption.
(1) Because certain of the Securities in certain Trusts may from time to
time under certain circumstances be sold or redeemed or will be called
or matured in accordance with their terms, there is no guarantee that
the value of each Unit at the respective Trust's termination will be
equal to the Principal Amount (Par Value) of Securities per Unit stated
above.
(2) The sales charge is decreased and the Estimated Current Return and
Estimated Long-Term Return are increased for transactions entitled to a
reduced sales charge. See "Public Offering-General."
(3) Anyone ordering Units for settlement after the First Settlement Date
will pay accrued interest from such date to the date of settlement
(normally three business days after order) less distributions from the
Interest Account subsequent to the First Settlement Date. After the
initial offering period, the Sponsor's Repurchase Price per Unit will be
determined as described under the caption "Public Offering-Public
Market."
(4) See "Rights of Unitholders-Redemption of Units."
(5) These figures are based on estimated per Unit cash flows. Estimated cash
flows will vary with changes in fees and expenses, with changes in
current interest rates and with the principal prepayment, redemption,
maturity, call, exchange or sale of the underlying Bonds. The estimated
cash flows for each Trust are available upon request at no charge from
the Sponsor.
(6) The Estimated Current Return is calculated by dividing the Estimated Net
Annual Interest Income per Unit by the Public Offering Price. The
Estimated Net Annual Interest Income per Unit will vary with changes in
fees and expenses of the Trustee, the Sponsor and the Evaluator and with
the principal prepayment, redemption, maturity, exchange or sale of
Bonds while the Public Offering Price will vary with changes in the
offering price of the underlying Bonds; therefore, there is no assurance
that the present Estimated Current Return indicated above will be
realized in the future. The Estimated Long-Term Return is calculated
using a formula which (1) takes into consideration, and determines and
factors in the relative weightings of, the market values, yields (which
takes into account the amortization of premiums and accretion of
discounts) and estimated retirements of all of the Bonds in a Trust and
(2) takes into account a compounding factor and the expenses and sales
charge associated with each Trust Unit. Since the market values and
estimated retirements of the Bonds and the expenses of a Trust will
change, there is no assurance that the present Estimated Long-Term
Return as indicated will be realized in the future. The Estimated
Current Return and Estimated Long-Term Return are expected to differ
because the calculation of the Estimated Long-Term Return reflects the
estimated date and amount of principal returned while the Estimated
Current Return calculation includes only Net Annual Interest Income and
Public Offering Price.
<PAGE>
Report of Independent Auditors
To the Unitholders of
First Trust Tax-Exempt Trust, Series 4:
We have audited the accompanying statements of assets and liabilities,
including the schedules of investments, of First Trust Tax-Exempt Trust,
Series 4 (the "Fund") (comprised of Colorado Insured Series 4 and Oregon
Insured Series 3 (the "Trusts")) as of February 28, 1999 and the related
statements of operations and changes in net assets for each of the two years
in the period then ended These financial statements are the responsibility of
the Fund's Sponsor. Our responsibility is to express an opinion on these
financial statements based on our audits. The financial statements for the
year ended February 28, 1997 were audited by other auditors whose report dated
April 11, 1997 expressed an unqualified opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned as of February 28, 1999,
by correspondence with the Trustee. An audit also includes assessing the
accounting principles used and significant estimates made by the Sponsor, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the 1999 and 1998 financial statements referred to above
present fairly, in all material respects, the financial position of each of
the respective Trusts constituting the First Trust Tax-Exempt Trust, Series 4
at February 28, 1999, and the results of their operations and changes in their
net assets for each of the two years in the period then ended, in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
June 4, 1999
<PAGE>
Colorado Insured Series 4
Schedule of Investments
February 28, 1999
<TABLE>
<CAPTION>
Aggregate
Principal Coupon Rate Redemption Market
Ratings (1) Amount Security Description and Maturity Features (2) Value
(Percentage of each investment category relates to total investments)
COLORADO MUNICIPAL BONDS (100.0%)
<C> <C> <S> <C> <C> <C>
GENERAL OBLIGATION (3.8%)
AAA/Aaa $85,000 Summit School District RE-1, Summit
County, Colorado, General Obligation
Improvement Bonds, Series 1995A, (FGIC
Insured)# 5.70% @ 2014 2005 @ 100 $89,855
HEALTH CARE REVENUE (31.8%)
AAA/Aaa 250,000 City of Colorado Springs, Colorado,
Hospital Revenue and Refunding Bonds, 2005 @102
Series 1995, (MBIA Insured)# 6.00% @ 2024 2016 @ 100 S.F. 270,035
AAA/Aaa 500,000 Sisters of Charity of Leavenworth Health
Services Corporation, City and County of
Denver, Colorado, Revenue Bonds, Series 2003 @ 102
1994 (MBIA Insured)# 5.00% @ 2023 2015 @ 100 S.F. 490,905
__________
760,940
__________
TRANSPORTATION REVENUE (21.8%)
AAA/Aaa 500,000 City and County of Denver, Colorado, for
and on behalf of its Department of
Aviation, Airport System Revenue Bonds, 2005 @ 102
Series 1995A, (MBIA Insured)# 5.70% @ 2025 2021 @ 100 S.F. 522,960
UTILITY REVENUE (20.8%)
AAA/Aaa 500,000 City of Colorado Springs, Colorado,
Utilities Revenue Bonds, Series 1994A
(MBIA Insured)# 5.125% @ 2023 2004 @ 100 499,610
EDUCATION REVENUE (21.8%)
AAA/Aaa 250,000 Board of Trustees of the State Colleges in
Colorado, Western State College of
Colorado Project, Series 1994C (MBIA 2004 @ 101
Insured)# 5.625% @ 2015 2010 @ 100 S.F. 260,735
AAA/Aaa 250,000 El Paso County School District No. 12,
Cheyenne Mountain, El Paso County,
Colorado, General Obligation Improvement
Bonds, Series 1995, (AMBAC Insured)# 5.65% @ 2015 2005 @ 100 261,787
__________
522,522
__________ __________
$2,335,000 Total Bonds (cost: $2,213,526) $2,395,887
========== ==========
</TABLE>
See Notes to Schedules of Investments and Financial Statements.
<PAGE>
Oregon Insured Series 3
Schedule of Investments
February 28, 1999
<TABLE>
<CAPTION>
Aggregate
Principal Coupon Rate Redemption Market
Ratings(1) Amount Security Description and Maturity Features(2) Value
(Percentage of each investment category relates to investments)
OREGON MUNICIPAL BONDS (100.0%)
<C> <C> <S> <C> <C> <C>
GENERAL OBLIGATION (67.9%)
AAA/Aaa $300,000 Lincoln County School District, Lincoln
County, Oregon, General Obligation
Bonds, Series 1995, (FSA Insured)# 5.25% @ 2012 2009 @ 100 $318,333
AAA/Aaa 275,000 Jackson County School District No. 549C,
Medford, Oregon, General Obligation 2005 @ 100
Bonds, Series 1995, (FSA Insured)# 5.375% @ 2012 2011 @ 100 S.F. 288,709
AAA/Aaa 400,000 Polk County School District No. 2, Dallas,
Oregon, General Obligation Bonds, Series 2003 @ 101
1993, (FSA Insured)# 5.40% @ 2012 2007 @ 100 S.F. 417,040
AAA/Aaa 490,000 Salem-Keizer School District No. 24J,
Marion & Polk Counties, Oregon, General
Obligation Building Bonds, Series 1994,
(FGIC Insured)# 5.75% @ 2012 2004 @ 100 538,657
__________
1,562,739
__________
LEASE REVENUE (13.6%)
AAA/Aaa 300,000 Washington County Education Service
District, Washington County, Oregon,
Advance Refunding Certificates of
Participation, Series 1995, (MBIA
Insured)# 5.75% @ 2025 2005 @ 100 312,888
HEALTH CARE REVENUE (5.2%)
AAA/Aaa 115,000 Hospital Facility Authority of the Western
Lane Hospital District, Revenue
Refunding Bonds, Series 1994, (Sisters
of St. Joseph of Peace, Health, and 2004 @ 102
Hospital Services), (MBIA Insured)# 5.75% @ 2019 2013 @ 100 S.F. 120,351
WATER AND SEWER REVENUE (13.3%)
AAA/Aaa 300,000 City of McMinnville, Yamhill County,
Oregon, Sewerage System Revenue Bonds, 2004 @ 102
Series 1994A, (FGIC Insured)# 5.00% @ 2014 2010 @ 100 S.F. 305,241
__________ __________
$2,180,000 Total Bonds (cost: $2,122,072) $2,301,219
========== ==========
</TABLE>
See Notes to Schedules of Investments and Financial Statements.
<PAGE>
FIRST TRUST TAX-EXEMPT TRUST, SERIES 4
Notes to Schedules of Investments
February 28, 1999
(1) All ratings (unaudited) are Standard & Poor's Corporation and/ or
Moody's Investors Service. As a result, of the insurance related to
each Bond, each Bond is rated "AAA" by Standard & Poor's and/or "Aaa" by
Moody's.
(2) Unless otherwise indicated, there is shown under this heading the year
in which each issue of bonds is initially redeemable and the redemption
price for that year; each such issue continues to be redeemable at
declining prices thereafter, but not below par. "S.F." indicates a
sinking fund has been or will be established with respect to an issue of
bonds. In addition, certain bonds in the portfolio may be redeemed in
whole or in part other than by operation of the stated redemption or
sinking fund provisions under certain unusual or extraordinary
circumstances specified in the instruments setting forth the terms and
provisions of such bonds. A sinking fund is a reserve fund accumulated
over a period of time for retirement of debt. A callable bond is one
which is subject to redemption prior to maturity at the option of the
issuer.
# Indicates Bond was issued at either an original issue discount or
purchased at market discount.
AMBAC - Insured by the AMBAC Indemnity Corporation
FGIC - Insured by the Financial Guaranty Insurance Company
FSA - Insured by the Financial Security Assurance
MBIA - Insured by the Municipal Bond Insurance Association
<PAGE>
FIRST TRUST TAX-EXEMPT TRUST, SERIES 4
Statements of Assets and Liabilities
February 28, 1999
<TABLE>
<CAPTION>
Colorado Oregon
Insured Insured
Series 4 Series 3
<S> <C> <C>
Assets
Investments in securities, at market value (cost:
$2,213,526 and $2,122,072 respectively) $2,395,887 $2,301,219
Interest receivable 37,219 25,578
__________ __________
Total assets 2,433,106 2,326,797
Liabilities:
Accrued expenses payable 602 644
Accrued distributions payable 10,016 9,288
Cash overdraft 29,837 17,143
Unit redemptions payable - 4,054
__________ __________
Total liabilities 40,455 31,129
__________ __________
Net Assets $2,392,651 $2,295,668
========== ==========
Net assets (233,819 and 223,263 units of fractional
undivided interest outstanding):
Cost of Trust assets 2,213,526 2,122,072
Less offering expense (Note 1) (13,311) (10,733)
__________ __________
2,200,215 2,111,339
Net unrealized appreciation of investments 182,361 179,147
Distributable funds 10,075 5,182
__________ __________
Net assets $2,392,651 $2,295,668
========== ==========
Net asset value per unit $10.23 $10.28
========== ==========
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE>
FIRST TRUST TAX-EXEMPT TRUST, SERIES 4
Statements of Operations
<TABLE>
<CAPTION>
Colorado Insured Series 4 Oregon Insured Series 3
Year ended February 28, Year ended February 28,
1999 1998 1997 1999 1998 1997
<S> <C> <C> <C> <C> <C> <C>
Investment income, interest $160,829 $165,813 $165,813 $128,597 $130,919 $130,919
Expenses:
Trustee fees 4,895 7,139 7,140 2,520 5,615 5,605
Evaluator fees 756 756 - 611 611 -
Sponsor fees 908 908 908 734 734 -
Audit fees 1,000 1,000 1,000 1,000 1,000 1,000
________ ________ ________ ________ ________ ________
Total expenses 7,559 9,803 9,048 4,865 7,960 6,605
________ ________ ________ ________ ________ ________
Investment income, net 153,270 156,010 156,765 123,732 122,959 124,314
Net gain (loss) on investments:
Net realized gain (loss) 50,501 - - 18,189 - -
Net change in unrealized
appreciation (depreciation) (17,304) 125,762 (8,087) 30,644 77,591 (17,675)
________ ________ ________ ________ ________ ________
Net gain (loss) on investments 33,197 125,762 (8,087) 48,833 77,591 (17,675)
________ ________ ________ ________ ________ ________
Net increase in net assets
resulting from operations $186,467 $281,772 $148,678 $172,565 $200,550 $106,639
======== ======== ======== ======== ======== ========
</TABLE>
See accompanying Notes to Financial Statements
<PAGE>
FIRST TRUST TAX-EXEMPT TRUST, SERIES 4
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Colorado Insured Series 4 Oregon Insured Series 3
Year ended February 28, Year ended February 28,
1999 1998 1997 1999 1998 1997
<S> <C> <C> <C> <C> <C> <C>
Operations:
Investment income, net $153,270 $156,010 $156,765 $123,732 $122,959 $124,314
Net realized gain (loss) 50,501 - - 18,189 - -
Net change in unrealized
appreciation (depreciation) (17,304) 125,762 (8,087) 30,644 77,591 (17,675)
________ ________ ________ ________ ________ ________
Net increase in net assets
resulting from operations 186,467 281,772 148,678 172,565 200,550 106,639
Distributions to unitholders from:
Investment income, net (149,175) (156,010) (156,265) (120,201) (122,959) (123,814)
__________ __________ __________ __________ __________ __________
Total distributions (149,175) (156,010) (156,265) (120,201) (122,959) (123,814)
Unit redemptions (68,691 and 21,239
units, respectively):
Principal portion (705,938) - - (219,276) - -
Net interest accrued (1,927) - - (404) - -
__________ __________ __________ __________ __________ __________
(707,865) - - (219,680) - -
Less: Offering expenses - - (1,022) - (335) (466)
________ ________ ________ ________ ________ ________
Total increase (decrease) in net
assets (670,573) 125,762 (8,609) (167,316) 77,256 (17,641)
Net assets:
Beginning of period 3,063,224 2,937,462 2,946,071 2,462,984 2,385,728 2,403,369
__________ __________ __________ __________ __________ __________
End of period $2,392,651 $3,063,224 $2,937,462 $2,295,668 $2,462,984 $2,385,728
========== ========== ========== ========== ========== ==========
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE>
FIRST TRUST TAX-EXEMPT TRUST, SERIES 4
Notes to Financial Statements
February 28, 1999
First Trust Tax-Exempt Trust, Series 4 (the "Fund") (formerly Delaware
Investments Tax-Exempt Trust, Series 4) consists of two separate unit
investment trusts: Colorado Insured Series 4 ("Colorado Insured") and Oregon
Insured Series 3 ("Oregon Insured") (collectively referred to as the
"Trusts"). The Fund was organized on July 20, 1995 and is registered under the
Investment Company Act of 1940.
1. Significant Accounting Policies
Security Valuation
The market value of securities is determined by the Evaluator (a) on the basis
of current bid prices for the bonds; (b) if bid prices are not available, on
the basis of current bid prices for comparable bonds; (c) by causing the value
of the bonds to be determined by others engaged in the practice of evaluating,
quoting, or appraising comparable bonds; or (d) by any combination of the
above.
Federal Income Taxes
No provisions for income taxes has been made because the Trusts are not
associations taxable as corporations for federal income tax purposes. Each
unit holder will be treated as the owner of a pro rata portion of the Trust
and will be taxed on his or her pro rata share of net investment income and
securities gains or losses, if any.
Organization and Offering Costs
Organization and offering costs, including the cost of preparing the initial
registration statement, registering units with the Securities and Exchange
Commission and states, the initial audit of the Trust portfolio and the
initial fees and expenses of the Trustees were charged against principal at
the end of the Trust's initial offering period.
Other
The financial statements of the Fund are prepared on the accrual basis of
accounting. Security transactions are accounted for on the date the
securities are purchased or sold. For financial reporting purposes, cost of
the bonds reflects no amortization or accretion of bond premium or discount.
<PAGE>
FIRST TRUST TAX-EXEMPT TRUST, SERIES 4
Notes to Financial Statements (continued)
2. Investments
At February 28, 1999, the unrealized market appreciation (depreciation) was as
follows:
<TABLE>
<CAPTION>
Colorado Oregon
Insured Insured
<S> <C> <C>
Gross unrealized appreciation $182,361 $179,147
Gross unrealized depreciation - -
________ ________
Net unrealized appreciation $182,361 $179,147
======== ========
</TABLE>
3. Trust Expenses
Each Trust pays trustee fees, evaluator fees, sponsor fees and various out-of-
pocket expenses
Chase Manhattan Bank serves as Trustee and receives a monthly fee based on
$2.20 and $2.17 per $1,000 principal amount of bonds outstanding as of the
first day of such month plus out-of-pocket expenses for Colorado Insured and
Oregon Insured, respectively.
Effective December 8, 1998, Nike Securities, L.P. ("Nike") succeeded Delaware
Capital Management, Inc. as Sponsor of the Trust and First Trust Advisors,
L.P. ("First Trust"), an affiliate of Nike, provides portfolio supervision
services to the Trust. Effective January 15, 1999, First Trust succeeded
Muller as Evaluator. The sponsor fees were unchanged.
The Evaluator receives a monthly fee (based on the number of units outstanding
as of the first day of such month) not to exceed $.0025 per unit on an annual
basis for each Trust.
The Sponsor receives a monthly fee (based on the number of units outstanding
as of the first day of such month) not to exceed $.003 per unit on an annual
basis for each Trust.
<PAGE>
FIRST TRUST TAX-EXEMPT TRUST, SERIES 4
Notes to Financial Statements (continued)
4. Selected Data
Selected data for a unit of the Trust outstanding throughout each period
follows:
<TABLE>
<CAPTION>
Colorado Insured Series 4 Oregon Insured Series 3
Year ended February 28, Year ended February 28,
1999 1998 1997 1999 1998 1997
<S> <C> <C> <C> <C> <C> <C>
Interest income $.53 $.55 $.55 $.54 $.54 $.54
Expenses (.02) (.03) (.03) (.02) (.03) (.03)
_______ _______ _______ _______ _______ _______
Net investment income .51 .52 .52 .52 .51 .51
Income distributions (.51) (.52) (.52) (.50) (.51) (.51)
_______ _______ _______ _______ _______ _______
- - - .02 - -
Offering expenses - - - - - -
Net gain (loss) on investments .10 0.42 (.03) .19 .31 (.07)
_______ _______ _______ _______ _______ _______
Increase (decrease) in net asset value .10 .42 (.03) .21 .31 (.07)
Net asset value, beginning of period 10.13 9.71 9.74 10.07 9.76 9.83
______ ______ ______ ______ ______ _____
Net asset value, end of period $10.23 $10.13 $9.71 $10.28 $10.07 $9.76
====== ====== ====== ====== ====== =====
</TABLE>
<PAGE>
FIRST TRUST TAX-EXEMPT TRUST, SERIES 4
Part One
Must be Accompanied by Part Two of This Prospectus
___________________
P R O S P E C T U S
___________________
SPONSOR: Nike Securities L.P.
1001 Warrenville Road
Lisle, Illinois 60532
TRUSTEE: The Chase Manhattan Bank
4 New York Plaza
New York, New York 10004-2413
This Prospectus does not constitute an offer to sell, or a solicitation of an
offer to buy, securities in any jurisdiction to any person to whom it is not
lawful to make such offer in such jurisdiction.
The Prospectus does not contain all the information set forth in the
registration statement and exhibits relating thereto, which the Fund has filed
with the Securities and Exchange Commission, Washington, D.C., under the
Securities Act of 1933 and the Investment Company Act of 1940, and to which
reference is hereby made.
FIRST TRUST TAX-EXEMPT TRUST SERIES
PROSPECTUS PART TWO OF THIS PROSPECTUS
Part Two MAY NOT BE DISTRIBUTED
June 30, 1999 WITHOUT PART ONE
The Fund. First Trust Tax-Exempt Trust Series (the "Fund") consists of
the underlying separate unit investment trusts set forth in Part One of
this Prospectus. The various trusts are collectively referred to herein
as the "Trusts." Territorial Insured Series and National Insured Series
are referred to herein as the "Insured National Trusts," while Arizona
Insured Series, Colorado Insured Series, Minnesota Insured Series,
Oregon Insured Series and Pennsylvania Insured Series are collectively
referred to herein as the "Insured State Trusts." Collectively, the
Insured National Trusts and Insured State Trusts may be referred to
herein as the "Insured Trusts." Because not all of the Bonds in certain
Territorial Series and the New Mexico Series are insured, certain
Territorial Series are not Insured National Trusts and the New Mexico
Series are not Insured State Trusts. Uninsured Territorial Series and
Insured National Trusts, collectively, may be referenced to herein as
the "National Trusts." New Mexico Series and the Insured State Trusts,
collectively, may be referred to herein as the "State Trusts." Each
Trust consists of interest-bearing obligations issued by or on behalf of
states and territories of the United States and political subdivisions
and authorities thereof, the interest on which is, with certain
exceptions, in the opinion of recognized bond counsel to the issuing
governmental authorities, exempt from all Federal income taxes under
existing law (the "Bonds"). In addition, the interest income of each
State Trust is, in the opinion of counsel, exempt to the extent
indicated from state and local taxes when held by residents of the state
where the issuers of Bonds in such State Trust are located. Investors
should consult their tax advisers to determine the extent to which such
interest income is exempt from taxation in their state of residence.
Capital gains, if any, are subject to Federal and state tax. All Bonds
in the Insured Trusts have insurance guaranteeing the payments of
principal and interest, when due, or are escrowed to maturity. All such
insurance remains effective so long as the Bonds are outstanding. It
should be noted that the insurance relates only to the Bonds in an
Insured Trust and not to the Units offered hereby or to the market value
thereof. As a result of such insurance or escrow, the Bonds of each
Insured Trust are rated "AAA" by Standard & Poor's Ratings Services, a
division of The McGraw-Hill Companies, Inc. ("Standard & Poor's") and/or
"Aaa" by Moody's Investors Service, Inc. ("Moody's"). Both Standard &
Poor's and Moody's have indicated that their respective rating is not a
recommendation to buy, hold or sell Units nor does it take into account
the extent to which expenses of an Insured Trust or sales by an Insured
Trust of Bonds for less than the purchase price paid by such Trust will
reduce payment to Unitholders of the interest and principal required to
be paid on such Bonds. See "Insurance on the Bonds in the Insured
Trusts." No representation is made as to any insurer's ability to meet
its commitments. NO INSURANCE POLICY HAS BEEN OBTAINED FOR ANY OF THE
BONDS IN CERTAIN TERRITORIAL SERIES AND THE NEW MEXICO SERIES; HOWEVER,
CERTAIN OF THE BONDS CONTAINED THEREIN MAY BE INSURED. Certain of the
BOTH PARTS OF THE PROSPECTUS SHOULD BE RETAINED FOR FUTURE REFERENCE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Page 1
Bonds in certain of the Trusts may have been acquired at prices which
resulted in such Bonds being purchased at a discount from the aggregate
par value of such Bonds. Gains based upon the difference, if any,
between the value of such Bonds at maturity, redemption or sale and
their purchase price at a discount (plus earned original issue discount)
may constitute taxable ordinary income with respect to a Unitholder who
is not a dealer with respect to his Units.
UNITS OF THE TRUSTS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK AND ARE NOT FEDERALLY INSURED OR OTHERWISE
PROTECTED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD OR ANY OTHER AGENCY AND INVOLVE INVESTMENT RISK, INCLUDING
LOSS OF PRINCIPAL.
Investment Objectives of the Fund. The objectives of the Fund are income
exempt from Federal income tax and, in the case of the State Trusts,
Federal and state income tax (if any) and conservation of capital
through an investment in diversified portfolios of Federal and state tax-
exempt obligations. The Trusts may be an appropriate investment vehicle
for investors who desire to participate in a portfolio of tax-exempt
fixed income securities with greater diversification than they might be
able to acquire individually. In addition, securities of the type
deposited in the Trusts are often not available in small amounts. There
is, of course, no guarantee that the Trusts will achieve their
objectives. The payment of interest and the preservation of principal
are dependent upon the continuing ability of the issuers and/or obligors
of the Bonds and of the insurers thereof to meet their respective
obligations.
Public Offering Price. The Public Offering Price of the Units of each
Trust is equal to the aggregate bid price of the Bonds in such Trust's
portfolio and cash, if any, in the Principal Account held or owned by
such Trust divided by the number of Units outstanding, plus the
applicable sales charge and accrued interest, if any. If the Bonds in
each Trust were available for direct purchase by investors, the purchase
price of the Bonds would not include the sales charge included in the
Public Offering Price of the Units. See "Public Offering."
Estimated Current Return and Estimated Long-Term Return. The Estimated
Current Return and Estimated Long-Term Return to Unitholders are as set
forth under "Summary of Essential Financial Information" in Part One of
this Prospectus. The methods of calculating Estimated Current Return and
Estimated Long-Term Return are set forth in the footnotes to the
"Summary of Essential Financial Information" in Part One of this
Prospectus and under "Estimated Current Return and Estimated Long-Term
Return."
Distributions. Unitholders will receive distributions on a monthly
basis. See "Rights of Unitholders-Distributions of Interest and
Principal." Record dates will be the first day of each month.
Distributions will be made on the fifteenth day of the month subsequent
to the respective record dates.
Market for Units. Although not obligated to do so, the Sponsor, Nike
Securities L.P. (the "Sponsor"), intends to maintain a secondary market
for the Units at prices based upon the aggregate bid price of the Bonds
in the portfolio of a Trust. If such a market is not maintained and no
other over-the-counter market is available, a Unitholder will be able to
dispose of his Units through redemption at prices based upon the bid
prices of the underlying Bonds (see "Rights of Unitholders-Redemption of
Units").
Page 2
Reinvestment Option. Unitholders have the opportunity to have their
distributions reinvested into an open-end management investment company
as described herein. See "Rights of Unitholder-Reinvestment Option."
Risk Factors. An investment in the Trusts should be made with an
understanding of the risks associated therewith, including, among other
factors, the inability of the issuer or an insurer to pay the principal
of or interest on a Bond when due, volatile interest rates, early call
provisions, and changes to the tax status of the Bonds. See "The Trusts-
Risk Factors" for the applicable Trust and "Risk Factors."
THE FUND
General. The Fund was created under the laws of the State of New York
pursuant to a Trust Agreement (the "Trust Agreement"), dated each
Trust's Initial Date of Deposit, as defined in "Summary of Essential
Financial Information" in Part One of this Prospectus, among Nike
Securities L.P. as Sponsor, First Trust Advisors L.P., as Evaluator, and
The Chase Manhattan Bank, as Trustee.
The Fund consists of separate unit investment trusts, each having a
portfolio of interest-bearing obligations issued by or on behalf of
states and territories of the United States, and political subdivisions
and authorities thereof, the interest on which is, in the opinion of
recognized bond counsel to the issuing governmental authorities, exempt
from all Federal income taxes under existing law. All issuers of Bonds
in a State Trust are located in the State for which such Trust is named
or in United States territories or possessions and their public
authorities; consequently, in the opinion of counsel, the related
interest earned on such Bonds is exempt to the extent indicated from
state and local taxes of such state or territory. In addition, in the
case of a National Trust, interest income may also be exempt from
certain state and local taxes for residents of various states. Illinois,
Indiana, Virginia and Washington residents may only purchase Units of a
National Trust by this Prospectus.
Each Unit represents the fractional undivided interest in each Trust as
indicated under "Summary of Essential Financial Information" in Part One
of this Prospectus. To the extent that any Units are redeemed by the
Trustee, the fractional undivided interest in a Trust represented by
each unredeemed Unit will increase, although the actual interest in such
Trust represented by such fraction will remain unchanged. Units will
remain outstanding until redeemed upon tender to the Trustee by
Unitholders, which may include the Sponsor, or until the termination of
the Trust Agreement.
Because certain of the Bonds in a Trust may from time to time under
certain circumstances be sold or redeemed or will mature in accordance
with their terms and because the proceeds from such events will be
distributed to Unitholders and will not be reinvested, no assurance can
be given that a Trust will retain for any length of time its present
size and composition. Neither the Sponsor nor the Trustee shall be
liable in any way for any default, failure or defect in any Bond.
In the event a Bond is sold or redeemed from a Trust or matures in
accordance with its terms, the estimated net annual interest income per
Unit for the Trust would be reduced and the Estimated Current Return and
Page 3
the Estimated Long-Term Return thereon might be lowered. In addition,
Unitholders should be aware that they may not be able at the time of
receipt of such principal to reinvest such proceeds in other securities
at a yield equal to or in excess of the yield which such proceeds were
earning to Unitholders in the affected Trust.
INVESTMENT OBJECTIVES AND PORTFOLIO SELECTION
The objectives of the Trusts are to provide interest income exempt from
Federal income tax and, in the case of a State Trust, Federal and state
income tax and to conserve capital through an investment in diversified
portfolios of Federal and state tax-exempt obligations. There is, of
course, no guarantee that the Trusts will achieve their objectives. The
Trusts may be an appropriate investment vehicle for investors who desire
to participate in a portfolio of tax-exempt fixed income securities with
greater diversification than they might be able to acquire individually.
In addition, securities of the type deposited in the Trusts are often
not available in small amounts.
Insurance guaranteeing the timely payment, when due, of all principal
and interest on the Bonds in each Insured Trust has been obtained by the
issuer of such Bonds, by a prior owner of such Bonds or by the Sponsor
prior to the deposit of such Bonds in such Insured Trust from one of
several insurance companies (the "Insurers"). Certain Bonds may be
escrowed to maturity. No representation is made as to any Insurer's
ability to meet its commitments. All Bonds insured by an Insurer receive
an "AAA" rating by Standard & Poor's and an "Aaa" rating by Moody's. All
Bonds selected for an uninsured Trust were rated in no case less than
"BBB" by Standard & Poor's or "Baa" by Moody's. See "Description of Bond
Ratings." No portfolio insurance has been obtained by the Sponsor for
Bonds contained in certain uninsured Territorial Series and the New
Mexico Series.
In selecting Bonds for the Trusts the following factors, among others,
were considered by the Sponsor: (i) either the Standard & Poor's rating
of the securities was in no case less than AAA in the case of the
Insured Trusts and BBB in the case of the uninsured Trusts, or the
Moody's rating of the Securities was in no case less than Aaa in the
case of the Insured Trusts and Baa in the case of the uninsured Trusts,
including provisional or conditional ratings, respectively, or, if not
rated, the Securities had, in the opinion of the Sponsor, credit
characteristics sufficiently similar to the credit characteristics of
interest-bearing tax-exempt obligations that were so rated as to be
acceptable for acquisition by the Trusts, (ii) whether the Bonds are
insured by an Insurer in the case of an Insured Trust, (iii) the prices
of the Bonds relative to other bonds of comparable quality and maturity
and (iv) the diversification of Bonds as to purpose of issue and
location of issuer, (v) with respect to the Insured Trusts, the
availability and cost of insurance for the prompt payment of principal
and interest, when due, on the Bonds. Subsequent to a Trust's Initial
Date of Deposit, a Bond may cease to be rated or its rating may be
reduced below either the applicable Standard & Poor's or Moody's ratings
set forth above or both. Neither event requires elimination of such
Bonds from the portfolio of a Trust but may be considered in the
Sponsor's determination as to whether or not to direct the Trustee to
dispose of the Bonds. See "Trust Administration-Portfolio Administration."
Page 4
THE TRUSTS
Risk Factors Specific to Arizona. The following brief summary regarding
the economy of Arizona is based upon information drawn from publicly
available sources and is included for the purpose of providing the
information about general economic conditions that may or may not affect
issuers of the Arizona Bonds. The Sponsor has not independently verified
any of the information contained in such publicly available documents.
General Economic Conditions. Progressing from its traditional reliance
on a cyclical construction industry, Arizona's economic base is maturing
and diversifying. One of the nation's leaders in employment growth,
Arizona has been among the top five employment growth states for more
than four years, and it should remain there through 1999. After climbing
by 6.2% in 1994, during which the State's economy produced the second-
highest number of jobs of any year in Arizona history, job creation in
Arizona is leveling off with employment growth of 5.6% in 1996-97, and
growth of 4.7% through November 1998 which ranked Arizona #1 in the
nation for nonagricultural job growth through that period. Arizona's
wage and salary employment grew 5.6% in 1996, 4.5% in 1997 and 4.6% in
1998. The unemployment rate was around 4.0% for 1998 and has remained
around 3.6% in early 1999, but is expected to increase throughout 1999.
Arizona's unemployment compares with a national rate of 4.9% in 1997 and
4.5% in 1998.
Arizona ranked third in the nation in personal income growth during 1991-
96. Personal income grew 7.2% in 1997 and 1998 and is expected to grow
by 7.8% in 1999. This compares with personal income growth of 5.6% in
1997 and 5.1% 1998 nationally.
Overall, Arizona's forecast is for continued but moderate rates of
growth in employment and personal income. Employment growth will
continue to be stronger in the Phoenix area than in the balance of the
State. Housing has probably peaked and is likely to decline after seven
extremely strong years. Retail sales should also continue to slow.
Population, because of continued employment growth, will record above-
average growth rates. Population grew 3.2% in 1996, 2.7% in 1997 and
2.5% in 1998, which compares to national population growth of 1% over
the same periods.
Budgetary Process. Although Arizona's fiscal year runs from July 1st of
one year to June 30th of the next year, the Legislature adopts 2-year
budgets. During the 1999 session, the Legislature will consider Fiscal
Year 2000-2001.
The Budget Reform Act of 1997 made significant changes to the State's
planning and budgeting systems. Beginning with the Fiscal Biennium 2000-
01, all State agencies, including capital improvement budgeting, will be
moved to a biennial budgeting system. From Fiscal Year 2000 to 2006, all
State agencies will move to a budget format that reflects the program
structure in the "Master List of State Government Programs." The Budget
Reform Act of 1993 established the current budgeting system of one- and
two-year budget reviews. Agencies selected for annual review and
appropriation are designated as Major Budget Units (MBUs). The 18 MBUs
account for over 90% of the total General Fund expenditures. Agencies
selected for biennial review and appropriation are designated as Other
Budget Units (OBUs).
Page 5
Revenues and Expenditures. The General Fund closed Fiscal Year 1998 with
a $525.8 million ending balance and the Executive plan for Fiscal Year
1999 anticipates a $60.8 million balance. Overall, Fiscal Year 1998
revenues totaled $5.745 billion. Corporate income tax revenue declined
by 10%, from $600 million in Fiscal Year 1997 to $528 million in Fiscal
Year 1998. Individual income tax revenues grew by 8.2% from Fiscal Year
1997 to Fiscal Year 1998. Expenditures for Fiscal Year 1998 totaled
$5.219 billion.
The current forecast for Fiscal Year 1999 revenue is $5.960 billion and
expenditures of $5.90 billion, leaving a balance of $60 million.. The
major revenue source, transaction privilege taxes, is forecast to
produce $2.547 billion for Fiscal Year 1999. Overall, General Fund
revenues will grow modestly, including 4% in Fiscal Year 1999 and 5.7%
in Fiscal Year 2000. The 1999 rate of growth reflects the impact of the
$120 million tax reduction program passed in 1998, and the 2000 revenue
estimate includes an incremental reduction to account for an additional
$60 million of tax reductions already enacted. After spending $2.926
billion on education in Fiscal Year 1998, the Executive fiscal plan for
Fiscal Year 1999 increases education spending to $3.405 billion.
For Fiscal Biennium 2000-2001, the Executive is recommending a base
operating budget of $5.7 billion and $6.03 billion, respectively. The
majority of recommended expenditures for Fiscal Biennium 2000-20001 are
in education. A projected ending balance of $26.9 million and $4.7
million is expected for Fiscal Biennium 2000-2001. By the end of Fiscal
Year 2001, the Budget Stabilization Fund balance is estimated to reach
$425 million, or 7.08% of revenues. The Medical Services Stabilization
Fund, by the end of Fiscal Year 2001 is estimated to reach $100.8
million, and the Temporary Assistance Stabilization Fund $59.7 million.
Debt Administration and Limitation. The State is not permitted to issue
general obligation debt. The particular source of payment and security
for each of the Arizona Obligations is detailed in the debt instruments
themselves and in related offering materials. There can be no assurances
with respect to whether the market value or marketability of any of the
Arizona Obligations issued by an entity other than the State of Arizona
will be affected by financial or other conditions of the State or of any
entity located within the State. In addition, it should be noted that
the State of Arizona, as well as counties, municipalities, political
subdivisions and other public authorities of the State, are subject to
limitations imposed by Arizona's Constitution with respect to ad valorem
taxation, bonded indebtedness and other matters. For example, the State
legislature cannot appropriate revenues in excess of 7% of the total
personal income of the State in any Fiscal Year. These limitations may
affect the ability of the issuers to generate revenues to satisfy their
debt obligations.
In 1994, the Arizona Supreme Court held that the state school financing
scheme, with its reliance on disparate property tax assessments for
wealthy and poor school districts, violated Article XI of the Arizona
State Constitution which requires a "general and uniform public school
system." In 1998, the Legislature passed a plan that reformulates
education funding by providing $350 million of state funds to build new
schools and places a statutory cap on the amount of bond indebtedness a
school district may incur. Essentially, the legislation replaces general
obligation bonding with a centralized state funded system. The bill
should not effect the payment of debt service on any school district's
bonds since the debt service on school district bonds is levied and
collected directly by the counties on behalf of the school districts.
Page 6
Although many of the Bonds in the Trust may be revenue obligations of
local governments or authorities in the State, there can be no assurance
that the fiscal and economic conditions referred to above will not
affect the market value or marketability of the Bonds or the ability of
the respective obligors to pay principal of and interest on the Bonds
when due.
The foregoing information constitutes only a brief summary of some of
the general factors which may impact certain issuers of Bonds and does
not purport to be a complete or exhaustive description of all adverse
conditions to which the issuers of Bonds held by the Trust are subject.
Additionally, many factors including national economic, social and
environmental policies and conditions, which are not within the control
of the issuers of the Bonds, could affect or could have an adverse
impact on the financial condition of the issuers. The Trust is unable to
predict whether or to what extent such factors or other factors may
affect the issuers of the Bonds, the market value or marketability of
the Bonds or the ability of the respective issuers of the Bonds acquired
by the Trust to pay interest on or principal of the Bonds. This
information has not been independently verified.
Arizona State Taxation. For a discussion of the Federal tax status of
income earned on Arizona Trust Units, see "Tax Status."
The assets of the Arizona Trust will consist of interest-bearing
obligations issued by or on behalf of the State of Arizona (the
"State"), its political subdivisions and authorities (the "Bonds"),
provided the interest on such Bonds received by the Trust is exempt from
State income taxes.
Neither the Sponsor nor its counsel have independently examined the
Bonds to be deposited in and held in the Trust. However, although no
opinion is expressed herein regarding such matters, it is assumed that:
(i) the Bonds were validly issued, (ii) the interest thereon is
excludable from gross income for Federal income tax purposes and (iii)
interest on the Bonds, if received directly by a Unitholder would be
exempt from the Arizona income tax (the "Arizona Income Tax"). We have
assumed that, at the respective times of issuance of the Bonds, opinions
relating to the validity thereof and to the exemption of interest
thereon from Federal income tax were rendered by bond counsel to the
respective issuing authorities. In addition, we have assumed that with
respect to the Arizona Bonds, bond counsel to the issuing authorities
rendered opinions that the interest on the Bonds is exempt from the
Arizona Income Tax. Neither the Sponsor nor its counsel has made any
review for the Trust of the proceedings relating to the issuance of the
Bonds or of the bases for the opinions rendered in connection therewith.
In the opinion of Chapman and Cutler, counsel to the Sponsor, under
existing Arizona law as of the date of this Prospectus and based upon
the assumptions set forth above:
1. For Arizona income tax purposes, each Unitholder
will be treated as the owner of a pro rata portion of the Arizona Trust,
and the income of the Arizona Trust therefore will be treated as the
income of the Unitholder under State law.
2. For Arizona income tax purposes, interest on the
Bonds which is excludable from Federal gross income and which is exempt
from Arizona income taxes when received by the Arizona Trust, and which
would be excludable from Federal gross income and exempt from Arizona
Page 7
income taxes if received directly by a Unitholder, will retain its
status as tax-exempt interest when received by the Arizona Trust and
distributed to the Unitholders.
3. To the extent that interest derived from the Arizona
Trust by a Unitholder with respect to the Bonds is excludable from
Federal gross income, such interest will not be subject to Arizona
income taxes.
4. Each Unitholder will receive taxable gain or loss
for Arizona income tax purposes when Bonds held in the Arizona Trust are
sold, exchanged, redeemed or paid at maturity, or when the Unitholder
redeems or sells Units, at a price that differs from original cost as
adjusted for amortization of Bond discount or premium and other basis
adjustments, including any basis reduction that may be required to
reflect a Unitholder's share of interest, if any, accruing on Bonds
during the interval between the Unitholder's settlement date and the
date such Bonds are delivered to the Arizona trust, if later.
5. Arizona law does not permit a deduction for interest
paid or incurred on indebtedness incurred or continued to purchase or
carry Units in the Arizona Trust, the interest on which is exempt from
Arizona income taxes. Special rules apply to financial institutions, and
such institutions should consult their own tax advisors with respect to
deductibility of interest.
6. Neither the Bonds nor the Units will be subject to
Arizona property taxes, sales tax or use tax.
Chapman and Cutler has expressed no opinion with respect to taxation
under any other provision of Arizona law. Ownership of the Units may
result in collateral Arizona tax consequences to certain taxpayers.
Prospective investors should consult their tax advisors as to the
applicability of any such collateral consequences.
Risk Factors Specific to Colorado. Based on data published by the
Colorado Department of Labor and Employment, total wage and salary
employment in 1997 was 1,977,000 (seasonally adjusted). This was an
increase of 76,600 from 1996. Services and trade were the number one and
two largest growing industries in Colorado in 1997, followed by the
finance, insurance, and real estate sector. Construction was the fourth
largest source of employment growth in 1997.
The annual average unemployment rate in Colorado from 1994 to 1996
remained stable at 4.2%. In 1997, the unemployment rate in Colorado
dropped to 3.3% while the nation's unemployment rate was 5.0%.
Colorado's job growth rate increased 4.0% in 1997, an increase from the
3.6% growth rate in 1996. In comparison, the job growth rate for the
United States in 1996 and 1997 was 2.0% and 2.3%, respectively. Total
nonagricultural employment in Colorado is expected to increase 3.9% in
1998.
Personal income rose 7.2% in Colorado during 1997 as compared with 5.8%
for the nation as a whole. In 1998, Colorado's personal income is
expected to increase 6.7%, outpacing the nation's 1998 estimated rate of
5.4%.
Page 8
The year 1998 will look much like 1997. There will be some slowing of
population, housing starts and employment, but the outlook is still
strong.
Restrictions on Appropriations and Revenues. The State Constitution
requires that expenditures for any fiscal year not exceed revenues for
such fiscal year. By statute, the amount of General Fund revenues
available for appropriation is based upon revenue estimates which,
together with other available resources, must exceed annual
appropriations by the amount of the unappropriated reserve (the
"Unappropriated Reserve"). The Unappropriated Reserve requirement for
fiscal year 1991, 1992 and 1993 was set at 3% of total appropriations
from the General Fund. For fiscal years 1994 and thereafter, the
Unappropriated Reserve requirement is set at 4%. In addition to the
Unappropriated Reserve, a constitutional amendment approved by Colorado
voters in 1992 requires the State and local government to reserve a
certain percentage of its fiscal year spending (excluding bonded debt
service) for emergency use (the "Emergency Reserve"). The minimum
Emergency Reserve is set at 2% for 1994 and 3% for 1995 and later years.
For fiscal year 1992 and thereafter, General Fund appropriations are
also limited by statute to an amount equal to the cost of performing
certain required reappraisals of taxable property plus an amount equal
to the lesser of (i) 5% of Colorado personal income or (ii) 106% of the
total General Fund appropriations for the previous fiscal year. This
restriction does not apply to any General Fund appropriations which are
required as a result of a new federal law, a final state or federal
court order or moneys derived from the increase in the rate or amount of
any tax or fee approved by a majority of the registered electors of the
State voting at any general election. In addition, the statutory limit
on the level of General Fund appropriations may be exceeded for a given
fiscal year upon the declaration of a State fiscal emergency by the
State General Assembly.
The 1997 fiscal year ending General Fund balance was $375.1 million
prior to legislative change HB 98-1414. The restated 1997 ending fund
balance is $514.1 million or $347.4 million over the combined
Unappropriated Reserve and Emergency Reserve requirement. As required by
the new law, the revised ending fund balance does not net out the
state's first TABOR rebate. The new measure directs the state
controller's office to show TABOR refunds in the year they are to be
refunded, rather than the year they were incurred. Based on June 12,
1998 estimates, the 1998 fiscal year ending General Fund balance is
expected to be $823.6 million, or $646.6 million over the required
Unappropriated Reserve and Emergency Reserve.
On November 3, 1992, voters in Colorado approved a constitutional
amendment (the "Amendment") which, in general, became effective December
31, 1992, and which could restrict the ability of the State and local
governments to increase revenues and impose taxes. The Amendment applies
to the State and all local governments, including home rule entities
("Districts"). Enterprises, defined as government-owned businesses
authorized to issue revenue bonds and receiving under 10% of annual
revenue in grants from all Colorado state and local governments
combined, are excluded from the provisions of the Amendment.
The provisions of the Amendment are unclear and have required judicial
interpretation. Among other provisions, beginning November 4, 1992, the
Amendment requires voter approval prior to tax increases, creation of
debt, or mill levy or valuation for assessment ratio increases. The
Amendment also limits increases in government spending and property tax
revenues to specified percentages. The Amendment requires that District
property tax revenues yield no more than the prior year's revenues
Page 9
adjusted for inflation, voter approved changes and (except with regard
to school districts) local growth in property values according to a
formula set forth in the Amendment. School districts are allowed to
adjust tax levies for changes in student enrollment. Pursuant to the
Amendment, local government spending is to be limited by the same
formula as the limitation for property tax revenues. The Amendment
limits increases in expenditures from the State General Fund and program
revenues (cash funds) to the growth in inflation plus the percentage
change in state population in the prior calendar year. The basis for
spending and revenue limits for each fiscal year is the prior fiscal
year's spending and property taxes collected in the prior calendar year.
Debt service changes, reductions and voter-approved revenue changes are
excluded from the calculation bases. The Amendment also prohibits new or
increased real property transfer tax rates, new state real property
taxes and local district income taxes.
Litigation concerning several issues relating to the Amendment was filed
in the Colorado courts. The litigation dealt with three principal
issues: (i) whether Districts can increase mill levies to pay debt
service on general obligation bonds without obtaining voter approval;
(ii) whether a multi-year lease purchase agreement subject to annual
appropriations is an obligation which requires voter approval prior to
execution of the agreement; and (iii) what constitutes an "enterprise"
which is excluded from the provisions of the Amendment. In September
1994, the Colorado Supreme Court held that Districts can increase mill
levies to pay debt service on general obligation bonds issued after the
effective date of the Amendment; in June, 1995, the Colorado Supreme
Court validated mill levy increases to pay general obligation bonds
issued prior to the Amendment. In late 1994, the Colorado Court of
Appeals held that multi-year lease-purchase agreements subject to annual
appropriation do not require voter approval. The time to file an appeal
in that case has expired. Finally, in May, 1995, the Colorado Supreme
Court ruled that entities with the power to levy taxes may not
themselves be "enterprises" for purposes of the Amendment; however, the
Court did not address the issue of how valid enterprises may be created.
Litigation in the "enterprise" arena may be filed in the future to
clarify these issues.
According to the Colorado Economic Perspective, Fourth Quarter, FY 1997-
98, June 12, 1998 (the "Economic Report"), inflation for 1996 was 3.5%
and population grew at the rate of 2.0% in Colorado. Accordingly, under
the Amendment, increases in State expenditures during the 1998 fiscal
year are limited to 5.5% over expenditures during the 1997 fiscal year.
The 1997 fiscal year is the base year for calculating the limitation for
the 1998 fiscal year. The limitation for the 1999 fiscal year is 5.3%,
based on inflation of 3.3% and population growth of 2.0% during 1997.
For the 1997 fiscal year, General Fund revenues totaled $4,639.9 million
and program revenues (cash funds) totaled $2,007.7 million, resulting in
total base revenues of $6,647.6 million. Expenditures for the 1998
fiscal year, therefore, cannot exceed $6,866.6 million. The 1998 fiscal
year General Fund and program revenues (cash funds) are expected to
total $7,395.4 million, or $528.8 million more than expenditures allowed
under the spending limitation. This will be the second time the state
has breached the limit since its implementation in 1992. The first
breach was in 1997 and the excess revenue of $139.0 million was refunded
to Colorado taxpayers during the 1998 tax filing season. A measure was
placed on the November 1998 ballot to deal with the excess revenue in
fiscal year 1998. The measure proposed spending the excess revenue
either $200 million per year or $1 billion for five years for highway
Page 10
construction and repair, K-12, safety needs, and higher education
building. The Economic Report estimates that the limit will be breached
by $494.1 million in fiscal year 1998-99.
There is also a statutory restriction on the amount of annual increases
in taxes that the various taxing jurisdictions in Colorado can levy
without electoral approval. This restriction does not apply to taxes
levied to pay general obligation debt.
State Finances. As the State experienced revenue shortfalls in the mid-
1980s, it adopted various measures, including impoundment of funds by
the Governor, reduction of appropriations by the General Assembly, a
temporary increase in the sales tax, deferral of certain tax reductions
and inter-fund borrowings. On a GAAP basis, the State had General Fund
balances (before reserves) at June 30 of approximately $405.1 million in
fiscal year 1994, $486.7 million in fiscal year 1995, $368.5 million in
fiscal year 1996 and $514.1 million in fiscal year 1997. The fiscal year
1998 ending General Fund balance (before reserves) is projected at
$823.6 million.
Revenues for the fiscal year ending June 30, 1997, showed Colorado's
general fund increasing after a slowdown in 1996. Revenues grew by
$410.7 million to $4,679.4 million, a 9.6% increase from 1996. This
figure was higher than the fiscal year 1996 pace of 6.8%. General Fund
revenues exceeded expenditures by $145.0 million. The turnaround in
fiscal year 1997 came as a result of surging corporate, use and
individual income taxes, which rose 15.3%, 11.0% and 12.6%, respectively.
For fiscal year 1997, the following tax categories generated the
following respective revenue percentages of the State's $4,679.4 million
total gross receipts: individual income taxes represented 55% of gross
fiscal year 1997 receipts; sales, use and excise taxes represented 30.5%
of gross fiscal year 1997 receipts; and corporate income taxes
represented 5.1% of gross fiscal year 1997 receipts. The percentages of
General Fund revenue generated by type of tax for fiscal year 1998 are
not expected to be significantly different from fiscal year 1997
percentages.
For fiscal year 1998, General Fund revenues are projected at $5,339.7
million. Revenue growth is expected to increase 14.1% over FY 1997
actual revenues. General fund expenditures are estimated at $4,733.7
million. The ending General Fund balance for fiscal year 1998, after
reserve set-asides, is $646.6 million.
State Debt. Under its constitution, the State of Colorado is not
permitted to issue general obligation bonds secured by the full faith
and credit of the State. However, certain agencies and instrumentalities
of the State are authorized to issue bonds secured by revenues from
specific projects and activities. The State enters into certain lease
transactions which are subject to annual renewal at the option of the
State. In addition, the State is authorized to issue short-term revenue
anticipation notes. Local governmental units in the State are also
authorized to incur indebtedness. The major source of financing for such
local government indebtedness is an ad valorem property tax. In
addition, in order to finance public projects, local governments in the
State can issue revenue bonds payable from the revenues of a utility or
enterprise or from the proceeds of an excise tax, or assessment bonds
payable from special assessments. Colorado local governments can also
finance public projects through leases which are subject to annual
appropriation at the option of the local government. Local governments
in Colorado also issue tax anticipation notes. The Amendment requires
Page 11
prior voter approval for the creation of any multiple fiscal year debt
or other financial obligation whatsoever, except for refundings at a
lower rate or obligations of an enterprise.
Economic conditions in the State may have continuing effects on other
governmental units within the State (including issuers of the Bonds in
the Colorado Trust), which, to varying degrees, have also experienced
reduced revenues as a result of recessionary conditions and other factors.
Colorado State Taxation. For a discussion of the Federal tax status of
income earned on Colorado Trust Units, see "Tax Status."
The assets of the Colorado Trust will consist of interest-bearing
obligations issued by or on behalf of the State of Colorado ("Colorado")
or counties, municipalities, authorities or political subdivisions
thereof (the "Colorado Bonds") the interest on which is expected to
qualify as exempt from Colorado income taxes.
Neither the Sponsor nor its counsel has independently examined the Bonds
to be deposited in and held in the Colorado Trust. However, although
Chapman and Cutler expresses no opinion with respect to the issuance of
the Bonds, in rendering its opinion expressed herein, it has assumed
that: (i) the Bonds were validly issued; (ii) the interest thereon is
excludable from gross income for Federal income tax purposes; and (iii)
interest on the Bonds, if received directly by a Unitholder, would be
exempt from the income tax imposed by the State of Colorado that is
applicable to individuals and corporations (the "State Income Tax").
This opinion does not address the taxation of persons other than full
time residents of Colorado.
We have assumed that, at the respective times of issuance of the Bonds,
opinions relating to the validity thereof and to the exemption of
interest thereon from Federal income tax were rendered by bond counsel
to the respective issuing authorities. In addition, we have assumed
that, with respect to the Colorado Bonds, bond counsel to the issuing
authorities rendered opinions that the interest on the Colorado Bonds is
exempt from the Colorado Income Tax. Neither the Sponsor nor its counsel
has made any review for the Colorado Trust of the proceedings relating
to the issuance of the Bonds or of the bases for the opinions rendered
in connection therewith.
In the opinion of Chapman and Cutler, counsel to the Sponsor, under
existing Colorado law as of the date of this Prospectus and based upon
the assumptions set forth above:
1. Because Colorado income tax law is based upon the
Federal law, the Colorado Trust is not an association taxable as a
corporation for purposes of Colorado income taxation.
2. With respect to Colorado Unitholders, in view of the
relationship between Federal and Colorado tax computations described
above:
(i) Each Colorado Unitholder will be treated as owning a
pro rata share of each asset of the Colorado Trust for Colorado income
tax purposes in the proportion that the number of Units of such Trust
held by the Unitholder bears to the total number of outstanding Units of
Page 12
the Colorado Trust, and the income of the Colorado Trust will therefore
be treated as the income of each Colorado Unitholder under Colorado law
in the proportion described and an item of income of the Colorado Trust
will have the same character in the hands of a Colorado Unitholder as it
would have in the hands of the Trustee;
(ii) Interest on Bonds that would not be includable in
income for Colorado income tax purposes when paid directly to a Colorado
Unitholder will be exempt from Colorado income taxation when received by
the Colorado Trust and attributed to such Colorado Unitholder and when
distributed to such Colorado Unitholder;
(iii) Any proceeds paid under individual policies obtained
by issuers of Bonds in the Colorado Trust which represent maturing
interest on defaulted Bonds held by the Trustee will be excludable from
Colorado adjusted gross income if, and to the same extent as, such
interest is so excludable for Federal income tax purposes if paid in the
normal course by the issuer notwithstanding that the source of payment
is from insurance proceeds provided that, at the time such policies are
purchased, the amounts paid for such policies are reasonable, customary
and consistent with the reasonable expectation that the issuer of the
Bonds, rather than the insurer, will pay debt service on the Bonds;
(iv) Each Colorado Unitholder will realize taxable gain
or loss when the Colorado Trust disposes of a Bond (whether by sale,
exchange, redemption, or payment at maturity) or when the Colorado
Unitholder redeems or sells Units at a price that differs from original
cost as adjusted for amortization of bond discount or premium and other
basis adjustments (including any basis reduction that may be required to
reflect a Colorado Unitholder's share of interest, if any, accruing on
Bonds during the interval between the Colorado Unitholder's settlement
date and the date such Bonds are delivered to the Colorado Trust, if
later);
(v) Tax basis reduction requirements relating to
amortization of bond premium may, under some circumstances, result in
Colorado Unitholders realizing taxable gain when their Units are sold or
redeemed for an amount equal to or less than their original cost; and
(vi) If interest on indebtedness incurred or continued by
a Colorado Unitholder to purchase Units in the Colorado Trust is not
deductible for Federal income tax purposes, it also will be non-
deductible for Colorado income tax purposes.
Unitholders should be aware that all tax-exempt interest, including
their share of interest on the Bonds paid to the Colorado Trust, is
taken into account for purposes of determining eligibility for the
Colorado Property Tax/Rent/Heat Rebate.
Chapman and Cutler has expressed no opinion with respect to taxation
under any other provision of Colorado law. Ownership of the Units may
result in collateral Colorado tax consequences to certain taxpayers.
Page 13
Prospective investors should consult with their tax advisors as to the
applicability of any such collateral consequences.
Risk Factors Specific to Minnesota. The State of Minnesota economy is
one of the strongest and most diverse in the nation, exhibiting a
balance of industries and solid expansion. In fact, the state's job
growth in nonfarm employment outpaced the nation's by about 60% between
1989 and 1998. Rapidly growing industries including business services,
motion pictures and air transportation, as well as continued expansion
in the state's more traditional industries, have contributed to this
performance.
Minnesota's economy continued to outperform national averages during
1998. Overall payroll employment increased 2.9% in 1998, up from 1997's
1.6% growth, to total over 2.6 million jobs. High technology industries,
including printing and publishing, health and medical devices, and
computer components and software are flourishing. Manufacturing,
transportation, trade and services experienced moderate growth, in the
2% to 3.5% range, as Minnesota's manufactured exports increased rapidly.
During 1997 the state's top three export industries-industrial
machinery, scientific instrument and electronic equipment-accounted for
about 60% ($5.8 billion) of Minnesota's total manufactured exports. The
fastest growing sectors in terms of employment, however, were
construction with 8.6% growth and the finance, insurance and real estate
(FIRE) sector, which enjoyed employment gains of 6.0% during 1998.
During the 1990s, Minnesota's FIRE sector has grown approximately six
times faster than the national average.
Agriculture is another important factor of the Minnesota economy. During
1997, the state exported over $2.6 billion worth of agricultural
products. Among the state's most important products are sugar beets,
soybeans, corn, wheat, oats, peas, turkeys and cheese. During 1998,
reduced Asian demand and good harvests sent farm prices below the break-
even point for many crop and livestock farmers, causing farm income for
Minnesota grain producers to hit the lowest levels since the mid-1980s.
The state's farmers are expected to face another difficult year in 1999.
Problems in Brazil will allow Minnesota to take a larger share of the
world soybean market, but soybean prices are likely to remain at or near
their 20-year lows. Livestock and poultry farmers will benefit from
lower grain prices, but current market prices for hogs and turkeys will
continue to be depressed.
The annual unemployment rate in Minnesota has been below the national
rate every year since 1985. During 1998, the state's average
unemployment rate dropped to 2.5% from 3.3% a year earlier, resting two
full percentage points below the U.S. rate. Nationally, the average
unemployment rate during 1998 was 4.5%. In conjunction with its low
unemployment rate, Minnesota boasts the highest labor participation rate
(75%) in the nation. Accordingly, investors should note that future
economic growth may be hampered by shortages in skilled workers.
Minnesota's per capita income growth has also outpaced the nation's
during the 1990s. While population has been stable in 1998 with less
than 1% growth (4.7 million), personal income has risen rapidly. The
state averaged 4.1% gains in per capita personal income during 1998,
following 6.3% growth in 1997. Minnesota's per capita personal income
level is now $26,295, almost 104% of the U.S. rate ($25,298).
Page 14
Personal income in Minnesota is forecast to grow by 4.7% during 1999,
slightly above the average rate forecast for the nation. Wage and salary
income growth, however, is projected to lag behind the national average
rate as states outside the Midwest also begin to feel labor market
pressures and part-time workers elsewhere increase their hours to, or
beyond, the levels they desire. Forecasts for 1999 show Minnesota
experiencing continued growth, particularly in high-tech industries and
business services. Despite a projected national slump in manufacturing,
the state's manufacturing sector is expected to rise much as it has in
the past when national manufacturing employment shrinks. Overall nonfarm
employment is projected to rise 2.1% during 1999.
Revenues and Expenditures. Minnesota operates on a two-year budget cycle
(a biennium). The 1998-99 biennium began on July 1, 1997. Net general
fund revenues for the current biennium are expected to total $22.5
billion, 1.3% more than the amount forecast shortly after the mid-point
of the biennium. Of this amount, $10.7 billion in receipts were
collected during Fiscal Year 1998. The individual income tax represents
the largest portion of these collections (44%), while the state sales
tax generates another 30%.
During Fiscal Year 1999, income tax revenues are expected to grow 8.2%
and sales tax revenues are projected to increase by 5.0%, bringing total
projected revenues to $11.9 billion. The larger than expected increase
in income tax revenues are due to strong wage gains, as well as rapidly
increasing capital gains payments. The $22.5 billion in estimated
revenues for the FY 1998-99 biennium represents 14.9% growth over the
previous biennium's revenues.
The February 1999 expenditure forecast for the FY 1998-99 biennium
totals $21.7 billion. Minor decreases in K-12 education, health care,
family support and other major local assistance estimates, combined with
slightly higher costs for property tax aid and state agency spending,
account for the increases in spending over originally budgeted amounts.
The largest area for appropriations continues to be education,
representing 31.9% of overall spending (or 43% when post-secondary
education is included). Another 14.4% is spent on health care, while
11.9% is used for property tax credits.
The ending balance for FY 1998-99 is projected to be $910 million. As of
the end of FY 1998, Minnesota had nearly $1 billion in general fund
reserves, including a $350 million Cash Flow Account and a Budget
Reserve Fund of $613 million. Minnesota's Budget Reserve is the 6th
largest in the nation, while the reserve as a percentage of expenditures
ranks 10th largest. At the end of the current biennium, the Budget
Reserve Fund is projected to reach $963 million or 5.4% of appropriations.
On May 8, 1998, Minnesota settled its lawsuit with the tobacco industry,
resulting in estimated revenues to the state of $6.1 billion over the
next 25 years. A small portion ($202 million) of the settlement has been
set aside by the courts for specific purposes, but the balance is to be
deposited into the state's general fund as non-dedicated revenues. The
payments have the following components: (1) Annual payments to the
state's general reserve fund start with a $114.8 million deposit in FY
2000. This amount increases annually, will reach $204 million during FY
2004, and will continue in perpetuity; and (2) One-time settlement
Page 15
payments begin in FY 1999 and will end in FY 2003. Those payments,
totaling $1.3 billion, will be $461 million during FY 1999, $242 million
during FY 2001-03, and $121 million in FY 2003.
Total current resources for the FY 2000-01 biennium are forecast to
reach $25.4 billion, 11.1% higher than the current biennium. Of this
amount, the income tax is expected to generate $5.8 million (up 13%) and
$6.1 million (up 5.7%) during FY 2000 and FY 2001, respectively. The
unusually high growth rate in the income tax during the first part of
the biennium is attributable to the impact of the property tax rebate
program on net income tax receipts during the FY 1998-99 biennium. Those
rebates have reduced that biennium's income tax by a total of $886
million. Without the rebates, the total increase in FY 2000-01 receipts
would be only 10.9%. Total expenditures for the biennium are projected
at $22.5 million, a 4.1% increase over the FY 1998-99 biennium.
Debt Management. Minnesota Statutes, Section 16A.641 provides for an
annual appropriation for transfer to the Debt Service Fund. The amount
of the appropriation is to be such that, when combined with the balance
on hand in the Debt Service Fund on December 1 of each year for state
bonds, it will be sufficient to pay all general obligation bond
principal and interest due and to become due through July 1 in the
second ensuing year. If the amount appropriated is insufficient when
combined with the balance on hand in the Debt Service Fund, the state
constitution requires the state auditor to levy a statewide property tax
to cover the deficiency. No such property tax has been levied since 1969
when the law was enacted requiring the appropriation.
For the FY 1998-99 biennium, operating transfers to the Debt Service
Fund total $545 million. The state issued $531 million of new general
obligation bonds during FY 1998, and $184.8 million of general
obligation bonds were redeemed, leaving an outstanding balance of $2.51
billion in general obligation debt as of June 30, 1998. General
obligation bonds authorized but unissued as of June 30, 1998 were $940.2
million.
Ratings. Fitch IBCA, Inc. (formerly known as Fitch Investors Service,
L.P.) rates State of Minnesota general obligation bonds as AAA. In May
1996, Moody's Investor Services upgraded Minnesota's general obligation
bond rating to Aaa. In August 1997, Standard & Poor's raised the state's
general obligation bond rating from AA+ to AAA.
Minnesota State Taxation. For a discussion of the Federal tax status of
income earned on Minnesota Trust Units, see "Tax Status."
Counsel to the Minnesota Trust understands that the Minnesota Trust
would only have income consisting of (i) interest from bonds issued by
the State of Minnesota and its political and governmental subdivisions,
municipalities and governmental agencies and instrumentalities (the
"Minnesota Bonds") and bonds issued by possessions of the United States
(the "Possession Bonds" and, with the Minnesota Bonds, the "Bonds")
which would be exempt from Federal and Minnesota income taxation when
paid directly to an individual, trust or estate, (ii) gain on the
disposition of such Bonds and (iii) proceeds paid under certain
insurance policies issued to the issuers of the Bonds which represent
maturing interest or principal payments on defaulted Bonds held by the
Trustee.
Page 16
Neither the Sponsor nor its counsel has independently examined the Bonds
to be deposited in and held in the Trust. However, although no opinion
is expressed herein regarding such matters, it is assumed that: (i) the
Bonds were validly issued, (ii) the interest thereon is excludable from
gross income for Federal income tax purposes and (iii) the interest
thereon is exempt from the income tax imposed by Minnesota that is
applicable to individuals, trusts and estates (the "Minnesota Income
Tax"). It should be noted that interest on the Minnesota Bonds is
subject to tax in the case of corporations subject to the Minnesota
Corporate Franchise Tax or the Corporate Alternative Minimum Tax and is
a factor in the computation of the Minimum Fee applicable to financial
institutions; no opinion is expressed with respect to the treatment of
interest on the Possession Bonds for purposes of such taxes. The opinion
set forth below does not address the taxation of persons other than full
time residents of Minnesota.
We have assumed that, at the respective times of issuance of the Bonds,
opinions relating to the validity thereof and to the exemption of
interest thereon from Federal income tax were rendered by bond counsel
to the respective issuing authorities. In addition, we have assumed
that, with respect to the Minnesota Bonds, bond counsel to the issuing
authorities rendered opinions that the interest on the Minnesota Bonds
is exempt from the Minnesota Income Tax and, with respect to the
Possession Bonds, bond counsel to the issuing authorities rendered
opinions that the Possession Bonds and the interest thereon is exempt
from all state and local income taxation. Neither the Sponsor nor its
counsel has made any review for the Minnesota Trust of the proceedings
relating to the issuance of the Bonds or of the bases for the opinions
rendered in connection therewith.
Although Minnesota state law provides that interest on Minnesota Bonds
is exempt from Minnesota state income taxation, the Minnesota state
legislature has enacted a statement of intent that interest on Minnesota
Bonds should be subject to Minnesota state income taxation if it is
judicially determined that the exemption discriminates against
interstate commerce, effective for the calendar year in which such a
decision becomes final. It cannot be predicted whether a court would
render such a decision or whether, as a result thereof, interest on
Minnesota Bonds and therefore distributions by the Minnesota Trust would
become subject to Minnesota state income taxation.
In the opinion of Chapman and Cutler, counsel to the Sponsor, under
existing Minnesota law as of the date of this Prospectus and based upon
the assumptions set forth above:
1. The Minnesota Trust is not an association taxable as
a corporation and each Unitholder of the Minnesota Trust will be treated
as the owner of a pro rata portion of the Minnesota Trust, and the
income of such portion of the Minnesota Trust will therefore be treated
as the income of the Unitholder for Minnesota Income Tax purposes;
2. Income on the Bonds, excludable from Minnesota
taxable income for purposes of the Minnesota Income Tax when received by
the Minnesota Trust, and which would be excludable from Minnesota
taxable income for purposes of the Minnesota Income Tax if received
directly by a Unitholder, will be excludable from Minnesota taxable
income for purposes of the Minnesota Income Tax when received by the
Minnesota Trust and distributed to such Unitholder;
Page 17
3. To the extent that interest on certain Bonds (except
with respect to Possession Bonds, as to which no opinion is expressed),
if any, is includable in the computation of "alternative minimum taxable
income" for Federal income tax purposes, such interest will also be
includable in the computation of "alternative minimum taxable income"
for purposes of the Minnesota Alternative Minimum Tax imposed on
individuals, estates and trusts;
4. Each Unitholder of the Minnesota Trust will
recognize gain or loss for Minnesota Income Tax purposes if the Trustee
disposes of a Bond (whether by redemption, sale or otherwise) or if the
Unitholder redeems or sells Units of the Minnesota Trust to the extent
that such a transaction results in a recognized gain or loss to such
Unitholder for Federal income tax purposes;
5. Tax basis reduction requirements relating to
amortization of bond premium may, under some circumstances, result in
Unitholders realizing taxable gain for Minnesota Income Tax purposes
when their Units are sold or redeemed for an amount equal to or less
than their original cost;
6. Proceeds, if any, paid under individual insurance
policies obtained by issuers of Bonds which represent maturing interest
on defaulted obligations held by the Trustee will be excludable from
Minnesota net income if, and to the same extent as, such interest would
have been so excludable from Minnesota net income if paid in the normal
course by the issuer of the defaulted obligation provided that, at the
time such policies are purchased, the amounts paid for such policies are
reasonable, customary and consistent with the reasonable expectation
that the issuer of the bonds, rather than the insurer, will pay debt
service on the bonds; and
7. To the extent that interest derived from the
Minnesota Trust by a Unitholder with respect to any Possession Bonds is
excludable from gross income for Federal income tax purposes and is
exempt from state and local taxation pursuant to federal law when
received by the Minnesota Trust, such interest will not be subject to
the Minnesota Income Tax when distributed by the Minnesota Trust and
received by the Unitholders. As noted above, we have expressed no
opinion as to the treatment of interest on the Possession Bonds for
purposes of the Minnesota Corporate Franchise Tax or the Alternative
Minimum Tax or whether it is a factor in the computation of the Minimum
Fee applicable to financial institutions. Although a federal statute
currently provides that bonds issued by the Government of Puerto Rico,
or by its authority, are exempt from all state and local taxation, the
Supreme Court of Minnesota has held that interest earned on bonds issued
by the Government of Puerto Rico may be included in taxable net income
for purposes of computing the Minnesota bank excise tax. The State of
Minnesota could apply the same reasoning in determining whether interest
on the Possession Bonds is subject to the taxes listed above on which we
express no opinion.
Chapman and Cutler has not examined any of the Bonds to be deposited and
held in the Minnesota Trust or the proceedings for the issuance thereof
or the opinions of bond counsel with respect thereto, and therefore
express no opinions as to the exemption from State income taxes of
interest on the Bonds if received directly by a Unitholder. Chapman and
Cutler has expressed no opinion with respect to taxation under any other
Page 18
provision of Minnesota law. Ownership of the Units may result in
collateral Minnesota tax consequences to certain taxpayers. Prospective
investors should consult their tax advisors as to the applicability of
any such collateral consequences. We have assumed that, at the
respective times of issuance of the Bonds, opinions relating to the
validity thereof and to the exemption of interest thereon from Federal
income tax were rendered by bond counsel to the respective issuing
authorities. In addition, we have assumed that, with respect to the
Minnesota Bonds, bond counsel to the issuing authorities rendered
opinions that the interest on the Minnesota Bonds is exempt from the
Minnesota Income Tax and, with respect to the Possession Bonds, bond
counsel to the issuing authorities rendered opinions that the Possession
Bonds and the interest thereon is exempt from all state and local income
taxation. Neither the Sponsor nor its counsel has made any review for
the Minnesota Trust of the proceedings relating to the issuance of the
Bonds or of the bases for the opinions rendered in connection therewith.
Risk Factors Specific to New Mexico. The following brief summary
regarding the economy of New Mexico is based upon information drawn from
publicly available sources and is included for the purpose of providing
the information about general economic conditions that may or may not
affect issuers of the New Mexico Bonds. The Sponsor has not
independently verified any of the information contained in such publicly
available documents.
General Economic Conditions. Economic Outlook. After slowing down
significantly in 1996, economic growth in New Mexico appears to have
stabilized at a relatively slow growth rate. Nonagricultural employment
growth has been about 1.6% per quarter on an annualized basis. Personal
income growth appears to have stabilized at just over 4.0%. Wage and
salary disbursements have grown by about 3.5% per year since mid-1996.
Major industries in the State are energy resources, services,
construction, trade, tourism, agriculture-agribusiness, manufacturing,
mining and government. From 1995-96, the value of construction contracts
increased 4.9% to $2.2 billion. In 1996, the total of gas and oil sales
was $4.45 billion, a dramatic increase of 41% from 1995. In 1995, the
value of mineral production (i.e., crude petroleum, natural gas, uranium
and coal) was approximately $4.9 billion, with figures showing an
increase for 1996. Major federally funded scientific research facilities
at Los Alamos, Albuquerque and White Sands are also a notable part of
the State's economy.
The State has a thriving tourist industry which has slowed since 1995.
In 1996, there were approximately 2.18 million visits to national parks
and about 5.0 million visits to State parks. According to the New Mexico
Department of Labor, the State's tourist industry generated about $2.1
billion in revenue and more than 66,000 jobs. Total gross receipts for
hotels and other lodging places increased 3.4% in 1996, compared with a
1.4% decrease in 1995. Yet visits to New Mexico's national parks and
monuments, affected partly by federal government shutdowns in the fall
and winter, dropped 3.1% in 1996.
Agriculture is a major part of the State's economy, producing an
estimated $1.468 billion in 1996. This was a 3.8% increase from 1995. As
a high, relatively dry region with extensive grasslands, the State is
ideal for raising cattle, sheep, and other livestock. Livestock receipts
increased 2.8% from 1995-96, to $991 million. This was after a 3.0%
Page 19
decrease from 1994-95 due to significant declines in prices for beef
cattle and calves. Because of irrigation and a variety of climatic
conditions, the State's farmers are able to produce a diverse assortment
of quality products. The State's farmers are major producers of alfalfa,
hay, wheat, chile peppers, cotton, fruits and pecans. Crop revenues in
1996 rose 5.7% to $478 million. Agricultural businesses include chile
canneries, wineries, alfalfa pellets, chemical and fertilizer plants,
farm machinery, feed lots and commercial slaughter plants.
New Mexico economic growth has definitely slowed since 1995.
Nonagricultural employment growth was only 1.8% in 1997 and 1.7% in
1996, following growth rates of 3.8% in 1995, 5.0% in 1994 and 4.1% in
1993. Causes for the slowdown can be traced to developments in several
sectors of the economy. Construction, particularly, has been an
important factor. After an increase of 6.0% in 1995, construction
employment declined 3.2% in 1996 and an additional 1.2% in 1997 due to
the completion of numerous large construction projects and public works
projects funded by the 1994 New Mexico Legislature, as well as a large
drop in housing construction. In addition, the finance, insurance and
real estate sector lost 0.3% of its jobs during 1997, after a strong
increase of 4.7% in 1996. New Mexico's manufacturing suffered one of the
largest decreases in the country during 1997, with a 0.4% drop in
employment. In the trade sector, a weak tourism year and slow growth in
real disposable income resulted in a small trade employment growth of
only 0.9% during 1996, the lowest since 1991, although employment in
this sector improved slightly during 1997 with 1.4% growth.
In 1997, employment in services increased by 2.6%. According to the New
Mexico Department of Labor, service occupations will continue to
experience the highest growth rates through 2006, with food service and
preparation occupations accounting for almost half of all new jobs in
this sector. During 1996, services, usually the fastest growing sector
in the economy, managed only a 2.0% employment increase. This sector was
significantly affected by a reclassification of employees of enterprises
owned by Indian tribes and tribal governments from services and other
sectors to the local government sector. Without this reclassification,
the 1996 growth rate would have been close to 4.5%.
Employment in the government sector and the combined transportation and
public utilities sectors both experienced 2.5% growth during 1997. Among
all the states, the growth rate of the government sector in New Mexico
was the 8th largest. This substantial increase stands in contrast to
significant drops in government employment during the previous two
years, including a 3.3% decrease in federal employment during 1996 due
in large part to layoffs at Los Alamos National Lab and the switchover
from F-111 to F-16 aircraft at Cannon Air Force Base in Clovis which
cost the State more than 1,000 jobs. At the State level, government
employment dropped 1.7% during 1996 because of an austerity program
implemented during that year.
In comparison to other states, New Mexico continues to rank low in terms
of per capita personal income, despite growth in this area. The rapid
growth of the State's population, at 14.2% from 1990-97 compared to only
7.6% for the nation, has had a negative impact on per capita personal
income. New Mexico's 1996 per capita personal income of $18,814 was
approximately 77% of the national figure ($24,426), and the State ranked
49th out of the fifty states and the District of Columbia. During 1997,
per capita personal income in the State climbed by 4.1% to $19,587,
moving New Mexico to a 48th place ranking. However, this gain is
Page 20
substantially lower than the increases in the 6.0% to 8.5% range from
1993 to 1995. The national growth rate in total personal income during
1997 was 5.7%.
After remaining stable at 6.3% in 1994 and 1995, New Mexico's
unemployment rate was a very high 8.1% in 1996. During 1997, however,
the State's unemployment rate averaged 6.2%. In comparison, the average
national unemployment rate during 1997 was 4.9%. In March 1998, New
Mexico's unemployment rate was recorded at 6.4%, the third highest in
the nation.
The outlook for the New Mexico economy is for slow to moderate income
and employment growth. Nonagricultural employment is projected to grow
at about 1.7% through 1999. The fastest growing industries will be
services and trade, with expansion expected in all sectors except
mining. Personal income growth will be in the 4.0-4.5% range through
1999. Wages and salaries are expected to improve somewhat, reflecting
tight labor markets nationwide. Finally, unemployment is expected to
remain in the 6.5% range through 1999.
Revenues and Expenditures. The State derives the bulk of its recurring
General Fund revenues from five major sources: general and selective
sales taxes, income taxes, the emergency school tax on oil and gas
production, rents and royalties from State and federal land, and
interest earnings from its two Permanent Funds. Effective July 1, 1981,
the Legislature abolished all property taxes for State operating purposes.
For the Fiscal Year ending June 30, 1997, recurring revenue totaled
$2.964 billion, an increase of 5.5% over the previous fiscal year. Total
General Fund Revenue was $3.033 billion, up 10% from fiscal year 1996.
In general, weakness in broad-based taxes was offset by strength in
revenue related to the production of natural gas and crude oil.
Preliminary results for fiscal year 1998 show recurring appropriations
at $2.999 billion, up 4.7% from the previous fiscal year. Nonrecurring
appropriations for fiscal year 1997 were $85.2 million, and are
estimated at $4.4 million for fiscal year 1998. The net transfer
necessary from the operating reserve was $15.2 million and is within the
$30 million transfer authority authorized by the 1996 legislature.
The 1996 legislature also established the risk reserve fund within the
general fund. General fund balances including the risk reserve fund are
projected to total $231.6 million. Without the risk reserve, balances
would be $95.4 million. The fiscal year 1997 balance in the operating
reserve was $80.8 million, or only 2.7% of fiscal year 1997 total revenue.
Disaster allotments from the appropriation contingency fund totaled $5.1
million, and the ending balance in the appropriation contingency fund is
$9.4 million.
General Fund recurring revenue is projected to reach $3.08 billion in
fiscal year 1998, a 4.0% increase over fiscal year 1997. When
nonrecurring revenue is included, total General Fund receipts will reach
$3.13 billion of recurring revenue and $3.14 billion total revenue,
increases of 1.5% and 0.3%, respectively. Current and projected growth
in recurring revenue is slow when compared to the 1993 and 1995 period.
Slow growth is largely attributable to declines in severance-related
taxes and declines in revenue from rents and royalties. Lower natural
Page 21
gas and oil prices are responsible for stagnation in severance-related
taxes which are expected to grow only 0.9% in fiscal year 1998 and
decline by 13.7% in fiscal year 1999. Gross receipts taxes will grow in
fiscal year 1998 by 5.0% and income taxes will increase by 7.4%. The
growth in income taxes is augmented by increased capital gains
realizations due to new federal legislation. Nonrecurring revenue will
decline 37.5% in fiscal year 1998 and an additional 79.1% in fiscal year
1999. Fiscal year 1997 nonrecurring revenue was attributable to new
estimated payments required for personal income tax purposes. Fiscal
year 1998 nonrecurring revenue includes higher than usual reversions in
the Medicaid program thanks to significant cost savings.
Debt Administration. The principal sources of funding for capital
projects by the State are surplus general fund balances, general
obligation bonds, and Severance Tax Bonds. The 1994 Legislature
authorized the largest capital program in the State's history, $383
million. The Executive Capital outlay recommendation for the 1998
session totals $265.9 million. These authorizations fund a broad range
of State and local capital needs for various public school and higher
education acquisitions as well as correction facilities, museum and
cultural facilities, health facilities, State building repairs, water
rights, wastewater and water systems, State parks, local roads, and
senior citizens facilities projects.
General Obligation Bonds. General obligation bonds of the State are
issued and the proceeds thereof appropriated to various purposes
pursuant to an act of the Legislature of the State. The State
Constitution requires that any law which authorizes general obligation
debt of the State shall provide for an annual tax levy sufficient to pay
the interest and to provide a sinking fund to pay the principal of the
debts. General obligation bonds are general obligations of the State for
the payment of which the full faith and credit of the State are pledged.
The general obligation bonds are payable from "ad valorem" taxes levied
without limit as to rate or amount on all property in the State subject
to taxation for State purposes. For the fiscal year ended June 30, 1997,
the total amount outstanding on General Obligation Bonds was
$247,313,874. Of this amount, $42,018,874 is in interest.
The State of New Mexico General Obligation Capital Projects Improvements
Bonds Series 1997 in the principal amount of $64,825,000 are authorized
by the 1996 Capital Projects General Obligation Bond Act (the "Act")
passed by the State Legislature in 1996, have been approved by the
voters in a Statewide election in November 1996 and will be issued
pursuant to a resolution of the State Board of Finance. General
obligation bond recommendations for fiscal year 1998-99 total $83.3
million. Of this amount, $72.1 million is for public and higher
education facilities, and $11.2 million is for Statewide projects.
Severance Tax Bonds. Severance Tax Bonds are not general obligations of
the State and the State is prohibited by law from using the proceeds of
property taxes as a source of payment of revenue bonds, including
Severance Tax Bonds. The State Treasurer keeps separate accounts for all
money collected as Severance Taxes, and is directed by State statute to
pay Severance Tax Bonds from monies on deposit in the Bonding Fund. For
the fiscal year ended June 30, 1997, the total amount outstanding on
Severance Tax Bonds was $444,723,257. Of this amount, $58,953,257 is in
interest.
Page 22
The Severance Tax Bonds, Series 1995A funds 55 projects for schools,
local governments, universities, and State agencies. Total amount of
principal and interest due on Series 1995-B and Series 1996-A as of June
30, 1997 is $66,176,318 and $47,067,458, respectively. Total amount of
principal and interest outstanding as of June 30, 1997 for the Series
1997-A Refunding Bonds is $68,515,621. The Severance Tax Bond
recommendation for the 1998 session totals $140 million. Of this amount,
$68.6 million is for public and higher education facilities, $12.7
million is for adult corrections projects and facility purchase and
$58.7 million is for other Statewide projects.
Severance taxes have been collected by the State since the adoption of
the Severance Tax Act in 1937. Since 1959, certain severance tax
receipts and certain other monies determined by the Legislature have
been deposited into the Bonding Fund and used, in part, to retire bond
issues which have funded a variety of capital improvements in the State.
The main minerals extracted from the State which contribute the largest
portion of Severance Tax revenues are natural gas, oil and coal.
Severance tax collections totaled $181.6 million in fiscal year 1997 and
are projected at $183.3 million for 1998.
Bond Ratings. Moody's Investors Service, Inc. and Standard & Poor's
Ratings Services have assigned the bond ratings of "Aa1" and "AA+,"
respectively, to State of New Mexico general obligation bonds and "Aa"
and "AA," respectively, to the Severance Tax Bonds, Series 1995A.
The foregoing information constitutes only a brief summary of some of
the financial difficulties which may impact certain issuers of Bonds and
does not purport to be a complete or exhaustive description of all
adverse conditions to which the issuers in the New Mexico Trust are
subject. Additionally, many factors including national economic, social
and environmental policies and conditions, which are not within the
control of the issuers of Bonds, could affect or could have an adverse
impact on the financial condition of the State and various agencies and
political subdivisions located in the State. The Sponsor is unable to
predict whether or to what extent such factors or other factors may
affect the issuers of Bonds, the market value or marketability of the
Bonds or the ability of the respective issuers of the Bonds acquired by
the New Mexico Trust to pay interest on or principal of the Bonds.
New Mexico State Taxation. For a discussion of the Federal tax status of
income earned on New Mexico Trust Units, see "Tax Status."
The assets of the New Mexico Trust will consist of interest-bearing
obligations issued by or on behalf of the State of New Mexico ("New
Mexico") or counties, municipalities, authorities or political
subdivisions thereof (the "New Mexico Bonds"), and by or on behalf of
the government of Puerto Rico, the government of the Guam, or the
government of the Virgin Islands (collectively the "Possession Bonds")
(collectively the New Mexico Bonds and the Possession Bonds shall be
referred to herein as the "Bonds") the interest on which is expected to
qualify as exempt from New Mexico income taxes.
Neither the Sponsor nor its counsel have independently examined the
Bonds to be deposited in and held in the New Mexico Trust. However,
although no opinion is expressed herein regarding such matter, it is
assumed that: (i) the Bonds were validly issued, (ii) the interest
Page 23
thereon is excludable from gross income for federal income tax purposes
and (iii) interest on the Bonds, if received directly by a Unit holder,
would be exempt from the New Mexico income taxes applicable to
individuals and corporation (collectively, the "New Mexico State Income
Tax"). At the respective times of issuance of the Bonds, opinions
relating to the validity thereof and to the exemption of interest
thereon from federal income tax were rendered by bond counsel to the
respective issuing authorities. In addition, with respect to the Bonds,
bond counsel to the issuing authorities rendered opinions as to the
exemption of interest from the New Mexico State Income Tax. Neither the
Sponsor nor its counsel has made any review for the New Mexico Trust of
the proceedings relating to the issuance of the Bonds or of the bases
for the opinions rendered in connection therewith. The opinion set forth
below does not address the taxation of persons other than full time
residents of New Mexico.
In the opinion of Chapman and Cutler, counsel to the Sponsor, under
existing New Mexico law as of the date of this Prospectus and based upon
the assumptions set forth above:
1. The New Mexico Trust will not be subject to tax
under the New Mexico State Income Tax.
2. Interest on the Bonds which is exempt from the New
Mexico State Income Tax when received by the New Mexico Trust, and which
would be exempt from the New Mexico State Income Tax if received
directly by a Unitholder, will retain its status as exempt from such tax
when received by the New Mexico Trust and distributed to such Unitholder
provided that the New Mexico Trust complies with the reporting
requirements contained in the New Mexico State Income Tax Regulations.
3. To the extent that interest income derived from the
New Mexico Trust by a Unitholder with respect to Possession Bonds is
exempt from state taxes pursuant to 48 U.S.C. Section 745, 48 U.S.C.
Section 1423a or 48 U.S.C. Section 1403, such interest income will not
be subject to New Mexico State Income Tax.
4. Each Unitholder will recognize gain or loss for New
Mexico State Income Tax purposes if the Trustee disposes of a bond
(whether by redemption, sale or otherwise) or if the Unitholder redeems
or sells Units of the New Mexico Trust to the extent that such a
transaction results in a recognized gain or loss to such Unitholder for
Federal income tax purposes.
5. The New Mexico State Income Tax does not permit a
deduction of interest paid on indebtedness or other expenses incurred
(or continued) in connection with the purchase or carrying of Units in
the New Mexico Trust to the extent that interest income related to the
ownership of Units is exempt from the New Mexico State Income Tax.
Chapman and Cutler has expressed no opinion with respect to taxation
under any other provisions of New Mexico law. Prospective investors
should consult their tax advisors regarding collateral tax consequences
under New Mexico law relating to the ownership of the Units, including,
but not limited to, the inclusion of income attributable to ownership of
the Units in "modified gross income" for the purposes of determining
eligibility for and the amount of the low income comprehensive tax
rebate, the child day care credit, and the elderly taxpayers' property
Page 24
tax rebate and the applicability of other New Mexico taxes, such as the
New Mexico estate tax. We have assumed that at the respective times of
issuance of the Bonds, opinions relating to the validity thereof and to
the exemption of interest thereon from Federal income tax were rendered
by bond counsel to the respective issuing authorities. In addition, we
have assumed that, with respect to the New Mexico Bonds, bond counsel to
the issuing authorities rendered opinions as to the exemption of
interest from the New Mexico Income Tax and, with respect to the
Possession Bonds, bond counsel to the issuing authorities rendered
opinions as to the exemption from all state and local income taxation of
the Possession Bonds and the interest thereon. Neither the Sponsor nor
its counsel has made any review for the New Mexico Trust of the
proceedings relating to the issuance of the Bonds or of the bases for
the opinions rendered in connection therewith.
Risk Factors Specific to Oregon. General Economic Conditions. Oregon's
December 1997 forecast issued by the Department of Administrative
Services predicts that downside risks have increased with volatility in
worldwide financial markets and the likelihood of slower growth in
important Asian markets. Yet, there is most likely to be a continuation
of the modest deceleration that has taken place during 1997. Growth is
expected to be led by further expansion of the state's high technology
manufacturing industries and their suppliers, along with additional
gains in transportation equipment manufacturing. Expansion of these
manufacturing sectors will translate into job creation in the service-
producing sectors. The construction sector is expected to level off
after four years of extremely rapid growth, thereby slowing the state's
overall growth rate.
A pattern of slowing growth is expected for both personal income and
employment. Total nonfarm wage and salary employment is projected to
increase 3.5% for 1997, down from 4.0% in 1996. Job growth is expected
to slow further to 2.6% in 1998. Personal income will grow a projected
6.7% for 1997 and 5.6% for 1998, down from 7.0% growth in 1996. The
state's population is forecast to increase 1.6% in 1998, up slightly
from an estimated 1.5% in 1997.
Oregon's unemployment rate increased from 4.8% in 1995 to 5.2% in 1996.
This compares favorably with the national unemployment rates of 5.6% in
1995 and 5.4% in 1996. However, as of November 1997, Oregon's
unemployment rate was 5.3% while the U.S. unemployment rate was 4.6%.
The statewide timber harvest is expected to be 4.0 billion board feet
for both 1997 and 1998, a slight increase from 3.932 billion board feet
in 1996. The 1996 statewide timber harvest was a decrease of 8.9% from
1995. In the agricultural industry, cash commodities include farm forest
products, cattle and calves, nursery crops, dairy, wheat, potatoes,
alfalfa hay, and perennial rye grass seed.
Budgetary Process. The Oregon budget is approved on a biennial basis by
separate appropriation measures. A biennium begins July 1 and ends June
30 of odd-numbered years. Measures are passed for the approaching
biennium during each regular Legislative session, held beginning in
January of odd-numbered years.
Page 25
Because the Oregon Legislative Assembly meets in regular session for
approximately six months of each biennium, provision is made for interim
funding through the Legislative Emergency Board. The Emergency Board is
authorized to make allocations of General Fund monies to State agencies
from the State Emergency Fund. The Emergency Board may also authorize
increases in expenditure limitations from Other or Federal Funds
(dedicated or continuously appropriated funds), and may take other
actions to meet emergency needs when the Legislative Assembly is not in
session. The most significant feature of the budgeting process in Oregon
is the constitutional requirement that the budget be in balance at the
end of each biennium. Because of this provision, Oregon may not budget a
deficit and is required to alleviate any revenue shortfalls within each
biennium.
Revenue and Expenditures. The Oregon Biennial budget is a two-year
fiscal plan balancing proposed spending against expected revenues. The
total budget consists of three segments distinguished by source of
revenues: programs supported by General Fund revenues; programs
supported by Other Funds (dedicated fund) revenues, including lottery
funds; and, Federal Funds. General Fund revenue totaled $7,731.58
million for the 1995-1997 biennium. Revenue exceeded the May estimate by
$187.7 million.
General Fund revenue is projected to be $8,477.4 million for the 1997-99
biennium. The beginning balance is estimated to be $794.2 million for a
total General Fund resource estimate of $9,271.6 million. The December
1997-99 General Fund revenue estimate is $42.9 million higher than the
September 1997 forecast. It is $252.4 million higher than the Close of
Session (COS) estimate.
The State is involved in certain legal proceedings that, if decided
against the State, may require the State to make significant future
expenditures or may impair future revenue sources. Because of the
prospective nature of these legal proceedings, no provision for these
potential liabilities has been recorded in the publicly disclosed
financial statements. Additionally, 1,229 notices of tort claims have
been filed against the State. Of those claims, 544 also have been filed
as court actions, and are pending against the State. These cases are
pending in State courts and are subject to the liability limitations
stated in the Tort Claims Act of $500,000 per occurrence, $200,000 per
individual for physical injuries, and $50,000 per occurrence for
property damage. The likelihood of an unfavorable outcome in these cases
ranges from probable to remote, but it is certain that these cases do
not involve real exposure of $25 million in the aggregate.
In the November 1994 general election, Oregonians approved a ballot
measure, introduced through the initiative process, that will have, or
may have, a material financial impact on the State. "Measure 11" amends
Oregon statutes to require mandated minimum sentences for certain
felonies, effective April 1, 1995. "Measure 11" creates a need for an
estimated 6,085 new prison beds by the year 2001 and calls for State
correction facility construction costs of approximately $462 million in
the next five years. The State also estimates increases in State
expenditures for correctional operations, beginning with an increase of
$3.2 million in fiscal year 1996, with accelerating costs that should
peak at an annual increase of up to $101.6 million by fiscal year 2001.
Because these demands will be made by the State General Fund, they will
reduce amounts that otherwise would be available in the future for the
Oregon Legislative Assembly to appropriate for other purposes.
Page 26
In November of 1996, voters approved Ballot Measure 47, the property tax
cut and cap. It will reduce revenues to schools, cities and counties by
as much as $1 billion and put pressure on the General Fund to make up
some or all of the difference.
Ballot Measure 50, passed by Oregon voters in May of 1997, limits the
taxes a property owner must pay. It limits taxes on each property by
rolling back the 1997-98 assessed value of each property to 90% of its
1995-96 value. The measure also limits future growth on taxable value to
3% a year, with exceptions for items such as new construction,
remodeling, subdivisions, and rezoning. It establishes permanent tax
rates for Oregon's local taxing districts, yet allows voters to approve
new, short-term option levies outside the permanent rate limit if
approved by a majority of a 50% voter turnout.
Debt Administration and Limitation. Oregon statutes give the State
Treasurer authority to review and approve the terms and conditions of
sale for State agency bonds. The Governor, by statute, seeks the advice
of the State Treasurer when recommending the total biennial bonding
level for State programs. Agencies may not request that the Treasurer
issue bonds or certificates of requirements for state agencies on
proposed and outstanding debt. Statutes contain management and reporting
requirements for state agencies on proposed and outstanding debt.
A variety of general obligation and revenue bond programs have been
approved in Oregon to finance public purpose programs and projects.
General obligation bond authority requires voter approval or a
constitutional amendment, while revenue bonds may be issued under
statutory authority. However, under the Oregon Constitution the state
may issue up to $50,000 of general obligation debt without specific
voter approval. The State Legislative Assembly has the right to place
limits on general obligation bond programs which are more restrictive
than those approved by the voters. General obligation authorizations are
normally expressed as a percentage of statewide True Cash Value (TCV) of
taxable property. Revenue bonds usually are limited by the Legislative
Assembly to a specific dollar amount.
The State's constitution authorizes the issuance of general obligation
bonds for financing community colleges, highway construction, and
pollution control facilities. Higher education institutions and
activities and community colleges are financed through an appropriation
from the General Fund. Facilities acquired under the pollution control
program are required to conservatively appear to be at least 70% self-
supporting and self-liquidating from revenues, gifts, federal government
grants, user charges, assessments, and other fees.
Additionally, the State's constitution authorizes the issuance of
general obligation bonds to make farm and home loans to veterans,
provide loans for state residents to construct water development
projects, provide credit for multi-family housing for elderly and
disabled persons, and for small scale local energy projects. These bonds
are self-supporting and are accounted for as enterprise funds. Certain
provisions of the Water Resources general obligation bond indenture
conflict with State statutes. Upon the advice of the Attorney General,
the method of handling investment interest is in compliance with the
statutes rather than the bond indenture. Currently there is litigation
pending against the State concerning this treatment of the investment
interest.
The State's constitution further authorizes the issuance of general
obligation bonds for financing higher education building projects,
facilities, institutions, and activities. As of September 1, 1997, the
Page 27
total balance of general obligation bonds was $3.26 billion. The debt
service requirements for general obligation bonds, including interest of
approximately $2.39 billion, as of September 1, 1997, was $5.66 billion.
In addition to general obligation and direct revenue bonds, the State of
Oregon issues industrial development revenue bonds ("IDBs"), Oregon Mass
Transportation Financing Authority revenue bonds and Health, Housing,
Educational and Cultural Facilities Authority ("HHECFA") revenue bonds.
The IDBs are issued to finance the expansion, enhancement or relocation
of private industry in the State. Before such bonds are issued, the
project application must be reviewed and approved by both the Oregon
State Treasury and the Oregon Economic Development Commission. Strict
guidelines for eligibility have been developed to ensure that the
program meets a clearly defined development objective. IDBs issued by
the State are secured solely by payments from the private company and
there is no obligation, either actual or implied, to provide state funds
to secure the bonds. The Oregon Mass Transportation Financing Authority
("OMTFA") reviews financing requests from local mass transit districts
and may authorize issuance of revenue bonds to finance eligible
projects. The State has no financial obligation for these bonds, which
are secured solely by payments from local transit districts.
The State is statutorily authorized to enter into financing agreements
through the issuance of certificates of participation. Certificates of
participation have been used for the acquisition of computer systems by
the Department of Transportation, Department of Administrative Services,
and the Department of Higher Education. Also, certificates of
participation have been used for the acquisition or construction of
buildings by the Department of Administrative Services, Department of
Fish and Wildlife, Department of Corrections, State Police, and
Department of Higher Education. Further, certificates of participation
were used in the acquisition of telecommunication systems by the
Department of Administrative Services and the Adult & Family Services
Division. As of September 1, 1997, the certificates of participation
debt totaled $634.9 million. The debt service requirements for
certificates of participation for 1995-1997 is estimated at $70.1 million.
HHECFA is a public corporation created in 1989, and modified in 1991, to
assist with the assembling and financing of lands for health care,
housing, educational and cultural uses and for the construction and
financing of facilities for such uses. The Authority reviews proposed
projects and makes recommendations to the State Treasurer as to the
issuance of bonds to finance proposed projects. The State has no
financial obligation for these bonds, which are secured solely by
payments from the entities for which the projects were financed.
The Treasurer on behalf of the State may also issue federally taxable
bonds in those situations where securing a federal tax exemption is
unlikely or undesirable; regulate "current" as well as "advance"
refunding bonds; enter into financing agreements, including lease
purchase agreements, installment sales agreements and loan agreements to
finance real or personal property and approve certificates of
participation with respect to the financing agreements. Amounts payable
by the State under a financing agreement are limited to funds
appropriated or otherwise made available by the Legislative Assembly for
such payment. The principal amount of such financing agreements are
treated as bonds subject to maximum annual bonding levels established by
the Legislative Assembly under Oregon statute.
Page 28
Each of Fitch IBCA, Inc. (formerly Fitch Investors Service, L.P.),
Moody's Investors Service and Standard & Poor's Ratings Group has
assigned their municipal bond ratings of "AA," "Aa2" and "AA"
respectively.
The foregoing information constitutes only a brief summary of some of
the financial difficulties which may impact certain issuers of Bonds and
does not purport to be a complete or exhaustive description of all
adverse conditions to which the issuers in the Oregon Trust are subject.
Additionally, many factors including national economic, social and
environmental policies and conditions, which are not within the control
of the issuers of Bonds, could affect or could have an adverse impact on
the financial condition of the State and various agencies and political
subdivisions located in the State. The Sponsor is unable to predict
whether or to what extent such factors or other factors may affect the
issuers of Bonds, the market value or marketability of the Bonds or the
ability of the respective issuers of the Bonds acquired by the Oregon
Trust to pay interest on or principal of the Bonds.
Oregon State Taxation. For a discussion of the Federal tax status of
income earned on Oregon Trust Units, see "Tax Status."
The assets of the Oregon Trust will consist of interest-bearing
obligations issued by or on behalf of the State of Oregon (the "State")
or counties, municipalities, authorities or political subdivisions
thereof (the "Oregon Bonds") or by the Commonwealth of Puerto Rico, Guam
and the United States Virgin Islands (the "Possession Bonds")
(collectively, the "Bonds"). Neither the Sponsor nor its counsel have
independently examined the Bonds to be deposited in and held in the
Oregon Trust. Although no opinion is expressed herein regarding such
matters, it is assumed that: (i) the Bonds were validly issued; (ii) the
interest thereon is excludable from gross income for Federal income tax
purposes; and (iii) interest on the Bonds, if received directly by an
Oregon Unitholder, would be exempt from the Oregon income tax applicable
to individuals (the "Oregon Personal Income Tax").
In the opinion of Chapman and Cutler, counsel to the Sponsor, under
existing Oregon law as of the date of this Prospectus and based on the
assumptions set forth above:
1. The Oregon Trust is not an association taxable as a
corporation and based upon an administrative rule of the Oregon State
Department of Revenue, each Oregon Unitholder of the Oregon Trust will
be essentially treated as the owner of a pro rata portion of the Oregon
Trust and the income of such portion of the Oregon Trust will be treated
as the income of the Oregon Unitholder for Oregon Personal Income Tax
purposes;
2. Interest on the Bonds which is exempt from the
Oregon Personal Income Tax when received by the Oregon Trust, and which
would be exempt from the Oregon Personal Income Tax if received directly
by an Oregon Unitholder, will retain its status as exempt from such tax
when received by the Oregon Trust and distributed to an Oregon Unitholder;
3. To the extent that interest derived from the Oregon
Trust by an Oregon Unitholder with respect to the Possession Bonds is
excludable from gross income for Federal income tax purposes pursuant to
Page 29
48 U.S.C. Section 745, 48 U.S.C. Section 1423a and 48 U.S.C. Section
1403, such interest will not be subject to the Oregon Personal Income Tax;
4. Each Oregon Unitholder of the Oregon Trust will
recognize gain or loss for Oregon Personal Income Tax purposes if the
Trustee disposes of a bond (whether by redemption, sale or otherwise) or
if the Oregon Unitholder redeems or sells Units of the Oregon Trust to
the extent that such a transaction results in a recognized gain or loss
to such Oregon Unitholder for Federal income tax purposes; and
5. The Oregon Personal Income Tax does not permit a
deduction of interest paid or incurred on indebtedness incurred or
continued to purchase or carry Units in the Oregon Trust, the interest
on which is exempt from such Tax.
Chapman and Cutler has expressed no opinion with respect to taxation
under any other provision of Oregon law. Ownership of the Units may
result in collateral Oregon tax consequences to certain taxpayers.
Prospective investors should consult their tax advisors as to the
applicability of any such collateral consequences.
Chapman and Cutler has not examined any of the Bonds to be deposited and
held in the Oregon Trust or the proceedings for the issuance thereof or
the opinions of bond counsel with respect thereto and therefore it
expresses no opinion as to the exemption from the Oregon Personal Income
Tax of interest on the Bonds if received directly by an Oregon
Unitholder. In addition, prospective purchasers subject to the Oregon
corporate income tax should be advised that for purposes of the Oregon
Corporate Income (Excise) Tax, interest on the Bonds received by the
Oregon Trust and distributed to an Oregon Unitholder subject to such tax
will be added to the corporate Oregon Unitholder's Federal taxable
income and therefore will be taxable. No opinion is expressed regarding
the Oregon taxation of foreign or domestic insurance companies. We have
assumed that at the respective times of issuance of the Bonds, opinions
relating to the validity thereof and to the exemption of interest
thereon from Federal income tax were rendered by bond counsel to the
respective issuing authorities. In addition, we have assumed that, with
respect to the Oregon Bonds, bond counsel to the issuing authorities
rendered opinions as to the exemption of interest from the Oregon Income
Tax and, with respect to the Possession Bonds, bond counsel to the
issuing authorities rendered opinions as to the exemption from all state
and local income taxation of the Possession Bonds and the interest
thereon. Neither the Sponsor nor its counsel has made any review for the
Oregon Trust of the proceedings relating to the issuance of the Bonds or
of the bases for the opinions rendered in connection therewith.
Risk Factors Specific to Pennsylvania. Investors should be aware of
certain factors that might affect the financial conditions of the
Commonwealth of Pennsylvania. Investors should be aware of certain
factors that might affect the financial conditions of the Commonwealth
of Pennsylvania. Pennsylvania historically has been identified as a
heavy industry state although that reputation has changed recently as
the industrial composition of the Commonwealth diversified when the
coal, steel and railroad industries began to decline. A more diversified
economy was necessary as the traditionally strong industries in the
Commonwealth declined due to a long-term shift in jobs, investment and
workers away from the northeast part of the nation. The major sources of
growth in Pennsylvania are in the service sector, including trade,
Page 30
medical and the health services, education and financial institutions.
Pennsylvania's agricultural industries are also an important component
of the Commonwealth's economic structure, particularly in crop and
livestock products as well as agribusiness and food related industries.
Economic Outlook. The Commonwealth of Pennsylvania historically has been
identified as a heavy industry state, although that reputation has been
changing as the industrial composition of the Commonwealth's economy
diversified as the coal, steel and railroad industries began to decline.
A more diversified economy is necessary as the traditionally strong
industries in the Commonwealth decline due to a long-term shift in jobs,
investment and workers away from the northeast part of the nation. The
major sources of growth in Pennsylvania are in the service sector,
including trade, medical and health services, education and financial
institutions. Pennsylvania's agricultural industries are also an
important component of the Commonwealth's economic structure,
particularly in crop and livestock products as well as agribusiness and
food related industries.
The strong growth experienced in Pennsylvania in 1997 was unanticipated
and did not continue at such a high level during 1998. Nevertheless, the
Commonwealth is still enjoying its longest period of economic growth,
most sectors have created new jobs, and unemployment rates are
comparable to the national average.
Although service producing employment is gaining ground in Pennsylvania,
goods producing employment is declining steadily. The combination of
these two factors resulted in a 1.1% drop in overall employment during
1998, after a 1.4% gain in 1997. The service sector gained about 60,000
in 1998, further increasing the share of non-manufacturing employment in
the state to approximately 83%. Construction employment also experienced
strong growth, due in part to unseasonably mild weather conditions
during the year. Manufacturing payrolls as a whole grew by 0.9% in 1998,
but several large durable and nondurable goods producing industries
continued to suffer losses, including metal production, industrial
machinery, transportation equipment, apparel and textiles, and paper
products.
Despite employment losses, Pennsylvania's unemployment rate dropped
during 1998, due in part to a 0.1% decline in the state's population of
12 million. The population loss is almost wholly depended on rapid
outward migration by Pennsylvania's residents to other states. During
1998, Pennsylvania posted an annual unemployment rate of 4.6% (4.5% in
the U.S. as a whole), with the state's unemployment rate recorded as low
as 3.8% during the course of the year. The 1998 rate is the first time
unemployment in Pennsylvania has fallen below 5.0% since 1989.
Personal income growth in Pennsylvania slowed a bit in 1997 but still
equals the national growth rate. The state's per capita personal income
rose 4.7% to $25,678. This average is 102% of the U.S. average of
$25,298, giving Pennsylvania a 17th place ranking among all the states.
Pennsylvania's economy is projected to continue its expansion during
1999, but at a slower rate than the national economy. Gains in the stock
market will cause personal income to continue rising, but overall
employment will be stagnant, with continued losses in durable and
nondurable manufacturing.
Page 31
Revenues and Expenditures. Financial information for the principal
operating funds of the Commonwealth of Pennsylvania is maintained on a
budgetary basis of accounting. A budgetary basis of accounting is used
for the purpose of ensuring compliance with the enacted operating budget
and is governed by applicable statutes of the Commonwealth and by
administrative procedures. The Commonwealth also prepares annual
financial statements in accordance with generally accepted accounting
principles ("GAAP"). The budgetary basis financial information
maintained by the Commonwealth to monitor and enforce budgetary control
is adjusted at fiscal year-end to reflect appropriate accruals for
financial reporting in conformity with GAAP.
At the end of fiscal year 1998 (ending June 30, 1998), the Commonwealth
reported an unreserved/undesignated fund balance (budgetary basis) of
$488.7 million in the General Fund, up 21.4% from a budgetary basis fund
balance of $402.7 million in FY 1997. The FY 1998 fund balance resulted
from total revenue collections of $27.8 billion less appropriation
authorizations totaling $25.9 billion, less other net financing uses
equaling $1.3 billion. The appropriation authorizations, which grew only
0.1% in FY 1998, include $13.6 billion for public health and welfare and
$7.7 billion for education. General Fund revenues, more than 70% of
which are generated from taxes, increased by 6.3% over FY 1997 figures.
Like most other states, Pennsylvania maintains a Tax Stabilization
("rainy day") Fund to ensure against depressed revenues during future
economic crises. During FY 1998, a record $209.5 million was transferred
into the fund, including a one time $150 million transfer above the
annual deposit. Currently, the minimum annual contribution to the Tax
Stabilization Fund is 15% of the General Fund's closing balance. At the
end of FY 1998, the Tax Stabilization Fund's balance surpassed $675
million.
Although Pennsylvania ranks 49th among the 50 states in the number of
state employees per capita, the Commonwealth plans to reduce salaried
positions by approximately 1,000 during 1999 in order to hold down the
cost of government operations. Total General Fund spending of $17.99
billion is budgeted for FY 1999, up 4.4% from the prior fiscal year.
Also included in the FY 1999 enacted budget is $221.8 million in tax
reductions, including a drop in the capital stock and franchise tax as
well as an increase in the income limit for eligibility for tax
forgiveness which is expected to benefit about 400,000 residents.
General Fund revenues are projected to grow more slowly than FY 1999
appropriations, gaining 4.2% to total $17.95 billion. Pennsylvania's
unreserved/undesignated General Fund balance at the end of FY 1999 is
estimated to be $52.2 million. With the $54 million projected transfer
at the end of FY 99, the reserve balance in the Commonwealth's Rainy Day
Fund will exceed $725 million, more than eleven times the $66 million
balance at the end of FY 95.
More than $273 million in tax reductions are proposed in the FY 2000
budget. Including the reductions, General Fund revenues are estimated to
grow to $18.65 billion, while appropriations of $18.63 billion are
anticipated. A General Fund closing balance of $22 million is
anticipated for the end of FY 2000, leaving $3 million for transfer to
the Tax Stabilization Fund.
Page 32
Debt Management. The Constitution of the Commonwealth of Pennsylvania
permits the incurrence of debt, without approval of the electorate, for
capital projects specifically authorized in a capital budget. Capital
project debt outstanding cannot exceed one and three quarters (1.75)
times the average of the annual tax revenues deposited in all funds
during the previous five fiscal years. The certified constitutional debt
limit at August 29, 1997 was $34.3 billion. Outstanding capital project
debt at August 29, 1997 amounted to $3.7 billion.
In addition to constitutionally authorized capital project debt, the
Commonwealth may incur debt for electorate approved programs, such as
economic revitalization, land and water development, and water
facilities restoration; and for special purposes approved by the General
Assembly, such as disaster relief. The total general obligation bond
indebtedness outstanding at June 30, 1997 was $4.8 billion. Total debt
service transfers paid from General Fund and Motor License Fund
appropriations during the fiscal year ended June 30, 1997 amounted to
$781.5 million.
In addition to general obligation bonds, the Commonwealth issues tax
anticipation notes ("TANS") to meet operating cash needs during certain
months of the fiscal year. The Commonwealth anticipates issuance of $225
million in General Fund TANS during the 1997-98 fiscal year. During
fiscal year 1996-97, $550 million TANS were issued.
The City of Philadelphia ("Philadelphia") is the largest city in the
Commonwealth, with an estimated 1997 population of 1.48 million
according to the U.S. Bureau of the Census. Philadelphia functions both
as a city of the first class and a county for the purpose of
administering various governmental programs.
Legislation providing for the establishment of the Pennsylvania
Intergovernmental Cooperation Authority ("PICA") to assist first class
cities in remedying fiscal emergencies was enacted by the General
Assembly and approved by the Governor in June 1991. PICA is designed to
provide assistance through the issuance of funding debt to liquidate
budget deficits and to make factual findings and recommendations to the
assisted city concerning its budgetary and fiscal affairs. An
intergovernmental cooperation agreement between Philadelphia and PICA
was approved by City Council on January 3, 1992, and approved by the
PICA Board and signed by the Mayor on January 8, 1992. At this time,
Philadelphia is operating under a five-year fiscal plan approved by PICA
on April 30, 1996.
As of February 28, 1997, PICA has issued approximately $1,761.7 million
of its Special Tax Revenue Bonds to provide financial assistance to
Philadelphia, to liquidate the cumulative General Fund balance deficit,
to refund certain general obligation bonds of the City and to fund
additional capital projects. No further PICA bonds are to be issued by
PICA for the purpose of financing a capital project or deficit as the
authority for such bond sales expired on December 31, 1994. PICA's
authority to issue debt for the purpose of financing a cash flow deficit
expired on December 31, 1996. Its ability to refund existing outstanding
debt is unrestricted. PICA had $1,102.4 million in Special Tax Revenue
Bonds outstanding as of June 30, 1997.
The audited General fund balance of the City as of June 30, 1995, 1996,
and 1997 showed a surplus of approximately $80.5 million, $118.5
million, and $128.8 million, respectively.
Page 33
Ratings. All outstanding general obligation bonds of the Commonwealth of
Pennsylvania are rated AA by Standard & Poor's Ratings Services; Aa3 by
Moody's Investor's Service, Inc.; and AA by Fitch IBCA, Inc. Standard &
Poor's rating on City of Philadelphia general obligation bonds is BBB,
and Moody's rating is Baa2. Any explanation concerning the significance
of such ratings must be obtained from the rating agencies. There is no
assurance that any ratings will continue for any period of time or that
they will not be revised or withdrawn.
It should be noted that the creditworthiness of obligations issued by
local Pennsylvania issuers may be unrelated to the creditworthiness of
obligations issued by the Commonwealth of Pennsylvania, and there is no
obligation on the part of the Commonwealth to make payment on such local
obligations in the event of default.
Pennsylvania State Taxation. For a discussion of the Federal tax status
of income earned on Pennsylvania Trust Units, see "Tax Status."
We have examined certain laws of the State of Pennsylvania (the "State")
to determine their applicability to the Pennsylvania Trust (the
"Pennsylvania Trust") and to the holders of Units in the Pennsylvania
Trust who are residents of the State of Pennsylvania (the
"Unitholders"). The assets of the Pennsylvania Trust will consist of
interest-bearing obligations issued by or on behalf of the State, any
public authority, commission, board or other agency created by the State
or a political subdivision of the State, or political subdivisions
thereof (the "Bonds"). Distributions of income with respect to the Bonds
received by the Pennsylvania Trust will be made monthly.
Although we express no opinion with respect thereto, in rendering the
opinion expressed herein, we have assumed that: (i) the Bonds were
validly issued by the State or its municipalities, as the case may be,
(ii) the interest thereon is excludable from gross income for federal
income tax purposes, (iii) the interest thereon is exempt from
Pennsylvania State and local taxes and (iv) the Bonds are exempt from
county personal property taxes. This opinion does not address the
taxation of persons other than full-time residents of Pennsylvania.
In the opinion of Chapman and Cutler, counsel to the Sponsor, under
existing Pennsylvania law as of the date of this Prospectus and based
upon the assumptions set forth above:
1. The Pennsylvania Trust will have no tax liability
for purposes of the personal income tax (the "Personal Income Tax"), the
corporate income tax (the "Corporate Income Tax") and the capital stock-
franchise tax (the "Franchise Tax"), all of which are imposed under the
Pennsylvania Tax Reform Code of 1971, or the Philadelphia School
District Investment Net Income Tax (the "Philadelphia School Tax")
imposed under Section 19-1804 of the Philadelphia Code of Ordinances.
2. Interest on the Bonds, net of Pennsylvania Trust
expenses, which is exempt from the Personal Income Tax when received by
the Pennsylvania Trust and which would be exempt from such tax if
received directly by a Unitholder, will retain its status as exempt from
such tax when received by the Pennsylvania Trust and distributed to such
Unitholder. Interest on the Bonds which is exempt from the Corporate
Page 34
Income Tax and the Philadelphia School Tax when received by the
Pennsylvania Trust and which would be exempt from such taxes if received
directly by a Unitholder, will retain its status as exempt from such
taxes when received by the Pennsylvania Trust and distributed to such
Unitholder.
3. Distributions from the Pennsylvania Trust
attributable to capital gains recognized by the Pennsylvania Trust upon
its disposition of a Bond issued on or after February 1, 1994, will be
taxable for purposes of the Personal Income Tax and the Corporate Income
Tax. No opinion is expressed with respect to the taxation of
distributions from the Pennsylvania Trust attributable to capital gains
recognized by the Pennsylvania Trust upon its disposition of a Bond
issued before February 1, 1994.
4. Distributions from the Pennsylvania Trust
attributable to capital gains recognized by the Pennsylvania Trust upon
its disposition of a Bond will be exempt from the Philadelphia School
Tax if the Bond was held by the Pennsylvania Trust for a period of more
than six months and the Unitholder held his Unit for more than six
months before the disposition of the Bond. If, however, the Bond was
held by the Pennsylvania Trust or the Unit was held by the Unitholder
for a period of less than six months, then distributions from the
Pennsylvania Trust attributable to capital gains recognized by the
Pennsylvania Trust upon its disposition of a Bond issued on or after
February 1, 1994 will be taxable for purposes of the Philadelphia School
Tax; no opinion is expressed with respect to the taxation of any such
gains attributable to Bonds issued before February 1, 1994.
5. Insurance proceeds paid under policies which
represent maturing interest on defaulted obligations will be exempt from
the Corporate Income Tax to the same extent as such amounts are excluded
from gross income for federal income tax purposes. No opinion is
expressed with respect to whether such insurance proceeds are exempt
from the Personal Income Tax or the Philadelphia School Tax.
6. Each Unitholder will recognize gain for purposes of
the Corporate Income Tax if the Unitholder redeems or sells Units of the
Pennsylvania Trust to the extent that such a transaction results in a
recognized gain to such Unitholder for federal income tax purposes and
such gain is attributable to Bonds issued on or after February 1, 1994.
No opinion is expressed with respect to the taxation of gains realized
by a Unitholder on the sale or redemption of a Unit to the extent such
gain is attributable to Bonds issued prior to February 1, 1994.
7. A Unitholder's gain on the sale or redemption of a
Unit will be subject to the Personal Income Tax, except that no opinion
is expressed with respect to the taxation of any such gain to the extent
it is attributable to Bonds issued prior to February 1, 1994.
8. A Unitholder's gain upon a redemption or sale of
Units will be exempt from the Philadelphia School Tax if the Unitholder
held his Unit for more than six months and the gain is attributable to
Bonds held by the Pennsylvania Trust for a period of more than six
months. If, however, the Unit was held by the Unitholder for less than
six months or the gain is attributable to Bonds held by the Pennsylvania
Trust for a period of less than six months, then the gains will be
Page 35
subject to the Philadelphia School Tax; except that no opinion is
expressed with respect to the taxation of any such gains attributable to
Bonds issued before February 1, 1994.
9. The Bonds will not be subject to taxation under the
County Personal Property Tax Act of June 17, 1913 (the "Personal
Property Tax"). Personal property taxes in Pennsylvania are imposed and
administered locally, and thus no assurance can be given as to whether
Units will be subject to the Personal Property Tax in a particular
jurisdiction. However, in our opinion, Units should not be subject to
the Personal Property Tax.
Unitholders should be aware that, generally, interest on indebtedness
incurred or continued to purchase or carry Units is not deductible for
purposes of the Personal Income Tax, the Corporate Income Tax or the
Philadelphia School Tax.
We have not examined any of the Bonds to be deposited and held in the
Pennsylvania Trust or the proceedings for the issuance thereof or the
opinions of bond counsel with respect thereto, and therefore express no
opinion as to the exemption from federal or state income taxation of
interest on the Bonds if interest thereon had been received directly by
a Unitholder.
Chapman and Cutler has expressed no opinion with respect to taxation
under any other provision of Pennsylvania law. Ownership of the Units
may result in collateral Pennsylvania tax consequences to certain
taxpayers. Prospective investors should consult their tax advisors as to
the applicability of any such collateral consequences.
Risk Factors Specific to Puerto Rico. Economic activity Puerto Rico
increased again during 1998. The growth in Puerto Rico's gross domestic
product (GDP) was 3%, with an additional 2.7% growth expected in 1999.
The main driving force behind this growth was manufacturing, Puerto
Rico's largest and most quickly developing economic sector, accounting
for more than 55% of the territory's GDP during 1998. Manufacturing
exports have increased more than 35% during the past five years to $23.4
billion in 1998, due in part to increasing emphasis on rebuilding Puerto
Rico's infrastructure, including the upcoming renovation of the Port of
San Juan.
Puerto Rico's unemployment, although at relatively low historical
levels, remains above the average for the United States. Average total
employment increased from 1.01 million in 1993 to 1.14 million in 1998,
with 11.4% growth during this five-year period. Non-farm employment (not
seasonally adjusted) for January 1999 reached 1,158,138, its highest
recorded level. The average unemployment rate decreased from 17.0% in
1993 to 13.3% in 1998 and dropped further to 12.7% in March 1999. The
U.S. average in 1998 was 4.5%.
The territory has experienced $1.9 billion in general fund revenue
growth during the past five years, totaling a $1.9 billion increase
between fiscal 1994 and fiscal 1998. During fiscal 1998, more than 67%
of Puerto Rico's $5.9 billion in general fund receipts were due to the
income tax, with excise taxes accounting for another 22%. Long-term debt
for the territory reached $14.7 billion at the end of fiscal 1998 (ended
June 30, 1998). Outstanding general obligation debt accounted for $4.8
Page 36
billion of this amount, while revenue bonds represents $5.2 billion.
Federal Taxation. For a discussion of the Federal tax status of income
earned on Territorial Trust Units, see "Tax Status."
EQUIVALENT TAXABLE ESTIMATED CURRENT RETURNS
As of the date of this Prospectus, the following table shows the
approximate taxable estimated current returns for individuals that are
equivalent to tax-exempt estimated current returns under published
Federal and State (if applicable) tax rates scheduled to be in effect in
1999. This table illustrates approximately what you would have to earn
on taxable investments to equal the tax-exempt estimated current return
in your income tax bracket. For cases in which more than one State rate
falls within a Federal bracket, the highest State rate corresponding to
the highest income within that federal bracket is used. The combined
State and Federal tax rates shown reflect the fact that State tax
payments are currently deductible for Federal tax purposes. The table
does not show the approximate taxable estimated current returns for
individuals who are subject to the alternative minimum tax. The taxable
equivalent estimated current returns may be somewhat higher than the
equivalent returns indicated in the following table for those
individuals who have adjusted gross incomes in excess of $126,600. The
table does not reflect the effect of limitations on itemized deductions
and the deduction for personal exemptions which were designed to phase
out certain benefits of these deductions for higher income taxpayers.
These limitations are subject to certain maximums, which depend on the
number of exemptions claimed and the total amount of the taxpayer's
itemized deductions. For example, the limitation on itemized deductions
will not cause a taxpayer to lose more than 80 percent of his allowable
itemized deductions, with certain exceptions. See "Tax Status" for a
more detailed discussion of recent Federal tax legislation, including a
discussion of provisions affecting corporations.
<TABLE>
<CAPTION>
ARIZONA TAX EQUIVALENT TABLE*
Taxable Income
($1,000's) Tax-Exempt Estimated Current Return
______________________ ________________________________________________________
Single Joint Tax 4-1/2% 5% 5-1/2% 6% 6-1/2% 7% 7-1/2%
Return Return Bracket Equivalent Taxable Estimated Current Return
______ ______ _______ _____ _____ ______ _____ ______ _____ ______
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$0-25.75 18.2% 5.50% 6.11% 6.72% 7.33% 7.95% 8.56% 9.17%
$ 0-43.05 17.7% 5.47 6.08 6.68 7.29 7.90 8.51 9.11
25.75-62.45 43.05-104.05 31.4% 6.56 7.29 8.02 8.75 9.48 10.20 10.93
62.45-130.25 104.05-158.55 34.3% 6.85 7.61 8.37 9.13 9.89 10.65 11.42
158.55-283.15 39.0% 7.38 8.20 9.02 9.84 10.66 11.48 12.30
130.25-283.15 39.2% 7.40 8.22 9.05 9.87 10.69 11.51 12.34
Over 283.15 Over 283.15 42.6% 7.84 8.71 9.58 10.45 11.32 12.20 13.07
<FN>
* Please note that the tax rates shown do not reflect the deductibility of
Arizona state income taxes in computing Arizona income subject to tax.
</FN>
</TABLE>
Page 37
<TABLE>
<CAPTION>
COLORADO TAX EQUIVALENT TABLE*
Taxable Income
($1,000's) Tax-Exempt Estimated Current Return
______________________ ________________________________________________________
Single Joint Tax 4-1/2% 5% 5-1/2% 6% 6-1/2% 7% 7-1/2%
Return Return Bracket Equivalent Taxable Estimated Current Return
______ ______ _______ _____ _____ ______ _____ ______ _____ ______
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0-25.75 $ 0-43.05 19.3 5.58% 6.20% 6.82% 7.43% 8.05% 8.67% 9.29%
25.75-62.45 43.05-104.05 31.6% 6.58 7.31 8.04 8.77 9.50 10.23 10.96
62.45-130.25 104.05-158.55 34.5% 6.87 7.63 8.40 9.16 9.92 10.69 11.45
130.25-283.15 158.55-283.15 39.2% 7.40 8.22 9.05 9.87 10.69 11.51 12.34
Over 283.15 Over 283.15 42.6% 7.84 8.71 9.58 10.45 11.32 12.20 13.07
<FN>
* Please note that tax table does not reflect possible reductions in the
State tax rates that may occur if there are excess state revenues and voters
have not authorized the state to retain and spend all or a portion of such
excess revenues.
</FN>
</TABLE>
<TABLE>
<CAPTION>
MINNESOTA TAX EQUIVALENT TABLE
Taxable Income
($1,000's) Tax-Exempt Estimated Current Return
______________________ ________________________________________________________
Single Joint Tax 4-1/2% 5% 5-1/2% 6% 6-1/2% 7% 7-1/2%
Return Return Bracket Equivalent Taxable Estimated Current Return
______ ______ _______ _____ _____ ______ _____ ______ _____ ______
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0-25.75 $ 0-43.05 21.2% 5.71% 6.35 6.98% 7.61% 8.25% 8.88% 9.52%
25.75-62.45 43.05-104.05 33.8% 6.80 7.55 8.31 9.06 9.82 10.57 11.33
62.45-130.25 104.05-158.55 36.5% 7.09 7.87 8.66 9.45 10.24 11.02 11.81
130.25-283.15 158.55-283.15 41.1% 7.64 8.49 9.34 10.19 11.04 11.88 12.73
Over 283.15 Over 283.15 44.4% 8.09 8.99 9.89 10.79 11.69 12.59 13.49
</TABLE>
<TABLE>
<CAPTION>
NATIONAL TAX EQUIVALENT TABLE
Taxable Income
($1,000's) Tax-Exempt Estimated Current Return
______________________ ________________________________________________________
Single Joint Tax 4-1/2% 5% 5-1/2% 6% 6-1/2% 7% 7-1/2%
Return Return Bracket Equivalent Taxable Estimated Current Return
______ ______ _______ _____ _____ ______ _____ ______ _____ ______
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0-25.75 $ 0-43.05 15.0% 5.29% 5.88% 6.47% 7.06% 7.65% 8.24% 8.82%
25.75-62.45 43.05-104.05 28.0 6.25 6.94 7.64 8.33 9.03 9.72 10.42
62.45-130.25 104.05-158.55 31.0 6.52 7.25 7.97 8.70 9.42 10.14 10.87
130.25-283.15 158.55-283.15 36.0 7.03 7.81 8.59 9.38 10.16 10.94 11.72
Over 283.15 Over 283.15 39.6 7.45 8.28 9.11 9.93 10.76 11.59 12.42
</TABLE>
Page 38
<TABLE>
<CAPTION>
NEW MEXICO TAX EQUIVALENT TABLE*
Taxable Income
($1,000's) Tax-Exempt Estimated Current Return
______________________ ________________________________________________________
Single Joint Tax 4-1/2% 5% 5-1/2% 6% 6-1/2% 7% 7-1/2%
Return Return Bracket Equivalent Taxable Estimated Current Return
______ ______ _______ _____ _____ ______ _____ ______ _____ ______
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0-25.75 20.1% 5.63% 6.26% 6.88% 7.51% 8.14% 8.76% 9.39%
$ 0-43.05 21.0 5.70 6.33 6.96 7.59 8.23 8.86 9.49
25.75-62.45 33.7 6.79 7.54 8.30 9.05 9.80 10.56 11.31
43.05-104.05 33.9 6.81 7.56 8.32 9.08 9.83 10.59 11.35
62.45-130.25 104.05-158.55 36.7 7.11 7.90 8.69 9.48 10.27 11.06 11.85
130.25-283.15 158.55-283.15 41.2 7.65 8.50 9.35 10.20 11.05 11.90 12.76
Over 283.15 Over 283.15 44.6 8.12 9.03 9.93 10.83 11.73 12.64 13.54
<FN>
* Please note that the tax rates shown do not reflect the deductibility of
New Mexico state income taxes in computing New Mexico income subject to tax.
</FN>
</TABLE>
<TABLE>
<CAPTION>
OREGON TAX EQUIVALENT TABLE
Taxable Income
($1,000's) Tax-Exempt Estimated Current Return
______________________ ________________________________________________________
Single Joint Tax 4-1/2% 5% 5-1/2% 6% 6-1/2% 7% 7-1/2%
Return Return Bracket Equivalent Taxable Estimated Current Return
______ ______ _______ _____ _____ ______ _____ ______ _____ ______
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0-25.75 $ 0-43.05 22.7% 5.82% 6.47% 7.12% 7.76% 8.41% 9.06% 9.70%
25.75-62.45 43.05-104.05 34.5 6.87 7.63 8.40 9.16 9.92 10.69 11.45
62.45-130.25 104.05-158.55 37.2 7.17 7.96 8.76 9.55 10.35 11.15 11.94
130.25-283.15 158.55-283.15 41.8 7.73 8.59 9.45 10.31 11.17 12.03 12.89
Over 283.15 Over 283.15 45.0 8.18 9.09 10.00 10.91 11.82 12.73 13.64
<FN>
___________
*The State tax brackets are those for 1998. The 1999 brackets may be indexed
by cost-of-living adjustment.
</FN>
</TABLE>
<TABLE>
<CAPTION>
PENNSYLVANIA TAX EQUIVALENT TABLE
Taxable Income
($1,000's) Tax-Exempt Estimated Current Return
______________________ ________________________________________________________
Single Joint Tax 4-1/2% 5% 5-1/2% 6% 6-1/2% 7% 7-1/2%
Return Return Bracket Equivalent Taxable Estimated Current Return
______ ______ _______ _____ _____ ______ _____ ______ _____ ______
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0-25.75 $ 0-43.05 17.4% 5.45% 6.05% 6.66% 7.26% 7.87% 8.47% 9.08%
25.75-62.45 43.05-104.05 30.0 6.43 7.14 7.86 8.57 9.29 10.00 10.71
62.45-130.25 104.05-158.55 32.9 6.71 7.45 8.20 8.94 9.69 10.43 11.18
130.25-283.15 158.55-283.15 37.8 7.23 8.04 8.84 9.65 10.45 11.25 12.06
Over 283.15 Over 283.15 41.3 7.67 8.52 9.37 10.22 11.07 11.93 12.78
</TABLE>
Page 39
<TABLE>
<CAPTION>
TERRITORIAL TAX EQUIVALENT TABLE
Taxable Income
($1,000's) Tax-Exempt Estimated Current Return
______________________ ________________________________________________________
Single Joint Tax 4-1/2% 5% 5-1/2% 6% 6-1/2% 7% 7-1/2%
Return Return Bracket Equivalent Taxable Estimated Current Return
______ ______ _______ _____ _____ ______ _____ ______ _____ ______
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0-25.75 $ 0-43.05 15.0% 5.29% 5.88% 6.47% 7.06% 7.65% 8.24% 8.82%
25.75-62.45 43.05-104.05 28.0 6.25 6.94 7.64 8.33 9.03 9.72 10.42
62.45-130.25 104.05-158.55 31.0 6.52 7.25 7.97 8.70 9.42 10.14 10.87
130.25-283.15 158.55-283.15 36.0 7.03 7.81 8.59 9.38 10.16 10.94 11.72
Over 283.15 Over 283.15 39.6 7.45 8.28 9.11 9.93 10.76 11.59 12.42
<FN>
___________
*The table reflects the Federal tax rate and does not reflect any effect that
Puerto Rico taxes may have in determining the taxable equivalent yield for
residents of Puerto Rico.
</FN>
</TABLE>
Certain of the Bonds in the Trusts may be original issue discount bonds.
Under current law, the original issue discount, which is the difference
between the stated redemption price at maturity and the issue price of
the Bonds, is deemed to accrue on a daily basis and the accrued portion
is treated as tax-exempt interest income for Federal income tax
purposes. On sale or redemption, any gain realized that is in excess of
the earned portion of original issue discount will be taxable as capital
gain unless the gain is attributable to market discount in which case
the accretion of market discount is taxable as ordinary income. See "Tax
Status." The current value of an original issue discount bond reflects
the present value of its stated redemption price at maturity. The market
value tends to increase in greater increments as the Bonds approach
maturity.
Certain of the original issue discount bonds may be zero coupon bonds
(including bonds known as multiplier bonds, money multiplier bonds,
capital appreciation bonds, capital accumulator bonds, compound interest
bonds and money discount maturity payment bonds). Zero coupon bonds do
not provide for the payment of any current interest and generally
provide for payment at maturity at face value unless sooner sold or
redeemed. Zero coupon bonds may be subject to more price volatility than
conventional bonds. While some types of zero coupon bonds, such as
multipliers and capital appreciation bonds, define par as the initial
offering price rather than the maturity value, they share the basic zero
coupon bond features of (i) not paying interest on a semi-annual basis
and (ii) providing for the reinvestment of the bond's semi-annual
earnings at the bond's stated yield to maturity. While zero coupon bonds
are frequently marketed on the basis that their fixed rate of return
minimizes reinvestment risk, this benefit can be negated in large part
by weak call protection, i.e., a bond's provision for redemption at only
a modest premium over the accreted value of the bond. See footnote (6)
in "The Trusts-Notes to Schedules of Investments" in Part One of this
Prospectus.
Certain of the Bonds in the Trusts may have been acquired at a market
premium from par value at maturity. The coupon interest rates on the
premium bonds at the time they were purchased and deposited in the
Trusts were higher than the current market interest rates for newly
issued bonds of comparable rating and type. If such interest rates for
newly issued and otherwise comparable bonds decrease, the market premium
of previously issued bonds will be increased, and if such interest rates
for newly issued comparable bonds increase, the market premium of
previously issued bonds will be reduced, other things being equal. The
current returns of bonds trading at a market premium are initially
Page 40
higher than the current returns of comparable bonds of a similar type
issued at currently prevailing interest rates because premium bonds tend
to decrease in market value as they approach maturity when the face
amount becomes payable. Because part of the purchase price is thus
returned not at maturity but through current income payments, early
redemption of a premium bond at par or early prepayments of principal
will result in a reduction in yield. Redemption pursuant to call
provisions generally will, and redemption pursuant to sinking fund
provisions may, occur at times when the redeemed Bonds have an offering
side valuation which represents a premium over par or for original issue
discount Bonds a premium over the accreted value. To the extent that the
Bonds were deposited in the Fund at a price higher than the price at
which they are redeemed, this will represent a loss of capital when
compared to the original Public Offering Price of the Units. Because
premium bonds generally pay a higher rate of interest than Bonds priced
at or below par, the effect of the redemption of premium bonds would be
to reduce estimated net annual unit income by a greater percentage than
the par amount of such bonds bears to the total par amount of Bonds in
the affected Trust. Although the actual impact of any such redemptions
that may occur will depend upon the specific Bonds that are redeemed, it
can be anticipated that the estimated net annual unit income will be
significantly reduced after the dates on which such Bonds are eligible
for redemption. A Trust may be required to sell zero coupon bonds prior
to maturity (at their current market price which is likely to be less
than their par value) in the event that all the Bonds in the portfolio
other than the zero coupon bonds are called or redeemed in order to pay
expenses of a Trust or in case a Trust is terminated. See "Trust
Administration-Portfolio Administration" and "Trust Administration-
Amendment or Termination." See "The Trusts-Schedule of Investments" in
Part One of this Prospectus for each Trust for the earliest scheduled
call date and the initial redemption price for each Bond.
Certain of the Bonds in certain of the Trusts may be general obligations
of a governmental entity that are backed by the taxing power of such
entity. In view of this an investment in such a Trust should be made
with an understanding of the characteristics of such issuers and the
risks which such an investment may entail. All other Bonds in the Trusts
are revenue bonds payable from the income of a specific project or
authority and are not supported by the issuer's power to levy taxes.
General obligation bonds are secured by the issuer's pledge of its
faith, credit and taxing power for the payment of principal and
interest. Revenue bonds, on the other hand, are payable only from the
revenues derived from a particular facility or class of facilities or,
in some cases, from the proceeds of a special excise tax or other
specific revenue source. There are, of course, variations in the
security of the different Bonds in the Fund, both within a particular
classification and between classifications, depending on numerous factors.
Certain of the Bonds in certain of the Trusts may be obligations which
derive their payments from mortgage loans. Certain of such housing bonds
may be FHA insured or may be single family mortgage revenue bonds issued
for the purpose of acquiring from originating financial institutions
notes secured by mortgages on residences located within the issuer's
boundaries and owned by persons of low or moderate income. In view of
this an investment in such a Trust should be made with an understanding
of the characteristics of such issuers and the risks which such an
investment may entail. Mortgage loans are generally partially or
completely prepaid prior to their final maturities as a result of events
such as sale of the mortgaged premises, default, condemnation or
casualty loss. Because these bonds are subject to extraordinary
mandatory redemption in whole or in part from such prepayments of
mortgage loans, a substantial portion of such bonds will probably be
Page 41
redeemed prior to their scheduled maturities or even prior to their
ordinary call dates. Extraordinary mandatory redemption without premium
could also result from the failure of the originating financial
institutions to make mortgage loans in sufficient amounts within a
specified time period. Additionally, unusually high rates of default on
the underlying mortgage loans may reduce revenues available for the
payment of principal of or interest on such mortgage revenue bonds.
These bonds were issued under Section 103A of the Internal Revenue Code,
which Section contains certain requirements relating to the use of the
proceeds of such bonds in order for the interest on such bonds to retain
its tax-exempt status. In each case the issuer of the bonds has
covenanted to comply with applicable requirements and bond counsel to
such issuer has issued an opinion that the interest on the bonds is
exempt from Federal income tax under existing laws and regulations.
Certain issuers of housing bonds have considered various ways to redeem
bonds they have issued prior to the stated first redemption dates for
such bonds. In connection with any housing bonds held by the Fund, the
Sponsor at the Initial Date of Deposit is not aware that any of the
respective issuers of such Bonds are actively considering the redemption
of such Bonds prior to their respective stated initial call dates.
Certain of the Bonds in certain of the Trusts may be health care revenue
bonds. In view of this an investment in such a Trust should be made with
an understanding of the characteristics of such issuers and the risks
which such an investment may entail. Ratings of bonds issued for health
care facilities are often based on feasibility studies that contain
projections of occupancy levels, revenues and expenses. A facility's
gross receipts and net income available for debt service may be affected
by future events and conditions including, among other things, demand
for services and the ability of the facility to provide the services
required, physicians' confidence in the facility, management
capabilities, competition with other health care facilities, efforts by
insurers and governmental agencies to limit rates, legislation
establishing state rate-setting agencies, expenses, the cost and
possible unavailability of malpractice insurance, the funding of
Medicare, Medicaid and other similar third party payor programs,
government regulation and the termination or restriction of governmental
financial assistance, including that associated with Medicare, Medicaid
and other similar third party payor programs. Medicare reimbursements
are currently calculated on a prospective basis utilizing a single
nationwide schedule of rates. Prior to such legislation, Medicare
reimbursements were based on the actual costs incurred by the health
facility. The current legislation may adversely affect reimbursements to
hospitals and other facilities for services provided under the Medicare
program.
Certain of the Bonds in certain of the Trusts may be obligations of
public utility issuers, including those selling wholesale and retail
electric power and gas. In view of this an investment in such a Trust
should be made with an understanding of the characteristics of such
issuers and the risks which such an investment may entail. General
problems of such issuers would include the difficulty in financing large
construction programs in an inflationary period, the limitations on
operations and increased costs and delays attributable to environmental
considerations, the difficulty of the capital market in absorbing
utility debt, the difficulty in obtaining fuel at reasonable prices and
the effect of energy conservation. All of such issuers have been
experiencing certain of these problems in varying degrees. In addition,
Federal, state and municipal governmental authorities may from time to
time review existing, and impose additional, regulations governing the
licensing, construction and operation of nuclear power plants, which may
Page 42
adversely affect the ability of the issuers of certain of the Bonds in
the portfolio to make payments of principal and/or interest on such Bonds.
Certain of the Bonds in certain of the Trusts may be obligations of
issuers whose revenues are derived from the sale of water and/or
sewerage services. In view of this an investment in such a Trust should
be made with an understanding of the characteristics of such issuers and
the risks which such an investment may entail. Such Bonds are generally
payable from user fees. The problems of such issuers include the ability
to obtain timely and adequate rate increases, population decline
resulting in decreased user fees, the difficulty of financing large
construction programs, the limitations on operations and increased costs
and delays attributable to environmental considerations, the increasing
difficulty of obtaining or discovering new supplies of fresh water, the
effect of conservation programs and the impact of "no growth" zoning
ordinances. All of such issuers have been experiencing certain of these
problems in varying degrees.
Certain of the Bonds in certain of the Trusts may be industrial revenue
bonds ("IRBs"). In view of this an investment in such a Trust should be
made with an understanding of the characteristics of such issuers and
the risks which such an investment may entail. IRBs have generally been
issued under bond resolutions pursuant to which the revenues and
receipts payable under the arrangements with the operator of a
particular project have been assigned and pledged to purchasers. In some
cases, a mortgage on the underlying project may have been granted as
security for the IRBs. Regardless of the structure, payment of IRBs is
solely dependent upon the creditworthiness of the corporate operator of
the project or corporate guarantor. Corporate operators or guarantors
may be affected by many factors which may have an adverse impact on the
credit quality of the particular company or industry. These include
cyclicality of revenues and earnings, regulatory and environmental
restrictions, litigation resulting from accidents or environmentally-
caused illnesses, extensive competition and financial deterioration
resulting from a corporate restructuring pursuant to a leveraged buy-
out, takeover or otherwise. Such a restructuring may result in the
operator of a project becoming highly leveraged which may impact on such
operator's creditworthiness which in turn would have an adverse impact
on the rating and/or market value of such Bonds. Further, the
possibility of such a restructuring may have an adverse impact on the
market for and consequently the value of such Bonds, even though no
actual takeover or other action is ever contemplated or effected.
Certain of the Bonds in certain of the Trusts may be obligations that
are secured by lease payments of a governmental entity (hereinafter
called "lease obligations"). Lease obligations are often in the form of
certificates of participation. In view of this an investment in such a
Trust should be made with an understanding of the characteristics of
such issuers and the risks which such an investment may entail. Although
the lease obligations do not constitute general obligations of the
municipality for which the municipality's taxing power is pledged, a
lease obligation is ordinarily backed by the municipality's covenant to
appropriate for and make the payments due under the lease obligation.
However, certain lease obligations contain "non-appropriation" clauses
which provide that the municipality has no obligation to make lease
payments in future years unless money is appropriated for such purpose
on a yearly basis. A governmental entity that enters into such a lease
agreement cannot obligate future governments to appropriate for and make
lease payments but covenants to take such action as is necessary to
include any lease payments due in its budgets and to make the
appropriations therefor. A governmental entity's failure to appropriate
Page 43
for and to make payments under its lease obligation could result in
insufficient funds available for payment of the obligations secured
thereby. Although "non-appropriation" lease obligations are secured by
the leased property, disposition of the property in the event of
foreclosure might prove difficult.
Certain of the Bonds in certain of the Trusts may be obligations of
issuers which are, or which govern the operation of, schools, colleges
and universities and whose revenues are derived mainly from ad valorem
taxes or, for higher education systems, from tuition, dormitory
revenues, grants and endowments. In view of this an investment in such a
Trust should be made with an understanding of the characteristics of
such issuers and the risks which such an investment may entail. General
problems relating to school bonds include litigation contesting the
state constitutionality of financing public education in part from ad
valorem taxes, thereby creating a disparity in educational funds
available to schools in wealthy areas and schools in poor areas.
Litigation or legislation on this issue may affect the sources of funds
available for the payment of school bonds in the Trusts. General
problems relating to college and university obligations include the
prospect of a declining percentage of the population consisting of
"college" age individuals, possible inability to raise tuitions and fees
sufficiently to cover increased operating costs, the uncertainty of
continued receipt of Federal grants and state funding, and government
legislation or regulations which may adversely affect the revenues or
costs of such issuers. All of such issuers have been experiencing
certain of these problems in varying degrees.
Certain of the Bonds in certain of the Trusts may be obligations which
are payable from and secured by revenues derived from the ownership and
operation of facilities such as airports, bridges, turnpikes, port
authorities, convention centers and arenas. In view of this an
investment in such a Trust should be made with an understanding of the
characteristics of such issuers and the risks which such an investment
may entail. The major portion of an airport's gross operating income is
generally derived from fees received from signatory airlines pursuant to
use agreements which consist of annual payments for leases, occupancy of
certain terminal space and service fees. Airport operating income may
therefore be affected by the ability of the airlines to meet their
obligations under the use agreements. The air transport industry is
experiencing significant variations in earnings and traffic, due to
increased competition, excess capacity, increased costs, deregulation,
traffic constraints and other factors, and several airlines are
experiencing severe financial difficulties. The Sponsor cannot predict
what effect these industry conditions may have on airport revenues which
are dependent for payment on the financial condition of the airlines and
their usage of the particular airport facility. Similarly, payment on
Bonds related to other facilities is dependent on revenues from the
projects, such as user fees from ports, tolls on turnpikes and bridges
and rents from buildings. Therefore, payment may be adversely affected
by reduction in revenues due to such factors as increased cost of
maintenance, decreased use of facility, lower cost of alternative modes
of transportation, scarcity of fuel and reduction or loss of rents.
Certain of the Bonds in certain of the Trusts may be obligations which
are payable from and secured by revenues derived from the operation of
resource recovery facilities. In view of this an investment in such a
Trust should be made with an understanding of the characteristics of
such issuers and the risks which such an investment may entail. Resource
recovery facilities are designed to process solid waste, generate steam
and convert steam to electricity. Resource recovery bonds may be subject
to extraordinary optional redemption at par upon the occurrence of
Page 44
certain circumstances, including but not limited to: destruction or
condemnation of a project; contracts relating to a project becoming
void, unenforceable or impossible to perform; changes in the economic
availability of raw materials, operating supplies or facilities
necessary for the operation of a project or technological or other
unavoidable changes adversely affecting the operation of a project;
administrative or judicial actions which render contracts relating to
the projects void, unenforceable or impossible to perform; or impose
unreasonable burdens or excessive liabilities. The Sponsor cannot
predict the causes or likelihood of the redemption of resource recovery
bonds in a Trust prior to the stated maturity of the Bonds.
An investment in Units of the Trusts should be made with an
understanding of the interest rate risk associated with such an
investment. Generally, bond prices (and therefore Unit prices) will move
inversely with interest rates, and bonds (Trusts) with longer maturities
are likely to exhibit greater fluctuations in market value, all other
things being equal, than bonds (Trusts) with shorter maturities.
Like other investment companies, financial and business organizations
and individuals around the world, a Trust could be adversely affected if
the computer systems used by the Sponsor, Evaluator or Trustee or other
service providers to the Trusts do not properly process and calculate
date-related information and data involving dates of January 1, 2000 and
thereafter. This is commonly known as the "Year 2000 Problem." The
Sponsor, Evaluator and Trustee are taking steps that they believe are
reasonably designed to address the Year 2000 Problem with respect to
computer systems that they use and to obtain reasonable assurances that
comparable steps are being taken by each Trust's other service
providers. At this time, however, there can be no assurance that these
steps will be sufficient to avoid any adverse impact to the Trusts. The
Sponsor is unable to predict what impact, if any, the Year 2000 Problem
will have on issuers of the Bonds contained in the Trusts.
To the best knowledge of the Sponsor, there is no litigation pending as
of the date of this Prospectus in respect of any Bonds which might
reasonably be expected to have a material adverse effect upon the Fund
or any of the Trusts. At any time after the date of this Prospectus,
litigation may be initiated on a variety of grounds with respect to
Bonds in the Fund. Such litigation, as, for example, suits challenging
the issuance of pollution control revenue bonds under environmental
protection statutes, may affect the validity of such Bonds or the tax-
free nature of the interest thereon. While the outcome of litigation of
such nature can never be entirely predicted, the Fund has received or
will receive opinions of bond counsel to the issuing authorities of each
Bond on the date of issuance to the effect that such Bonds have been
validly issued and that the interest thereon is exempt from Federal and
applicable state income taxation. In addition, other factors may arise
from time to time which potentially may impair the ability of issuers to
meet obligations undertaken with respect to the Bonds.
Redemptions of Bonds. Certain of the Bonds in certain of the Trusts are
subject to redemption prior to their stated maturity date pursuant to
sinking fund provisions, call provisions or extraordinary optional or
mandatory redemption provisions or otherwise. A sinking fund is a
reserve fund accumulated over a period of time for retirement of debt. A
callable debt obligation is one which is subject to redemption or
refunding prior to maturity at the option of the issuer. A refunding is
a method by which a debt obligation is redeemed, at or before maturity,
by the proceeds of a new debt obligation. In general, call provisions
Page 45
are more likely to be exercised when the offering side valuation is at a
premium over par than when it is at a discount from par. The exercise of
redemption or call provisions will (except to the extent the proceeds of
the called Bonds are used to pay for Unit redemptions) result in the
distribution of principal and may result in a reduction in the amount of
subsequent interest distributions and it may also affect the current
return on Units of the Trust involved. Each Trust portfolio contains a
listing of the sinking fund and call provisions, if any, with respect to
each of the Bonds. Extraordinary optional redemptions and mandatory
redemptions result from the happening of certain events. Generally,
events that may permit the extraordinary optional redemption of Bonds or
may require the mandatory redemption of Bonds include, among others: the
substantial damage or destruction by fire or other casualty of the
project for which the proceeds of the Bonds were used; an exercise by a
local, state or Federal governmental unit of its power of eminent domain
to take all or substantially all of the project for which the proceeds
of the Bonds were used; changes in the economic availability of raw
materials, operating supplies or facilities or technological or other
changes which render the operation of the project for which the proceeds
of the Bonds were used uneconomic; changes in law or an administrative
or judicial decree which renders the performance of the agreement under
which the proceeds of the Bonds were made available to finance the
project impossible or which creates unreasonable burdens or which
imposes excessive liabilities, such as taxes, not imposed on the date
the Bonds are issued on the issuer of the Bonds or the user of the
proceeds of the Bonds; an administrative or judicial decree which
requires the cessation of a substantial part of the operations of the
project financed with the proceeds of the Bonds, an overestimate of the
costs of the project to be financed with the proceeds of the Bonds
resulting in excess proceeds of the Bonds which may be applied to redeem
Bonds; or an underestimate of a source of funds securing the Bonds
resulting in excess funds which may be applied to redeem Bonds. The
Sponsor is unable to predict all of the circumstances which may result
in such redemption of an issue of Bonds. See "Schedule of Investments"
in Part One of this Prospectus for each Trust and the "Notes to
Schedules of Investments" in Part One of this Prospectus.
ESTIMATED CURRENT RETURN AND ESTIMATED LONG-TERM RETURN
As of the date indicated in "Summary of Essential Financial Information"
in Part One of this Prospectus, the Estimated Current Returns and the
Estimated Long-Term Returns were those indicated therein. The Estimated
Current Returns are calculated by dividing the estimated net annual
interest income per Unit by the Public Offering Price. The estimated net
annual interest income per Unit will vary with changes in fees and
expenses of the Trustee, Sponsor and Evaluator and with the principal
prepayment, redemption, maturity, exchange or sale of Bonds while the
Public Offering Price will vary with changes in the offering price of
the underlying Bonds; therefore, there is no assurance that the present
Estimated Current Returns will be realized in the future. Estimated Long-
Term Returns are calculated using a formula which (i) takes into
consideration, and determines and factors in the relative weightings of,
the market values, yields (which takes into account the amortization of
premiums and the accretion of discounts) and estimated retirements of
all the Bonds in a Trust and (ii) takes into account a compounding
factor and the expenses and sales charge associated with each Trust
Unit. Since the market values and estimated retirements of the Bonds and
the expenses of a Trust will change, there is no assurance that the
present Estimated Long-Term Returns will be realized in the future.
Estimated Current Returns and Estimated Long-Term Returns are expected
to differ because the calculation of Estimated Long-Term Returns
reflects the estimated date and amount of principal returned while
Page 46
Estimated Current Returns calculations include only net annual interest
income and Public Offering Price.
TRUST OPERATING EXPENSES
Compensation of Sponsor, Nike Securities L.P., which acts as Sponsor,
will receive a fee for providing supervisory services as set forth under
"Summary of Essential Financial Information" in Part One of this
Prospectus. Any such charges would be payable in monthly installments
and would be based on the number of Units outstanding on the first day
of each month of each year. The Sponsor may also be reimbursed for
bookkeeping and administrative services in amounts which will not exceed
the amounts set forth under "Summary of Essential Financial Information"
in Part One of this Prospectus. With respect to fees payable to the
Sponsor for providing portfolio supervision, and bookkeeping and
administrative services to the Trusts, such individual fees may exceed
the actual costs of providing such services for a Trust, but at no time
will the total amount paid to the Sponsor for providing such services
rendered to all unit investment trusts sponsored by the Sponsor or its
affiliates in any calendar year exceed the aggregate cost to the Sponsor
and its affiliates of supplying such services in such year. The
foregoing fees may be increased without approval of the Unitholders by
amounts not exceeding proportionate increases under the category "All
Services Less Rent of Shelter" in the Consumer Price Index published by
the United States Department of Labor or, if such category is no longer
published, in a comparable category. The Sponsor will receive sales
commissions and may realize other profits (or losses) in connection with
the sale of Units.
Evaluator's Fee. For its services, the Evaluator will receive an annual
fee as set forth under "Summary of Essential Financial Information" in
Part One of this Prospectus. The Evaluator's fees are payable in monthly
installments. The Evaluator's fees may be increased without approval of
the Unitholders by amounts not exceeding proportionate increases under
the category "All Services Less Rent of Shelter" in the Consumer Price
Index published by the United States Department of Labor or, if such
category is no longer published, in a comparable category.
Trustee's Fee. For its services, the Trustee will receive an annual fee
as set forth under "Summary of Essential Financial Information" in Part
One of this Prospectus. The Trustee's fees are payable in monthly
installments (based on the outstanding principal amount of Bonds in a
Trust as of the first day of each month of each year) on or before the
fifteenth day of each month from the Interest Account to the extent
funds are available and then from the Principal Account. The Trustee's
fee may be periodically adjusted in response to fluctuations in short-
term interest rates (reflecting the cost to the Trustee of advancing
funds to a Trust to meet scheduled distributions) and may be further
increased without approval of the Unitholders by amounts not exceeding
proportionate increases under the category "All Services Less Rent of
Shelter" in the Consumer Price Index published by the United States
Department of Labor or, if such category is no longer published, in a
comparable category. Since the Trustee has the use of the funds being
held in the Principal and Interest Accounts for future distributions,
payment of expenses and redemptions and since such Accounts are non-
interest bearing to Unitholders, the Trustee benefits thereby. Part of
the Trustee's compensation for its services to the Fund is expected to
result from the use of these funds. For a discussion of the services
Page 47
rendered by the Trustee pursuant to its obligations under the Trust
Agreement, see "Rights of Unitholders-Reports Provided" and "Trust
Administration."
Miscellaneous Expenses. The following additional charges are or may be
incurred by the Trusts: (i) fees of the Trustee for extraordinary
services, (ii) expenses of the Trustee (including legal and auditing
expenses) and of counsel designated by the Sponsor, (iii) various
governmental charges, (iv) expenses and costs of any action taken by the
Trustee to protect a Trust and the rights and interests of Unitholders,
(v) indemnification of the Trustee for any loss, liability or expenses
incurred by it in the administration of a Trust without gross
negligence, bad faith or willful misconduct on its part, (vi) any
special custodial fees payable in connection with the sale of any of the
Bonds in a Trust and (vii) expenditures incurred in contacting
Unitholders upon termination of a Trust.
The fees and expenses set forth herein are payable out of the Trusts.
When such fees and expenses are paid by or owing to the Trustee, they
are secured by a lien on the portfolio or portfolios of the applicable
Trust or Trusts. If the balances in the Interest and Principal Accounts
are insufficient to provide for amounts payable by the Fund, the Trustee
has the power to sell Bonds to pay such amounts.
INSURANCE ON THE BONDS IN THE INSURED TRUSTS
Insurance guaranteeing prompt payment of interest and principal, when
due, on all the Bonds in the Insured Trusts in the Fund has been
obtained by the Sponsor or by the issuers or underwriters of such Bonds.
Although no insurance has been obtained on the Bonds in the uninsured
Trusts, certain of the Bonds in the uninsured Trusts may be insured.
An Insurer has issued a policy or policies of insurance covering each of
the Bonds in the Insured Trusts, each policy to remain in force until
the payment in full of such Bonds and whether or not the Bonds continue
to be held by an Insured Trust. By the terms of each policy, the Insurer
will unconditionally guarantee to the holders or owners of the Insured
Bonds the payment, when due, required of the issuer of the Bonds of an
amount equal to the principal of and interest on the Bonds as such
payments shall become due, but not be paid (except that in the event of
any acceleration of the due date of principal by reason of mandatory or
optional redemption, default or otherwise, the payments guaranteed will
be made in such amounts and at such times as would have been due had
there not been an acceleration). The Insurer will be responsible for
such payments, less any amounts received by the holders or owners of the
Bonds from any trustee for the bond issuers or from any other sources
other than the Insurer. The Insurers' policies relating to small
industrial development bonds and pollution control revenue bonds also
guarantee the full and complete payments required to be made by or on
behalf of an issuer of Bonds pursuant to the terms of the Bonds if there
occurs an event which results in the loss of the tax-exempt status of
the interest on such Bonds, including principal, interest or premium
payments, if any, as and when thereby required. Each Insurer has
indicated that its insurance policies do not insure the payment of
principal or interest on bonds which are not required to be paid by the
issuer thereof because the bonds were not validly issued. However, as
indicated under "Tax Status," the respective issuing authorities have
received opinions of bond counsel relating to the valid issuance of each
of the Bonds in the Trusts. Each Insurer's policy also does not insure
against non-payment of principal of or interest on the Bonds resulting
Page 48
from the insolvency, negligence or any other act or omission of the
trustee or other paying agent for the Bonds. Such policies are not
covered by the Property/Casualty Insurance Security Fund specified in
Article 76 of the New York Insurance Law. The policies are non-
cancelable and the insurance premiums have been fully paid on or prior
to the date of deposit, either by the Sponsor or, if a policy has been
obtained by a Bond issuer, by such issuer.
Standard & Poor's rates all new issues insured by an Insurer "AAA Prime
Grade." Moody's rates all bond issues insured by an Insurer "Aaa." These
ratings independently reflect each company's current assessment of the
creditworthiness of each Insurer and its ability to pay claims on its
policies of insurance. See "Investment Objectives and Portfolio
Selection." Any further explanation as to the significance of either
rating may be obtained only from the company which issued the respective
rating. Neither rating is a recommendation to buy, sell or hold the
Bonds, and such rating may be subject to revision or withdrawal at any
time by the respective issuer. Any downward revision or withdrawal of
the rating may have an adverse effect on the market price of the Bonds.
Because the insurance on the Bonds will be effective so long as the
Bonds are outstanding, such insurance will be taken into account in
determining the market value of the Bonds and therefore some value
attributable to such insurance will be included in the value of the
Units of the Insured Trusts. The insurance does not, however, guarantee
the market value of the Bonds or of the Units.
TAX STATUS
At the respective times of issuance of the Bonds, opinions relating to
the validity thereof and to the exclusion of interest thereon from
Federal gross income were rendered by bond counsel to the respective
issuing authorities. In addition, with respect to State Trusts, where
applicable, bond counsel to the issuing authorities rendered opinions as
to the exemption of interest on such Bonds when held by residents of the
State in which issuers of such Bonds are located, from State income
taxes and certain State or local intangibles and local income taxes.
Neither the Sponsor nor Chapman and Cutler has made any review of the
Fund proceedings relating to the issuance of the Bonds or of the bases
for the opinions rendered in connection therewith. If the interest on a
Bond should be determined to be taxable, the Bond would generally have
to be sold at a substantial discount. In addition, investors could be
required to pay income tax on interest received prior to the date on
which interest is determined to be taxable. Gain realized on the sale or
redemption of the Bonds by the Trustee or of a Unit by a Unitholder is
includable in gross income for Federal income tax purposes and may be
includable in gross income for state tax purposes. (Such gain does not
include any amounts received in respect of accrued interest or accrued
original issue discount, if any.) For purposes of the following
opinions, it is assumed that each asset of the Trust is debt, the
interest on which is excluded for Federal income tax purposes.
In the opinion of Chapman and Cutler, counsel for the Sponsor, under
existing law as of the date of this prospectus:
1. Each Trust is not an association taxable as a
corporation for Federal income tax purposes and interest and accrued
original issue discount on Bonds which is excludable from gross income
Page 49
under the Internal Revenue Code of 1986 (the "Code") will retain its
status for Federal income tax purposes when received by a Trust and when
distributed to Unitholders; however such interest may be taken into
account in computing the alternative minimum tax, an additional tax on
branches of foreign corporations and the environmental tax (the
"Superfund Tax"), as noted below;
2. Each Unitholder is considered to be the owner of a
pro rata portion of each asset of the respective Trust under subpart E,
subchapter J of chapter 1 of the Code and will have a taxable event when
such Trust disposes of a Bond, or when the Unitholder redeems or sells
his Unit. If the Unitholder disposes of a Unit, he is deemed thereby to
have disposed of his entire pro rata interest in all assets of the Trust
involved including his pro rata portion of all the Bonds represented by
the Unit. The Taxpayer Relief Act of 1997 includes provisions that treat
certain transactions designed to reduce or eliminate risk of loss and
opportunities for gain (e.g., short sales, offsetting notional principal
contracts, futures or forward contracts, or similar transactions) as
constructive sales for purposes of recognition of gain (but not loss)
and for purposes of determining the holding period. Unitholders should
consult their own tax advisors with regard to any such constructive sale
rules. Unitholders must reduce the tax basis of their Units for their
share of accrued interest received by the respective Trust, if any, on
Bonds delivered after the date the Unitholders pay for their Units to
the extent that such interest accrued on such Bonds before the date the
Trust acquired ownership of the Bonds (and the amount of this reduction
may exceed the amount of accrued interest paid to the seller), and,
consequently, such Unitholders may have an increase in taxable gain or
reduction in capital loss upon the disposition of such Units. Gain or
loss upon the sale or redemption of Units is measured by comparing the
proceeds of such sale or redemption with the adjusted basis of the
Units. If the Trustee disposes of Bonds (whether by sale, payment at
maturity, redemption or otherwise), gain or loss is recognized to the
Unitholder (subject to various nonrecognition provisions of the Code).
The amount of any such gain or loss is measured by comparing the
Unitholder's pro rata share of the total proceeds from such disposition
with the Unitholder's basis for his or her fractional interest in the
asset disposed of. In the case of a Unitholder who purchases Units, such
basis (before adjustment for accrued original issue discount and
amortized bond premium, if any) is determined by apportioning the cost
of the Units among each of the Trust assets ratably according to value
as of the valuation date nearest the date of acquisition of the Units.
The tax basis reduction requirements of the Code relating to
amortization of bond premium may, under some circumstances, result in
the Unitholder realizing a taxable gain when his Units are sold or
redeemed for an amount less than or equal to his original cost.
Unitholders should consult their own tax advisors with regard to the
calculation of basis.; and
3. Any proceeds paid under individual policies obtained
by issuers of Bonds which represent maturing interest on defaulted Bonds
held by the Trustee will be excludable from Federal gross income if, and
to the same extent as, such interest would have been excludable if paid
in the normal course by the issuer of the defaulted Bonds provided that,
at the time such policies are purchased, the amounts paid for such
policies are reasonable, customary and consistent with the reasonable
expectation that the issuer of the Bonds, rather than the Insurer, will
pay debt service on the Bonds.
Page 50
Sections 1288 and 1272 of the Code provide a complex set of rules
governing the accrual of original issue discount. These rules provide
that original issue discount accrues either on the basis of a constant
compound interest rate or ratably over the term of the Bond, depending
on the date the Bond was issued. In addition, special rules apply if the
purchase price of a Bond exceeds the original issue price plus the
amount of original issue discount which would have previously accrued
based upon its issue price (its "adjusted issue price") to prior owners.
If a Bond is acquired with accrued interest, that portion of the price
paid for the accrued interest is added to the tax basis of the Bond.
When this accrued interest is received, it is treated as a return of
capital and reduces the tax basis of the Bond. If a Bond is purchased
for a premium, the amount of the premium is added to the tax basis of
the Bond. Bond premium is amortized over the remaining term of the Bond,
and the tax basis of the Bond is reduced each tax year by the amount of
the premium amortized in that tax year. The application of these rules
will also vary depending on the value of the Bonds on the date a
Unitholder acquires his Units and the price the Unitholder pays for his
Units. Unitholders should consult with their tax advisers regarding
these rules and their application.
"The Revenue Reconciliation Act of 1993" (the "1993 Tax Act") subjects
tax-exempt bonds to the market discount rules of the Code effective for
bonds purchased after April 30, 1993. In general, market discount is the
amount (if any) by which the stated redemption price at maturity exceeds
an investor's purchase price (except to the extent that such difference,
if any, is attributable to original issue discount not yet accrued)
subject to a statutory de minimis rule. Market discount can arise based
on the price a Trust pays for Bonds or the price a Unitholder pays for
his or her Units. Under the 1993 Tax Act, accretion of market discount
is taxable as ordinary income; under prior law the accretion had been
treated as capital gain. Market discount that accretes while a Trust
holds a Bond would be recognized as ordinary income by the Unitholders
when principal payments are received on the Bond, upon sale or at
redemption (including early redemption), or upon the sale or redemption
of his or her Units, unless a Unitholder elects to include market
discount in taxable income as it accrues. Legislation has been proposed
that would require accrual basis taxpayers to include market discount in
income as it accrues. The market discount rules are complex and
Unitholders should consult their tax advisers regarding these rules and
their application.
In the case of certain corporations, the alternative minimum tax and the
Superfund Tax for taxable years beginning after December 31, 1986 depend
upon the corporation's alternative minimum taxable income ("AMTI"),
which is the corporation's taxable income with certain adjustments. One
of the adjustment items used in computing the AMTI of a corporation
(other than an S Corporation, Regulated Investment Company, Real Estate
Investment Trust, REMIC or FASIT) is an amount equal to 75% of the
excess of such corporation's "adjusted current earnings" over an amount
equal to its AMTI (before such adjustment item and the alternative tax
net operating loss deduction). "Adjusted current earnings" includes all
tax exempt interest, including interest on all of the Bonds in the
Trust. Under current Code provisions, the Superfund Tax does not apply
to tax years beginning on or after January 1, 1996. Legislative
proposals have been introduced that would reinstate the Superfund Tax
for taxable years beginning after December 31, 1998 and before January
1, 2010. Under the provisions of Section 884 of the Code, a branch
profits tax is levied on the "effectively connected earnings and
profits" of certain foreign corporations which include tax-exempt
interest such as interest on the Bonds in the Trusts. Unitholders should
consult their tax advisers with respect to the particular tax
Page 51
consequences to them including the corporate alternative minimum tax,
the Superfund Tax and the branch profits tax imposed by Section 884 of
the Code.
Counsel for the Sponsor has also advised that under Section 265 of the
Code, interest on indebtedness incurred or continued to purchase or
carry Units of a Trust is not deductible for Federal income tax
purposes. The Internal Revenue Service has taken the position that such
indebtedness need not be directly traceable to the purchase or carrying
of Units (however, these rules generally do not apply to interest paid
on indebtedness incurred to purchase or improve a personal residence).
Also, under Section 265 of the Code, certain financial institutions that
acquire Units would generally not be able to deduct any of the interest
expense attributable to ownership of such Units. Legislative proposals
have been made that would extend the financial institution rules to
certain other corporations, including securities dealers and other
financial intermediaries. Investors with questions regarding these
issues should consult with their tax advisers.
In the case of certain of the Bonds in the Trust, the opinions of bond
counsel indicate that interest on such Bonds received by a "substantial
user" of the facilities being financed with the proceeds of these Bonds,
or persons related thereto, for periods while such Bonds are held by
such a user or related person, will not be excludable from Federal gross
income, although interest on such Bonds received by others would be
excludable from Federal gross income. "Substantial user" and "related
person" are defined under the Code and U.S. Treasury Regulations. Any
person who believes that he or she may be a "substantial user" or a
"related person" as so defined should contact his or her tax adviser.
ALL STATEMENTS OF LAW IN THE PROSPECTUS CONCERNING EXCLUSION FROM GROSS
INCOME FOR FEDERAL, STATE OR OTHER TAX PURPOSES ARE THE OPINIONS OF
COUNSEL AND ARE TO BE SO CONSTRUED.
At the respective times of issuance of the Bonds, opinions relating to
the validity thereof and to the exclusion of interest thereon from
Federal gross income are rendered by bond counsel to the respective
issuing authorities. Neither the Sponsor nor Chapman and Cutler has made
any special review for the Fund of the proceedings relating to the
issuance of the Bonds or of the basis for such opinions.
The Internal Revenue Service Restructuring and Return Act of 1998 (the
"1998 Tax Act") provides that for taxpayers other than corporations, net
capital gain (which is defined as net long-term capital gain over net
short-term capital loss for the taxable year) realized from property
(with certain exclusions) is subject to a maximum marginal stated tax
rate of 20% (10% in the case of certain taxpayers in the lowest tax
bracket). Capital gain or loss is long-term if the holding period for
the asset is more than one year, and is short-term if the holding period
for the asset is one year or less. The date on which a Unit is acquired
(i.e., the "trade date") is excluded for purposes of determining the
holding period of the Unit. The legislation is generally effective
retroactively for amounts properly taken into account on or after
January 1, 1998. Capital gains realized from assets held for one year or
less are taxed at the same rates as ordinary income.
In addition, please note that capital gains may be recharacterized as
ordinary income in the case of certain financial transactions that are
considered "conversion transactions" effective for transactions entered
Page 52
into after April 30, 1993. Unit holders should consult their tax
advisors regarding the potential effect of this provision on their
investment in Units.
For purposes of computing the alternative minimum tax for individuals
and corporations and the Superfund Tax for corporations, interest on
certain private activity bonds (which includes most industrial and
housing revenue bonds) issued on or after August 8, 1996 is included as
an item of tax preference.
In general, Section 86 of the Code, provides that 50% of Social Security
benefits are includable in gross income to the extent that the sum of
"modified adjusted gross income" plus 50% of the Social Security
benefits received exceeds a "base amount." The base amount is $25,000
for unmarried taxpayers, $32,000 for married taxpayers filing a joint
return and zero for married taxpayers who do not live apart at all times
during the taxable year and who file separate returns. Modified adjusted
gross income is adjusted gross income determined without regard to
certain otherwise allowable deductions and exclusions from gross income
and by including tax-exempt interest. To the extent that Social Security
benefits are includable in gross income, they will be treated as any
other item of gross income.
In addition, under the 1993 Tax Act, for taxable years beginning after
December 31, 1993, up to 85% of Social Security benefits are includable
in gross income to the extent that the sum of "modified adjusted gross
income" plus 50% of Social Security benefits received exceeds an
"adjusted base amount." The adjusted base amount is $34,000 for
unmarried taxpayers, $44,000 for married taxpayers filing a joint
return, and zero for married taxpayers who do not live apart at all
times during the taxable year and who file separate returns.
Although tax-exempt interest is included in modified adjusted gross
income solely for the purpose of determining what portion, if any, of
Social Security benefits will be included in gross income, no tax-exempt
interest, including that received from a Trust, will be subject to tax.
A taxpayer whose adjusted gross income already exceeds the base amount
or the adjusted base amount must include 50% or 85%, respectively, of
his Social Security benefits in gross income whether or not he receives
any tax-exempt interest. A taxpayer whose modified adjusted gross income
(after inclusion of tax-exempt interest) does not exceed the base amount
need not include any Social Security benefits in gross income.
FOR A DISCUSSION OF THE STATE TAX STATUS OF INCOME EARNED ON UNITS OF A
TRUST, SEE "THE TRUSTS-STATE TAXATION" FOR THE APPLICABLE TRUST. EXCEPT
AS NOTED THEREIN, THE EXEMPTION OF INTEREST ON STATE AND LOCAL
OBLIGATIONS FOR FEDERAL INCOME TAX PURPOSES DISCUSSED ABOVE DOES NOT
NECESSARILY RESULT IN EXEMPTION UNDER THE INCOME OR OTHER TAX LAWS OF
ANY STATE OR CITY. THE LAWS OF THE SEVERAL STATES VARY WITH RESPECT TO
THE TAXATION OF SUCH OBLIGATIONS.
Ownership of the Units may result in collateral federal income tax
consequences to certain taxpayers, including, without limitation,
corporations subject to either the environmental tax or the branch
profits tax, financial institutions, certain insurance companies,
certain S corporations, individual recipients of Social Security or
Railroad Retirement benefits and taxpayers who may be deemed to have
incurred (or continued) indebtedness to purchase or carry tax-exempt
obligations. Prospective investors should consult their tax advisors as
to the applicability of any collateral consequences.
Page 53
PUBLIC OFFERING
General. Units are offered at the Public Offering Price. The Public
Offering Price is based on the bid prices of the Bonds in each Trust and
includes a sales charge of 5.5% of the Public Offering Price (5.820% of
the aggregate bid price of the Bonds) plus any accrued interest.
Employees, officers and directors (including their immediate family
members, defined as spouses, children, grandchildren, parents,
grandparents, mothers-in-law, fathers-in-law, sons-in-law and daughters-
in-law, and trustees, custodians or fiduciaries for the benefit of such
persons) of the Sponsor and its subsidiaries, related companies to the
Sponsor and a registered representative purchasing for such
representative's personal account may purchase Units of the Trusts
without a sales charge in the secondary offering period.
Investors who purchase Units through registered broker/dealers who
charge periodic fees for financial planning, investment advisory or
asset management services, or provide such services in connection with
the establishment of an investment account for which a comprehensive
"wrap fee" charge is imposed may purchase Units in the secondary
offering period at the Public Offering Price less the concession the
Sponsor typically would allow such broker/dealer. See "Public Offering-
Unit Distribution."
Accrued Interest. Accrued interest is the accumulation of unpaid
interest on a bond from the last day on which interest thereon was paid.
Interest on Bonds generally is paid semi-annually, although a Trust
accrues such interest daily. Because of this, each Trust always has an
amount of interest earned but not yet collected by the Trustee. For this
reason, the Public Offering Price of Units will have added to it the
proportionate share of accrued interest to the date of settlement.
Unitholders will receive on the next distribution date of the respective
Trust the amount, if any, of accrued interest paid on their Units.
Because of the varying interest payment dates of the Bonds, accrued
interest at any point in time will be greater than the amount of
interest actually received by a Trust and distributed to Unitholders.
Therefore, there will always remain an item of accrued interest that is
added to the value of the Units. If a Unitholder sells or redeems all or
a portion of his Units, he will be entitled to receive his proportionate
share of the accrued interest from the purchaser of his Units. Since the
Trustee has the use of the funds held in the Interest Account for
distributions to Unitholders and since such Account is noninterest-
bearing to Unitholders, the Trustee benefits thereby.
Offering Price. The Public Offering Price of the Units will vary from
the amounts stated under "Summary of Essential Financial Information" in
Part One of this Prospectus in accordance with fluctuations in the
prices of the underlying Bonds in each Trust.
As indicated above, the price of the Units as of the opening of business
on the date of Part One of this Prospectus was determined by adding to
the determination of the aggregate bid price of the Bonds an amount
equal to 5.820% of such value and dividing the sum so obtained by the
number of Units outstanding. This computation produced a gross
underwriting profit equal to 5.5% of the Public Offering Price. The
Evaluator will appraise or cause to be appraised the value of the
underlying Bonds as of the close of trading of the New York Stock
Exchange (generally 4:00 p.m. Eastern Time) on days on which the New
York Stock Exchange is open (or as of any earlier closing time on a day
Page 54
on which the New York Stock Exchange is scheduled in advance to close at
such earlier time) for each day on which any Unit of a Trust is tendered
for redemption, and it shall determine the aggregate value of such Trust
as of 4:00 p.m. Eastern time (or as of any earlier closing time on a day
on which the New York Stock Exchange is scheduled in advance to close at
such earlier time) on such other days as may be necessary. Such Public
Offering Price will be effective for all orders received at or prior to
4:00 p.m. Eastern time (or as of any earlier closing time on a day on
which the New York Stock Exchange is scheduled in advance to close at
such earlier time) on each such day. Orders received by the Trustee or
the Sponsor or any dealer for purchases, sales or redemptions after that
time, or on a day when the New York Stock Exchange is closed, will be
held until the next determination of price.
The aggregate price of the Bonds in each Trust has been and will be
determined on the basis of bid prices (i) on the basis of current market
prices for the Bonds obtained from dealers or brokers who customarily
deal in bonds comparable to those held by the Trust; (ii) if such prices
are not available for any particular Bonds, on the basis of current
market prices for comparable bonds; (iii) by causing the value of the
Bonds to be determined by others engaged in the practice of evaluation,
quoting or appraising comparable bonds; or (iv) by any combination of
the above.
The Public Offering Price per Unit is based on the bid price per Unit of
the Bonds in each Trust plus the applicable sales charge plus accrued
interest. The offering price of Bonds in each Trust may be expected to
range from .35%-1% more than the bid price of such Bonds.
Although payment is normally made three business days following the
order for purchase, payment may be made prior thereto. However, delivery
of certificates, if any are requested in writing, representing Units so
ordered will be made as soon as possible following such order or shortly
thereafter. A person will become the owner of Units on the date of
settlement provided payment has been received. Cash, if any, made
available to the Sponsor prior to the date of settlement for the
purchase of Units may be used in the Sponsor's business and may be
deemed to be a benefit to the Sponsor, subject to the limitations of the
Securities Exchange Act of 1934.
Unit Distribution. Units repurchased in the secondary market, if any,
may be offered by this prospectus at the secondary Public Offering Price
in the manner described. Broker-dealers or others will be allowed a
concession or agency commission in connection with the distribution of
Units in the secondary market equal to 4.0% of the Public Offering Price
per Unit.
As stated under "Public Market" below, the Sponsor intends to maintain a
secondary market for the Units of the Fund. In so maintaining a market,
the Sponsor will also realize profits or sustain losses in the amount of
any difference between the price at which Units are purchased and the
price at which Units are resold (which price is based on the bid prices
of the Bonds in a Trust and includes a sales charge). In addition, the
Sponsor will also realize profits or sustain losses resulting from a
redemption of such repurchased Units at a price above or below the
purchase price for such Units, respectively.
At various times, the Sponsor may implement programs under which the
sales forces of brokers, dealers, banks and/or others may be eligible to
win nominal awards for certain sales efforts, or under which the Sponsor
will reallow to any such brokers, dealers, banks and/or others that
Page 55
sponsor sales contests or recognition programs conforming to criteria
established by the Sponsor, or participate in sales programs sponsored
by the Sponsor, an amount not exceeding the total applicable sales
charges on the sales generated by such person at the public offering
price during such programs. Also, the Sponsor in its discretion may from
time to time pursuant to objective criteria established by the Sponsor
pay fees to qualifying brokers, dealers, banks or others for certain
services or activities which are primarily intended to result in sales
of Units of the Trusts. Such payments are made by the Sponsor out of its
own assets, and not out of the assets of the Trusts. These programs will
not change the price Unitholders pay for their Units or the amount that
the Trusts will receive from the Units sold.
Public Market. Although not obligated to do so, the Sponsor intends to
maintain a market for the Units offered hereby and to offer continuously
to purchase such Units at the bid price of the Bonds in the portfolio
plus interest accrued to the date of settlement plus any principal cash
on hand, less any amounts representing taxes or other governmental
charges payable out of the Trust and less any accrued Trust expenses. If
the supply of Units exceeds demand or if some other business reason
warrants it, the Sponsor may either discontinue all purchases of Units
or discontinue purchases of Units at such prices. In the event that a
market is not maintained for the Units and the Unitholder cannot find
another purchaser, a Unitholder desiring to dispose of his Units may
dispose of such Units by tendering them to the Trustee for redemption at
the Redemption Price, which is based upon the aggregate bid price of the
Bonds in the portfolio and any accrued interest. The aggregate bid
prices of the underlying Bonds in a Trust are expected to be less than
the related aggregate offering prices. See "Rights of Unitholders-
Redemption of Units." A Unitholder who wishes to dispose of his Units
should inquire of his broker as to current market prices in order to
determine whether there is in existence any price in excess of the
Redemption Price and, if so, the amount thereof.
RIGHTS OF UNITHOLDERS
Ownership of Units. Ownership of Units of any Trust will not be
evidenced by certificates unless a Unitholder, the Unitholder's
registered broker/dealer or the clearing agent for such broker/dealer
makes a written request to the Trustee. Certificates, if issued, will be
so noted on the confirmation statement sent to the Unitholder's broker.
Non-receipt of such certificate(s) must be reported to the Trustee
within one year; otherwise, a 2% surety bond fee will be required for
replacement.
Units are transferable by making a written request to the Trustee and,
in the case of Units evidenced by a certificate, by presenting and
surrendering such certificate to the Trustee properly endorsed or
accompanied by a written instrument or instruments of transfer which
should be sent registered or certified mail for the protection of the
Unitholder. Unitholders must sign such written request, and such
certificate or transfer instrument, exactly as their names appear on the
records of the Trustee and on any certificate representing the Units to
be transferred. Such signatures must be guaranteed by a participant in
the Securities Transfer Agents Medallion Program ("STAMP") or such other
signature guarantee program in addition to, or in substitution for,
STAMP, as may be accepted by the Trustee.
Although no such charge is now made or contemplated, the Trustee may
require a Unitholder to pay a reasonable fee for each certificate
reissued or transferred and to pay any governmental charge that may be
Page 56
imposed in connection with each such transfer or interchange. Destroyed,
stolen, mutilated or lost certificates will be replaced upon delivery to
the Trustee of satisfactory indemnity, evidence of ownership and payment
of expenses incurred. Mutilated certificates must be surrendered to the
Trustee for replacement.
Distributions of Interest and Principal. Interest received by the
Trusts, including that part of the proceeds of any disposition of Bonds
which represents accrued interest and including any insurance proceeds
representing interest due on defaulted Bonds, is credited by the Trustee
to the Interest Account of the appropriate Trust. Other receipts are
credited to the Principal Account of the appropriate Trust. Interest
received by a Trust will be distributed on or shortly after the
fifteenth day of each month on a pro rata basis to Unitholders of record
as of the preceding record date (which will be the first day of the
month). All distributions will be net of applicable expenses. The pro
rata share of cash in the Principal Account will be computed as of the
applicable record date, and distributions to the Unitholders as of such
record date will be made on or shortly after the fifteenth day of such
month. Proceeds received from the disposition of any of the Bonds after
such record date and prior to the following distribution date will be
held in the Principal Account and not distributed until the next
distribution date. The Trustee is not required to pay interest on funds
held in the Principal or Interest Accounts (but may itself earn interest
thereon and therefore benefits from the use of such funds) nor to make a
distribution from the Principal Account unless the amount available for
distribution shall equal at least $0.01 per Unit.
The distribution to the Unitholders as of each record date will be made
on the following distribution date or shortly thereafter and shall
consist of an amount substantially equal to one twelfth portion of the
Unitholders' pro rata share of the estimated net annual unit income in
the Interest Account after deducting estimated expenses. Because
interest payments are not received by the Trusts at a constant rate
throughout the year, such interest distribution may be more or less than
the amount credited to the Interest Account as of the record date. For
the purpose of minimizing fluctuation in the distributions from the
Interest Account, the Trustee is authorized to advance such amounts as
may be necessary to provide interest distributions of approximately
equal amounts. The Trustee shall be reimbursed for any such advances
from funds in the Interest Account on the ensuing record date. Persons
who purchase Units will commence receiving distributions only after such
person becomes a record owner. Notification to the Trustee of the
transfer of Units is the responsibility of the purchaser, but in the
normal course of business such notice is provided by the selling broker-
dealer.
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
Trusts (as determined on the basis set forth under "Trust Operating
Expenses"). The Trustee also may withdraw from said accounts such
amounts, if any, as it deems necessary to establish a reserve for any
governmental charges or extraordinary charges payable out of the Trusts.
Amounts so withdrawn shall not be considered a part of a Trust's assets
until such time as the Trustee shall return all for 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 redemption of Units by the Trustee.
Page 57
Reinvestment Option. Unitholders of the Trusts may elect to have each
distribution of interest income, capital gains and/or principal on their
Units automatically reinvested in shares of any mutual fund in the
Delaware Investments Family of Mutual Funds which are registered in the
Unitholder's state of residence. Such mutual funds are hereinafter
collectively referred to as the "Reinvestment Funds."
Each Reinvestment Fund has investment objectives which differ from those
of the Trusts. The prospectus relating to each Reinvestment Fund
describes the investment policies of such fund and sets forth the
procedures to follow to commence reinvestment. A Unitholder should
obtain a prospectus for the respective Reinvestment Fund by writing to
Delaware Distributors, L.P. at 1818 Market Street, Philadelphia,
Pennsylvania 19103, or by phone at 800-362-7500.
After becoming a participant in a reinvestment plan, each distribution
of interest income, capital gains and/or principal on the participant's
Units will, on the applicable distribution date, automatically be
applied, as directed by such person, as of such distribution date by the
Trustee to purchase shares (or fractions thereof) of the applicable
Reinvestment Fund at a net asset value as computed as of the next end of
a "business day," as defined in the Reinvestment Fund's prospectus.
Confirmations of all reinvestments by a Unitholder into a Reinvestment
Fund will be mailed to the Unitholder by such Reinvestment Fund.
A participant may at any time prior to five days preceding the next
succeeding distribution date, by so notifying the Trustee in writing,
elect to terminate his or her reinvestment plan and receive future
distributions on his or her Units in cash. There will be no charge or
other penalty for such termination. Each Reinvestment Fund, its sponsor
and its investment adviser shall have the right to terminate at any time
the reinvestment plan relating to such fund.
Reports Provided. The Trustee shall furnish Unitholders of a Trust in
connection with each distribution a statement of the amount of interest
and, if any, the amount of other receipts being distributed expressed in
each case as a dollar amount representing the pro rata share of each
Unit of a Trust outstanding. For as long as the Sponsor deems it to be
in the best interests of the Unitholders, the accounts of each Trust
shall be audited, not less frequently than annually, by independent
certified public accountants and the report of such accountants shall be
furnished by the Trustee to Unitholders of such Trusts upon request.
Within a reasonable period of time after the end of each calendar year,
the Trustee shall furnish to each person who at any time during the
calendar year was a registered Unitholder of a Trust a statement (i) as
to the Interest Account: interest received (including amounts
representing interest received upon any disposition of the Bonds) and
the percentage of such amount by states and territories in which the
issuers of such Bonds are located, deductions for applicable taxes and
for fees and expenses of such Trust, for purchases of Replacement Bonds
and for redemptions of Units, if any, reservations made by the Trustee,
if any, and the balance remaining after such distributions and
deductions, expressed in each case both as a total dollar amount and as
a dollar amount representing the pro rata share of each Unit outstanding
on the last business day of such calendar year; (ii) as to the Principal
Account: the dates of disposition of any Bonds and the net proceeds
received therefrom (excluding any portion representing accrued
interest), the amount paid for purchases of Replacement Bonds and for
redemptions of Units, if any, reservations made by the Trustee, if any,
Page 58
deductions for payment of applicable taxes, fees and expenses of such
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; (iii) a list of the Bonds held and
the number of Units outstanding on the last business day of such
calendar year; (iv) the Redemption Price per Unit based upon the last
computation thereof made during such calendar year; and (v) amounts
actually distributed during such calendar year from the Interest and
Principal Accounts, separately stated, expressed both as total dollar
amounts and as dollar amounts representing the pro rata share of each
Unit outstanding.
In order to comply with Federal and state tax reporting requirements,
Unitholders will be furnished, upon request to the Trustee, evaluations
of the Bonds in a Trust furnished to it by the Evaluator.
Redemption of Units. A Unitholder who does not dispose of Units in the
secondary market described above may cause Units to be redeemed by the
Trustee by making a written request to the Trustee, at its unit
investment trust office, The Chase Manhattan Bank, 4 New York Plaza, 6th
Floor, New York, New York 10004-2413 and, in the case of Units evidenced
by a certificate, by tendering such certificate to the Trustee, properly
endorsed or accompanied by a written instrument or instruments of
transfer in form satisfactory to the Trustee. Unitholders must sign the
request, and such certificate or transfer instrument, exactly as their
names appear on the records of the Trustee and on any certificate
representing the Units to be redeemed. If the amount of the redemption
is $25,000 or less and the proceeds are payable to the Unitholder(s) of
record at the address of record, no signature guarantee is necessary for
redemptions by individual account owners (including joint owners).
Additional documentation may be requested, and a signature guarantee is
always required, from corporations, executors, administrators, trustees,
guardians or associations. The signatures must be guaranteed by a
participant in the STAMP or such other guarantee program in addition to,
or in substitution for, STAMP, as may be accepted by the Trustee. A
certificate should only be sent by registered or certified mail for the
protection of the Unitholder. Since tender of the certificate is
required for redemption when one has been issued, Units represented by a
certificate cannot be redeemed until the certificate representing such
Units has been received by the purchasers. The Trustee's toll-free
number for customer assistance is 800-682-7520, available 9:00 a.m. to
5:00 p.m. EST any business day.
Redemption shall be made by the Trustee on the third business day
following the day on which a tender for redemption is received (the
"Redemption Date"). Such redemption shall be made by payment of cash,
equivalent to the Redemption Price for such Trust, determined as set
forth below as of the evaluation time stated under "Summary of Essential
Financial Information" in Part One of this Prospectus, next following
such tender, multiplied by the number of Units being redeemed. Any Units
redeemed shall be cancelled and any undivided fractional interest in the
Fund extinguished. The price received upon redemption might be more or
less than the amount paid by the Unitholder depending on the value of
the Bonds in the Trust involved at the time of redemption.
Under regulations issued by the Internal Revenue Service, the Trustee
will be required to withhold a specified percentage of the principal
amount of a Unit redemption if the Trustee has not been furnished the
redeeming Unitholder's tax identification number in the manner required
Page 59
by such regulations. Any amount so withheld is transmitted to the
Internal Revenue Service and may be recovered by the Unitholder only
when filing a return. Under normal circumstances the Trustee obtains the
Unitholder's tax identification number from the selling broker. However,
at any time a Unitholder elects to tender Units for redemption, such
Unitholder should provide a tax identification number to the Trustee in
order to avoid this possible "back-up withholding" in the event the
Trustee has not been previously provided such number.
Accrued interest paid on redemption shall be withdrawn from the Interest
Account or, if the balance therein is insufficient, from the Principal
Account. All other amounts will be withdrawn from the Principal Account.
The Trustee is empowered to sell underlying Bonds in order to make funds
available for redemption. Units so redeemed shall be cancelled.
The Redemption Price per Unit (as well as the secondary market Public
Offering Price) will be determined on the basis of the bid price of the
Bonds in each Trust, as of the close of trading on the New York Stock
Exchange (or as of any earlier closing time on a day on which the New
York Stock Exchange is scheduled in advance to close at such earlier
time) on days of trading on the New York Stock Exchange on the date any
such determination is made. While the Trustee has the power to determine
the Redemption Price per Unit when Units are tendered for redemption,
such authority has been delegated to the Evaluator which determines the
price per Unit on a daily basis. The Redemption Price per Unit is the
pro rata share of each Unit in a Trust determined 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 Trust based on the bid
prices of the Bonds (including "when issued" contracts, if any) and
(iii) interest accrued thereon, less (a) amounts representing taxes or
other governmental charges payable out of such Trust and (b) the accrued
expenses of such Trust.
The Evaluator may determine the value of the Bonds in a Trust by
employing any of the methods set forth in "Public Offering-Offering
Price."
The price at which Units may be redeemed could be less than the price
paid by the Unitholder and may be less than the par value of the Bonds
represented by the Units so redeemed. As stated above, the Trustee may
sell Bonds to cover redemptions. When Bonds are sold, the size of the
affected Trust will be, and the diversity may be, reduced. Such sales
may be required at a time when Bonds would not otherwise be sold and
might result in lower prices than might otherwise be realized.
The right of redemption may be suspended and payment postponed for any
period during which the New York Stock Exchange is closed, other than
for customary weekend and holiday closings, or during which the
Securities and Exchange Commission determines that trading on that
Exchange is restricted or an emergency exists, as a result of which
disposal or evaluation of the Bonds in a Trust is not reasonably
practicable, or for such other periods as the Securities and Exchange
Commission may by order permit. The Trustee is not liable to any person
in any way for any loss or damage which may result from any such
suspension or postponement.
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TRUST ADMINISTRATION
Sponsor Purchases of Units. The Trustee shall notify the Sponsor of any
tender of Units for redemption. If the Sponsor's bid in the secondary
market at that time equals or exceeds the Redemption Price per Unit, it
may purchase such Units by notifying the Trustee before the close of
business on the date of such notification and by making payment therefor
to the Unitholder not later than the day on which the Units would
otherwise have been redeemed by the Trustee. Units held by the Sponsor
may be tendered to the Trustee for redemption as any other Units.
The offering price of any Units acquired by the Sponsor will be in
accord with the Public Offering Price described in the then currently
effective prospectus describing such Units. Any profit resulting from
the resale of such Units will belong to the Sponsor which likewise will
bear any loss resulting from a lower offering or redemption price
subsequent to its acquisition of such Units.
Portfolio Administration. The Trustee is empowered to sell, for the
purpose of redeeming Units tendered by any Unitholder, and for the
payment of expenses for which funds may not be available, such of the
Bonds designated by the Sponsor as the Trustee in its sole discretion
may deem necessary. The Sponsor, in designating such Bonds, will
consider a variety of factors, including (i) interest rates, (ii) market
value and (iii) marketability. The Sponsor may direct the Trustee to
dispose of Bonds in the event there is a decline in price or the
occurrence of other market or credit factors, including advance
refunding (i.e., the issuance of refunding securities and the deposit of
the proceeds thereof in trust or escrow to retire the refunded
securities on their respective redemption dates), so that in the opinion
of the Sponsor the retention of such Securities would be detrimental to
the interest of the Unitholders. The Trustee may, from time to time,
retain and pay compensation to the Sponsor (or an affiliate of the
Sponsor) to act as agent for the Trusts with respect to selling Bonds
from the Trusts. In acting in such capacity, the Sponsor or its
affiliate will be held subject to the restrictions under the Investment
Company Act of 1940, as amended.
The Sponsor is required to instruct the Trustee to reject any offer made
by an issuer of any of the Bonds to issue new obligations in exchange or
substitution for any Bond pursuant to a refunding or refinancing plan,
except that the Sponsor may instruct the Trustee to accept or reject
such an offer or to take any other action with respect thereto as the
Sponsor may deem proper if (i) the issuer is in default with respect to
such Bond or (ii) in the written opinion of the Sponsor the issuer will
probably default with respect to such Bond in the reasonably foreseeable
future. Any obligation so received in exchange or substitution will be
held by the Trustee subject to the terms and conditions of the Trust
Agreement to the same extent as Bonds originally deposited thereunder.
Within five days after the deposit of obligations in exchange or
substitution for underlying Bonds, the Trustee is required to give
notice thereof to each Unitholder, identifying the Bonds eliminated and
the Bonds substituted therefor. Except as stated herein, the acquisition
by the Trust of any obligations other than the Bonds initially deposited
is not permitted.
If any default in the payment of principal or interest on any Bond
occurs and no provision for payment is made therefor within 30 days, the
Trustee is required to notify the Sponsor thereof. If the Sponsor fails
to instruct the Trustee to sell or to hold such Bond within 30 days
Page 61
after notification by the Trustee to the Sponsor of such default, the
Trustee may in its discretion sell the defaulted Bond and not be liable
for any depreciation or loss thereby incurred.
Amendment or Termination. The Sponsor and the Trustee have the power to
amend the Trust Agreement without the consent of any of the Unitholders
when such an amendment is (i) to cure an ambiguity or to correct or
supplement any provision of the Trust Agreement which may be defective
or inconsistent with any other provision contained therein or (ii) to
make such other provisions as shall not adversely affect the interest of
the Unitholders (as determined in good faith by the Sponsor and the
Trustee), provided that the Trust Agreement may not be amended to
increase the number of Units issuable thereunder or to permit the
deposit or acquisition of obligations either in addition to or in
substitution for any of the Bonds initially deposited in a Trust, except
for the substitution of certain refunding obligations for such Bonds,
for Replacement Bonds and for subsequent deposits (see "The Fund"). In
the event of any amendment requiring the consent of Unitholders, the
Trustee is obligated to notify promptly all Unitholders of the substance
of such amendment.
A Trust may be terminated at any time by consent of Unitholders
representing 66-2/3% of the Units of such Trust then outstanding or by
the Trustee when the value of such Trust, as shown by any semi-annual
evaluation, is less than the minimum value indicated under "Summary of
Essential Financial Information" in Part One of this Prospectus. A Trust
will be liquidated by the Trustee in the event that a sufficient number
of Units not yet sold are tendered for redemption by the Underwriters,
including the Sponsor, so that the net worth of such Trust would be
reduced to less than 40% of the initial principal amount of such Trust.
If a Trust is liquidated because of the redemption of unsold Units by
the Underwriters, the Sponsor will refund to each purchaser of Units the
entire sales charge paid by such purchaser.
The Trust Agreement provides that a Trust shall terminate upon the
redemption, sale or other disposition of the last Bond held in such
Trust, but in no event shall it continue beyond the end of the year
preceding the fiftieth anniversary of the Trust Agreement. In the event
of termination of a Trust, written notice thereof will be sent by the
Trustee to each Unitholder of such Trust at his address appearing on the
registration books of the Trust maintained by the Trustee, such notice
specifying the time or times at which the Unitholder may surrender his
certificate or certificates, if any were issued, for cancellation.
Within a reasonable time thereafter, the Trustee shall liquidate any
Bonds then held in such Trust and shall deduct from the rinds of such
Trust any accrued costs, expenses or indemnities provided by the Trust
Agreement, including estimated compensation of the Trustee and costs of
liquidation and any amounts required as a reserve to provide for payment
of any applicable taxes or other governmental charges. The sale of Bonds
in a Trust upon termination may result in a lower amount than might
otherwise be realized if such sale were not required at such time. For
this reason, among others, the amount realized by a Unitholder upon
termination may be less than the principal amount or par amount of Bonds
represented by the Units held by such Unitholder. The Trustee shall then
distribute to each Unitholder his or her share of the balance of the
Interest and Principal Accounts. With such distribution, the Unitholders
shall be furnished a final distribution statement of the amount
distributable. At such time as the Trustee in its sole discretion shall
determine that any amounts held in reserve are no longer necessary, it
shall make distribution thereof to Unitholders in the same manner.
Page 62
Limitation on Liabilities. The Sponsor, the Evaluator and the Trustee
shall be under no liability to Unitholders for taking any action or for
refraining from taking any action in good faith pursuant to the Trust
Agreement, or for errors in judgment, but shall be liable only for their
own willful misfeasance, bad faith or gross negligence in the
performance of their duties or by reason of their reckless disregard of
their obligations and duties thereunder. The Trustee shall not be liable
for depreciation or loss incurred by reason of the sale by the Trustee
of any of the Bonds. In the event of the failure of the Sponsor to act
under the Trust Agreement, the Trustee may act thereunder and shall not
be liable for any action taken by it in good faith under the Trust
Agreement.
The Trustee shall not be liable for any taxes or other governmental
charges imposed upon or in respect of the Bonds or upon the interest
thereon or upon it as Trustee under the Trust Agreement or upon or in
Fund which the Trustee may be required to pay under any present or
future law of the United States of America or of any other taxing
authority having jurisdiction. In addition, the Trust Agreement contains
other customary provisions limiting the liability of the Trustee.
The Trustee, Sponsor and Unitholders may rely on any evaluation
furnished by the Evaluator and shall have no responsibility for the
accuracy thereof. Determinations by the Evaluator under the Trust
Agreement shall be made in good faith upon the basis of the best
information available to it, provided, however, that the Evaluator shall
be under no liability to the Trustee, Sponsor or Unitholders for errors
in judgment. This provision shall not protect the Evaluator in any case
of willful misfeasance, bad faith, gross negligence or reckless
disregard of its obligations and duties.
Sponsor. We, Nike Securities L.P., specialize in the underwriting,
trading and wholesale distribution of unit investment trusts under the
"First Trust" brand name and other securities. An Illinois limited
partnership formed in 1991, we act as Sponsor for successive series of:
- - The First Trust Combined Series
- - FT Series (formerly known as The First Trust Special Situations Trust)
- - The First Trust Insured Corporate Trust
- - The First Trust of Insured Municipal Bonds
- - The First Trust GNMA
First Trust introduced the first insured unit investment trust in 1974.
To date we have deposited more than $25 billion in First Trust unit
investment trusts. Our employees include a team of professionals with
many years of experience in the unit investment trust industry.
We are a member of the National Association of Securities Dealers, Inc.
and Securities Investor Protection Corporation. Our principal offices
are at 1001 Warrenville Road, Lisle, Illinois 60532; telephone number
(630) 241-4141. As of December 31, 1998, the total partners' capital of
Nike Securities L.P. was $18,506,548 (audited).
This information refers only to the Sponsor and not to the Trust or to
any series of the Trust or to any other dealer. We are including this
information only to inform you of our financial responsibility and our
Page 63
ability to carry out our contractual obligations. We will provide more
detailed financial information on request.
If the Sponsor shall fail to perform any of its duties under the Trust
Agreement or become incapable of acting or become bankrupt or its
affairs are taken over by public authorities, then the Trustee may (i)
appoint a successor Sponsor at rates of compensation deemed by the
Trustee to be reasonable and not exceeding amounts prescribed by the
Securities and Exchange Commission, (ii) terminate the Trust Agreement
and liquidate the Fund as provided therein or (iii) continue to act as
Trustee without terminating the Trust Agreement.
Evaluator. The Evaluator is First Trust Advisors L.P., an Illinois
limited partnership formed in 1991 and an affiliate of the Sponsor. The
Evaluator's address is 1001 Warrenville Road, Lisle, Illinois 60532.
The Trustee, Sponsor and Unit holders may rely on the accuracy of any
evaluation prepared by the Evaluator. The Evaluator will make
determinations in good faith based upon the best available information.
However, the Evaluator will not be liable to the Trustee, Sponsor or
Unitholders for errors in judgment.
Trustee. The Trustee is The Chase Manhattan Bank, with its principal
executive office located at 270 Park Avenue, New York, New York 10017
and its unit investment trust office at 4 New York Plaza, 6th Floor, New
York, New York 10004-2413. 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 duties of the Trustee are primarily ministerial in nature. It did
not participate in the selection of Bonds for the portfolio of any Trust.
In accordance with the Trust Agreement, the Trustee shall keep proper
books of record and account of all transactions at its office for the
Fund. Such records shall include the name and address of, and the
certificates issued by each Trust to, every Unitholder of each Trust.
Such books and records shall be open to inspection by any Unitholder at
all reasonable times during usual business hours. The Trustee shall make
such annual or other reports as may from time to time be required under
any applicable state or Federal statute, rule or regulation (see "Rights
of Unitholders-Reports Provided"). The Trustee is required to keep a
certified copy or duplicate original of the Trust Agreement on file in
its office available for inspection at all reasonable times during the
usual business hours by any Unitholder, together with a current list of
the Bonds held in the Trusts.
Under the Trust Agreement, the Trustee or any successor trustee may
resign and be discharged of the Trusts created by the Trust Agreement by
executing an instrument in writing and filing the same with the Sponsor.
The Trustee or successor trustee must mail a copy of the notice of
resignation to all Unitholders then of record, not less than 60 days
before the date specified in such notice when such resignation is to
take effect. The Sponsor upon receiving notice of such resignation is
obligated to appoint a successor trustee promptly. If, upon such
resignation, no successor trustee has been appointed and has accepted
the appointment within 30 days after notification, the retiring Trustee
may apply to a court of competent jurisdiction for the appointment of a
Page 64
successor. The Sponsor may remove the Trustee and appoint a successor
trustee as provided in the Trust Agreement. Notice of such removal and
appointment shall be mailed to each Unitholder by the Sponsor. Upon
execution of a written acceptance of such appointment by such successor
trustee, all the rights, powers, duties and obligations of the original
trustee shall vest in the successor. The resignation or removal of a
Trustee becomes effective only when the successor trustee accepts its
appointment as such or when a court of competent jurisdiction appoints a
successor trustee.
Any corporation into which a Trustee may be merged or with which it may
be consolidated, or any corporation resulting from any merger or
consolidation to which a Trustee shall be a party, shall be the
successor trustee. The Trustee must be a corporation organized under the
laws of the United States or any State, be authorized to exercise trust
powers and have at all times an aggregate capital, surplus and undivided
profits of not less than $5,000,000.
OTHER MATTERS
Legal Opinions. The legality of the Units offered hereby and certain
matters relating to Federal and state tax law have been passed upon by
Chapman and Cutler, 111 West Monroe Street, Chicago, Illinois 60603, as
counsel for the Sponsor. Carter, Ledyard & Milburn will act as counsel
for the Trustee and as special New York tax counsel for the Trusts.
Experts. The financial statements of each Trust as of the date presented
in Part One of this Prospectus have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report therein appearing
elsewhere herein, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
DESCRIPTION OF BOND RATINGS*
Standard & Poor's. A brief description of the applicable Standard &
Poor's ratings symbols and their meanings 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 may take into consideration
obligors such as guarantors, insurers, or lessees.
The bond rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or
suitability for a particular investor.
The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources it considers reliable.
Standard & Poor's does not perform an audit in connection with any
rating and may, on occasion, rely on unaudited financial information.
The ratings may be changed, suspended or withdrawn as a result of
changes in, or unavailability of, such information, or for other
circumstances.
__________________
* As published by the ratings companies.
Page 65
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; and
III. Protection afforded by, and relative position of,
the obligation in the event of bankruptcy, reorganization or other
arrangements under the laws of bankruptcy and other laws affecting
creditors' rights.
AAA - Bonds rated AAA have the highest rating assigned by Standard &
Poor's to a debt obligation. Capacity to pay interest and repay
principal is extremely strong.**
AA - Bonds rated AA have a very strong capacity to pay interest and
repay principal and differ from the highest rated issues only in small
degree.
A - Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than bonds
in higher rated categories.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for bonds in this category than for bonds
in higher rated categories.
Plus (+) or Minus (-): The ratings from "AA" to "BBB" may be modified by
the addition of a plus or minus sign to show relative standing within
the major rating categories.
Provisional Ratings: The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of
the project being financed by the bonds being rated and indicates that
payment of debt service requirements is largely or entirely dependent
upon the successful and timely completion of the project. This rating,
however, while addressing credit quality subsequent to completion of the
project, makes no comment on the likelihood of, or the risk of default
upon failure of, such completion. The investor should exercise his/her
own judgment with respect to such likelihood and risk.
_________________
** Bonds insured by Financial Guaranty Insurance Company, Ambac
Assurance Corporation (formerly, AMBAC Indemnity Corporation), Municipal
Bond Investors Assurance Corporation, Connie Lee Insurance Company,
Financial Security Assurance and Capital Guaranty Insurance Company are
automatically rated "AAA" by Standard & Poor's.
Page 66
Credit Watch: Credit Watch highlights potential changes in ratings of
bonds and other fixed income securities. It focuses on events and trends
which place companies and government units under special surveillance by
S&P's 180-member analytical staff. These may include merges, voter
referendums, actions by regulatory authorities, or developments gleaned
from analytical reviews. Unless otherwise noted, a rating decision will
be made within 90 days. Issues appear on Credit Watch where an event,
situation, or deviation from trends occurred and needs to be evaluated
as to its impact. On credit ratings. A listing, however, does not mean a
rating change is inevitable. Since S&P continuously monitors all of its
ratings, Credit Watch is not intended to include all issues under
review. Thus, rating changes will occur without issues appearing on
Credit Watch.
Bonds insured by Financial Guaranty Insurance Company, Ambac Assurance
Corporation (formerly AMBAC Indemnity Corporation), Municipal Bond
Investors Assurance Corporation, Connie Lee Insurance Company, Financial
Security Assurance and Capital Guaranty Insurance Company are
automatically rated "AAA" by Standard & Poor's
Moody's Investors Service, Inc. A brief description of the applicable
Moody's Investors Service, Inc. rating symbols and their meanings 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. Their safety is so absolute that with the occasional
exception of oversupply in a few specific instances, characteristically,
their market value is affected solely by money market fluctuations.
Aa - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities
or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long term risks
appear somewhat larger than in Aaa securities. Their market value is
virtually immune to all but money market influences, with the occasional
exception of oversupply in a few specific instances.
A - Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to impairment
sometime in the future. The market value of A-rated bonds may be
influenced to some degree by economic performance during a sustained
period of depressed business conditions, but, during periods of
normalcy, A-rated bonds frequently move in parallel with Aaa and Aa
obligations, with the occasional exception of oversupply in a few
specific instances.
A 1 and Baa 1 - Bonds which are rated A 1 and Baa 1 offer the maximum in
security within their quality group, can be bought for possible
upgrading in quality, and additionally, afford the investor an
opportunity to gauge more precisely the relative attractiveness of
offerings in the market place.
Page 67
Baa - Bonds which are rated Baa are considered as medium grade
obligation; i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present
but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds
lack outstanding investment characteristics and in fact have speculative
characteristics as well. The market value of Baa-rated bonds is more
sensitive to changes in economic circumstances, and aside form
occasional speculative factors applying to some bonds of this class, Baa
market valuations will move in parallel with Aaa, Aa, and A obligations
during periods of economic normalcy, except in instances of oversupply.
Moody's bond rating symbols may contain numerical modifiers of a generic
rating classification. The modifier 1 indicates that the bond ranks at
the high end of its category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates that the issue ranks in the lower
end of its generic rating category.
Con. (--) - Bonds for which the security depends upon the completion of
some act or the fulfillment of some condition are rated conditionally.
These are bonds secured by (a) earnings of projects under construction,
(b) earnings of projects unseasoned in operation experience, (c) rentals
which begin when facilities are completed, or (d) payments to which some
other limiting condition attaches. Parenthetical rating denotes probable
credit stature upon completion of construction or elimination of basis
of condition.
Page 68
No person is authorized to give any information or to make any
representations not contained in this Prospectus; and any information or
representation not contained herein must not be relied upon as having
been authorized by the Fund, the Sponsor or the Underwriters. This
Prospectus does not constitute an offer to sell, or a solicitation of an
offer to buy, securities in any state to any person to whom it is not
lawful to make such offer in such state.
__________________
TABLE OF CONTENTS
TITLE PAGE
THE FUND 3
INVESTMENT OBJECTIVES AND PORTFOLIO SELECTION 4
THE TRUSTS 5
Arizona Trusts 5
Colorado Trusts 8
Minnesota Trusts 14
New Mexico Trusts 19
Oregon Trusts 25
Pennsylvania Trusts 30
EQUIVALENT TAXABLE ESTIMATED CURRENT RETURNS 37
ESTIMATED CURRENT RETURN AND ESTIMATED LONG-TERM RETURN 46
TRUST OPERATING EXPENSES 47
INSURANCE ON THE BONDS IN THE INSURED TRUSTS 48
TAX STATUS 49
PUBLIC OFFERING 54
RIGHTS OF UNITHOLDERS 56
TRUST ADMINISTRATION 61
OTHER MATTERS 65
DESCRIPTION OF BOND RATINGS 65
__________________
This Prospectus contains information concerning the Fund and the
Sponsor, but does not contain all of the information set forth in the
registration statements and exhibits relating thereto, which the Fund
has filed with the Securities and Exchange Commission, Washington, D.C.,
under the Securities Act of 1933 and the Investment Company Act of 1940,
and to which reference is hereby made.
PROSPECTUS
__________________
June 30, 1999
PROSPECTUS PART TWO
FIRST TRUST
TAX-EXEMPT TRUST SERIES
Page 69
CONTENTS OF POST-EFFECTIVE AMENDMENT
OF REGISTRATION STATEMENT
This Post-Effective Amendment of Registration Statement
comprises the following papers and documents:
The facing sheet
The prospectus
The signatures
The Consent of Independent Auditors
S-1
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933,
the Registrant, First Trust Tax-Exempt Trust, Series 4,
certifies that it meets all of the requirements for effectiveness
of this Registration Statement pursuant to Rule 485(b) under the
Securities Act of 1933 and has duly caused this Post-Effective
Amendment of its Registration Statement to be signed on its
behalf by the undersigned thereunto duly authorized in the
Village of Lisle and State of Illinois on June 30, 1999.
FIRST TRUST TAX-EXEMPT TRUST,
SERIES 4
(Registrant)
By NIKE SECURITIES L.P.
(Depositor)
By Robert M. Porcellino
Senior Vice President
Pursuant to the requirements of the Securities Act of 1933,
this Post-Effective Amendment of Registration Statement has been
signed below by the following person in the capacity and on the
date indicated:
Signature Title* Date
Robert D. Van Kampen Director of )
Nike Securities )
Corporation, ) June 30, 1999
the General Partner )
of Nike Securities L.P. )
)
David J. Allen Director of Nike ) Robert M. Porcellino
Securities Corporation, ) Attorney-in-Fact**
the General Partner of
Nike Securities L.P.
* The title of the person named herein represents his capacity
in and relationship to Nike Securities L.P., Depositor.
** An executed copy of the related power of attorney was filed
with the Securities and Exchange Commission in connection
with the Amendment No. 1 to Form S-6 of The First Trust
Combined Series 258 (File No. 33-63483) and the same is
hereby incorporated herein by this reference.
S-2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption
"Experts" and to the use of our report dated June 4, 1999 in this
Post-Effective Amendment to the Registration Statement and
related Prospectus of First Trust Tax-Exempt Trust Series
dated June 29, 1999.
ERNST & YOUNG LLP
Chicago, Illinois
June 28, 1999
