<PAGE>
PURSUANT TO RULE NO. 497(b)
REGISTRATION NOS. 333-12495
333-17917
---------------------------------------------------------
National Trust 223 California Trust 155
TAX EXEMPT
SECURITIES
TRUST
- ---------------------- ---------------------------------------------------
15,000 UNITS
INVESTORS SHOULD READ AND RETAIN THIS PROSPECTUS FOR FUTURE REFERENCE.
IN THE OPINION OF COUNSEL UNDER EXISTING LAW, INTEREST INCOME TO THE TRUSTS AND
TO UNIT HOLDERS (EXCEPT IN CERTAIN INSTANCES DEPENDING UPON THE UNIT HOLDERS)
IS EXEMPT FROM REGULAR FEDERAL INCOME TAX AND FROM CERTAIN STATE AND LOCAL
PERSONAL INCOME TAXES, TO THE EXTENT INDICATED, IN THE STATE FOR WHICH A STATE
TRUST IS NAMED. CAPITAL GAINS, IF ANY, ARE SUBJECT TO TAX.
THE TAX EXEMPT SECURITIES TRUST consists of separate underlying unit investment
trusts designated as National Trust 223 and California Trust 155 (the "National
Trust" and the "California Trust," respectively) (the "Trusts" or the "Trust"
as the context requires and in the case of a Trust designated by a state name,
the "State Trust" or the "State Trusts," as the context requires). Each Trust
was formed to obtain for its Unit holders tax-exempt interest income and
conservation of capital through investment in a professionally selected, fixed
portfolio of municipal bonds rated at the time of deposit in the category A or
better by Standard & Poor's Ratings Group, a division of McGraw-Hill, Inc.
("Standard & Poor's"), Moody's Investors Service, Inc. ("Moody's"), Fitch
Investors Service, Inc. ("Fitch") or Duff & Phelps Credit Rating Co. ("Duff &
Phelps"). (See "Portfolio of Securities".) Each State Trust comprises a fixed
portfolio of interest-bearing obligations issued primarily by or on behalf of
the state for which such State Trust is named and counties, municipalities,
authorities or political subdivisions thereof. Interest on all bonds in each
Trust is in the opinion of counsel under existing law, with certain exceptions,
exempt from regular Federal income taxes (see Part B, "Taxes") and from certain
state and local personal income taxes in the state for which a State Trust is
named, but may be subject to other state and local taxes. (See discussions of
State and local taxes in Part C.)
THE PUBLIC OFFERING PRICE of the Units of each Trust during the initial public
offering period is equal to the aggregate offering price of the underlying
bonds in the Trust's portfolio divided by the number of Units outstanding in
such Trust, plus a sales charge. The Public Offering Price of the Units of each
Trust following the initial public offering period is equal to the aggregate
bid price of the underlying bonds in the Trust's portfolio divided by the
number of Units outstanding in such Trust, plus a sales charge. During the
initial public offering period the sales charge is equal to 4.70% of the Public
Offering Price (4.932% of the aggregate offering price of the bonds per Unit)
for each Trust, and following the initial public offering period this charge
will be equal to 5.00% of the Public Offering Price (5.263% of the aggregate
bid price of the bonds per Unit) for each Trust. See Part B, "Public Offering--
Distribution of Units" for a description of the initial public offering period.
If the Units had been available for sale on January 14, 1997, the Public
Offering Price per Unit (including the sales charge) would have been $1,027.20
and $1,015.09 for the National Trust and California Trust, respectively. In
addition, there will be added an amount equal to accrued interest commencing on
the day after the Date of Deposit through the date of settlement (normally
three business days after purchase).
THE SPONSOR, although not obligated to do so, intends to maintain a market for
the Units of the Trusts at prices based upon the aggregate bid price of the
underlying bonds, as more fully described under "Public Offering--Market for
Units" in Part B. If such a market is not maintained, a Unit holder will be
able to dispose of his Units through redemption, at prices that are also based
upon the aggregate bid price of the underlying bonds. Units can be sold at any
time without fee or penalty.
MONTHLY DISTRIBUTIONS of principal and interest received by each Trust will be
made on or shortly after the fifteenth day of each month to holders of record
on the first day of that month. For further information regarding the
distributions by each Trust, see "Summary of Essential Information".
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
The date of this Prospectus is January 15, 1997
<PAGE>
TAX EXEMPT SECURITIES TRUST
SUMMARY OF ESSENTIAL INFORMATION
AS OF JANUARY 14, 1997#
SPONSOR RECORD DATES
Smith Barney Inc. The first day of each month,
commencing February 1, 1997
TRUSTEE
DISTRIBUTION DATES
The Chase Manhattan Bank
The fifteenth day of each
month,** commencing February
15, 1997
EVALUATOR
Kenny S & P Evaluation
Services, a business unit
of J.J . Kenny Company, Inc. EVALUATION TIME
As of 1:00 P.M. on the Date of
Deposit. Thereafter, as of
4:00 P.M. New York Time.
DATE OF DEPOSIT AND OF TRUST
AGREEMENT
EVALUATOR'S FEE
January 14, 1997
The Evaluator will receive a
MANDATORY TERMINATION DATE* fee of $.29 per bond per
evaluation. (See Part B,
"Evaluator--Responsibility"
and "Public Offering--Offering
Price".)
Each Trust will terminate on the
date of maturity, redemption,
sale or other disposition of the
last Bond held in the Trust.
SPONSOR'S ANNUAL PORTFOLIO
SUPERVISION FEE***
Maximum of $.25 per $1,000
face amount of the underlying
Bonds.
- -------
# The Date of Deposit. The Date of Deposit is the date on which the Trust
Agreement was signed and the deposit with the Trustee was made.
* The actual date of termination of each trust may be considerably earlier
(see Part B, "Amendment and Termination of the Trust Agreement--
Termination").
**The first monthly income distribution of $2.65 and $2.56 for the National
Trust and California Trust, respectively, will be made on February 15,
1997.
***In addition to this amount, the Sponsor may be reimbursed for bookkeeping
and other administrative expenses not exceeding its actual costs.
A-2
<PAGE>
<TABLE>
<CAPTION>
NATIONAL CALIFORNIA
TRUST 223 TRUST 155
----------- ----------
<S> <C> <C>
Principal Amount of Bonds in Trust.................... $11,000,000 $4,000,000
Number of Units....................................... 11,000 4,000
Principal Amount of Bonds in Trust per Unit........... $ 1,000 $ 1,000
Fractional Undivided Interest in Trust per Unit....... 1/11,000 1/4,000
Minimum Value of Trust:
Trust Agreement may be Terminated if Principal
Amount is less than................................ $ 5,500,000 $2,000,000
Calculation of Public Offering Price per Unit*:
Aggregate Offering Price of Bonds in Trust.......... $10,768,153 $3,869,518
=========== ==========
Divided by Number of Units.......................... $ 978.92 $ 967.38
Plus: Sales Charge (4.70% of the Public Offering
Price)............................................. $ 48.28 $ 47.71
----------- ----------
Public Offering Price per Unit...................... $ 1,027.20 $ 1,015.09
Plus: Accrued Interest*............................. $ 1.09 $ 1.05
----------- ----------
Total............................................. $ 1,028.29 $ 1,016.14
=========== ==========
Sponsor's Initial Repurchase Price per Unit (per Unit
Offering
Price of Bonds)*.................................... $ 978.92 $ 967.38
Approximate Redemption Price per Unit (per Unit Bid
Price of Bonds)**.................................. $ 972.92 $ 961.76
----------- ----------
Difference Between per Unit Offering and Bid Prices of
Bonds................................................ $ 6.00 $ 5.62
=========== ==========
Calculation of Estimated Net Annual Income per Unit:
Estimated Annual Income per Unit.................... $ 58.54 $ 56.71
Less: Estimated Trustee's Annual Fee***............. $ 1.39 $ 1.37
Less: Organizational Expenses****................... $ .50 $ .50
Less: Other Estimated Annual Expenses............... $ .49 $ .48
----------- ----------
Estimated Net Annual Income per Unit................ $ 56.16 $ 54.36
=========== ==========
Calculation of Monthly Income Distribution per Unit:
Estimated Net Annual Income per Unit.................. $ 56.16 $ 54.36
Divided by 12....................................... $ 4.68 $ 4.53
Accrued interest from the day after the Date of
Deposit to the first record date**.................... $ 2.65 $ 2.56
First distribution per unit........................... $ 2.65 $ 2.56
Daily Rate (360-day basis) of Income Accrual per Unit. $ .1560 $ .1510
Estimated Current Return based on Public Offering
Price*****........................................... 5.47% 5.36%
Estimated Long-Term Return*****....................... 5.39% 5.21%
</TABLE>
- -------
* Accrued interest will be commencing on the day after the Date of Deposit
through the date of settlement (normally three business days after
purchase).
** This figure will also include accrued interest from the day after the
Date of Deposit to the date of settlement (normally three business days
after purchase) and the net of cash on hand in the relevant Trust,
accrued expenses of such Trust and amounts distributable to holders of
record of Units of such Trust as of a date prior to the computation date,
on a pro rata share basis. (See Part B, "Redemption of Units--Computation
of Redemption Price per Unit.")
*** Per $1,000 principal amount of Bonds, plus expenses. (See Part B, "Rights
of Unit Holders--Distribution of Interest and Principal.")
**** Each Trust (and therefore the investors) will bear all or a portion of
its organizational costs--including costs of preparing the registration
statement, the trust indenture and other closing documents, registering
units with the SEC and the states and the initial audit of the Trust--as
is common for mutual funds. Historically, the Sponsors of unit investment
trusts have paid all the costs of establishing those trusts. Advertising
and selling expenses will be paid by the Underwriters at no cost to a
Trust.
***** The Estimated Current Return is calculated by dividing the Estimated Net
Annual Interest Income per Unit by the Public Offering Price per Unit.
The Estimated Net Annual Interest Income per Unit will vary with changes
in fees and expenses of the Trustee 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 factors in the relative
weightings of, the market values, yields (which takes into account the
amortization of premiums and the accretion of discounts) and estimated
retirements of all of the Bonds in the Trust and (2) takes into account
the expenses and sales charge associated with each Unit. Since the market
values and estimated retirements of the Bonds and the expenses of the
Trust will change, there is no assurance that the present Estimated Long-
Term Return as indicated above 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 calculations include only Net Annual Interest Income and
Public Offering Price as of the Date of Deposit.
A-3
<PAGE>
PORTFOLIO SUMMARY AS OF DATE OF DEPOSIT
NATIONAL TRUST 223
The Portfolio of the National Trust contains 26 issues of Bonds of issuers
located in 14 States. All of the issues are payable from the income of
specific projects or authorities and are not supported by the issuer's power
to levy taxes. Although income to pay such Bonds may be derived from more than
one source, the primary sources of such income and the percentage of the Bonds
in this Trust deriving income from such sources are as follows: hospital and
health care facilities: 37.7%*; housing facilities: 23.2%; power facilities:
6.0%; industrial development facilities: 6.5%; pollution control facilities:
2.4%; educational facilities: 5.5%; water and sewer facilities: 10.3%; and
lease rental payments: 8.4%. The Trust is considered to be concentrated in
hospital and health care facilities issues.+ (See Part B, "Tax Exempt
Securities Trust--Risk Factors" for a brief summary of additional
considerations relating to certain of these issues.) 6.0% of the Bonds in this
Trust are insured as to timely payment of principal and interest by certain
insurance companies (MBIA, 6.0%) (see Part B, "Tax Exempt Securities Trust--
Risk Factors--Insurance"). Eighteen Bonds in this Trust have been issued with
an "original issue discount." (See Part B, "Taxes.") The average life to
maturity of the Bonds in the National Trust is 28.4 years.
As of the Date of Deposit, 79.8% of the Bonds in this Trust are rated by
Standard & Poor's (17.4% rated AAA, 23.0% rated AA and 39.4% rated A); and
20.2% are rated by Moody's (4.6% rated Aaa, 7.0% rated Aa and 8.6% rated A).
For a description of the meaning of the applicable rating symbols as published
by the rating agencies, see Part B, "Bond Ratings." It should be emphasized,
however, that the ratings of the rating agencies represent their opinions as
to the quality of the Bonds which they undertake to rate, and that these
ratings are general and are not absolute standards of quality and may change
from time to time.
2.8% of the Bonds in the National Trust were acquired from the Sponsor as
sole underwriter or from an underwriting syndicate in which the Sponsor
participated, or otherwise from the Sponsor's own organization. (See Part B,
"Public Offering--Sponsor's and Underwriters' Profits.")
CALIFORNIA TRUST 155
The Portfolio of the California Trust contains 11 issues of Bonds of issuers
located in the State of California. All of the issues are payable from the
income of specific projects or authorities and are not supported by the
issuer's power to levy taxes. Although income to pay such Bonds may be derived
from more than one source, the primary sources of such income and the
percentage of the Bonds in this Trust deriving income from such sources are as
follows: hospital and health care facilities: 41.9%*; power facilities: 6.7%;
educational facilities: 28.1%; water and sewer facilities: 23.3%.The Trust is
considered to be concentrated in hospital and health care facilities and
educational facilities issues.+ (See Part B, "Tax Exempt Securities Trust--
Risk Factors" for a brief summary of additional considerations relating to
certain of these issues.) 6.7% of the Bonds in this Trust are insured as to
timely payment of principal and interest by certain insurance companies (MBIA,
6.7%) (see Part B, "Tax Exempt Securities Trust--Risk Factors--Insurance").
Ten Bonds in this Trust have been issued with an "original issue discount."
(See Part B, "Taxes.") The average life to maturity of the Bonds in the
National Trust is 25.2 years.
As of the Date of Deposit, 86.6% of the Bonds in this Trust are rated by
Standard & Poor's (6.7% rated AAA, 23.3% rated AA and 56.6% rated A); and
13.4% are rated A by Moody's. For a description of the meaning of the
applicable rating symbols as published by the rating agencies, see Part B,
"Bond Ratings." It should be emphasized, however, that the ratings of the
rating agencies represent their opinions as to the quality of the Bonds which
they undertake to rate, and that these ratings are general and are not
absolute standards of quality and may change from time to time.
None of the Bonds in the California Trust were acquired from the Sponsor as
sole underwriter or from an underwriting syndicate in which the Sponsor
participated, or otherwise from the Sponsor's own organization. (See Part B,
"Public Offering--Sponsor's and Underwriters' Profits.")
- -------
* Percentages computed on the basis of the aggregate offering price of the
Bonds in the Trust on the Date of Deposit.
+ A trust is considered to be "concentrated" in a particular category when the
Bonds in that category constitute 25% or more of the aggregate offering
price of the Bonds in the Trust.
A-4
<PAGE>
UNDERWRITING
The names and addresses of the Underwriters and the number of Units to be
sold by them are as follows:
<TABLE>
<CAPTION>
UNITS
--------------------
NATIONAL CALIFORNIA
TRUST 223 TRUST 155
--------- ----------
<S> <C> <C>
Smith Barney Inc. ......................................... 10,050 3,650
388 Greenwich Street
New York, New York 10013
Gruntal & Co. Incorporated................................. 250 250
14 Wall Street
New York, New York 10005
William R. Hough........................................... 300 --
100 Second Avenue
Suite 800
St. Petersburg, Florida 33701
Roosevelt & Cross, Inc. ................................... 100 100
20 Exchange Place
New York, New York 10005
Oppenheimer & Co., Inc. ................................... 100 --
Oppenheimer Tower
One World Financial Center
New York, New York 10281
Ragen Mackenzie Inc. ...................................... 100 --
999 Third Avenue, Suite 4300
Seattle, Washington 98104
Raymond James & Associates................................. 100 --
880 Carillon Parkway
P.O. Box 12749
St. Petersburg, Florida 33733
------ -----
Total...................................................... 11,000 4,000
====== =====
</TABLE>
A-5
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Sponsor, Trustee and Unit Holders of Tax Exempt Securities Trust,
National Trust 223 and California Trust 155:
We have audited the accompanying statements of financial condition, including
the portfolios of securities, of each of the respective trusts constituting Tax
Exempt Securities Trust, National Trust 223 and California Trust 155 as of
January 14, 1997. These financial statements are the responsibility of the
Trustee (see note 6 to the statements of financial condition). Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statements of financial condition are
free of material misstatement. An audit of a statement of financial condition
includes examining, on a test basis, evidence supporting the amounts and
disclosures in that statement of financial condition. Our procedures included
confirmation with the Trustee of an irrevocable letter of credit deposited on
January 14, 1997 for the purchase of securities, as shown in the statements of
financial condition and portfolios of securities. An audit of a statement of
financial condition also includes assessing the accounting principles used and
significant estimates made by the Trustee, as well as evaluating the overall
statement of financial condition presentation. We believe that our audits of
the statements of financial condition provide a reasonable basis for our
opinion.
In our opinion, the statements of financial condition referred to above
present fairly, in all material respects, the financial position of each of the
respective trusts constituting Tax Exempt Securities Trust, National Trust 223
and California Trust 155 as of January 14, 1997, in conformity with generally
accepted accounting principles.
KPMG PEAT MARWICK LLP
New York, New York
January 14, 1997
A-6
<PAGE>
TAX EXEMPT SECURITIES TRUST
STATEMENTS OF FINANCIAL CONDITION
AS OF DATE OF DEPOSIT, JANUARY 14, 1997
<TABLE>
<CAPTION>
TRUST PROPERTY
----------------------
NATIONAL CALIFORNIA
TRUST 223 TRUST 155
----------- ----------
<S> <C> <C>
Investment in Tax-Exempt Securities:
Bonds represented by purchase contracts backed
by letter of credit (1)...................... $10,768,153 $3,869,518
Accrued interest through the Date of Deposit on
underlying bonds (1)(2)........................ 127,086 56,213
Organizational costs (3)........................ 27,500 10,000
----------- ----------
Total....................................... $10,922,739 $3,935,731
=========== ==========
<CAPTION>
LIABILITIES AND INTEREST OF
UNIT HOLDERS
------------------------------
<S> <C> <C>
Liabilities:
Accrued interest through the Date of Deposit
on
underlying bonds (1)(2)...................... $ 127,086 $ 56,213
Accrued expenses (3).......................... 27,500 10,000
----------- ----------
154,586 66,213
----------- ----------
Interest of Unit Holders:
Units of fractional undivided interest out-
standing (National Trust 223: 11,000;
California Trust 155: 4,000)
Cost to investors (4)........................ 11,299,238 4,060,362
Less--Gross underwriting commission (5)...... 531,085 190,844
----------- ----------
Net amount applicable to investors........... 10,768,153 3,869,518
----------- ----------
Total....................................... $10,922,739 $3,935,731
=========== ==========
</TABLE>
(1) Aggregate cost to each Trust of the Bonds listed under the Portfolios of
Securities on the immediately following pages is based on offering prices
as of 1:00 P.M. on January 14, 1997, the Date of Deposit, determined by the
Evaluator on the basis set forth in Part B, "Public Offering--Offering
Price." Morgan Guaranty Trust Company of New York issued an irrevocable
letter of credit in the aggregate principal amount of $16,000,000 which was
deposited with the Trustee for the purchase of $15,000,000 principal amount
of Bonds pursuant to contracts to purchase such Bonds at the Sponsor's
aggregate cost of $14,637,671 plus $183,299 representing accrued interest
thereon through the Date of Deposit.
(2) The Indenture provides that the Trustee will advance amounts equal to the
accrued interest on the underlying securities of each Trust (net of accrued
expenses) through the Date of Deposit and that such amounts will be
distributed to the Sponsor as Unit holder of record on such date, as set
forth in Part B, "Rights of Unit Holders--Distribution of Interest and
Principal."
(3) Organizational costs to be paid by the Trusts have been deferred and will
be amortized over five years.
(4) Aggregate public offering price (exclusive of interest) computed on 11,000
and 4,000 Units of National Trust and California Trust, respectively, on
the basis set forth in Part B, "Public Offering--Offering Price."
(5) Sales charge of 4.70% computed on 11,000 and 4,000 Units of National Trust
and California Trust, respectively, on the basis set forth in Part B,
"Public Offering--Offering Price."
(6) The Trustee has custody of and responsibility for all accounting and
financial books, records, financial statements and related data of each
Trust and is responsible for establishing and maintaining a system of
internal controls directly related to, and designed to provide reasonable
assurance as to the integrity and reliability of, financial reporting of
each Trust. The Trustee is also responsible for all estimates and accruals
reflected in each Trust's financial statements. The Evaluator determines
the price for each underlying Bond included in each Trust's Portfolio of
Securities on the basis set forth in Part B, "Public Offering--Offering
Price."
A-7
<PAGE>
TAX EXEMPT SECURITIES TRUST
NATIONAL TRUST 223--PORTFOLIO OF SECURITIES AS OF JANUARY 14, 1997
<TABLE>
<CAPTION>
YIELD ON ANNUAL
REDEMPTION COST OF DATE OF INTEREST
AGGREGATE SECURITIES REPRESENTED RATINGS PROVISIONS SECURITIES DEPOSIT INCOME
PRINCIPAL BY PURCHASE CONTRACTS (1) (2) TO TRUST (3)(4) (4) TO TRUST
--------- ------------------------ ------- ----------------- --------------- -------- --------
<C> <C> <S> <C> <C> <C> <C> <C>
1. $750,000 City of Valdez, Alaska, AA- 10/1/03 @ 102 $702,038 5.950% $41,250
Marine Terminal Revenue
Refunding Bonds, BP
Pipelines Inc. Project,
5.50% Due 10/1/2028
2. 365,000 State Public Works Board A 6/1/03 @ 100 325,770 5.800 18,250
of the State of SF 6/1/22 @ 100
California, Lease
Revenue Bonds, The
Regents of the
University of
California, Various
University of California
Projects, 5.00% Due
6/1/2023
3. 250,000 State of California AA 12/1/03 @ 101 227,767 5.700 12,500
Department of Water SF 12/1/17 @ 100
Resources, Central
Valley Project, Water
System Revenue Bonds,
5.00% Due 12/1/2019
4. 500,000 State of California AA 12/1/05 @ 101 434,625 5.676 23,750
Departments of Water SF 12/1/23 @ 100
Resources, Central
Valley Project, Water
System Revenue Bonds,
4.75% Due 12/1/2025
5. 500,000 Metropolitan Water AA 1/1/07 @ 100 444,900 5.700 25,000
District of Southern SF 7/1/28 @ 100
California, Water
Revenue Bonds, 5.00% Due
7/1/2037
6. 750,000 Los Angeles, California, AAA 10/15/03 @ 102 649,072 5.800 35,625
Department of Water & SF 10/15/16 @ 100
Power, Electric Plant
Revenue Bonds, MBIA
Insured, 4.75% Due
10/15/2020
7. 500,000 City of West Covina, A 8/15/04 @ 102 525,425 5.800 32,500
California, Certificates SF 8/15/15 @ 100
of Participation, Queen
of the Valley Hospital,
6.50% Due 8/15/2019
8. 500,000 Housing Authority of the AAA 12/1/06 @ 103 496,155 5.900 29,250
City of Waterbury, SF 8/1/16 @ 100
Connecticut, Second Lien
Multifamily Mortgage
Revenue Bonds, GNMA
Collateralized Program--
Villagewood Apartments,
Section 8 Assisted
Project, 5.85% Due
2/1/2037
9. 250,000 Atlanta, Georgia, Aa* 1/1/02 @ 102 256,340 5.900 15,875
Housing Development SF 7/1/15 @ 100
Corporation, Mortgage
Revenue Refunding Bonds,
FHA Insured Mortgage
Loan, Bedford Tower
Section 8 Assisted
Project, 6.35% Due
1/1/2023
10. 300,000 Illinois Health A 2/15/04 @ 102 299,616 6.010 18,000
Facilities Authority SF 2/15/10 @ 100
Revenue Refunding Bonds,
Edward Hospital Project,
6.00% Due 2/15/2019
11. 160,000 Community Unit School AA 2/1/07 @ 101 161,272 6.000 9,760
District, Lake County, SF 2/1/15 @ 100
Illinois, Round Lake,
School Bonds, 6.10% Due
2/1/2016
12. 220,000 Howard County, Maryland, AAA 7/1/06 @ 102 223,621 5.900 13,420
Mortgage Revenue SF 1/1/18 @ 100
Refunding Bonds, FHA
Insured Mortgage Loan--
Normandy Woods III
Apartments Project,
6.10% Due 7/1/2025
</TABLE>
A-8
<PAGE>
TAX EXEMPT SECURITIES TRUST
NATIONAL TRUST 223--PORTFOLIO OF SECURITIES AS OF JANUARY 14, 1997
<TABLE>
<CAPTION>
YIELD ON ANNUAL
REDEMPTION COST OF DATE OF INTEREST
AGGREGATE SECURITIES REPRESENTED RATINGS PROVISIONS SECURITIES DEPOSIT INCOME
PRINCIPAL BY PURCHASE CONTRACTS (1) (2) TO TRUST (3)(4) (4) TO TRUST
--------- ------------------------ ------- ----------------- --------------- -------- --------
<C> <C> <S> <C> <C> <C> <C> <C>
13. $500,000 Massachusetts State Aa* 2/15/04 @ 102 $499,225 6.010% $30,000
Health & Education SF 8/15/11 @ 100
Facilities Authority
Revenue Refunding Bonds,
Youville Hospital Issue,
FHA Insured Project,
6.00% Due 2/15/2034
14. 250,000 City of Eagan, Aaa* 2/1/07 @ 102 249,623 5.960 14,875
Minnesota, Multifamily SF 2/1/21 @ 100
Housing Revenue
Refunding Bonds, GNMA
Collateralized Mortgage
Loan--Woodridge
Apartments Project,
5.95% Due 2/1/2032
15. 250,000 City of Little Canada, Aaa* 2/1/07 @ 102 249,622 5.960 14,875
Minnesota, Multifamily SF 2/1/21 @ 100
Housing Revenue
Refunding Bonds, GNMA
Collateralized Mortgage
Loan, Cedars Lakeside
Apartments Project 5.95%
Due 2/1/2032
16. 500,000 The Hospitals and Higher A- 11/15/03 @ 102 519,400 6.050 33,125
Education Facilities SF 11/15/09 @ 100
Authority of
Philadelphia,
Pennsylvania, Hospital
Revenue Bonds, Temple
University Hospital,
6.625% Due 11/15/2023
17. 750,000 South Fork Municipal A- 7/1/03 @ 102 691,245 6.100 41,250
Authority, Cambria SF 7/1/12 @ 100
County, Pennsylvania,
Hospital Revenue Bonds,
Lee Hospital Project,
5.50% Due 7/1/2023
18. 250,000 The Industrial A- 9/1/04 @ 102 264,643 5.700 16,250
Development Board of
Maury County, Tennessee,
Pollution Control
Refunding Revenue Bonds.
Saturn Corporation
Project, 6.50% Due
9/1/2024
19. 500,000 Texas Department of A 7/1/06 @ 102 512,160 6.200 32,500
Housing and Community SF 1/1/17 @ 100
Affairs, Multifamily
Housing Revenue Bonds,
Dallas Fort Worth
Project, 6.50% Due
7/1/2026
20. 205,000 Brazos County, Texas, A- 1/1/04 @ 102 204,744 6.010 12,300
Health Facilities SF 1/1/14 @ 100
Development Corporation,
Franciscan Services
Corporation Revenue
Refunding Bonds, St.
Joseph Hospital and
Health Center of Bryan,
Texas, 6.00% Due
1/1/2019
21. 500,000 Collin County, Texas, AAA 3/1/06 @ 102 507,990 6.000 31,000
Housing Finance SF 3/1/12 @ 100
Corporation, Multifamily
Housing Revenue Bonds,
Summer Crossing
Apartments Project, FSA
Insured, 6.20% Due
3/1/2026
22. 750,000 Harris County, Texas, A- 6/1/04 @ 102 794,220 5.800 49,687
Health Facilities SF 6/1/15 @ 100
Development Corporation,
Hospital Revenue Bonds,
Memorial Hospital System
Project, 6.625% Due
6/1/2024
23. 400,000 Victoria County, Texas, A3* 2/15/07 @ 100 399,508 6.010 24,000
Public Facilities SF 2/15/13 @ 100
Corporation Lease
Revenue Bonds, Victoria
County Navarro Lease
Project, 6.00% Due
2/15/2017
24. 100,000 Vermont Educational and A- 4/1/06 @102 99,862 6.010 6,000
Health Buildings SF 4/1/12 @ 100
Financing Agency Revenue
Bonds, St. Michael's
College Project, 6.00%
Due 4/1/2021
</TABLE>
A-9
<PAGE>
TAX EXEMPT SECURITIES TRUST
NATIONAL TRUST 223--PORTFOLIO OF SECURITIES AS OF JANUARY 14, 1997
<TABLE>
<CAPTION>
YIELD ON ANNUAL
REDEMPTION COST OF DATE OF INTEREST
AGGREGATE SECURITIES REPRESENTED RATINGS PROVISIONS SECURITIES DEPOSIT INCOME
PRINCIPAL BY PURCHASE CONTRACTS (1) (2) TO TRUST (3)(4) (4) TO TRUST
--------- ----------------------- ------- --------------- --------------- -------- --------
<C> <C> <S> <C> <C> <C> <C> <C>
25. $ 500,000 West Virginia Hospital A1* 1/1/03 @ 102 $ 522,055 5.800% $ 32,500
Finance Authority, SF 9/1/17 @ 100
Hospital Revenue Bonds,
Charleston Area Medical
Center, Inc., 6.50% Due
9/1/2023
26. 500,000 State of Wyoming Farm AA- 10/1/04 @ 102 507,255 5.900 30,500
Loan Board, Capital SF 4/1/15 @ 100
Facilities Revenue
Bonds, 6.10% Due
4/1/2024
----------- ----------- --------
$11,000,000 $10,768,153 $644,042
=========== =========== ========
</TABLE>
The Notes following the Portfolios are an integral part of each Portfolio of
Securities.
A-10
<PAGE>
TAX EXEMPT SECURITIES TRUST
CALIFORNIA TRUST 155--PORTFOLIO OF SECURITIES AS OF JANUARY 14, 1997
<TABLE>
<CAPTION>
COST OF YIELD ON ANNUAL
REDEMPTION SECURITIES DATE OF INTEREST
AGGREGATE RATINGS PROVISIONS TO TRUST DEPOSIT INCOME
PRINCIPAL SECURITIES REPRESENTED BY PURCHASE CONTRACTS (1) (2) (3)(4) (4) TO TRUST
--------- -------------------------------------------- ------- ----------------- ---------- -------- --------
<C> <C> <S> <C> <C> <C> <C> <C>
1. $ 505,000 California Educational A1* 12/1/03 @ 102 $ 518,882 5.700% $ 30,805
Facilities Authority SF 12/1/09 @ 100
Revenue Bonds, Harvey
Mudd College, 6.10% Due
12/1/2013
2. 250,000 California Health A+ 9/1/02 @ 102 258,390 5.700 15,625
Facilities Financing SF 9/1/05 @ 100
Authority, Insured
Revenue Refunding Bonds,
Aids Healthcare
Foundation, 6.25% Due
9/1/2017
3. 500,000 California Statewide A 9/1/02 @ 102 524,425 5.700 32,500
Communities Development SF 9/1/13 @ 100
Authority, Insured
Health Facilities
Revenue Certificates of
Participation, The
Health Care Children's
Campus, Van Nuys, 6.50%
Due 9/1/2022
4. 340,000 State Public Works Board A- 6/1/03 @ 102 326,750 5.800 18,700
of the State of SF 6/1/15 @ 100
California, Lease
Revenue Refunding Bonds,
The Regents of the
University of
California, Various
University of California
Projects, 5.50% Due
6/1/2021
5. 250,000 State Public Works Board A- 6/1/03 @ 102 240,648 5.800 13,750
of the State of SF 6/1/15 @ 100
California, Lease
Revenue Bonds, The
Regents of the
University of
California, Various
University of California
Projects, 5.50% Due
6/1/2019
6. 500,000 State of California AA 12/1/03 @ 101 455,535 5.700 25,000
Department of Water SF 12/1/17 @ 100
Resources, Central
Valley Project, Water
System Revenue Bonds,
5.00% Due 12/1/2019
7. 500,000 Metropolitan Water AA 1/1/07 @ 100 444,900 5.700 25,000
District of Southern SF 7/1/28 @ 100
California, Water
Revenue Bonds, 5.00% Due
7/1/2037
8. 300,000 Los Angeles, California, AAA 10/15/03 @ 102 259,629 5.800 14,250
Department of Water & SF 10/15/16 @ 100
Power, Electric Plant
Revenue Bonds, MBIA
Insured, 4.75% Due
10/15/2020
9. 255,000 San Bernardino County, A- 8/1/04 @ 102 210,095 6.000 12,112
California, Certificates SF 8/1/27 @ 100
of Participation,
Medical Center Financing
Project, 4.75% Due
8/1/2028
10. 100,000 County of San Joaquin, A- 9/1/03 @ 102 104,839 5.900 6,625
California, Public SF 9/1/14 @ 100
Facilities Financing
Corporation,
Certificates of
Participation, General
Hospital Project, 6.625%
Due 9/1/2020
11. 500,000 City of West Covina, A 8/15/04 @ 102 525,425 5.800 32,500
California, Certificates SF 8/15/15 @ 100
of Participation, Queen
of the Valley Hospital,
6.50% Due 8/15/2019
---------- ---------- --------
$4,000,000 $3,869,518 $226,867
========== ========== ========
</TABLE>
The Notes following the Portfolios are an integral part of each Portfolio of
Securities.
A-11
<PAGE>
NOTES TO PORTFOLIOS OF SECURITIES
(1)For a description of the meaning of the applicable rating symbols as
published by Standard & Poor's Ratings Group, a division of McGraw-Hill,
Inc. and Moody's Investors Service(*), see Part B, "Bond Ratings".
(2) There is shown under this heading the year in which each issue of Bonds
initially is redeemable and the redemption price for that year; unless
otherwise indicated, each issue continues to be redeemable at declining
prices thereafter, but not below par. "SF" indicates a sinking fund has been
or will be established with respect to an issue of Bonds. The prices at
which Bonds may be redeemed or called prior to maturity may or may not
include a premium and, in certain cases, may be less than the cost of the
Bonds to a Trust. Certain Bonds in a Portfolio, including Bonds listed as
not being subject to redemption provisions, may be redeemed in whole or in
part other than by operation of the stated redemption or sinking fund
provision under certain unusual or extraordinary circumstances specified in
the instruments setting forth the terms and provisions of such Bonds. For
example, see discussion of obligations of housing authorities in Part B,
"Tax Exempt Securities Trust--Portfolio."
(3) Contracts to purchase Bonds were entered into during the period October 11,
1996, through January 14, 1997, with the final settlement date on January
30, 1997. The Profit to the Sponsor on Deposit totals $69,336 and $36,713
for the National Trust and California Trust, respectively.
(4) Evaluation of the Bonds by the Evaluator is made on the basis of current
offering prices for the Bonds. The current offering prices of the Bonds are
greater than the current bid prices of the Bonds. The Redemption Price per
Unit and the public offering price of the Units in the secondary market are
determined on the basis of the current bid prices of the Bonds. (See Part B,
"Public Offering--Offering Price" and "Rights of Unit Holders--Redemption of
Units.") Yield of Bonds was computed on the basis of offering prices on the
date of deposit. The aggregate bid price of the Bonds in the National Trust
and California Trust, on January 14, 1997, was $10,702,153 and $3,847,048,
respectively.
A-12
<PAGE>
PROSPECTUS--PART B:
- --------------------------------------------------------------------------------
NOTE THAT PART B OF THIS PROSPECTUS MAY NOT BE DISTRIBUTED UNLESS ACCOMPANIED
BY PART A.
- --------------------------------------------------------------------------------
TAX EXEMPT SECURITIES TRUST
THE TRUSTS
For over 20 years, Tax Exempt Securities Trust has specialized in quality
municipal bond investments designed to meet a variety of investment objectives
and tax situations. Tax Exempt Securities Trust is a convenient and cost
effective alternative to individual bond purchases. Each Trust is one of a
series of similar but separate unit investment trusts created under the laws of
the State of New York by a Trust Indenture and Agreement and related Reference
Trust Agreement dated the Date of Deposit (collectively, the "Trust
Agreement"), of Smith Barney Inc., as Sponsor, The Chase Manhattan Bank, as
Trustee, and Kenny S&P Evaluation Services, a business unit of J.J. Kenny
Company, Inc., as Evaluator. Each Trust containing Bonds of a State for which
such Trust is named (a "State Trust") and each National Trust, Selected Term
Trust, Long-Intermediate Term Trust, Intermediate Term Trust, Short-
Intermediate Term Trust and Short Term Trust are referred to herein as the
"Trust" or "Trusts," unless the context requires otherwise. On the Date of
Deposit, the Sponsor deposited contracts and funds (represented by a certified
check or checks and/or an irrevocable letter or letters of credit, issued by a
major commercial bank) for the purchase of certain interest-bearing obligations
(the "Bonds") and/or Units of preceding Series of Tax Exempt Securities Trust
(such Bonds and Units of preceding Series of Tax Exempt Securities Trust, if
any, (the "Deposited Units") being referred to herein collectively as the
"Securities"). The Trustee thereafter delivered to the Sponsor registered
certificates of beneficial interest (the "Certificates") representing the units
(the "Units") comprising the entire ownership of each Trust, which Units are
being offered hereby. References to multiple Trusts in Part B herein should be
read as references to a single Trust if Part A indicates the creation of only
one Trust.
Notwithstanding the availability of the above-mentioned certified check or
checks and/or irrevocable letter or letters of credit, it is expected that the
Sponsor will pay for the Bonds as the contracts for their purchase become due.
A substantial portion of such contracts have not become due by the date of this
Prospectus. To the extent Units are sold prior to the settlement of such
contracts, the Sponsor will receive the purchase price on such Units prior to
the time at which they pay for Bonds pursuant to such contracts and have the
use of such funds during this period.
OBJECTIVES
A tax-exempt unit investment trust provides many of the same benefits as
individual bond purchases, while the Unit holder avoids the complexity of
analyzing, selecting and monitoring a multi-bond portfolio. The objectives of a
Trust are tax-exempt income and conservation of capital through an investment
in a diversified portfolio of municipal bonds. There is, of course, no
guarantee that a Trust's objectives will be achieved since the payment of
interest and the preservation of principal are dependent upon the continued
ability of the issuers of the bonds to meet such obligations. Subsequent to the
Date of Deposit, the ratings of the Bonds set forth in Part A--"Portfolio of
Securities" may decline due to, among other factors, a decline in
creditworthiness of the issuer of said Bonds.
PORTFOLIO
The Sponsor's investment professionals select Bonds for the Trust portfolios
from among the 200,000 municipal bond issues that vary according to bond
purpose, credit quality and years to maturity. The following factors, among
others, were considered in selecting the Bonds for each Trust: (1) the Bonds
are obligations of the states, counties, territories or municipalities of the
United States and authorities or political subdivisions thereof, so that the
interest on them will, in the opinion of recognized bond counsel to the issuing
governmental authorities, be exempt from Federal tax (including alternative
minimum tax) under existing law to the extent described in "Taxes", (2) all the
Bonds deposited in a State Trust are obligations of the State for which such
Trust is named or of the counties, territories or municipalities of such State,
and authorities or political subdivisions thereof, or of the Territory of Guam
or the Commonwealth of Puerto Rico, so that the interest on them will, in the
opinion of recognized bond counsel to the issuing governmental authorities, be
exempt from regular Federal income tax under existing law to the extent
described in "Taxes" and from state income taxes in the state for which such
State Trust is named to the extent described in Part C, (3) the Bonds are rated
A or better by a major bond rating agency, (4) the Bonds were chosen, in part,
on the basis of their respective maturity dates and offer a degree of call
protection, (5) the Bonds are diversified as to purpose of issue and location
of issuer, except in the case of a State Trust where the Bonds are diversified
only as to purpose of issue, and (6) in the opinion of the Sponsor, the Bonds
are fairly valued relative to other bonds of comparable quality and maturity.
The Bonds in the Portfolio of a Trust were chosen in part on the basis of
their respective maturity dates. The Bonds in each Trust will have a dollar-
weighted average portfolio maturity as designated in Part A--"Portfolio Summary
as of Date of Deposit." For the
B-1
<PAGE>
actual maturity date of each of the Bonds contained in a Trust, which date may
be earlier or later than the dollar-weighted average portfolio maturity of the
Trust, see Part A, "Portfolio of Securities" for information relating to the
particular Trust. A sale or other disposition of a Bond by the Trust prior to
the maturity of such Bond may be at a price which results in a loss to the
Trust. The inability of an issuer to pay the principal amount due upon the
maturity of a Bond would result in a loss to the Trust.
In the event that any contract for the purchase of any Bond fails, the
Sponsor is authorized under the Trust Agreement, subject to the conditions set
forth below, to instruct the Trustee to acquire other securities (the
"Replacement Bonds") for inclusion in the Portfolio of the affected Trust. Any
Replacement Bonds must be deposited not later than the earlier of (i) the first
monthly Distribution Date of the Trust and (ii) 90 days after such Trust was
established. The cost and aggregate principal amount of a Replacement Bond may
not exceed the cost and aggregate principal amount of the Bond which it
replaces. In addition, a Replacement Bond must (1) be a tax-exempt bond; (2)
have a fixed maturity or disposition date comparable to the Bond it replaces;
(3) be purchased at a price that results in a yield to maturity and in a
current return, in each case as of the execution and delivery of the Trust
Agreement, which is approximately equivalent to the yield to maturity and
current return of the Bond which it replaces; (4) be purchased within twenty
days after delivery of notice of the failed contracts; and (5) be rated in a
category A or better by Standard & Poor's, Moody's, Fitch, or Duff & Phelps.
Whenever a Replacement Bond has been acquired for a Trust, the Trustee shall,
within five days thereafter, notify all Unit holders of such Trust of the
acquisition of the Replacement Bond.
In the event that a contract to purchase any of the Bonds fails and
Replacement Bonds are not acquired, the Trustee will, not later than the second
monthly Distribution Date, distribute to Unit holders the funds attributable to
the failed contract. The Sponsor will, in such a case, refund the sales charge
applicable to the failed contract. If less than all the funds attributable to a
failed contract are applied to purchase Replacement Bonds, the remaining moneys
will be distributed to Unit holders not later than the second monthly
Distribution Date. Moreover, the failed contract will reduce the Estimated Net
Annual Income per Unit, and may lower the Estimated Current Return and
Estimated Long-Term Return indicated in the "Summary of Essential Information"
in Part A.
RISK FACTORS
Certain Bonds in a Trust may have been purchased by the Sponsor on a "when,
as and if issued" basis; that is, they had not yet been issued by their
governmental entity on the Date of Deposit (although such governmental entity
had committed to issue such Bonds). Contracts relating to such "when, as and if
issued" Bonds are not expected to be settled by the first settlement date for
Units. In the case of these and/or certain other Bonds, the delivery of the
Bonds may be delayed ("delayed delivery") or may not occur. Unit holders who
purchased their Units of a Trust prior to the date such Bonds are actually
delivered to the Trustee may have to make a downward adjustment in the tax
basis of their Units for interest accruing on such "when, as and if issued" or
"delayed delivery" Bonds during the interval between their purchase of Units
and delivery of such Bonds, since the Trust and the Unit holders will not be
reimbursing the Sponsor for interest accruing on such "when, as and if issued"
or "delayed delivery" Bonds during the period between the settlement date for
the Units and the delivery of such Bonds into the Trust. (See "Taxes.") Such
adjustment has been taken into account in computing the Estimated Current
Return and Estimated Long-Term Return set forth herein, which is slightly lower
than Unit holders may receive after the first year. (See Part A, "Summary of
Essential Information.") To the extent that the delivery of such Bonds is
delayed beyond their respective expected delivery dates, the Estimated Current
Return and Estimated Long-Term Return for the first year may be lower than
indicated in the "Summary of Essential Information" in Part A.
Most of the Bonds in the Portfolio of a Trust are subject to redemption prior
to their stated maturity date pursuant to sinking fund or call provisions. (See
Part A--"Portfolio Summary as of Date of Deposit" for information relating to
the particular Trust described therein.) In general, a call or redemption
provision is more likely to be exercised when the offering price valuation of a
bond is higher than its call or redemption price, as it might be in periods of
declining interest rates, than when such price valuation is less than the
bond's call or redemption price. To the extent that a Bond was deposited in a
Trust at a price higher than the price at which it is redeemable, redemption
will result in a loss of capital when compared with the original public
offering price of the Units. Conversely, to the extent that a Bond was acquired
at a price lower than the redemption price, redemption will result in an
increase in capital when compared with the original public offering price of
the Units. Monthly distributions will generally be reduced by the amount of the
income which would otherwise have been paid with respect to redeemed bonds. The
Estimated Current Return and Estimated Long-Term Return of the Units may be
affected by such redemptions. Each Portfolio of Securities in Part A contains a
listing of the sinking fund and call provisions, if any, with respect to each
of the Bonds in a Trust. Because certain of the Bonds may from time to time
under certain circumstances be sold or redeemed or will mature in accordance
with their terms and the proceeds from such events will be distributed to Unit
holders and will not be reinvested, no assurance can be given that a Trust will
retain for any length of time its present size and composition. NEITHER THE
SPONSOR NOR THE TRUSTEE SHALL BE LIABLE IN ANY WAY FOR ANY DEFAULT, FAILURE OR
DEFECT IN ANY BOND.
The Portfolio of the Trust may consist of some Bonds whose current market
values were below face value on the Date of Deposit. A primary reason for the
market value of such Bonds being less than face value at maturity is that the
interest coupons of such Bonds are at lower rates than the current market
interest rate for comparably rated Bonds, even though at the time of the
issuance of such Bonds
B-2
<PAGE>
the interest coupons thereon represented then prevailing interest rates on
comparably rated Bonds then newly issued. Bonds selling at market discounts
tend to increase in market value as they approach maturity when the principal
amount is payable. A market discount tax-exempt Bond held to maturity will have
a larger portion of its total return in the form of taxable ordinary income and
less in the form of tax-exempt income than a comparable Bond bearing interest
at current market rates. Under the provisions of the Internal Revenue Code in
effect on the date of this Prospectus any ordinary income attributable to
market discount will be taxable but will not be realized until maturity,
redemption or sale of the Bonds or Units.
As set forth under "Portfolio Summary as of Date of Deposit", the Trust may
contain or be concentrated in one or more of the classifications of Bonds
referred to below. A Trust is considered to be "concentrated" in a particular
category when the Bonds in that category constitute 25% or more of the
aggregate value of the Portfolio. (See Part A--"Portfolio Summary as of Date of
Deposit" for information relating to the particular Trust described therein.)
An investment in Units of the Trust should be made with an understanding of the
risks that these investments may entail, certain of which are described below.
GENERAL OBLIGATION BONDS. Certain of the Bonds in the Portfolio may be
general obligations of a governmental entity that are secured by the taxing
power of the entity. General obligation bonds are backed by the issuer's pledge
of its full faith, credit and taxing power for the payment of principal and
interest. However, the taxing power of any governmental entity may be limited
by provisions of state constitutions or laws and an entity's credit will depend
on many factors, including an erosion of the tax base due to population
declines, natural disasters, declines in the state's industrial base or
inability to attract new industries, economic limits on the ability to tax
without eroding the tax base and the extent to which the entity relies on
Federal or state aid, access to capital markets or other factors beyond the
entity's control.
As a result of the recent recession's adverse impact upon both their revenues
and expenditures, as well as other factors, many state and local governments
are confronting deficits and potential deficits which are the most severe in
recent years. Many issuers are facing highly difficult choices about
significant tax increases and/or spending reductions in order to restore
budgetary balance. Failure to implement these actions on a timely basis could
force the issuers to depend upon market access to finance deficits or cash flow
needs.
In addition, certain of the Bonds in the Trust may be obligations of issuers
(including California issuers) who rely in whole or in part on ad valorem real
property taxes as a source of revenue. Certain proposals, in the form of state
legislative proposals or voter initiatives, to limit ad valorem real property
taxes have been introduced in various states, and an amendment to the
constitution of the State of California, providing for strict limitations on ad
valorem real property taxes, has had a significant impact on the taxing powers
of local governments and on the financial conditions of school districts and
local governments in California. It is not possible at this time to predict the
final impact of such measures, or of similar future legislative or
constitutional measures, on school districts and local governments or on their
abilities to make future payments on their outstanding debt obligations.
INDUSTRIAL DEVELOPMENT REVENUE BONDS ("IDRS"). IDRs, including pollution
control revenue bonds, are tax-exempt securities issued by states,
municipalities, public authorities or similar entities ("issuers") to finance
the cost of acquiring, constructing or improving various projects, including
pollution control facilities and certain industrial development facilities.
These projects are usually operated by corporate entities. IDRs are not general
obligations of governmental entities backed by their taxing power. Issuers are
only obligated to pay amounts due on the IDRs to the extent that funds are
available from the unexpended proceeds of the IDRs or receipts or revenues of
the issuer under arrangements between the issuer and the corporate operator of
a project. These arrangements may be in the form of a lease, installment sale
agreement, conditional sale agreement or loan agreement, but in each case the
payments to the issuer are designed to be sufficient to meet the payments of
amounts due on the IDRs.
IDRs are generally issued under bond resolutions, agreements or trust
indentures pursuant to which the revenues and receipts payable under the
issuer's arrangements with the corporate operator of a particular project have
been assigned and pledged to the holders of the IDRs or a trustee for the
benefit of the holders of the IDRs. In certain cases, a mortgage on the
underlying project has been assigned to the holders of the IDRs or a trustee as
additional security for the IDRs. In addition, IDRs are frequently directly
guaranteed by the corporate operator of the project or by another affiliated
company. Regardless of the structure, payment of IDRs is solely dependent upon
the creditworthiness of the corporate operator of the project or corporate
guarantor. Corporate operators or guarantors that are industrial companies 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 (including that of low-cost foreign companies), unfunded pension
fund liabilities or off-balance sheet items, and financial deterioration
resulting from leveraged buy-outs or takeovers. However, certain of the IDRs in
the Portfolio may be additionally insured or secured by letters of credit
issued by banks or otherwise guaranteed or secured to cover amounts due on the
IDRs in the event of default in payment by an issuer.
HOSPITAL AND HEALTH CARE FACILITY BONDS. The ability of hospitals and other
health care facilities to meet their obligations with respect to revenue bonds
issued on their behalf is dependent on various factors, including but not
limited to the level of payments received from private third-party payors and
government programs and the cost of providing health care services.
B-3
<PAGE>
A significant portion of the revenues of hospitals and other health care
facilities is derived from private third-party payors and government programs,
including the Medicare and Medicaid programs. Both private third-party payors
and government programs have undertaken cost containment measures designed to
limit payments made to health care facilities. Furthermore, government programs
are subject to statutory and regulatory changes, retroactive rate adjustments,
administrative rulings and government funding restrictions, all of which may
materially decrease the rate of program payments for health care facilities.
Certain special revenue obligations (i.e., Medicare or Medicaid revenues) may
be payable subject to appropriations by state legislatures. There can be no
assurance that payments under governmental programs will remain at levels
comparable to present levels or will, in the future, be sufficient to cover the
costs allocable to patients participating in such programs. In addition, there
can be no assurance that a particular hospital or other health care facility
will continue to meet the requirements for participation in such programs.
The costs of providing health care services are subject to increase as a
result of, among other factors, changes in medical technology and increased
labor costs. In addition, health care facility construction and operation is
subject to federal, state and local regulation relating to the adequacy of
medical care, equipment, personnel, operating policies and procedures, rate-
setting, and compliance with building codes and environmental laws. Facilities
are subject to periodic inspection by governmental and other authorities to
assure continued compliance with the various standards necessary for licensing
and accreditation. These regulatory requirements are subject to change and, to
comply, it may be necessary for a hospital or other health care facility to
incur substantial capital expenditures or increased operating expenses to
effect changes in its facilities, equipment, personnel and services.
Hospitals and other health care facilities are subject to claims and legal
actions by patients and others in the ordinary course of business. Although
these claims are generally covered by insurance, there can be no assurance that
a claim will not exceed the insurance coverage of a health care facility or
that insurance coverage will be available to a facility. In addition, a
substantial increase in the cost of insurance could adversely affect the
results of operations of a hospital or other health care facility. The Clinton
Administration may impose regulations which could limit price increases for
hospitals or the level of reimbursements for third-party payors or other
measures to reduce health care costs and make health care available to more
individuals, which would reduce profits for hospitals. Some states, such as New
Jersey, have significantly changed their reimbursement systems. If a hospital
cannot adjust to the new system by reducing expenses or raising rates,
financial difficulties may arise. Also, Blue Cross has denied reimbursement for
some hospitals for services other than emergency room services. The lost volume
would reduce revenues unless replacement patients were found.
Certain hospital bonds may provide for redemption at par at any time upon the
sale by the issuer of the hospital facilities to a non-affiliated entity, if
the hospital becomes subject to ad valorem taxation, or in various other
circumstances. For example, certain hospitals may have the right to call bonds
at par if the hospital may be legally required because of the bonds to perform
procedures against specified religious principles or to disclose information
that is considered confidential or privileged. Certain FHA-insured bonds may
provide that all or a portion of these bonds, otherwise callable at a premium,
can be called at par in certain circumstances. If a hospital defaults upon a
bond obligation, the realization of Medicare and Medicaid receivables may be
uncertain and, if the bond obligation is secured by the hospital facilities,
legal restrictions on the ability to foreclose upon the facilities and the
limited alternative uses to which a hospital can be put may severely reduce its
collateral value.
The Internal Revenue Service has engaged in a program of audits of certain
large tax-exempt hospital and health care facility organizations. Although
these audits have not yet been completed, it has been reported that the tax-
exempt status of some of these organizations may be revoked. At this time, it
is uncertain whether any of the hospital and health care facility bonds held by
the Trust will be affected by such audit proceedings.
SINGLE FAMILY AND MULTI-FAMILY HOUSING BONDS. Multi-family housing revenue
bonds and single family mortgage revenue bonds are state and local housing
issues that have been issued to provide financing for various housing projects.
Multi-family housing revenue bonds are payable primarily from the revenues
derived from mortgage loans to housing projects for low to moderate income
families. Single-family mortgage revenue bonds are issued for the purpose of
acquiring from originating financial institutions notes secured by mortgages on
residences.
Housing obligations are not general obligations of the issuer although
certain obligations may be supported to some degree by Federal, state or local
housing subsidy programs. Budgetary constraints experienced by these programs
as well as the failure by a state or local housing issuer to satisfy the
qualifications required for coverage under these programs or any legal or
administrative determinations that the coverage of these programs is not
available to a housing issuer, probably will result in a decrease or
elimination of subsidies available for payment of amounts due on the issuer's
obligations. The ability of housing issuers to make debt service payments on
their obligations may also be affected by various economic and non-economic
developments including, among other things, the achievement and maintenance of
sufficient occupancy levels and adequate rental income in multi-family
projects, the rate of default on mortgage loans underlying single family issues
and the ability of mortgage insurers to pay claims, employment and income
conditions prevailing in local markets, increases in construction costs, taxes,
utility costs and other operating expenses, the managerial ability of project
managers, changes in laws and governmental regulations and economic trends
generally in the localities in which the projects are situated. Occupancy of
multi-family housing projects may also be adversely affected by high rent
levels and income limitations imposed under Federal, state or local programs.
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All single family mortgage revenue bonds and certain multi-family housing
revenue bonds are prepayable over the life of the underlying mortgage or
mortgage pool, and therefore the average life of housing obligations cannot be
determined. However, the average life of these obligations will ordinarily be
less than their stated maturities. Single-family issues are subject to
mandatory redemption in whole or in part from prepayments on underlying
mortgage loans; mortgage loans are frequently partially or completely prepaid
prior to their final stated maturities as a result of events such as declining
interest rates, sale of the mortgaged premises, default, condemnation or
casualty loss. Multi-family issues are characterized by mandatory redemption at
par upon the occurrence of monetary defaults or breaches of covenants by the
project operator. Additionally, housing obligations are generally subject to
mandatory partial redemption at par to the extent that proceeds from the sale
of the obligations are not allocated within a stated period (which may be
within a year of the date of issue). To the extent that these obligations were
valued at a premium when a Holder purchased Units, any prepayment at par would
result in a loss of capital to the Holder and, in any event, reduce the amount
of income that would otherwise have been paid to Holders.
The tax exemption for certain housing revenue bonds depends on qualification
under Section 143 of the Internal Revenue Code of 1986, as amended (the
"Code"), in the case of single family mortgage revenue bonds or Section
142(a)(7) of the Code or other provisions of Federal law in the case of certain
multi-family housing revenue bonds (including Section 8 assisted bonds). These
sections of the Code or other provisions of Federal law contain certain ongoing
requirements, including requirements relating to the cost and location of the
residences financed with the proceeds of the single family mortgage revenue
bonds and the income levels of tenants of the rental projects financed with the
proceeds of the multi-family housing revenue bonds. While the issuers of the
bonds and other parties, including the originators and servicers of the single-
family mortgages and the owners of the rental projects financed with the multi-
family housing revenue bonds, generally covenant to meet these ongoing
requirements and generally agree to institute procedures designed to ensure
that these requirements are met, there can be no assurance that these ongoing
requirements will be consistently met. The failure to meet these requirements
could cause the interest on the bonds to become taxable, possibly retroactively
to the date of issuance, thereby reducing the value of the bonds, subjecting
the Holders to unanticipated tax liabilities and possibly requiring the Trustee
to sell the bonds at reduced values. Furthermore, any failure to meet these
ongoing requirements might not constitute an event of default under the
applicable mortgage or permit the holder to accelerate payment of the bond or
require the issuer to redeem the bond. In any event, where the mortgage is
insured by the Federal Housing Administration, its consent may be required
before insurance proceeds would become payable to redeem the mortgage bonds.
POWER FACILITY BONDS. The ability of utilities to meet their obligations with
respect to revenue bonds issued on their behalf is dependent on various
factors, including the rates they may charge their customers, the demand for a
utility's services and the cost of providing those services. Utilities, in
particular investor-owned utilities, are subject to extensive regulations
relating to the rates which they may charge customers. Utilities can experience
regulatory, political and consumer resistance to rate increases. Utilities
engaged in long-term capital projects are especially sensitive to regulatory
lags in granting rate increases. Any difficulty in obtaining timely and
adequate rate increases could adversely affect a utility's results of
operations.
The demand for a utility's services is influenced by, among other factors,
competition, weather conditions and economic conditions. Electric utilities,
for example, have experienced increased competition as a result of the
availability of other energy sources, the effects of conservation on the use of
electricity, self-generation by industrial customers and the generation of
electricity by co-generators and other independent power producers. Also,
increased competition will result if federal regulators determine that
utilities must open their transmission lines to competitors. Utilities which
distribute natural gas also are subject to competition from alternative fuels,
including fuel oil, propane and coal.
The utility industry is an increasing cost business making the cost of
generating electricity more expensive and heightening its sensitivity to
regulation. A utility's costs are influenced by the utility's cost of capital,
the availability and cost of fuel and other factors. In addition, natural gas
pipeline and distribution companies have incurred increased costs as a result
of long-term natural gas purchase contracts containing "take or pay" provisions
which require that they pay for natural gas even if natural gas is not taken by
them. There can be no assurance that a utility will be able to pass on these
increased costs to customers through increased rates. Utilities incur
substantial capital expenditures for plant and equipment. In the future they
will also incur increasing capital and operating expenses to comply with
environmental legislation such as the Clean Air Act of 1990, and other energy,
licensing and other laws and regulations relating to, among other things, air
emissions, the quality of drinking water, waste water discharge, solid and
hazardous substance handling and disposal, and siting and licensing of
facilities. Environmental legislation and regulations are changing rapidly and
are the subject of current public policy debate and legislative proposals. It
is increasingly likely that some or many utilities will be subject to more
stringent environmental standards in the future that could result in
significant capital expenditures. Future legislation and regulation could
include, among other things, regulation of so-called electromagnetic fields
associated with electric transmission and distribution lines as well as
emissions of carbon dioxide and other so-called greenhouse gases associated
with the burning of fossil fuels. Compliance with these requirements may limit
a utility's operations or require substantial investments in new equipment and,
as a result, may adversely affect a utility's results of operations.
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The electric utility industry in general is subject to various external
factors including (a) the effects of inflation upon the costs of operation and
construction, (b) substantially increased capital outlays and longer
construction periods for larger and more complex new generating units, (c)
uncertainties in predicting future load requirements, (d) increased financing
requirements coupled with limited availability of capital, (e) exposure to
cancellation and penalty charges on new generating units under construction,
(f) problems of cost and availability of fuel, (g) compliance with rapidly
changing and complex environmental, safety and licensing requirements, (h)
litigation and proposed legislation designed to delay or prevent construction
of generating and other facilities, (i) the uncertain effects of conservation
on the use of electric energy, (j) uncertainties associated with the
development of a national energy policy, (k) regulatory, political and consumer
resistance to rate increases and (l) increased competition as a result of the
availability of other energy sources. These factors may delay the construction
and increase the cost of new facilities, limit the use of, or necessitate
costly modifications to, existing facilities, impair the access of electric
utilities to credit markets, or substantially increase the cost of credit for
electric generating facilities. The Sponsor cannot predict at this time the
ultimate effect of such factors on the ability of any issuers to meet their
obligations with respect to Bonds.
The National Energy Policy Act ("NEPA"), which became law in October, 1992,
made it mandatory for a utility to permit non-utility generators of electricity
access to its transmission system for wholesale customers, thereby increasing
competition for electric utilities. NEPA also mandated demand-side management
policies to be considered by utilities. NEPA prohibits the Federal Energy
Regulatory Commission from mandating electric utilities to engage in retail
wheeling, which is competition among suppliers of electric generation to
provide electricity to retail customers (particularly industrial retail
customers) of a utility. However, under NEPA, a state can mandate retail
wheeling under certain conditions.
There is concern by the public, the scientific community, and the U.S.
Congress regarding environmental damage resulting from the use of fossil fuels.
Congressional support for the increased regulation of air, water, and soil
contaminants is building and there are a number of pending or recently enacted
legislative proposals which may affect the electric utility industry. In
particular, on November 15, 1990, legislation was signed into law which
substantially revised the Clean Air Act (the "1990 Amendments"). The 1990
Amendments sought to improve the ambient air quality throughout the United
States by the year 2000. A main feature of the 1990 Amendments is the reduction
of sulphur dioxide and nitrogen oxide emissions caused by electric utility
power plants, particularly those fueled by coal. Under the 1990 Amendments the
U.S. Environmental Protection Agency ("EPA") was required to develop limits for
nitrogen oxide emissions by 1993. The sulphur dioxide reduction will be
achieved in two phases. Phase I addressed specific generating units named in
the 1990 Amendments. In Phase II the total U.S. emissions will be capped at 8.9
million tons by the year 2000. The 1990 Amendments contain provisions for
allocating allowances to power plants based on historical or calculated levels.
An allowance is defined as the authorization to emit one ton of sulphur
dioxide.
The 1990 Amendments also provided for possible further regulation of toxic
air emissions from electric generating units pending the results of several
federal government studies to be conducted over a three to four year period
with respect to anticipated hazards to public health, available corrective
technologies, and mercury toxicity.
Electric utilities which own or operate nuclear power plants are exposed to
risks inherent in the nuclear industry. These risks include exposure to new
requirements resulting from extensive federal and state regulatory oversight,
public controversy, decommissioning costs, and spent fuel and radioactive waste
disposal issues. While nuclear power construction risks are no longer of
paramount concern, the emerging issue is radioactive waste disposal. In
addition, nuclear plants typically require substantial capital additions and
modifications throughout their operating lives to meet safety, environmental,
operational and regulatory requirements and to replace and upgrade various
plant systems. The high degree of regulatory monitoring and controls imposed on
nuclear plants could cause a plant to be out of service or on limited service
for long periods. When a nuclear facility owned by an investor-owned utility or
a state or local municipality is out of service or operating on a limited
service basis, the utility operator or its owners may be liable for the
recovery of replacement power costs. Risks of substantial liability also arise
from the operation of nuclear facilities and from the use, handling, and
possible radioactive emissions associated with nuclear fuel. Insurance may not
cover all types or amounts of loss which may be experienced in connection with
the ownership and operation of a nuclear plant and severe financial
consequences could result from a significant accident or occurrence. The
Nuclear Regulatory Commission has promulgated regulations mandating the
establishment of funded reserves to assure financial capability for the
eventual decommissioning of licensed nuclear facilities. These funds are to be
accrued from revenues in amounts currently estimated to be sufficient to pay
for decommissioning costs.
The ability of state and local joint action power agencies to make payments
on bonds they have issued is dependent in large part on payments made to them
pursuant to power supply or similar agreements. Courts in Washington, Oregon
and Idaho have held that certain agreements between the Washington Public Power
Supply System ("WPPSS") and the WPPSS participants are unenforceable because
the participants did not have the authority to enter into the agreements. While
these decisions are not specifically applicable to agreements entered into by
public entities in other states, they may cause a reexamination of the legal
structure and economic viability of certain projects financed by joint power
agencies, which might exacerbate some of the problems referred to above and
possibly lead to legal proceedings questioning the enforceability of agreements
upon which payment of these bonds may depend.
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WATER AND SEWER REVENUE BONDS. Water and sewer bonds are generally payable
from user fees. The ability of state and local water and sewer authorities to
meet their obligations may be affected by failure of municipalities to utilize
fully the facilities constructed by these authorities, economic or population
decline and resulting decline in revenue from user charges, rising construction
and maintenance costs and delays in construction of facilities, impact of
environmental requirements, failure or inability to raise user charges in
response to increased costs, the difficulty of obtaining or discovering new
supplies of fresh water, the effect of conservation programs and the impact of
"no growth" zoning ordinances. In some cases this ability may be affected by
the continued availability of Federal and state financial assistance and of
municipal bond insurance for future bond issues.
UNIVERSITY AND COLLEGE BONDS. The ability of universities and colleges to
meet their obligations is dependent upon various factors, including the size
and diversity of their sources of revenues, enrollment, reputation, management
expertise, the availability and restrictions on the use of endowments and other
funds, the quality and maintenance costs of campus facilities, and, in the case
of public institutions, the financial condition of the relevant state or other
governmental entity and its policies with respect to education. The
institution's ability to maintain enrollment levels will depend on such factors
as tuition costs, demographic trends, geographic location, geographic diversity
and quality of the student body, quality of the faculty and the diversity of
program offerings.
Legislative or regulatory action in the future at the Federal, state or local
level may directly or indirectly affect eligibility standards or reduce or
eliminate the availability of funds for certain types of student loans or grant
programs, including student aid, research grants and work-study programs, and
may affect indirect assistance for education.
LEASE RENTAL BONDS. Lease rental bonds are issued for the most part by
governmental authorities that have no taxing power or other means of directly
raising revenues. Rather, the authorities are financing vehicles created solely
for the construction of buildings (administrative offices, convention centers
and prisons, for example) or the purchase of equipment (police cars and
computer systems, for example) that will be used by a state or local government
(the "lessee"). Thus, the bonds are subject to the ability and willingness of
the lessee government to meet its lease rental payments which include debt
service on the bonds. Willingness to pay may be subject to changes in the views
of citizens and government officials as to the essential nature of the finance
project. Lease rental bonds are subject, in almost all cases, to the annual
appropriation risk, i.e., the lessee government is not legally obligated to
budget and appropriate for the rental payments beyond the current fiscal year.
These bonds are also subject to the risk of abatement in many states--rental
bonds cease in the event that damage, destruction or condemnation of the
project prevents its use by the lessee. (In these cases, insurance provisions
and reserve funds designed to alleviate this risk become important credit
factors). In the event of default by the lessee government, there may be
significant legal and/or practical difficulties involved in the reletting or
sale of the project. Some of these issues, particularly those for equipment
purchase, contain the so-called "substitution safeguard", which bars the lessee
government, in the event it defaults on its rental payments, from the purchase
or use of similar equipment for a certain period of time. This safeguard is
designed to insure that the lessee government will appropriate the necessary
funds even though it is not legally obligated to do so, but its legality
remains untested in most, if not all, states.
CAPITAL IMPROVEMENT FACILITY BONDS. The Portfolio of a Trust may contain
Bonds which are in the capital improvement facilities category. Capital
improvement bonds are bonds issued to provide funds to assist political
subdivisions or agencies of a state through acquisition of the underlying debt
of a state or local political subdivision or agency which bonds are secured by
the proceeds of the sale of the bonds, proceeds from investments and the
indebtedness of a local political subdivision or agency. The risks of an
investment in such bonds include the risk of possible prepayment or failure of
payment of proceeds on and default of the underlying debt.
SOLID WASTE DISPOSAL BONDS. Bonds issued for solid waste disposal facilities
are generally payable from tipping fees and from revenues that may be earned by
the facility on the sale of electrical energy generated in the combustion of
waste products. The ability of solid waste disposal facilities to meet their
obligations depends upon the continued use of the facility, the successful and
efficient operation of the facility and, in the case of waste-to-energy
facilities, the continued ability of the facility to generate electricity on a
commercial basis. All of these factors may be affected by a failure of
municipalities to fully utilize the facilities, an insufficient supply of waste
for disposal due to economic or population decline, rising construction and
maintenance costs, any delays in construction of facilities, lower-cost
alternative modes of waste processing and changes in environmental regulations.
Because of the relatively short history of this type of financing, there may be
technological risks involved in the satisfactory construction or operation of
the projects exceeding those associated with most municipal enterprise
projects. Increasing environmental regulation on the federal, state and local
level has a significant impact on waste disposal facilities. While regulation
requires more waste producers to use waste disposal facilities, it also imposes
significant costs on the facilities. These costs include compliance with
frequently changing and complex regulatory requirements, the cost of obtaining
construction and operating permits, the cost of conforming to prescribed and
changing equipment standards and required methods of operation and, for
incinerators or waste-to-energy facilities, the cost of disposing of the waste
residue that remains after the disposal process in an environmentally safe
manner. In addition, waste disposal facilities frequently face substantial
opposition by environmental groups and officials to their location and
operation, to the possible adverse effects upon the public health and the
environment that may be caused by wastes disposed of at the facilities and to
alleged improper operating
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procedures. Waste disposal facilities benefit from laws which require waste to
be disposed of in a certain manner but any relaxation of these laws could cause
a decline in demand for the facilities' services. Finally, waste-to-energy
facilities are concerned with many of the same issues facing utilities insofar
as they derive revenues from the sale of energy to local power utilities (see
Power Facility Bonds above).
MORAL OBLIGATION BONDS. The Trust may also include "moral obligation" bonds.
If an issuer of moral obligation bonds is unable to meet its obligations, the
repayment of the bonds becomes a moral commitment but not a legal obligation of
the state or municipality in question. Even though the state may be called on
to restore any deficits in capital reserve funds of the agencies or authorities
which issued the bonds, any restoration generally requires appropriation by the
state legislature and accordingly does not constitute a legally enforceable
obligation or debt of the state. The agencies or authorities generally have no
taxing power.
REFUNDED BONDS. Refunded Bonds are typically secured by direct obligations of
the U.S. Government, or in some cases obligations guaranteed by the U.S.
Government, placed in an escrow account maintained by an independent trustee
until maturity or a predetermined redemption date. These obligations are
generally noncallable prior to maturity or the predetermined redemption date.
In a few isolated instances to date, however, bonds which were thought to be
escrowed to maturity have been called for redemption prior to maturity.
AIRPORT, PORT AND HIGHWAY REVENUE BONDS. Certain facility revenue bonds are
payable from and secured by the revenues from the ownership and operation of
particular facilities, such as airports (including airport terminals and
maintenance facilities), bridges, marine terminals, turnpikes and port
authorities. For example, the major portion of gross airport operating income
is generally derived from fees received from signatory airlines pursuant to use
agreements which consist of annual payments for airport use, occupancy of
certain terminal space, facilities, service fees, concessions and leases.
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 aviation fuel costs,
deregulation, traffic constraints, the recent recession and other factors. As a
result, several airlines experienced severe financial difficulties. Several
airlines have sought protection from their creditors under Chapter 11 of the
Bankruptcy Code while, other airlines have been liquidated. 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. Furthermore, proposed
Legislation would provide the U.S. Secretary of Transportation with the
temporary authority to freeze airport fees upon the occurrence of disputes
between a particular airport facility and the airlines utilizing that facility.
Similarly, payment on bonds related to other facilities is dependent on
revenues from the projects, such as use 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 and increased cost of maintenance
or decreased use of a facility, lower cost of alternative modes of
transportation or scarcity of fuel and reduction or loss of rents.
SPECIAL TAX BONDS. Special tax bonds are payable from and secured by the
revenues derived by a municipality from a particular tax such as a tax on the
rental of a hotel room, on the purchase of food and beverages, on the rental of
automobiles or on the consumption of liquor. Special tax bonds are not secured
by the general tax revenues of the municipality, and they do not represent
general obligations of the municipality. Therefore, payment on special tax
bonds may be adversely affected by a reduction in revenues realized from the
underlying special tax due to a general decline in the local economy or
population or due to a decline in the consumption, use or cost of the goods and
services that are subject to taxation. Also, should spending on the particular
goods or services that are subject to the special tax decline, the municipality
may be under no obligation to increase the rate of the special tax to ensure
that sufficient revenues are raised from the shrinking taxable base.
TAX ALLOCATION BONDS. Tax allocation bonds are typically secured by
incremental tax revenues collected on property within the areas where
redevelopment projects, financed by bond proceeds are located ("project
areas"). Such payments are expected to be made from projected increases in tax
revenues derived from higher assessed values of property resulting from
development in the particular project area and not from an increase in tax
rates. Special risk considerations include: reduction of, or a less than
anticipated increase in, taxable values of property in the project area, caused
either by economic factors beyond the Issuer's control (such as a relocation
out of the project area by one or more major property owners) or by destruction
of property due to natural or other disasters; successful appeals by property
owners of assessed valuations; substantial delinquencies in the payment of
property taxes; or imposition of any constitutional or legislative property tax
rate decrease.
TRANSIT AUTHORITY BONDS. Mass transit is generally not self-supporting from
fare revenues. Therefore, additional financial resources must be made available
to ensure operation of mass transit systems as well as the timely payment of
debt service. Often such financial resources include Federal and state
subsidies, lease rentals paid by funds of the state or local government or a
pledge of a special tax such as a sales tax or a property tax. If fare revenues
or the additional financial resources do not increase appropriately to pay for
rising operating expenses, the ability of the issuer to adequately service the
debt may be adversely affected.
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CONVENTION FACILITY BONDS. The Portfolio of a Trust may contain Bonds of
issuers in the convention facilities category. Bonds in the convention
facilities category include special limited obligation securities issued to
finance convention and sports facilities payable from rental payments and
annual governmental appropriations. The governmental agency is not obligated to
make payments in any year in which the monies have not been appropriated to
make such payments. In addition, these facilities are limited use facilities
that may not be used for purposes other than as convention centers or sports
facilities.
PUERTO RICO BONDS. Certain of the Bonds in the Trust may be general
obligations and/or revenue bonds of issuers located in Puerto Rico which will
be affected by general economic conditions in Puerto Rico. The economy of
Puerto Rico is closely integrated with that of the mainland United States.
During fiscal year 1995, approximately 89% of Puerto Rico's exports were to the
United States mainland, which was also the source of 65% of Puerto Rico's
imports. In fiscal 1995, Puerto Rico experienced a $4.6 billion positive
adjusted trade balance. The economy of Puerto Rico is dominated by the
manufacturing and service sectors. The manufacturing sector has experienced a
basic change over the years as a result of increased emphasis on higher wage,
high technology industries such as pharmaceuticals, electronics, computers,
microprocessors, professional and scientific instruments, and certain high
technology machinery and equipment. The service sector, including finance,
insurance and real estate, wholesale and retail trade, and hotel and related
services, also plays a major role in the economy. It ranks second only to
manufacturing in contribution to the gross domestic product and leads all
sectors in providing employment. In recent years, the service sector has
experienced significant growth in response to and paralleling the expansion of
the manufacturing sector. Since fiscal 1985, personal income, both aggregate
and per capita, has increased consistently in each fiscal year. In fiscal 1995,
aggregate personal income was $27.0 billion ($22.5 billion in 1987 prices) and
personal income per capita was $7,296 ($6,074 in 1987 prices). Personal income
includes transfer payments to individuals in Puerto Rico under various social
programs. Total federal payments to Puerto Rico, which include many types in
addition to federal transfer payments, are lower on a per capita basis in
Puerto Rico than in any state. Transfer payments to individuals in fiscal 1995
were $5.9 billion, of which $4.0 billion, or 67.6%, represent entitlement to
individuals who had previously performed services or made contributions under
programs such as Social Security, Veterans Benefits and Medicare. The number of
persons employed in Puerto Rico during fiscal 1995 averaged 1,051,000, an
increase of 4.0% over fiscal 1994. The unemployment, although at a low level
compared to the late 1970s, remains above the average for the United States. At
fiscal year end June 30, 1994, the unemployment rate in Puerto Rico for fiscal
1995 decreased from 16.0% to 13.8%. The Puerto Rico Planning Board's most
recent gross product forecast for fiscal 1996, made in February 1995, showed an
increase of 2.7%. The Planning Board's Economic Activity Index, a composite
index for thirteen economic indicators, increased 2.7% for the first seven
months of fiscal 1995 compared to the same period of fiscal 1994, which period
showed an increase of 1.7% over the same period of fiscal 1993. During the
first four months of fiscal 1996 the Index increased 1.8% compared to the same
period of fiscal 1995, which period showed an increase of 2.7% over the same
period of fiscal 1994. Growth in the Puerto Rico economy in fiscal 1996 depends
on several factors, including the state of the United States economy and the
relative stability in the price of oil imports, the exchange value of the U.S.
dollar, the level of federal transfers and the cost of borrowing.
INSURANCE. Certain Bonds (the "Insured Bonds") may be insured or guaranteed
by AMBAC Indemnity Corporation ("AMBAC"), Asset Guaranty Reinsurance Company
("Asset Guaranty"), Capital Guaranty Insurance Company ("CGIC"), Capital
Markets Assurance Corp. ("CAPMAC"), Connie Lee Insurance Company ("Connie
Lee"), Financial Guaranty Insurance Company "Financial Guaranty"), Financial
Security Assurance Inc. ("FSA"), or MBIA Insurance Corporation ("MBIA")
(collectively, the "Insurance Companies"). The claims-paying ability of each of
these companies, unless otherwise indicated, is rated AAA by Standard & Poor's
or another acceptable national rating service. The ratings are subject to
change at any time at the discretion of the rating agencies. In determining
whether to insure bonds, the Insurance Companies severally apply their own
standards. The cost of this insurance is borne either by the issuers or
previous owners of the bonds or by the Sponsor. The insurance policies are non-
cancellable and will continue in force so long as the Insured Bonds are
outstanding and the insurers remain in business. The insurance policies
guarantee the timely payment of principal and interest on but do not guarantee
the market value of the Insured Bonds or the value of the Units. The insurance
policies generally do not provide for accelerated payments of principal or,
except in the case of any portfolio insurance policies, cover redemptions
resulting from events of taxability. If the issuer of any Insured Bond should
fail to make an interest or principal payment, the insurance policies generally
provide that the Trustee or its agent shall give notice of nonpayment to the
Insurance Company or its agent and provide evidence of the Trustee's right to
receive payment. The Insurance Company is then required to disburse the amount
of the failed payment to the Trustee or its agent and is thereafter subrogated
to the Trustee's right to receive payment from the issuer.
The following are brief descriptions of certain of the insurance companies
that may insure or guarantee certain Bonds. The financial information presented
for each company has been determined on a statutory basis and is unaudited.
AMBAC is a Wisconsin-domiciled stock insurance corporation, regulated by the
Office of the Commissioner of Insurance of the State of Wisconsin, and licensed
to do business in 50 states, the District of Columbia and the Commonwealth of
Puerto Rico, with admitted assets of approximately $2,505,000,000 (unaudited)
and statutory capital of approximately $1,384,000,000 (unaudited) as of June
30, 1996. Statutory capital consists of AMBAC's policyholders' surplus and
statutory contingency reserve. AMBAC is a wholly owned subsidiary of AMBAC
Inc., a 100% publicly-held company. Moody's, Standard & Poor's and Fitch have
each assigned a triple-A claims-paying ability rating to AMBAC.
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AMBAC has obtained a ruling from the Internal Revenue Service to the effect
that the insuring of an obligation by AMBAC will not affect the treatment for
federal income tax purposes of interest on such obligation and that insurance
proceeds representing maturing interest paid by AMBAC under policy provisions
substantially identical to those contained in its municipal bond insurance
policy shall be treated for federal income tax purposes in the same manner as
if such payments were made by the issuer of the Bonds.
Asset Guaranty is a New York State insurance company licensed to write
financial guarantee, credit, residual value and surety insurance. Asset
Guaranty commenced operations in mid-1988 by providing reinsurance to several
major monoline insurers. Asset Guaranty also issued limited amounts of primary
financial guaranty insurance, but not in direct competition with the primary
mono-line companies for which it acts as a reinsurer. The parent holding
company of Asset Guaranty, Asset Guarantee Inc. (AGI), merged with Enhance
Financial Services (EFS) in June, 1990 to form Enhance Financial Services Group
Inc. (EFSG). The two main, 100%-owned subsidiaries of EFSG, Asset Guaranty and
Enhance Reinsurance Company (ERC), share common management and physical
resources. As of April 30, 1996 EFSG is 55.3% owned by the public, 30.2% by
U.S. WEST Inc., 8.9% by senior management and 5.6% by Swiss Reinsurance
Company. Both ERC and Asset Guaranty are rated "AAA" for claims paying ability
by Duff & Phelps. ERC is rated triple-A for claims-paying ability by both
Standard & Poor's and Moody's. Asset Guaranty received a "AA" claims-paying-
ability rating from Standard & Poor's during August 1993, but remains unrated
by Moody's. As of March 31, 1996 Asset Guaranty had admitted assets of
approximately $187,000,000 and policyholders' surplus of approximately
$82,000,000.
CAPMAC commenced operations in December, 1987 as the second monoline
financial guaranty insurance company (after FSA) organized solely to insure
non-municipal obligations. CAPMAC, a New York corporation, is a wholly-owned
subsidiary of CAPMAC Holdings, Inc. (CHI), which was sold in 1992 by Citibank
(New York State) to a group of 12 investors led by the following: Dillon Read's
Saratoga Partners II; L.P. (Saratoga), an acquisition fund; Caprock Management,
Inc., representing Rockefeller family interests; Citigrowth Fund, a Citicorp
venture capital group; and CAPMAC senior management and staff. These groups
control approximately 70% of the stock of CHI. CAPMAC had traditionally
specialized in guaranteeing consumer loan and trade receivable asset-backed
securities. Under the new ownership group CAPMAC intends to become involved in
the municipal bond insurance business, as well as their traditional non-
municipal business. As of March 31, 1995 CAPMAC's admitted assets were
approximately $210,000,000 and its policyholders' surplus was approximately
$138,000,000.
FSA is a monoline insurance company incorporated in 1984 under the laws of
the State of New York and is licensed to engage in the financial guaranty
insurance business in all 50 states, the District of Columbia and Puerto Rico.
FSA is a wholly owned subsidiary of Financial Security Assurance Holdings
Ltd. ("Holdings"), a New York Stock Exchange listed company. Major shareholders
of Holdings include Fund American Enterprises Holdings, Inc., US WEST Capital
Corporation and Tokio Marine and Fire Insurance Co., Ltd. No shareholder of
Holdings is obligated to pay any debt of FSA or any claim under any insurance
policy issued by FSA or to make any additional contribution to the capital of
FSA.
Pursuant to an intercompany agreement, liabilities on financial guaranty
insurance written or reinsured from third parties, by FSA or any of its
domestic operating insurance company subsidiaries are reinsured among such
companies on an agreed upon percentage substantially proportional to their
respective capital, surplus and reserves, subject to applicable statutory risk
limitations. In addition, FSA reinsures a portion of its liabilities under
certain of its financial guaranty insurance policies with other reinsurers
under various quota-share treaties and on a transaction-by-transaction basis.
Such reinsurance is utilized by FSA as a risk management device and to comply
with certain statutory and rating agency requirements; it does not alter or
limit FSA's obligations under any financial guaranty insurance policy. As of
June 30, 1996, total shareholders equity of FSA and its wholly-owned
subsidiaries was (unaudited) $785,072,000 and total unearned premium reserves
was (unaudited) $351,180,000.
Connie Lee, a stock insurance company incorporated in Wisconsin, is a wholly-
owned subsidiary of College Construction Loan Insurance Association, a
stockholder-owned District of Columbia insurance holding company whose creation
was authorized by the 1986 amendments to the Higher Education Act. The United
States Department of Education and Student Loan Marketing Association are
founding shareholders of College Construction Loan Insurance Association. As a
federally authorized company, Connie Lee's structure and operational
authorities are subject to revisions by amendments to the Higher Education Act
or other federal enactments. CONNIE LEE IS NOT AN AGENCY OR INSTRUMENTALITY OF
THE UNITED STATES GOVERNMENT, ALTHOUGH THE UNITED STATES GOVERNMENT IS A
STOCKHOLDER OF COLLEGE CONSTRUCTION LOAN INSURANCE ASSOCIATION. THE OBLIGATIONS
OF CONNIE LEE ARE NOT OBLIGATIONS OF THE UNITED STATES GOVERNMENT. As of June
30, 1996, its total admitted assets were approximately $219,098,333 (unaudited)
and total policyholders' surplus was approximately $112,734,947 (unaudited), as
reported to the Commissioner of Insurance of the State of Wisconsin.
Financial Guaranty, a New York stock insurance company, is a wholly-owned
subsidiary of FGIC Corporation ("FGIC") which is wholly-owned by General
Electric Capital Corporation ("GECC"). Neither FGIC nor GECC are not obligated
to pay the debts of or the claims against Financial Guaranty. Financial
Guaranty commenced its business of providing insurance and financial guarantees
for a
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<PAGE>
variety of investment instruments in January 1984 and is currently authorized
to provide insurance in 50 states and the District of Columbia. It files
reports with state regulatory agencies and is subject to audit and review by
those authorities. As of June 30, 1996, its total admitted assets were
approximately $2,377,900,000 and its policyholders' surplus was approximately
$1,069,597.
MBIA is the principal operating subsidiary of MBIA Inc. The principal
shareholders of MBIA Inc. were originally Aetna Casualty and Surety Company,
The Fund American Companies, Inc., subsidiaries of CIGNA Corporation and Credit
Local de France, CAECL, S.A. These principal shareholders now own approximately
13% of the outstanding common stock of MBIA Inc., following a series of four
public equity offerings over a five-year period. MBIA is domiciled in the State
of New York and licensed to do business in, and subject to regulation under,
the laws of all 50 states, the District of Columbia, the Commonwealth of Puerto
Rico, the Commonwealth of the Northern Mariana Islands, the Virgin Islands of
the United States and the Territory of Guam. As of June 30, 1996, MBIA had
admitted assets of approximately $4,200,000,000 (unaudited), total liabilities
of approximately $2,800,000,000 (unaudited), and policyholders' surplus of
approximately $1,400,000,000 (unaudited), prepared in accordance with statutory
accounting practices prescribed or permitted by insurance regulatory
authorities. As of December 31, 1995, MBIA had admitted assets of approximately
$3,800,000,000 (audited), total liabilities of approximately $2,500,000,000
(audited) and policyholders' surplus of approximately $1,300,000,000 (audited).
Insurance companies are subject to regulation and supervision in the
jurisdictions in which they do business under statutes which delegate
regulatory, supervisory and administrative powers to state insurance
commissioners. This regulation, supervision and administration relate, among
other things, to: the standards of solvency which must be met and maintained;
the licensing of insurers and their agents; the nature of and limitations on
investments; deposits of securities for the benefit of policyholders; approval
of policy forms and premium rates; periodic examinations of the affairs of
insurance companies; annual and other reports required to be filed on the
financial condition of insurers or for other purposes; and requirements
regarding reserves for unearned premiums, losses and other matters. Regulatory
agencies require that premium rates not be excessive, inadequate or unfairly
discriminatory. Insurance regulation in many states also includes "assigned
risk" plans, reinsurance facilities, and joint underwriting associations, under
which all insurers writing particular lines of insurance within the
jurisdiction must accept, for one or more of those lines, risks unable to
secure coverage in voluntary markets. A significant portion of the assets of
insurance companies is required by law to be held in reserve against potential
claims on policies and is not available to general creditors.
Although the Federal government does not regulate the business of insurance,
Federal initiatives can significantly impact the insurance business. Current
and proposed Federal measures which may significantly affect the insurance
business include pension regulation (ERISA), controls on medical care costs,
minimum standards for no-fault automobile insurance, national health insurance,
personal privacy protection, tax law changes affecting life insurance companies
or the relative desirability of various personal investment vehicles and repeal
of the current antitrust exemption for the insurance business. (If this
exemption is eliminated, it will substantially affect the way premium rates are
set by all property-liability insurers.) In addition, the Federal government
operates in some cases as a co-insurer with the private sector insurance
companies.
Insurance companies are also affected by a variety of state and Federal
regulatory measures and judicial decisions that define and extend the risks and
benefits for which insurance is sought and provided. These include judicial
redefinitions of risk exposure in areas such as products liability and state
and Federal extension and protection of employee benefits, including pension,
workers' compensation, and disability benefits. These developments may result
in short-term adverse effects on the profitability of various lines of
insurance. Longer-term adverse effects can often be minimized through prompt
repricing of coverages and revision of policy terms. In some instances, these
developments may create new opportunities for business growth. All insurance
companies write policies and set premiums based on actuarial assumptions about
mortality, injury, the occurrence of accidents and other insured events. These
assumptions, while well supported by past experience, necessarily do not take
account of future events. The occurrence in the future of unforeseen
circumstances could affect the financial condition of one or more insurance
companies. The insurance business is highly competitive and with the
deregulation of financial service businesses, it should become more
competitive. In addition, insurance companies may expand into non-traditional
lines of business which may involve different types of risks.
The above financial information relating to the Insurance Companies has been
obtained from publicly available information. No representation is made as to
the accuracy or adequacy of the information or as to the absence of material
adverse changes since the information was made available to the public.
LITIGATION AND LEGISLATION. To the best knowledge of the Sponsor, there is no
litigation pending as of the Initial Date in respect of any Bonds which might
reasonably be expected to have a material adverse effect upon the Trust. At any
time after the Initial Date of Deposit, litigation may be initiated on a
variety of grounds, or legislation may be enacted, with respect to Bonds in the
Trust. Litigation, for example, challenging the issuance of pollution control
revenue bonds under environmental protection statutes may affect the validity
of Bonds or the tax-free nature of their interest. While the outcome of
litigation of this nature can never be entirely predicted, opinions of bond
counsel are delivered on the date of issuance of each Bond to the effect that
the Bond has been validly issued and that the interest thereon is exempt from
Federal income tax. In addition, other factors may arise from time to time
which potentially may impair the ability of issuers to make payments due on the
Bonds.
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<PAGE>
Under the Federal Bankruptcy Act, a political subdivision or public agency or
instrumentality of any state, including municipalities, may proceed to
restructure or otherwise alter the terms of its obligations, including those of
the type comprising the Trust's Portfolio. The Sponsor is unable to predict
what effect, if any, this legislation might have on the Trust.
From time to time Congress considers proposals to tax the interest on state
and local obligations, such as the Bonds. The Supreme Court clarified in South
Carolina v. Baker (decided April 20, 1988) that the U.S. Constitution does not
prohibit Congress from passing a nondiscriminatory tax on interest on state and
local obligations. This type of legislation, if enacted into law, could
adversely affect an investment in Units. Holders are urged to consult their own
tax advisers.
TAX EXEMPTION. In the opinion of bond counsel rendered on the date of
issuance of each Bond, the interest on each Bond is excludable from gross
income under existing law for regular Federal income tax purposes (except in
certain circumstances depending on the Holder) but may be subject to state and
local taxes. As discussed under Taxes below, interest on some or all of the
Bonds may become subject to regular Federal income tax, perhaps retroactively
to their date of issuance, as a result of changes in Federal law or as a result
of the failure of issuers (or other users of the proceeds of the Bonds) to
comply with certain ongoing requirements.
Moreover, the Internal Revenue Service is expanding its examination program
with respect to tax-exempt bonds. The expanded examination program will consist
of, among other measures, increased enforcement against abusive transactions,
broader audit coverage (including the expected issuance of audit guidelines)
and expanded compliance achieved by means of expected revisions to the tax-
exempt bond information return forms. At this time, it is uncertain whether the
tax exempt status of any of the Bonds would be affected by such proceedings, or
whether such effect, if any, would be retroactive.
In certain cases, a Bond may provide that if the interest on the Bond should
ultimately be determined to be taxable, the Bond would become due and payable
by its issuer, and, in addition, may provide that any related letter of credit
or other security could be called upon if the issuer failed to satisfy all or
part of its obligation. In other cases, however, a Bond may not provide for the
acceleration or redemption of the Bond or a call upon the related letter of
credit or other security upon a determination of taxability. In those cases in
which a Bond does not provide for acceleration or redemption or in which both
the issuer and the bank or other entity issuing the letter of credit or other
security are unable to meet their obligations to pay the amounts due on the
Bond as a result of a determination of taxability, the Trustee would be
obligated to sell the Bond and, since it would be sold as a taxable security,
it is expected that it would have to be sold at a substantial discount from
current market price. In addition, as mentioned above, under certain
circumstances Holders could be required to pay income tax on interest received
prior to the date on which the interest is determined to be taxable.
THE UNITS
On the Date of Deposit, each Unit in a Trust represented a fractional
undivided interest in the principal and net income of such Trust as is set
forth in Part A, "Summary of Essential Information."
If any Units are redeemed after the date of this Prospectus by the Trustee,
the principal amount of Bonds in the affected Trust will be reduced by an
amount allocable to redeemed Units and the fractional undivided interest in the
affected Trust represented by each unredeemed Unit will be increased. Units
will remain outstanding until redeemed upon tender to the Trustee by any Unit
holder, which may include the Sponsor, or until the termination of the Trust
Agreement. (See "Amendment and Termination of the Trust Agreement--
Termination.")
TAXES
The following discussion addresses only the tax consequences of Units held as
capital assets and does not address the tax consequences of Units held by
dealers, financial institutions or insurance companies.
In the opinion of Battle Fowler LLP, special counsel for the Sponsor, under
existing law:
The Trusts are not associations taxable as corporations for Federal
income tax purposes, and income received by the Trusts will be treated as
the income of the Unit holders ("Holders") in the manner set forth below.
Each Holder of Units of a Trust will be considered the owner of a pro
rata portion of each Bond in the Trust under the grantor trust rules of
Sections 671-679 of the Internal Revenue Code of 1986, as amended (the
"Code"). In order to determine the face amount of a Holder's pro rata
portion of each Bond on the Date of Deposit, see "Aggregate Principal"
under "Portfolio of Securities". The total cost to a Holder of his Units,
including sales charges, is allocated to his pro rata portion of each Bond,
in proportion to the fair market values thereof on the date the Holder
purchases his Units, in order to determine his tax cost for his pro rata
portion of each Bond. In order for a Holder who purchases his Units on the
Date of Deposit to determine the fair market value of his pro rata portion
of each Bond on such date, see "Cost of Securities to Trust" under
"Portfolio of Securities".
Each Holder of Units of a Trust will be considered to have received the
interest on his pro rata portion of each Bond when interest on the Bond is
received by the Trust. In the opinion of bond counsel (delivered on the
date of issuance of each Bond), such
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<PAGE>
interest will be excludable from gross income for regular Federal income
tax purposes (except in certain limited circumstances referred to below).
Amounts received by a Trust pursuant to a bank letter of credit, guarantee
or insurance policy with respect to payments of principal, premium or
interest on a Bond in the Trust will be treated for Federal income tax
purposes in the same manner as if such amounts were paid by the issuer of
the Bond.
The Trusts may contain Bonds which were originally issued at a discount
("original issue discount"). The following principles will apply to each
Holder's pro rata portion of any Bond originally issued at a discount. In
general, original issue discount is defined as the difference between the
price at which a debt obligation was issued and its stated redemption price
at maturity. Original issue discount on a tax-exempt obligation issued
after September 3, 1982, is deemed to accrue as tax-exempt interest over
the life of the obligation under a formula based on the compounding of
interest. Original issue discount on a tax-exempt obligation issued before
July 2, 1982 is deemed to accrue as tax-exempt interest ratably over the
life of the obligation. Original issue discount on any tax-exempt
obligation issued during the period beginning July 2, 1982 and ending
September 3, 1982 is also deemed to accrue as tax-exempt interest over the
life of the obligation, although it is not clear whether such accrual is
ratable or is determined under a formula based on the compounding of
interest. If a Holder's tax cost for his pro rata portion of a Bond issued
with original issue discount is greater than its "adjusted issue price" but
less than its stated redemption price at maturity (as may be adjusted for
certain payments), the Holder will be considered to have purchased his pro
rata portion of the Bond at an "acquisition premium." A Holder's adjusted
tax basis for his pro rata portion of a Bond issued with original issue
discount will include original issue discount accrued during the period
such Holder held his Units. Such increases to the Holder's tax basis in his
pro rata portion of the Bond resulting from the accrual of original issue
discount, however, will be reduced by the amortization of any such
acquisition premium.
If a Holder's tax basis for his pro rata portion of a Bond in the
Holder's Trust exceeds the redemption price at maturity thereof (subject to
certain adjustments), the Holder will be considered to have purchased his
pro rata portion of the Bond with "amortizable bond premium". The Holder is
required to amortize such bond premium over the term of the Bond. Such
amortization is only a reduction of basis for his pro rata portion of the
Bond and does not result in any deduction against the Holder's income.
Therefore, under some circumstances, a Holder may recognize taxable gain
when his pro rata portion of a Bond is disposed of for an amount equal to
or less than his original tax basis therefor.
A Holder will recognize taxable gain or loss when all or part of his pro
rata portion of a Bond in his Trust is disposed of by the Trust for an
amount greater or less than his adjusted tax basis. Any such taxable gain
or loss will be capital gain or loss, except that any gain from the
disposition of a Holder's pro rata portion of a Bond acquired by the Holder
at a "market discount" (i.e., where the Holder's original basis for his pro
rata portion of the Bond (plus any original issue discount which will
accrue thereon until its maturity) is less than its stated redemption price
at maturity) would be treated as ordinary income to the extent the gain
does not exceed the accrued market discount. Capital gains are generally
taxed at the same rate as ordinary income. However, the excess of net long-
term capital gains over net short-term capital losses may be taxed at a
lower rate than ordinary income for certain noncorporate taxpayers. A
capital gain or loss is long-term if the asset is held for more than one
year and short-term if held for one year or less. The deduction of capital
losses is subject to limitations. A Holder will also be considered to have
disposed of all or part of his pro rata portion of each Bond when he sells
or redeems all or some of his Units.
Under the income tax laws of the State and City of New York, the Trust is
not an association taxable as a corporation and income received by each
Trust will be treated as the income of the Holders in the same manner as
for Federal income tax purposes, but will not necessarily be tax-exempt.
Under Section 265 of the Code, a Holder (except a corporate Holder) is
not entitled to a deduction for his pro rata share of fees and expenses of
a Trust because the fees and expenses are incurred in connection with the
production of tax-exempt income. Further, if borrowed funds are used by a
Holder to purchase or carry Units of any Trust, interest on such
indebtedness will not be deductible for Federal income tax purposes. In
addition, under rules used by the Internal Revenue Service, the purchase of
Units may be considered to have been made with borrowed funds even though
the borrowed funds are not directly traceable to the purchase of Units.
Similar rules may be applicable for state tax purposes.
From time to time proposals are introduced in Congress and state
legislatures which, if enacted into law, could have an adverse impact on
the tax-exempt status of the Bonds. It is impossible to predict whether any
legislation in respect of the tax status of interest on such obligations
may be proposed and eventually enacted at the Federal or state level.
The foregoing discussion relates only to Federal and certain aspects of
New York State and City income taxes. Depending on their state of
residence, Holders may be subject to state and local taxation and should
consult their own tax advisers in this regard.
Interest on certain tax-exempt bonds issued after August 7, 1986 will be a
preference item for purposes of the alternative minimum tax ("AMT"). The
Sponsor believes that interest (including any original issue discount) on the
Bonds should not be subject to the AMT for individuals or corporations under
this rule. A corporate Holder should be aware, however, that the accrual or
receipt of tax-exempt
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<PAGE>
interest not subject to the AMT may give rise to an alternative minimum tax
liability (or increase an existing liability) because the interest income will
be included in the corporation's "adjusted current earnings" for purposes of
the adjustment to alternative minimum taxable income required by Section 56(g)
of the Code and will be taken into account for purposes of the environmental
tax on corporations under Section 59A of the Code, which is based on an
alternative minimum taxable income.
In addition, interest on the Bonds must be taken into consideration in
computing the portion, if any, of social security benefits that will be
included in an individual's gross income and subject to Federal income tax.
Holders are urged to consult their own tax advisers concerning an investment in
Units.
At the time of issuance of each Bond, an opinion relating to the validity of
the Bond and to the exemption of interest thereon from regular Federal income
taxes was or will be rendered by bond counsel. Neither the Sponsor nor Battle
Fowler LLP have made or will make any review of the proceedings relating to the
issuance of the Bonds or the basis for these opinions. The tax exemption is
dependent upon the issuer's (and other users') compliance with certain ongoing
requirements, and the opinion of bond counsel assumes that these requirements
will be complied with. However, there can be no assurance that the issuer (and
other users) will comply with these requirements, in which event the interest
on the Bond could be determined to be taxable retroactively to the date of
issuance.
In the case of certain of the Bonds, 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 such Bonds, or persons related thereto, for
periods while such Bonds are held by such a user or related person, will not be
exempt from regular Federal income taxes, although interest on such Bonds
received by others would be exempt from regular Federal income taxes.
"Substantial user" is defined under U.S. Treasury Regulations to include only a
person whose gross revenue derived with respect to the facilities financed by
the issuance of bonds is more than 5% of the total revenue derived by all users
of such facilities, or who occupies more than 5% of the usable area of such
facilities or for whom such facilities or a part thereof were specifically
constructed, reconstructed or acquired. "Related persons" are defined to
include certain related natural persons, affiliated corporations, partners and
partnerships. Similar rules may be applicable for state tax purposes.
After the end of each calendar year, the Trustee will furnish to each Holder
an annual statement containing information relating to the interest received by
the Trust on the Bonds, the gross proceeds received by the Trust from the
disposition of any Bond (resulting from redemption or payment at maturity of
any Bond or the sale by the Trust of any Bond), and the fees and expenses paid
by the Trust. The Trustee will also furnish annual information returns to each
Holder and to the Internal Revenue Service. Holders are required to report to
the Internal Revenue Service the amount of tax-exempt interest received during
the year.
EXPENSES AND CHARGES
INITIAL EXPENSES
All or some portion of the expenses incurred in establishing each Trust,
including the cost of the initial preparation of documents relating to a Trust,
Federal and State registration fees, the initial fees and expenses of the
Trustee, legal expenses and any other out-of-pocket expenses will be paid by
the Trust, and amortized over five years. Any balance of the expenses incurred
in establishing a Trust, as well as advertising and selling expenses and other
out-of-pocket expenses will be paid at no cost to the Trusts.
TRUSTEE'S, SPONSOR'S AND EVALUATOR'S FEES
The Trustee will receive for its ordinary recurring services to a Trust an
annual fee in the amount set forth under Part A, "Summary of Essential
Information." For a discussion of the services performed by the Trustee
pursuant to its obligations under the Trust Agreement, see "Rights of Unit
Holders." The Trustee will receive the benefit of any reasonable cash balances
in the Income and Principal Accounts.
There are no management fees and the Sponsor earns only a nominal Portfolio
Supervision fee (the "Supervision Fee"), which is earned for Portfolio
supervisory services. This fee is based upon the greatest face amount of Bonds
in the Trust at any time during the calendar year with respect to which the fee
is being computed.
The Supervision Fee, which is not to exceed the amount set forth in Part A--
"Summary of Essential Information", may exceed the actual costs of providing
Portfolio supervisory services for such Trust, but at no time will the total
amount the Sponsor receives for Portfolio supervisory services rendered to all
series of Tax Exempt Securities Trust in any calendar year exceed the aggregate
cost to them of supplying such services in such year. In addition, the Sponsor
may also be reimbursed for bookkeeping and other administrative services
provided to the Trust in amounts not exceeding their costs of providing these
services.
The Evaluator will receive a fee in the amount set forth under Part A,
"Summary of Essential Information," for each evaluation of the Bonds in a
Trust. For a discussion of the services performed by the Evaluator pursuant to
its obligations under the Trust Agreement, see "Evaluator--Responsibility" and
"Public Offering--Offering Price."
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<PAGE>
Any of such fees may be increased without approval of the Unit holders by
amounts not exceeding proportionate increases in consumer prices for services
as measured by the United States Department of Labor's Consumer Price Index
entitled "All Services Less Rent" or, if such Index is no longer published, in
a similar Index to be determined by the Trustee and the Sponsor.
OTHER CHARGES
The following additional charges are or may be incurred by a Trust: all
expenses of the Trustee (including fees and expenses of counsel and auditors)
incurred in connection with its activities under the Trust Agreement, including
reports and communications to Unit holders; expenses and costs of any action
undertaken by the Trustee to protect a Trust and the rights and interests of
the Unit holders; fees of the Trustee for any extraordinary services performed
under the Trust Agreement; indemnification of the Trustee for any loss or
liability accruing to it without gross negligence, bad faith or willful
misconduct on its part, arising out of or in connection with its acceptance or
administration of a Trust; to the extent lawful, expenses (including legal,
accounting and printing expenses) of maintaining registration or qualification
of the Units and/or a Trust under Federal or state securities laws subsequent
to initial registration so long as the Sponsor maintains a market for the Units
and all taxes and other governmental charges imposed upon the Bonds or any part
of a Trust (no such taxes or charges are being levied or made or, to the
knowledge of the Sponsor, contemplated). The above expenses, including the
Trustee's fee, when paid by or owing to the Trustee, are secured by a lien on
the Trust. In addition, the Trustee is empowered to sell Bonds in order to make
funds available to pay all expenses.
PUBLIC OFFERING
OFFERING PRICE
During the initial public offering period, the Public Offering Price of the
Units of a Trust is determined by adding to the Evaluator's determination of
the aggregate OFFERING price of the Bonds per Unit a sales charge equal to a
percentage of the Public Offering Price of the Units of the Trust, as set forth
in the table below. After the initial public offering period, the Public
Offering Price of the Units of a Trust will be determined by adding to the
Evaluator's determination of the aggregate BID price of the Bonds per Unit a
sales charge equal to 5.00% of the Public Offering Price (5.263% of the
aggregate bid price of the Bonds per Unit). A proportionate share of accrued
and undistributed interest on the Bonds in a Trust at the date of delivery of
the Units of such Trust to the purchaser is also added to the Public Offering
Price. (See "Rights of Unit Holders--Distribution of Interest and Principal.")
During the initial public offering period, the sales charge and dealer
concession for the Trusts will be reduced as follows:
<TABLE>
<CAPTION>
PERCENT OF PERCENT OF
PUBLIC NET AMOUNT DEALER
UNITS PURCHASED+ OFFERING PRICE INVESTED CONCESSION
- ---------------- -------------- ---------- ----------
<S> <C> <C> <C>
1- 99.................................. 4.70% 4.932% $33.00
100-249.................................. 4.25% 4.439% $32.00
250-499.................................. 4.00% 4.167% $30.00
500-999.................................. 3.50% 3.627% $25.00
1,000 or more.............................. 3.00% 3.093% $20.00
</TABLE>
The Sponsor may at any time change the amount by which the sales charge is
reduced, or discontinue the discount completely.
Pursuant to employee benefit plans, Units of a Trust are available to
employees of the Sponsor and its subsidiaries, affiliates and employee-related
discounts, during the initial public offering period, at a Public Offering
Price equal to the Evaluator's determination of the aggregate offering price of
the Bonds of a Trust per Unit plus a sales charge of .50% of the Public
Offering Price and after the initial public offering period, at a Public
Offering Price equal to the Evaluator's determination of the aggregate bid
price of the Bonds of a Trust per Unit plus a sales charge of .50% of the
Public Offering Price. Sales through such plans to employees of the Sponsor
result in less selling effort and selling expenses than sales to the general
public. Participants in the Smith Barney Asset One SM Program may purchase
Units of the Trust at a Public Offering Price equal to the Evaluator's
determination of the aggregate offering price of the Bonds of a Trust per Unit
during the initial offering period and after the initial offering period at a
Public Offering Price equal to the Evaluator's determination of the aggregate
bid price of the Bonds of a Trust per Unit. In addition, upon the receipt of an
appropriate exemptive order from the Securities and Exchange Commission,
participants will be able to exchange Units of a Trust purchased through the
Smith Barney Asset One SM Program for units of any available series of the Tax
Exempt Securities Trust at their net asset value without any sales charge.
Participants in the Smith Barney Asset One SM Program are subject to certain
fees for specified securities brokerage and execution services.
METHOD OF EVALUATION
During the initial public offering period, the aggregate offering price of
the Bonds is determined by the Evaluator (1) on the basis of current offering
prices for the Bonds*, (2) if offering prices are not available for any Bonds,
on the basis of current offering prices for comparable securities, (3) by
appraisal, or (4) by any combination of the above. Such determinations are made
each business day as of
- -------
+ The reduced sales charge is also applied on a dollar basis utilizing a
breakpoint equivalent in the above table of $1,000 for one Unit, etc.
* Current offering or bid prices of the Deposited Units, if any, are based on
prevailing weekly evaluations of the obligations underlying such Deposited
Units.
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<PAGE>
the Evaluation Time set forth in the "Summary of Essential Information," in
Part A, effective for all sales made subsequent to the last preceding
determination. Following the initial public offering period, the aggregate bid
price of the Bonds (which is used to calculate the price at which the Sponsor
repurchases and sells Units in the secondary market and the Redemption Price at
which Units may be redeemed) will be determined by the Evaluator (1) on the
basis of the current bid prices for the Bonds*, (2) if bid prices are not
available for any Bonds, on the basis of current bid prices of comparable
securities, (3) by appraisal, or (4) by any combination of the above. Such
determinations will be made each business day as of the Evaluation Time set
forth in the "Summary of Essential Information," in Part A, effective for all
sales made subsequent to the last preceding determination. The term "business
day," as used herein shall exclude Saturdays, Sundays and any day on which the
New York Stock Exchange is closed. The difference between the bid and offering
prices of the Bonds may be expected to average approximately 1 1/2% of
principal amount. In the case of actively traded securities, the difference may
be as little as 1/2 of 1%, and in the case of inactively traded securities such
difference will usually not exceed 3%. The price at which Units may be
repurchased by the Sponsor in the secondary market could be less than the price
paid by the Unit holder. On the Date of Deposit for each Trust the aggregate
current offering price of such Bonds per Unit exceeded the bid price of such
Bonds per Unit by the amounts set forth under "Summary of Essential
Information" in Part A. For information relating to the calculation of the
Redemption Price per Unit, which is also based upon the aggregate bid price of
the underlying Bonds and which may be expected to be less than the Public
Offering Price per Unit, see "Rights of Unit Holders--Redemption of Units."
DISTRIBUTION OF UNITS
During the initial public offering period Units of a Trust will be
distributed to the public at the Public Offering Price determined in the manner
provided above (see "Public Offering--Offering Price") through the Underwriters
and dealers. The initial public offering period is 30 days unless all Units of
a Trust are sold prior thereto, in which case the initial public offering
period terminates with the sale of all Units. So long as all Units initially
offered have not been sold, the Sponsor may extend the initial public offering
period for up to four additional successive 30-day periods. Upon completion of
the initial public offering, Units which remain unsold or which may be acquired
in the secondary market (see "Public Offering--Market for Units") may be
offered by this Prospectus at the Public Offering Price determined in the
manner provided above (see "Public Offering--Offering Price").
It is the Sponsor's intention to qualify Units of a Trust for sale through
the Underwriters and dealers who are members of the National Association of
Securities Dealers, Inc. Units of a State Trust will be offered for sale only
in the State for which the Trust is named, except that Units of a New York
Trust will also be offered for sale to residents of the State of Connecticut,
the State of Florida and the Commonwealth of Puerto Rico. Units will initially
be sold to dealers at prices which represent a concession equal to the amount
designated in the tables under "Public Offering--Offering Price" herein, for a
Trust with an unreduced sales charge as specified in Part A--"The Public
Offering Price." The Sponsor reserves the right to change the amount of the
concession to dealers from time to time. After the initial offering period the
dealer concession is negotiated on a case-by-case basis.
Sales will be made only with respect to whole Units, and the Sponsor reserves
the right to reject, in whole or in part, any order for the purchase of Units.
A purchaser does not become a Unit holder (Certificate holder) or become
entitled to exercise the rights of a Unit holder (including the right to redeem
his Units) until he has paid for his Units. Generally, such payment must be
made within five business days after an order for the purchase of Units has
been placed. The price paid by a Unit holder is the Public Offering Price in
effect at the time his order is received, plus accrued interest (see "Public
Offering--Method of Evaluation"). This price may be different from the Public
Offering Price in effect on any other day, including the day on which he made
payment for the Units.
MARKET FOR UNITS
Following the initial public offering period the Sponsor, although not
obligated to do so, presently intends to maintain a market for the Units of a
Trust and continuously to offer to purchase such Units at prices based upon the
aggregate bid price of the underlying Bonds. For information relating to the
method and frequency of the Evaluator's determination of the aggregate bid
price of the underlying Bonds, see "Public Offering--Method of Evaluation." The
Sponsor may cease to maintain such a market at any time and from time to time
without notice if the supply of Units of a Trust of this Series exceeds demand
or for any other reason. In this event the Sponsor may nonetheless purchase
Units, as a service to Unit holders, at prices based on the current Redemption
Price of those Units. In the event that a market is not maintained for the
Units of a Trust, a Unit holder of such Trust desiring to dispose of his Units
may be able to do so only by tendering such Units to the Trustee for redemption
at the Redemption Price, which is based upon the aggregate bid price of the
underlying Bonds. The aggregate bid price of the underlying Bonds of a Trust
may be expected to be less than the aggregate offering price.
EXCHANGE OPTION
Unit holders may elect to exchange any or all of their Units of this series
for units of one or more of any series of Tax Exempt Securities Trust (the
"Exchange Trust") available for sale in the state in which the Unit holder
resides at a Public Offering Price for the
- -------
* Current offering or bid prices of the Deposited Units, if any, are based on
prevailing weekly evaluations of the obligations underlying such Deposited
Units.
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<PAGE>
units of the Exchange Trust to be acquired based on a fixed sales charge of $25
per unit. The Sponsor reserves the right to modify, suspend or terminate this
plan at any time without further notice to Unit holders. Therefore, there is no
assurance that a market for units will in fact exist on any given date on which
a Unit holder wishes to sell his Units of this series and thus there is no
assurance that the Exchange Option will be available to a Unit holder.
Exchanges will be effected in whole units ONLY. If the proceeds from the Units
being surrendered are less than the cost of a whole number of units being
acquired, the exchanging Holder will be permitted to add cash in an amount to
round up to the next highest number of whole units.
An exchange of Units pursuant to the Exchange Option for units of an Exchange
Trust will generally constitute a "taxable event" under the Code, i.e., a
Holder will recognize a gain or loss at the time of exchange. However, an
exchange of Units of this Trust for units of any other series of the Tax Exempt
Securities Trust which are grantor trusts for U.S. Federal income tax purposes
will not constitute a taxable event to the extent that the underlying
securities in each trust do not differ materially either in kind or in extent.
Unit holders are urged to consult their own tax advisors as to the tax
consequences to them of exchanging Units in particular cases.
Units of the Exchange Trust will be sold under the Exchange Option at the bid
prices of the underlying securities in the particular portfolio involved per
unit plus a fixed charge of $25 per unit. As an example, assume that a Unit
holder, who has three units of a trust with a current price of $1,020 per unit
based on the bid prices of the underlying securities, desires to exchange his
Units for units of a series of an Exchange Trust with a current price of $880
per unit based on the bid prices of the underlying securities. In this example,
the proceeds from the Unit holder's units will aggregate $3,060. Since only
whole units of an Exchange Trust may be purchased under the Exchange Option,
the Unit holder would be able to acquire four units in the Exchange Trust for a
total cost of $3,620 ($3,520 for the units and $100 for the sales charge).
REINVESTMENT PROGRAMS
Distributions of interest and principal, if any, are made to Unit holders
monthly. The Unit holder will have the option of either receiving his monthly
income check from the Trustee or participating in one of the reinvestment
programs offered by the Sponsor provided such Unit holder meets the minimum
qualifications of the reinvestment program and such program lawfully qualifies
for sale in the jurisdiction in which the Unit holder resides. Upon enrollment
in a reinvestment program, the Trustee will direct monthly interest
distributions and principal distributions, if any, to the reinvestment program
selected by the Unit holder. Since the Sponsor has arranged for different
reinvestment alternatives, Unit holders should contact the Sponsor for more
complete information, including charges and expenses. The appropriate
prospectus will be sent to the Unit holder. The Unit holder should read the
prospectus for a reinvestment program carefully before deciding to participate.
Participation in the reinvestment program will apply to all Units of a Trust
owned by a Unit holder and may be terminated at any time by the Unit holder, or
the program may be modified or terminated by the Trustee or the program's
Sponsor.
SPONSOR'S AND UNDERWRITERS' PROFITS
For their services the Underwriters (see Part A, "Underwriting") receive a
commission based on the sales charge of a particular Trust (see "Public
Offering--Offering Price") as adjusted pursuant to the Agreement Among
Underwriters. The Sponsor receives a gross commission equal to the applicable
sales charge for any Units they have underwritten, and receive the difference
between the applicable sales charge and the Underwriter's commission for the
remainder of the Units. In addition, the Sponsor may realize profits or sustain
losses, as the case may be, in the amount of any difference between the cost of
the Bonds to a Trust (which is based on the aggregate offering price of the
underlying Bonds on the Date of Deposit) and the purchase price of such Bonds
to the Sponsor (which is the cost of the Bonds at the time they were acquired
for the account of a Trust and the cost of the Deposited Units at the time they
were acquired by the Sponsor). (See Part A, "Portfolio of Securities"--Note
(3).) Under certain circumstances, an Underwriter may be entitled to share in
such profits, if any, realized by the Sponsor. The Sponsor may also realize
profits or sustain losses with respect to Bonds deposited in a Trust which were
acquired from its own organization or from underwriting syndicates of which it
was a member. During the initial public offering period the Underwriters also
may realize profits or sustain losses as a result of fluctuations after the
Date of Deposit in the offering prices of the Bonds and hence in the Public
Offering Price received by the Underwriters for Units. Cash, if any, made
available to the Sponsor prior to the anticipated first settlement date for the
purchase of Units may be used in the Sponsor's businesses to the extent
permitted by applicable regulations and may be of use to the Sponsor.
In maintaining a market for the Units of a Trust (see "Public Offering--
Market for Units"), the Sponsor will also realize profits or sustain losses in
the amount of any difference between the price at which they buy such Units and
the price at which they resell or redeem such Units (see "Public Offering--
Offering Price").
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RIGHTS OF UNIT HOLDERS
CERTIFICATES
Ownership of Units of a Trust is evidenced by registered certificates
executed by the Trustee and the Sponsor. Certificates are transferable by
presentation and surrender to the Trustee properly endorsed or accompanied by a
written instrument or instruments of transfer.
Certificates may be issued in denominations of one Unit or any multiple
thereof. A Unit holder may be required to pay $2.00 per certificate reissued or
transferred, and to pay any governmental charge that may be imposed in
connection with each such transfer or interchange. For new certificates issued
to replace destroyed, stolen or lost certificates, the Unit holder must furnish
indemnity satisfactory to the Trustee and must pay such expenses as the Trustee
may incur. Mutilated certificates must be surrendered to the Trustee for
replacement.
DISTRIBUTION OF INTEREST AND PRINCIPAL
Interest and principal received by a Trust will be distributed on each
monthly Distribution Date on a pro rata basis to Unit holders in such Trust of
record as of the preceding Record Date. All distributions will be net of
applicable expenses and funds required for the redemption of Units and, if
applicable, reimbursements to the Trustee for interest payments advanced to
Unit holders on previous Monthly Distribution Dates. (See Part A, "Summary of
Essential Information," "Tax Exempt Securities Trust--Expenses and Charges" and
"Rights of Unit Holders--Redemption of Units.")
The Trustee will credit to the Interest Account of a Trust all interest
received by such Trust, including that part of the proceeds of any disposition
of Bonds of such Trust which represents accrued interest. Other receipts will
be credited to the Principal Account of a Trust. The pro rata share of the
Interest Account and the pro rata share of cash in the Principal Account
represented by each Unit of a Trust will be computed by the Trustee each month
as of the Record Date. (See Part A, "Summary of Essential Information.")
Proceeds received from the disposition of any of the Bonds subsequent to a
Record Date and prior to the next succeeding Distribution Date will be held in
the Principal Account and will not be distributed until the following
Distribution Date. The distribution to the Unit holders 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 of such holders' pro
rata share of the estimated annual income to the Interest Account after
deducting estimated expenses (the "Monthly Income Distribution") plus such Unit
holders' pro rata share of the cash balance in the Principal Account computed
as of the close of business on the preceding Record Date. Persons who purchase
Units between a Record Date and a Distribution Date will receive their first
distribution on the second Distribution Date following their purchase of Units.
No distribution need be made from the Principal Account if the balance therein
is less than an amount sufficient to distribute $5.00 per Unit. The Monthly
Income Distribution per Unit initially will be in the amount shown under Part
A, "Summary of Essential Information" for a Trust and will change as the income
and expenses of such Trust change and as Bonds are exchanged, redeemed, paid or
sold.
Normally, interest on the Bonds in the Portfolio of a Trust is paid on a
semi-annual basis. Because Bond interest is not received by a Trust at a
constant rate throughout the year, any Monthly Income Distribution may be more
or less than the amount credited to the Interest Account as of the Record Date.
In order to eliminate fluctuations in Monthly Income Distributions resulting
from such variances, the Trustee is required by the Trust Agreement to advance
such amounts as may be necessary to provide Monthly Income Distributions of
approximately equal amounts. The Trustee will be reimbursed, without interest,
for any such advances from funds available from the Interest Account on the
next ensuing Record Date or Record Dates, as the case may be. If all or a
portion of the Bonds for which advances have been made subsequently fail to pay
interest when due, the Trustee may recoup advances made by it in anticipation
of receipt of interest payments on such Bonds by reducing the amount
distributed per Unit in one or more Monthly Interest Distributions. If Units
are redeemed subsequent to such advances by the Trustee, but prior to receipt
by the Trustee of actual notice of such failure to pay interest, the amount of
which was so advanced by the Trustee, each remaining Unit holder will be
subject to a greater pro rata reduction in his Monthly Interest Distribution
than would have occurred absent such redemptions. Funds which are available for
future distributions, payments of expenses and redemptions are in accounts
which are non-interest bearing to Unit holders and are available for use by The
Chase Manhattan Bank (National Association) pursuant to normal banking
procedures. The Trustee is entitled to the benefit of any reasonable cash
balances in the Income and Principal Accounts. Because of the varying interest
payment dates of the Bonds comprising a Trust Portfolio, accrued interest at
any point in time will be greater than the amount of interest actually received
by a Trust and distributed to Unit holders. This excess accrued but
undistributed interest amount will be added to the value of the Units on any
purchase made after the Date of Deposit. If a Unit holder sells all or a
portion of his Units a portion of his sale proceeds will be allocable to his
proportionate share of the accrued interest. Similarly, if a Unit holder
redeems all or a portion of his Units, the Redemption Price per Unit which he
is entitled to receive from the Trustee will also include his accrued interest
on the Bonds. (See "Rights of Unit Holders--Redemption of Units--Computation of
Redemption Price per Unit.") The Trustee is also entitled to withdraw from the
Interest Account,
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<PAGE>
and to the extent funds are not sufficient therein, from the Principal Account,
on one or more Record Dates as may be appropriate, amounts sufficient to recoup
advances which it has made in anticipation of the receipt by the Trust of
interest in respect of Bonds which subsequently fail to pay interest when due.
As of the first day of each month the Trustee will deduct from the Interest
Account of a Trust and, to the extent funds are not sufficient therein, from
the Principal Account of such Trust, amounts necessary to pay the expenses of
such Trust. (See "Tax Exempt Securities Trust--Expenses and Charges.") The
Trustee also may withdraw from said accounts such amounts, if any, as it deems
necessary to establish a reserve for any governmental charges payable out of a
Trust. Amounts so withdrawn shall not be considered a part of the Trust's
assets until such time as the Trustee shall return all or any part of such
amounts to the appropriate account. In addition, the Trustee may withdraw from
the Interest Account and the Principal Account such amounts as may be necessary
to cover redemption of Units by the Trustee. (See "Rights of Unit Holders--
Redemption of Units.")
The Trustee has agreed to advance to a Trust the amount of accrued interest
due on the Bonds of such Trust from their respective issue dates or previous
interest payment dates through the Date of Deposit. This accrued interest
amount will be paid to the Sponsor as the holder of record of all Units on the
first settlement date for the Units. Consequently, when the Sponsor sells Units
of a Trust, the amount of accrued interest to be added to the Public Offering
Price of the Units purchased by an investor will include only accrued interest
from the day after the Date of Deposit through the date of settlement of the
investor's purchase (normally three business days after purchase), less any
distributions from the Interest Account. The Trustee will recover its
advancements to a Trust (without interest or other cost to such Trust) from
interest received on the Bonds deposited in such Trust.
REPORTS AND RECORDS
The Trustee shall furnish Unit holders in connection with each distribution a
statement of the amount of interest, if any, and the amount of other receipts,
if any, which are being distributed, expressed in each case as a dollar amount
per Unit. In the event that the issuer of any of the Bonds fails to make
payment when due of any interest or principal and such failure results in a
change in the amount which would otherwise be distributed as a monthly
distribution, the Trustee will, with the first such distribution following such
failure, set forth in an accompanying statement, the issuer and the Bond, the
amount of the reduction in the distribution per Unit resulting from such
failure, the percentage of the aggregate principal amount of Bonds which such
Bond represents and, to the extent then determined, information regarding any
disposition or legal action with respect to such Bond. Within a reasonable time
after the end of each calendar year, the Trustee will furnish to each person
who at any time during the calendar year was a Unit holder of record, a
statement (1) as to the Interest Account: interest received (including amounts
representing interest received upon any disposition of Bonds), deductions for
payment of applicable taxes and for fees and expenses of a Trust, redemptions
of Units and the balance remaining after such distributions and deductions,
expressed both as a total dollar amount and as a dollar amount representing the
pro rata share of each Unit outstanding on the last business day of such
calendar year; (2) as to the Principal Account: the dates of disposition of any
Bonds and the net proceeds received therefrom (excluding any portion
representing interest), deductions for payments of applicable taxes and for
fees and expenses of a Trust, redemptions of Units, and the balance remaining
after such distributions and deductions, expressed both as a total dollar
amount and as a dollar amount representing the pro rata share of each Unit
outstanding on the last business day of such calendar year; (3) a list of the
Bonds held and the number of Units outstanding on the last business day of such
calendar year; (4) the Redemption Price per Unit based upon the last
computation thereof made during such calendar year; and (5) amounts actually
distributed during such calendar year from the Interest Account and from the
Principal Account, separately stated, expressed both as total dollar amounts
and as dollar amounts representing the pro rata share of each Unit outstanding.
The accounts of a Trust shall be audited not less frequently than annually by
independent auditors designated by the Sponsor, and the report of such auditors
shall be furnished by the Trustee to Unit holders upon request.
The Trustee shall keep available for inspection by Unit holders at all
reasonable times during usual business hours, books of record and account of
its transactions as Trustee including records of the names and addresses of
Unit holders, certificates issued or held, a current list of Bonds in the
Portfolio of a Trust and a copy of the Trust Agreement.
REDEMPTION OF UNITS
Units may be tendered to the Trustee for redemption at its unit investment
trust office at 770 Broadway, New York, New York 10003, upon payment of any
relevant tax. At the present time there are no specific taxes related to the
redemption of the Units. No redemption fee will be charged by the Sponsor or
the Trustee. Units redeemed by the Trustee will be cancelled.
Certificates for Units to be redeemed must be properly endorsed or
accompanied by a written instrument of transfer. Unit holders must sign exactly
as their name appears on the face of the certificate with the signature
guaranteed by an officer of a national bank or trust company or by a member of
either the New York, Midwest or Pacific Stock Exchange. In certain instances
the Trustee may require additional documents such as, but not limited to, trust
instruments, certificates of death, appointments as executor or administrator
or certificates of corporate authority.
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Within seven calendar days following such tender, the Unit holder will be
entitled to receive in cash an amount for each Unit tendered equal to the
Redemption Price per Unit computed as of the Evaluation Time set forth in the
"Summary of Essential Information" in Part A on the date of tender. (See
"Redemption of Units--Computation of Redemption Price per Unit.") The "date of
tender" is deemed to be the date on which Units are received by the Trustee,
except as regards Units received after the close of trading on the New York
Stock Exchange, the date of tender is the next day on which such Exchange is
open for trading, and such Units will be deemed to have been tendered to the
Trustee on such day for redemption at the Redemption Price computed on that
day. For information relating to the purchase by the Sponsor of Units tendered
to the Trustee for redemption at prices in excess of the Redemption Price, see
"Redemption of Units--Purchase by the Sponsor of Units Tendered for
Redemption."
Accrued interest paid on redemption shall be withdrawn from the Interest
Account, or, if the balance therein is insufficient, from the Principal
Account. All other amounts paid on redemption shall be withdrawn from the
Principal Account. The Trustee is empowered to sell Bonds in order to make
funds available for redemption. Such sales, if required, could result in a sale
of Bonds by the Trustee at a loss. To the extent Bonds are sold, the size and
diversity of a Trust will be reduced.
The Trustee reserves the right to suspend the right of redemption and to
postpone the date of payment of the Redemption Price per Unit for any period
during which the New York Stock Exchange is closed, other than weekend and
holiday closings, or trading on that Exchange is restricted or during which (as
determined by the Securities and Exchange Commission) an emergency exists as a
result of which disposal or evaluation of the underlying Bonds is not
reasonably practicable, or for such other periods as the Securities and
Exchange Commission has by order permitted.
COMPUTATION OF REDEMPTION PRICE PER UNIT--The Redemption Price per Unit of a
Trust is determined by the Trustee on the basis of the bid prices of the Bonds
in such Trust as of the Evaluation Time on the date any such determination is
made. The Redemption Price per Unit of a Trust is each Unit's pro rata share,
determined by the Trustee, of: (1) the aggregate value of the Bonds in such
Trust on the bid side of the market (determined by the Evaluator as set forth
below), (2) cash on hand in such Trust (other than funds covering contracts to
purchase Bonds), and accrued and unpaid interest on the Bonds as of the date of
computation, less (a) amounts representing taxes or governmental charges
payable out of such Trust, (b) the accrued expenses of such Trust, and (c) cash
held for distribution to Unit holders of such Trust of record as of a date
prior to the evaluation. The Evaluator may determine the value of the Bonds in
the Trust (1) on the basis of current bid prices for the Bonds, (2) if bid
prices are not available for any Bonds, on the basis of current bid prices for
comparable securities, (3) by appraisal, or (4) by any combination of the
above.
The difference between the bid and offering prices of the Bonds may be
expected to average approximately 1 1/2% of principal amount. In the case of
actively traded securities, the difference may be as little as 1/2 of 1%, and
in the case of inactively traded securities such difference usually will not
exceed 3%. The price at which Units may be redeemed could be less than the
price paid by the Unit holder. On the Date of Deposit for each Trust the
aggregate current offering price of such Bonds per Unit exceeded the bid price
of such Bonds per Unit by the amounts set forth under Part A, "Summary of
Essential Information."
PURCHASE BY THE SPONSOR OF UNITS TENDERED FOR REDEMPTION--The Trust Agreement
requires that the Trustee notify the Sponsor of any tender of Units for
redemption. So long as the Sponsor maintains a bid in the secondary market, the
Sponsor, prior to the close of business on the second succeeding business day,
will purchase any Units tendered to the Trustee for redemption at the price so
bid by making payment therefor to the Unit holder in an amount not less than
the Redemption Price not later than the day on which the Units would otherwise
have been redeemed by the Trustee. (See "Public Offering--Market for Units.")
The offering price of any Units resold by the Sponsor will be the Public
Offering Price determined in the manner provided in this Prospectus. (See
"Public Offering--Offering Price.") 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 their
acquisition of such Units. (See "Public Offering--Sponsor's and Underwriters'
Profits.")
SPONSOR
Smith Barney Inc., 388 Greenwich Street, New York, New York 10013 ("Smith
Barney"), was incorporated in Delaware in 1960 and traces its history through
predecessor partnerships to 1873. Smith Barney, an investment banking and
securities broker-dealer firm, is a member of the New York Stock Exchange, Inc.
and other major securities and commodities exchanges, the National Association
of Securities Dealers, Inc. and the Securities Industry Association. Smith
Barney is an indirect wholly-owned subsidiary of The Travelers Inc.
Smith Barney or an affiliate is investment adviser, principal underwriter or
distributor of 60 open-end investment companies and investment manager of 12
closed-end investment companies. Smith Barney also sponsors all Series of
Corporate Securities Trust, Government Securities Trust, Harris, Upham Tax-
Exempt Fund and Tax Exempt Securities Trust, and acts as sponsor of most Series
of Defined Assets Funds. The Sponsor has acted previously as managing
underwriter of other investment companies. In addition to
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participating as a member of various underwriting and selling groups or as
agent of other investment companies, the Sponsor also executes orders for the
purchase and sale of securities of investment companies and sells securities to
such companies in its capacity as broker or dealer in securities.
LIMITATIONS ON LIABILITY
The Sponsor is liable for the performance of its obligations arising from its
responsibilities under the Trust Agreement, but will be under no liability to
Unit holders for taking any action or refraining from any action in good faith
or for errors in judgment or responsible in any way for depreciation or loss
incurred by reason of the sale of any Bonds, except in cases of willful
misfeasance, bad faith, gross negligence or reckless disregard of its
obligations and duties. (See "Sponsor--Responsibility" below.)
RESPONSIBILITY
Although the Trusts are not actively managed as mutual funds are, the
portfolios are reviewed periodically on a regular cycle. The Sponsor is
empowered to direct the Trustee to dispose of Bonds when certain events occur
that adversely affect the value of the Bonds, including default in payment of
interest or principal, default in payment of interest or principal on other
obligations of the same issuer, institution of legal proceedings, default under
other documents adversely affecting debt service, decline in price or the
occurrence of other market or credit factors, or decline in projected income
pledged for debt service on revenue Bonds and advanced refunding that, in the
opinion of the Sponsor, may be detrimental to the interests of the Unit
holders.
The Sponsor intends to provide Portfolio supervisory services for each Trust
in order to determine whether the Trustee should be directed to dispose of any
such Bonds.
It is the responsibility of the Sponsor to instruct the Trustee to reject any
offer made by an issuer of any of the Bonds to issue new obligations in
exchange and substitution for any Bonds pursuant to a refunding or refinancing
plan, except that the Sponsor may instruct the Trustee to accept such an offer
or to take any other action with respect thereto as the Sponsor may deem proper
if the issuer is in default with respect to such Bonds or in the judgment of
the Sponsor the issuer will probably default in respect to such Bonds in the
foreseeable future.
Any obligations so received in exchange or substitution will be held by the
Trustee subject to the terms and conditions 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 Unit holder, identifying the
Bonds eliminated and the Bonds substituted therefor. Except as stated in this
and the preceding paragraph, the acquisition by a Trust of any securities other
than the Bonds initially deposited in the Trust is prohibited.
RESIGNATION
If the Sponsor resigns or otherwise fails or becomes unable to perform its
duties under the Trust Agreement, and no express provision is made for action
by the Trustee in such event, the Trustee may appoint a successor sponsor or
terminate the Trust Agreement and liquidate the Trusts.
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, New York, New York 10004. The Trustee is
subject to supervision by the Superintendent of Banks of the State of New York,
the Federal Deposit Insurance Corporation and the Board of Governors of the
Federal Reserve System. In connection with the storage and handling of certain
Bonds deposited in the Trust, the Trustee may use the services of The
Depository Trust Company. These services may include safekeeping of the Bonds
and coupon-clipping, computer book-entry transfer and institutional delivery
services. The Depository Trust Company is a limited purpose trust company
organized under the Banking Law of the State of New York, a member of the
Federal Reserve System and a clearing agency registered under the Securities
Exchange Act of 1934.
LIMITATIONS ON LIABILITY
The Trustee shall not be liable or responsible in any way for depreciation or
loss incurred by reason of the disposition of any moneys, securities or
certificates or in respect of any evaluation or for any action taken in good
faith reliance on prima facie properly executed documents except in cases of
willful misfeasance, bad faith, gross negligence or reckless disregard for its
obligations and duties. In
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addition, the Trustee shall not be personally liable for any taxes or other
governmental charges imposed upon or in respect of a Trust which the Trustee
may be required to pay under current or future law of the United States or any
other taxing authority having jurisdiction. (See "Tax Exempt Securities Trust--
Portfolio.") For information relating to the responsibilities and
indemnification of the Trustee under the Trust Agreement, reference is made to
the material set forth under "Rights of Unit Holders", "Sponsor--Resignation"
and "Other Charges."
RESIGNATION
By executing an instrument in writing and filing the same with the Sponsor,
the Trustee and any successor may resign. In such an event the Sponsor is
obligated to appoint a successor trustee as soon as possible. If the Trustee
becomes incapable of acting or becomes bankrupt or its affairs are taken over
by public authorities, the Sponsor may remove the Trustee and appoint a
successor as provided in the Trust Agreement. Such resignation or removal shall
become effective upon the acceptance of appointment by the successor trustee.
If no successor has accepted the appointment within thirty days after notice of
resignation, the retiring trustee may apply to a court of competent
jurisdiction for the appointment of a successor. The resignation or removal of
a trustee becomes effective only when the successor trustee accepts its
appointment as such or when a court of competent jurisdiction appoints a
successor trustee.
EVALUATOR
The Evaluator is Kenny S&P Evaluation Services, a business unit of J.J. Kenny
Company, Inc., a subsidiary of The McGraw-Hill Companies, Inc., with main
offices located at 65 Broadway, New York, New York 10006.
LIMITATIONS ON LIABILITY
The Trustee, Sponsor and Unit holders may rely on any evaluation furnished by
the Evaluator and shall have no responsibility for the accuracy thereof.
Determination by the Evaluator under the Trust Agreement shall be made in good
faith upon the basis of the best information available to it; provided,
however, that the Evaluator shall be under no liability to the Trustee, the
Sponsor, or Unit holders for errors in judgment. But this provision shall not
protect the Evaluator in cases of willful misfeasance, bad faith, gross
negligence or reckless disregard of its obligations and duties.
RESPONSIBILITY
The Trust Agreement requires the Evaluator to evaluate the Bonds of a Trust
on the basis of their bid prices on the last business day of June and December
in each year, on the day on which any Unit of such Trust is tendered for
redemption and on any other day such evaluation is desired by the Trustee or is
requested by the Sponsor. For information relating to the responsibility of the
Evaluator to evaluate the Bonds on the basis of their offering prices, see
"Public Offering--Offering Price."
RESIGNATION
The Evaluator may resign or may be removed by the joint action of the Sponsor
and the Trustee, and in such event, the Sponsor and the Trustee are to use
their best efforts to appoint a satisfactory successor. Such resignation or
removal shall become effective upon the acceptance of appointment by a
successor evaluator. If upon resignation of the Evaluator no successor has
accepted appointment within thirty days after notice of resignation, the
Evaluator may apply to a court of competent jurisdiction for the appointment of
a successor.
AMENDMENT AND TERMINATION OF THE TRUST AGREEMENT
AMENDMENT
The Sponsor and the Trustee have the power to amend the Trust Agreement
without the consent of any of the Unit holders when such an amendment is (1) to
cure any ambiguity or to correct or supplement any provision of the Trust
Agreement which may be defective or inconsistent with any other provision
contained therein, or (2) to make such other provisions as shall not adversely
affect the interests of the Unit holders; provided, that the Trust Agreement is
not amended to increase the number of Units issuable thereunder or to permit
the deposit or acquisition of securities either in addition to or in
substitution for any of the Bonds initially deposited in a Trust, except for
the substitution of certain refunding securities for such Bonds or to permit
the Trustee to engage in business or investment activities not specifically
authorized in the Trust Agreement as originally adopted. In the event of any
amendment, the Trustee is obligated to notify promptly all Unit holders of the
substance of such amendment.
B-22
<PAGE>
TERMINATION
The Trust Agreement provides that if the principal amount of Bonds held in
Trust is less than 50% of the principal amount of the Bonds originally
deposited in such Trust, the Trustee may in its discretion and will, when
directed by the Sponsor, terminate such Trust. A Trust may be terminated at any
time by 100% of the Unit holders. However, in no event may a Trust continue
beyond the Mandatory Termination Date set forth under Part A, "Summary of
Essential Information." In the event of termination, written notice thereof
will be sent by the Trustee to all Unit holders. Within a reasonable period
after termination, the Trustee will sell any Bonds remaining in the affected
Trust, and, after paying all expenses and charges incurred by such Trust, will
distribute to each Unit holder, upon surrender for cancellation of his
certificate for Units, his pro rata share of the balances remaining in the
Interest and Principal Account of such Trust.
LEGAL OPINION
The legality of the Units has been passed upon by Battle Fowler LLP, 75 East
55th Street, New York, New York 10022, as special counsel for the Sponsor.
AUDITORS
The statements of financial condition and the portfolios of securities
included in this Prospectus have been audited by KPMG Peat Marwick LLP,
independent auditors, as indicated in their report with respect thereto, and is
included herein in reliance upon the authority of said firm as experts in
accounting and auditing.
BOND RATINGS+
All ratings shown under Part A, "Portfolio of Securities", except those
identified otherwise, are by Standard & Poor's.
STANDARD & POOR'S
A Standard & Poor's corporate or municipal bond rating is a current
assessment of the creditworthiness of an obligor with respect to a specific
debt obligation. This assessment of creditworthiness may take into
consideration obligors such as guarantors, insurers, or lessees.
The bond rating is not a recommendation to purchase or sell a security,
inasmuch as it does not comment as to market price or suitability for a
particular investor.
The ratings are based on current information furnished to Standard & Poor's
by the issuer and obtained by Standard & Poor's from other sources it considers
reliable. The ratings may be changed, suspended or withdrawn as a result of
changes in, or unavailability of, such information.
The ratings are based, in varying degrees, on the following considerations:
I. Likelihood of default--capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in accordance
with the terms of the obligation;
II. Nature of and provisions of the obligation; and
III. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization or other arrangement under the laws
of bankruptcy and other laws affecting creditors' rights.
AAA--This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay interest and repay
principal.
AA--Bonds rated AA have a very strong capacity to pay interest and repay
principal, and in the majority of instances they differ from AAA issues only in
small degrees.
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 weakened capacity to pay interest and repay principal for
bonds in this category than for bonds in the higher-rated categories.
Plus (+) or Minus (-): To provide more detailed indications of credit
quality, the ratings from "AA" to "BB" may be modified by the addition of a
plus or minus sign to show relative standing within the major rating
categories.
Provisional Ratings: The letter "p" following a rating indicates the rating
is provisional. A provisional rating assumes the successful completion of the
project being financed by the issuance of the bonds being rated and indicates
that payment of debt service requirements
- -------
+As described by the rating agencies.
B-23
<PAGE>
is largely or entirely dependent upon the successful and timely completion of
the project. This rating, however, while addressing credit quality subsequent
to completion, makes no comment on the likelihood of, or the risk of default
upon failure of, such completion. Accordingly, the investor should exercise his
own judgment with respect to such likelihood and risk.
Conditional rating(s), indicated by "Con" are given to bonds for which the
continuance of the security rating is contingent upon Standard & Poor's receipt
of an executed copy of the escrow agreement or closing documentation confirming
investments and cash flows and/or the security rating is conditional upon the
issuance of insurance by the respective insurance company.
MOODY'S
A brief description of the applicable Moody's rating symbols and their
meanings is as follows:
Aaa--Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge". Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa--Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. Aa bonds 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.
A--Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa--Bonds which are rated Baa are considered as medium grade obligations:
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Rating symbols may include numerical modifiers "1," "2," or "3." The
numerical modifier "1" indicates that the security ranks at the high end, "2"
in the mid-range, and "3" nearer the low end of the generic category. These
modifiers of rating symbols "Aa," "A" and "Baa" are to give investors a more
precise indication of relative debt quality in each of the historically defined
categories.
FITCH
AAA--These bonds are considered to be investment grade and of the highest
quality. The obligor has an extraordinary ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA--These bonds are considered to be investment grade and of high quality.
The obligor's ability to pay interest and repay principal, while very strong,
is somewhat less than for AAA rated securities or more subject to possible
change over the term of the issue.
A--These bonds are considered to be investment grade and of good quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions
and circumstances than bonds with higher ratings.
BBB--These bonds are considered to be investment grade and of satisfactory
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however are more likely to weaken this ability than bonds with
higher ratings.
A "+" or a "-" sign after a rating symbol indicates relative standing in its
rating.
DUFF & PHELPS
AAA--Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA--High credit quality. Protection factors are strong. Risk is modest but
may vary slightly from time to time because of economic conditions.
A--Protection factors are average but adequate. However, risk factors are
more variable and greater in periods of economic stress.
A "+" or a "-" sign after a rating symbol indicates relative standing in its
rating.
B-24
<PAGE>
FEDERAL TAX FREE VS. TAXABLE INCOME
This table shows the approximate yields which taxable securities must earn in
various income brackets to produce, after Federal income tax, returns
equivalent to specified tax-exempt bond yields. The table is computed on the
theory that the taxpayer's highest bracket tax rate is applicable to the entire
amount of any increase or decrease in his taxable income resulting from a
switch from taxable to tax-exempt securities or vice versa. The table reflects
projected Federal income tax rates and the tax brackets for the 1997 taxable
year. Because the Federal rate brackets are subject to adjustment based on
changes in the Consumer Price Index, the taxable equivalent yields for
subsequent years may vary somewhat from those indicated in the table. Use this
table to find your tax bracket. Read across to determine the approximate
taxable yield you would need to equal a return free of Federal income tax.
1997 TAX YEAR
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TAXABLE INCOME BRACKET TAX EXEMPT YIELD
FEDERAL
JOINT RETURN SINGLE RETURN TAX RATE 4.00% 4.50% 5.00% 5.50% 6.00% 6.50%
TAXABLE EQUIVALENT YIELD
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0-
41,200 $ 0- 24,650 15.00% 4.71% 5.29% 5.88% 6.47% 7.06% 7.65%
$ 41,201-
99,600 $ 24,651- 59,750 28.00% 5.56 6.25 6.94 7.64 8.33 9.03
$ 99,601-
121,200 $ 59,751-121,200 31.00% 5.80 6.52 7.25 7.97 8.70 9.42
$121,201-
151,750 $121,201-124,650 31.93% 5.88 6.61 7.35 8.08 8.81 9.55
$151,751-
271,050 $124,651-271,050 37.08% 6.36 7.15 7.95 8.74 9.54 10.33
OVER
$271,050 OVER $271,050 40.79% 6.76 7.60 8.44 9.29 10.13 10.98
- -------------------------------------------------------------------------------------
</TABLE>
Note: This table reflects the following:
1 Taxable income, as reflected in the above table, equals Federal adjusted
gross income (AGI), less personal exemptions and itemized deductions.
However, certain itemized deductions are reduced by the lesser of (i)
three percent of the amount of the taxpayer's AGI over $121,200, or (ii)
80 percent of the amount of such itemized deductions otherwise allowable.
The effect of the three percent phase out on all itemized deductions and
not just those deductions subject to the phase out is reflected above in
the combined Federal and state tax rates through the use of higher
effective Federal tax rates. In addition, the effect of the 80 percent
cap on overall itemized deductions is not reflected on this table.
Federal income tax rules also provide that personal exemptions are phased
out at a rate of two percent for each $2,500 (or fraction thereof) of AGI
in excess of $181,800 for married taxpayers filing a joint tax return and
$121,200 for single taxpayers. The effect of the phase out of personal
exemptions is not reflected in the above table.
2 Interest earned on municipal obligations may be subject to the federal
alternative minimum tax. This provision is not incorporated into the
table.
3 The taxable equivalent yield table does not incorporate the effect of
graduated rate structures in determining yields. Instead, the tax rates
used are the highest marginal tax rates applicable to the income levels
indicated within each bracket.
4 Interest earned on all municipal obligations may cause certain investors
to be subject to tax on a portion of their Social Security and/or
railroad retirement benefits. The effect of this provision is not
included in the above table.
PERFORMANCE INFORMATION
Sales material may compare tax-equivalent yields of long-term municipal bonds
to long-term U.S. Treasury bonds and to the Bond Buyer Revenue Bond Index. Such
information is based on past performance and is not indicative of future
results. Yields on taxable investment are generally higher than those of tax-
exempt securities of comparable maturity. While income from municipal bonds is
exempt from federal income taxes, income from Treasuries is exempt from state
and local taxes. Since Treasuries are considered to have the highest possible
credit quality, the difference in yields is somewhat narrower than if compared
to corporate bonds with similar ratings and maturities.
B-25
<PAGE>
PROSPECTUS--PART C:
- --------------------------------------------------------------------------------
NOTE: PART C OF THIS PROSPECTUS MAY NOT BE DISTRIBUTED UNLESS ACCOMPANIED BY
PARTS A AND B.
- --------------------------------------------------------------------------------
TAX EXEMPT SECURITIES TRUST--THE STATE TRUSTS
Potential purchasers of the Units of a State Trust should consider the fact
that the Trust's Portfolio consists primarily of Bonds issued by the state for
which such State Trust is named or its municipalities or authorities and
realize the substantial risks associated with an investment in such Bonds. Each
State Trust is subject to certain additional risk factors. The Sponsor believes
the discussions of risk factors summarized below describe some of the more
significant aspects of the State Trusts. The sources of such information are
the official statements of issuers as well as other publicly available
documents. While the Sponsor has not independently verified this information,
it has no reason to believe that such information is not correct in all
material respects. Investment in a State Trust should be made with an
understanding that the value of the underlying Portfolio may decline with
increases in interest rates.
CALIFORNIA TRUST
RISK FACTORS--
Beginning in the 1990-91 fiscal year, California faced the worst economic,
fiscal and budget conditions since the 1930s. Construction, manufacturing
(especially aerospace), exports and financial services, among others, were
severely affected. Job losses were the worst of any post-war recession and have
been estimated to exceed 800,000.
The recession seriously affected State tax revenues. It also caused increased
expenditures for health and welfare programs. The State has also faced a
structural imbalance in its budget with the largest programs supported by the
General Fund--K-12 schools and community colleges, health, welfare and
corrections--growing at rates higher than the growth rates for the principal
revenue sources of the General Fund. (The General Fund, the State's main
operating fund, consists of revenues which are not required to be credited to
any other fund.) The State experienced recurring budget deficits. The State
Controller reported that expenditures exceeded revenues for four of the six
fiscal years ending with 1992-93, and were essentially equal in 1993-94.
According to the Department of Finance, the State suffered a continuing budget
deficit of approximately $2.8 billion in the Special Fund for Economic
Uncertainties. (Special Funds account for revenues obtained from specific
revenue sources, and which are legally restricted to expenditures for specified
purposes.) The 1993-94 Budget Act incorporated a Deficit Reduction Plan to
repay this deficit over two years. The original budget for 1993-94 reflected
revenues which exceeded expenditures by approximately $2.8 billion. As a result
of continuing recession, the excess of revenues over expenditures for the 1993-
94 fiscal year was less than $300 million. The accumulated budget deficit at
June 30, 1994 was not able to be retired by June 30, 1995 as planned. When the
economy failed to recover sufficiently in 1993-94, a second two-year plan was
implemented in 1994-95. The accumulated budget deficits over the past several
years, together with expenditures for school funding which have not been
reflected in the budget, and the reduction of available internal borrowable
funds, have combined to significantly deplete the State's cash resources to pay
its ongoing expenses. In order to meet its cash needs, the State has had to
rely for several years on a series of external borrowings, including borrowings
past the end of a fiscal year. At the end of its 1995-96 fiscal year, however,
the State did not borrow moneys into the subsequent fiscal year.
Since the severe recession, California's economy has been recovering.
Employment has grown by over 500,000 in 1994 and 1995, and the prerecession
level of total employment is expected to be matched by early 1996. The
strongest growth has been in export-related industries, business services,
electronics, entertainment and tourism, all of which have offset the recession-
related losses which were heaviest in aerospace and defense-related industries
(accounting for approximately two-thirds of the job losses), finance and
insurance. Residential housing construction, with new permits for under 100,000
annual new units issued in 1994 and 1995, is weaker than in previous
recoveries, but has been growing slowly since 1993.
Sectors which are now contributing to California's recovery include
construction and related manufacturing, wholesale and retail trade,
transportation and several service industries such as amusements and
recreation, business services, and management consulting. Electronics is
showing modest growth and the rate of decline in aerospace manufacturing is
slowly diminishing. As a result of these factors, average 1994 non-farm
employment exceeded expectations and grew beyond 1993 levels.
Many California counties continue to be under severe fiscal stress. Such
stress has impacted smaller, rural counties and larger urban counties such as
Los Angeles, and Orange County, which declared bankruptcy in 1994. Orange
County has implemented significant reductions in services and personnel, and
continues to face fiscal constraints in the aftermath of its bankruptcy.
C-1
<PAGE>
1994-95 BUDGET
The 1994-95 Fiscal Year represented the fourth consecutive year the Governor
and Legislature were faced with a very difficult budget environment to produce
a balance budget. Many program cuts and budgetary adjustments have already been
made in the last three years. The Governor's May Revision to his Budget
proposal recognized that the accumulated deficit could not be repaid in one
year, and proposed a two-year solution. The May Revision set forth revenue and
expenditure forecasts and revenue and expenditure proposals which would result
in operating surpluses for the budget for both 1994-95 and 1995-96, and would
lead to the elimination of the accumulated deficit, estimated at about $2
billion at June 30, 1994, by June 30, 1996.
The 1994-95 Budget Act, signed by the Governor on July 8, 1994, projected
revenues and transfers of $41.9 billion, about $2.1 billion higher than
revenues in 1993-94. This reflected the Administration's forecast of an
improved economy. Also included in this figure was the projected receipt of
about $360 million from the Federal Government to reimburse the State for the
cost of incarcerating undocumented immigrants. The Legislature took no action
on a proposal in the Governor's January Budget to undertake expansion of the
transfer of certain programs to counties, which would also have transferred to
counties 0.5% of the State's current sales tax. The Budget Act projected
Special Fund revenues of $12.1 billion, a decrease of 2.4% from 1993-94
estimated levels.
The 1994-95 Budget Act projected General Fund expenditures of $40.9 billion,
an increase of $1.6 billion over 1993-94. The Budget Act also projected Special
Fund expenditures of $13.7 billion, a 5.4% increase over 1993-94 estimated
expenditures. The principal features of the Budget Act were the following:
1. Reductions of approximately $1.1 billion in health and welfare
programs.
2. A General Fund increase of approximately $38 million in support for
the University of California and $65 million for the California State
University. It was anticipated that student fees for both the U.C. and the
C.S.U. would increase up to 10%.
3. Proposition 98 funding for K-14 schools was increased by $526 million
from the 1993-94 levels, representing an increase for enrollment growth and
inflation. Consistent with previous budget agreements, Proposition 98
funding provided approximately $4,217 per student for K-12 schools, equal
to the level in the prior three years.
4. Legislation enacted with the Budget Act clarified laws passed in 1992
and 1993 requiring counties and other local agencies to transfer funds to
local school districts, thereby reducing State aid. Some counties had
implemented programs providing less moneys to schools if there were
redevelopment agencies projects. The legislation banned this method of
transfers. If all counties had implemented this method, General Fund aid to
K-12 schools would have increased by $300 million in each of the 1994-95
and 1995-96 Fiscal Years.
5. The Budget Act provided funding for anticipated growth in the State's
prison inmate population, including provisions for implementing recent
legislation (the so-called "Three Strikes" law) which requires mandatory
life sentences for certain third-time felony offenders.
6. Additional miscellaneous cuts ($500 million) and fund transfers ($255
million) totalling in the aggregate approximately $755 million.
The 1994-95 Budget Act contained no tax increases. Under legislation enacted
for the 1993-94 Budget, the renters' tax credit was suspended for 1993 and
1994. A ballot proposition to permanently restore the renters' credit after
this year failed at the June 1994 election. The Legislature enacted a further
one-year suspension of the renters' tax credit, saving about $390 million in
the 1995-96 Fiscal Year. The 1994-95 Budget assumed that the State would use a
cash flow borrowing program in 1994-95 which would combine one-year notes and
warrants. Issuance of the warrants would allow the State to defer repayment of
approximately $1 billion of its accumulated budget deficit into the 1995-96
Fiscal Year.
May 1995 reports by the Department of Finance indicated that General Fund
revenues for the 1994-95 Fiscal Year exceeded projections, and expenditures
were lower than projected due to slower than anticipated health/welfare
caseload growth and school enrollments. The overall effect was to improve the
budget by approximately $500 million, leaving an estimated deficit of about
$630 million as of June 30, 1995.
Department of Finance analysis of the 1994-95 Fiscal Year budget indicated
that approximately $98 million was appropriated for the State to offset costs
of incarcerating illegal immigrants, in contrast to the $356 million assumed
for this purpose by the State's 1994-95 Budget Act. Approximately $33 million
of these funds were estimated to be received by the State during the 1994-95
Fiscal Year, with the remainder to be received the following fiscal year.
Departing from 1994-95 Fiscal Year assumptions, the federal budget contains
$400 million in additional funding for refugee assistance and health costs.
However, the Department of Finance did not expect that the State would continue
its efforts to obtain all or a portion of these federal funds.
C-2
<PAGE>
1995-96 BUDGET
The state began the 1995-96 Fiscal Year with strengthening revenues based on
an improving economy and the smallest nominal "budget gap" to be closed in many
years.
The 1995-96 Budget Act, signed by the Governor on August 3, 1995, projects
General Fund revenues and transfers of $44.1 billion, about $2.2 billion higher
than projected revenues in 1994-95. The Budget Act projects Special Fund
revenues of $12.7 billion, an increase from $12.1 billion projected in 1994-95.
The Department of Finances released updated projections for the 1995-96
fiscal year in May, 1996, estimating that revenues and transfers to be $46.1
billion, approximately $2 billion over the original fiscal year estimate.
Expenditures also increased, to an estimated $45.4 billion, as a result of the
requirement to expend revenues for schools under Proposition 98, and, among
other things, failure of the federal government to budget new aid for illegal
immigrant costs which had been counted on to allow reductions in costs.
The principal features of the Budget Act were the following:
1. Proposition 98 funding for schools and community colleges will
increase by about $1 billion (General Fund) and $1.2 billion total above
revised 1994-95 levels. Because of higher than projected revenues in 1994-
95, an additional $543 million is appropriated to the 1994-95 Proposition
98 entitlement. A significant component of this amount is a block grant of
about $54 per pupil for any one-time purpose. Per-pupil expenditures are
projected to increase by another $126 in 1995-96 to $4,435. A full 2.7%
cost of living allowance is funded for the first time in several years. The
budget compromise anticipated a settlement of the CTA v. Gould litigation.
2. Cuts in health and welfare costs totaling about $900 million, some of
which would require federal legislative approval.
3. A 3.5% increase in funding for the University of California ($90
million General Fund) and the California State University system ($24
million General Fund), with no increases in student fees.
4. The updated Budget assumes receipt of $494 million in new federal aid
for costs of illegal immigrants, in excess of federal government
commitments.
5. General Fund support for the Department of Corrections is increased by
about 8 percent over 1994-95, reflecting estimates of increased prison
population. This amount is less than was proposed in the 1995 Governor's
Budget.
1996-97 BUDGET
The 1996-97 Budget Act was signed by the Governor on July 15, 1996, and
projected General Fund revenues and transfers of approximately $47.64 billion
and General Fund expenditures of approximately $47.25 billion. The Governor
vetoed about $82 million of appropriations (both General Fund and Special Fund)
and the State has implemented its regular cash flow borrowing program with the
issuance of $3.0 billion of Revenue Anticipation Notes to mature on or before
June 30, 1997. The 1996-97 Budget Act appropriated a budget reserve in the
Special Fund for Economic Uncertainties of $305 million, as of June 30, 1997.
The Department of Finance projects that, on June 30, 1997, the State's
available internal borrowable (cash) resources will be approximately $2.9
billion, after payment of all obligations due by that date, so that no cross-
fiscal year borrowing will be needed.
The State Legislature rejected the Governor's proposed 15% cut in personal
income taxes (to be phased over three years), but did approve a 5% cut in bank
and corporation taxes, to be effective for income years starting on June 1,
1997. As a result, revenues for the Fiscal Year will be an estimated $550
million higher than projected in the May Revision to the 1996-97 Budget, and
are now estimated to total $47.643 billion, a 3.3 percent increase over the
final estimated 1995-96 revenues. Special Fund revenues are estimated to be
$13.3 billion.
The Budget Act contains General Fund appropriations totaling $47.251 billion,
a 4.0 percent increase over the final estimated 1995-96 expenditures. Special
Fund expenditures are budgeted at $12.6 billion.
The following are the principal features of the 1996-97 Budget Act:
1. Proposition 98 funding for schools and community college districts
increased by almost $1.6 billion (General Fund) and $1.65 billion total
above revised 1995-96 level periods. Almost half of this money was budgeted
to fund class-size reduction in kindergarten and grades 1-3. Also, for the
second year in a row, the full cost of living allowance (3.2 percent) was
funded. The Proposition 98 increases have brought K-12 expenditures to
almost $4,800 per pupil (also called per ADA, or Average Daily Attendance),
an almost 15% increase over the level prevailing during the recession
years. Community colleges will receive an increase in funding of $157
million for 1996-97 out of this $1.6 billion total.
C-3
<PAGE>
2. Proposed cuts in health and welfare totaling $660 million. All of
these cuts require federal law changes (including welfare reform), federal
waivers, or federal budget appropriations in order to be achieved. The
1996-97 Budget Act assumes approval/action by October, 1996, with the
savings to be achieved beginning in November, 1996. The 1996-97 Budget Act
was based on continuation of previously approved assistance levels for Aid
to Families with Dependent Children and other health and welfare programs,
which had been reduced in prior years, including suspension of State
authorized cost of living increases. Part of the federal actions referred
to above is approval to maintain reduced assistance levels in 1996-97. The
Legislature did not approve the Governor's proposal for further cuts in
these assistance levels. The Budget Act does include some $92 million for a
variety of preventive programs in health and social services areas such as
the prevention of teenage pregnancy and domestic violence.
3. A 4.9 percent increase in funding for the University of California
($130 million General Fund) and the California State University system
($101 million General Fund), with no increases in student fees, maintaining
the second year of the Governor's four-year "Compact" with the State's
higher education units.
4. The 1996-97 Budget Act assumed the federal government will provide
approximately $700 million in new aid for incarceration and health care
costs of illegal immigrants. These funds reduce appropriations in these
categories that would otherwise have to be paid from the General Fund. (For
purposes of cash flow projections, the Department of Finance expects $540
million of this amount to be received during the 1996-97 fiscal year.)
5. General Fund support for the Department of Corrections was increased
by about 7 percent over the prior year, reflecting estimates of increased
prison population.
6. With respect to aid to local governments, the principal new programs
included in the 1996-97 Budget Act are $100 million in grants to cities and
counties for law enforcement purposes, and budgeted $50 million for
competitive grants to local governments for programs to combat juvenile
crime. The 1996-97 Budget Act also assumed that legislation will be adopted
to revise the Trial Court Funding program, so that future increases in
trial court costs will be funded by the State; this change will not have a
significant impact in 1996-97.
The 1996-97 Budget Act did not contain any tax increases. As noted, there was
a reduction in corporate taxes. In addition, the Legislature approved another
one-year suspension of the Renters Tax Credit, saving $520 million in
expenditures.
PROPOSED 1997-98 BUDGET
On January 9, 1997, Governor Wilson announced his proposed 1997-98 State
budget detailing plans to cut welfare, increase education spending and provide
certain tax cuts to businesses and banks. The total spending plan in the amount
of approximately $66.6 billion represents an increase of approximately 4% from
the 1996-97 State Budget, with an increase in the State's General Fund to
approximately $50.3 billion.
The Governor announced a proposal to restructure the State's welfare system,
placing strict time limits on the provision of assistance and introducing
penalties. In addition, the Governor proposed a 10% reduction in California's
bank and corporate taxes to be implemented over two years and a $200 million
bond issue to capitalize an infrastructure bank to help finance infrastructure
projects related to business development.
Under the Governor's education spending plan, the State would spend an
average of approximately $5,010 a year per public school pupil, with the total
from all sources reaching approximately $5,989 per student by the end of the
1997-1998 fiscal year. The Governor proposed a ballot measure seeking voter
approval of a $2 billion bond measure to fund new classrooms and construction.
The Governor's education plan also includes approximately $1.26 billion to fund
a program to lower class size to 20 students in kindergarten through third
grade. Public schools would receive a total of approximately $21 billion, and
California's colleges and universities are slated to receive approximately $6.5
billion.
THE FOREGOING DISCUSSION IS BASED ON OFFICIAL STATEMENTS AND OTHER
INFORMATION PROVIDED BY THE STATE OF CALIFORNIA. THE STATE HAS INDICATED THAT
ITS DISCUSSION OF BUDGETARY INFORMATION IS BASED ON ESTIMATES AND PROJECTIONS
OF REVENUES AND EXPENDITURES FOR THE CURRENT FISCAL YEAR AND MUST NOT BE
CONSTRUED AS STATEMENTS OF FACT; THE ESTIMATES AND PROJECTIONS ARE BASED UPON
VARIOUS ASSUMPTIONS WHICH MAY BE AFFECTED BY NUMEROUS FACTORS, INCLUDING FUTURE
ECONOMIC CONDITIONS IN THE STATE AND THE NATION, AND THERE CAN BE NO ASSURANCE
THAT THE ESTIMATES WILL BE ACHIEVED.
C-4
<PAGE>
RECENT VOTER INITIATIVE
"Proposition 218" or the "Right to Vote on Taxes Act" (the "Proposition") was
approved by the California electorate at the November, 1996 general election.
Officially titled "Voter Approval For Local Government Taxes, Limitation on
Fees, Assessments and Charges Initiative Constitutional Amendment," the Act was
approved by a majority of the voters voting at the election and adds Articles
XIIIC and XIIID to the California Constitution.
The Proposition, among other things, requires local governments to follow
certain procedures in imposing or increasing any fee or charge as defined.
"Fee" or "charge" is defined to mean "any levy other than an ad valorem tax, a
special tax or an assessment imposed by an agency upon a parcel or upon a
person as an incident of property ownership, including user fees or charges for
a property related service."
The procedure required by the Proposition to impose or increase any fee or
charge include a public hearing upon the proposed fee or charge and the
opportunity to present written protests by the owners of the parcels subject to
the proposed fee or charge. If written protests against the proposed fee or
charge are presented by a majority of owners of the identified parcels, the
local government shall not impose the fee or charge.
The Proposition further provides as follows:
"Except for fees or charges for sewer, water, and refuse collection
services, no property related fee or charge shall be imposed or increased
unless and until such fee or charge is submitted and approved by a majority
vote of the property owners of the property subject to the fee or charge
or, at the option of the agency, by a two-thirds vote of the electorate
residing in the affected area."
Additionally, the Proposition provides, with respect to standby charges, as
follows:
"No fee or charge may be imposed for a service unless that service is
actually used by, or immediately available to, the owner of the property in
question. Fees or charges based on potential or future use of a service are
not permitted. Standby charges, whether characterized as charges or
assessments, shall be classified as assessments and shall not be imposed
without compliance with Section 4 of this Article."
The Proposition provides that beginning July 1, 1997, all fees or charges
shall comply with the Proposition's requirements.
The Proposition is silent with respect to future increases of pre-existing
fees or charges which are pledged to payment of indebtedness or obligations
previously incurred by the local government. Presumably, the Proposition cannot
preempt outstanding contractual obligations protected by the contract
impairment clause of the federal constitution. However, with respect to any
given situation or case, litigation may be the method which will settle any
question concerning the authority of a local government to increase fees or
charges outside of the strictures of the Proposition in order to meet
contractual obligations.
Proposition 218 also contains a new provision subjecting "matters of reducing
or repealing any local tax, assessments and charges" to the initiative power.
This means that no city or local agency revenue source is safe from reduction
or repeal pursuant to the initiative process.
Litigation concerning various elements of the Proposition may ultimately
ensue and clarifying legislation may be enacted.
STATE APPROPRIATIONS LIMIT
The State is subject to an annual appropriations limit imposed by Article
XIIIB of the State Constitution (the "Appropriations Limit"), and is prohibited
from spending "appropriations subject to limitation" in excess of the
Appropriations Limit. Article XIIIB, originally adopted in 1979, was modified
substantially by Propositions 98 and 111 in 1988 and 1990, respectively.
"Appropriations subject to limitation" are authorizations to spend "proceeds of
taxes," which consist of tax revenues and certain other funds, including
proceeds from regulatory licenses, user charges or other fees to the extent
that such proceeds exceed the reasonable cost of providing the regulation,
product or service. The Appropriations Limit is based on the limit for the
prior year, adjusted annually for certain changes, and is tested over
consecutive two-year periods. Any excess of the aggregate proceeds of taxes
received over such two-year period above the combined Appropriation Limits for
those two years is divided equally between transfers to K-14 districts and
refunds to taxpayers.
Exempted from the Appropriations Limit are debt Service costs of certain
bonds, court or federally mandated costs, and, pursuant to Proposition 111,
qualified capital outlay projects and appropriations or revenues derived from
any increase in gasoline taxes and motor vehicle weight fees above January 1,
1990 levels. Some recent initiatives were structured to create new tax revenues
dedicated to specific
C-5
<PAGE>
uses and expressly exempted from the Article XIIIB limits. The Appropriations
Limit may also be exceeded in cases of emergency arising from civil disturbance
or natural disaster declared by the Governor and approved by two-thirds of the
Legislature. If not so declared and approved, the Appropriations Limit for the
next three years must be reduced by the amount of the excess.
Article XIIIB, as amended by Proposition 98 on November 8, 1988, also
establishes a minimum level of state funding for school and community college
districts and requires that excess revenues up to a certain limit be
transferred to schools and community college districts instead of returned to
the taxpayers. Determination of the minimum level of funding is based on
several tests set forth in Proposition 98. During fiscal year 1991-1992
revenues were smaller than expected, thus reducing the payment owed to schools
in 1991-92 under alternate "test" provisions. In response to the changing
revenue situation, and to fully fund the Proposition 98 guarantee in the 1991-
1992 and 1992-1993 fiscal years without exceeding it, the Legislature enacted
legislation to reduce 1991-92 appropriations. The amount budgeted to schools
but which exceeded the reduced appropriation was treated as a non-Proposition
98 short-term loan in 1991-92. As part of the 1992-93 Budget, $1.083 billion of
the amount budgeted to K-14 schools was designated to "repay" the prior year
loan, thereby reducing cash outlays in 1992-93 by that amount. To maintain per-
average daily attendance ("ADA") funding, the 1992-93 Budget included loans of
$732 million to K-12 schools and $241 million to community colleges, to be
repaid from future Proposition 98 entitlements. The 1993-94 Budget also
provided new loans of $609 million to K-12 schools and $178 million to
community colleges to maintain ADA funding. These loans have been combined with
the 1992-93 fiscal year loans into one loan of $1.760 billion, to be repaid
from future years' Proposition 98 entitlements, and conditioned upon
maintaining current funding levels per pupil at K-12 schools.
A Sacramento County Superior Court in California Teachers' Association, et
al. v Gould, et al., ruled that the 1992-93 loans to K-12 schools and community
colleges violate Proposition 98. As part of the negotiations leading to the
1995-96 Budget Act, an oral agreement was reached to settle this case. The
parties reached a conditional final settlement of the case in April, 1996. The
settlement required adoption of legislation satisfactory to the parties to
implement its terms, which has occurred, and final approval by the court, which
was pending in early July, 1996.
The settlement provides, among other things, that both the State and K-14
schools share in the repayment of prior years' emergency loans to schools. Of
the total $1.76 billion in loans, the State will repay $935 million by
forgiveness of the amount owed, while schools will repay $825 million. The
State share of the repayment will be reflected as expenditures above the
current Proposition 98 base circulation. The schools' share of the repayment
will count as appropriations that count toward satisfying the Propositions 98
guarantee, or from "below" the current base. Repayments are to be spread over
the eight-year period beginning 1994-95 through 2002-03. Once the Director of
Finance certifies that a settlement has occurred, approximately $377 million in
appropriations from the 1995-96 fiscal year to schools will be disbursed.
Because of the complexities of Article XIIIB, the ambiguities and possible
inconsistencies in its terms, the applicability of its exceptions and
exemptions and the impossibility of predicting future appropriations, the
Sponsor cannot predict the impact of this or related legislation on the bonds
in the Trust Portfolio. Other Constitutional amendments affecting state and
local taxes and appropriations have been proposed from time to time. If any
such initiatives are adopted, the state could be pressured to provide
additional financial assistance to local governments or appropriate revenues as
mandated by such initiatives. Propositions such as Proposition 98 and others
that may be adopted in the future, may place increasing pressure on the State's
budget over future years, potentially reducing resources available for other
State programs, especially to the extent that the Article XIIIB spending limit
would restrain the State's ability to fund such other programs by raising
taxes.
STATE INDEBTEDNESS
As of July 1, 1996, the State had over $18.20 billion aggregate amount of its
general obligation bonds outstanding. General obligation bond authorizations in
an aggregate amount of approximately $4.31 billion remained unissued as of July
1, 1996. The State also builds and acquires capital facilities through the use
of lease purchase borrowing. As of July 1, 1996, the State had approximately
$5.85 billion of outstanding Lease-Purchase Debt.
In addition to the general obligation bonds, State agencies and authorities
had approximately $20.77 billion aggregate principal amount of revenue bonds
and notes outstanding as of June 30, 1996. Revenue bonds represent both
obligations payable from State revenue-producing enterprises and projects,
which are not payable from the General Fund, and conduit obligations payable
only from revenues paid by private users of facilities financed by such revenue
bonds. Such enterprises and projects include transportation projects, various
public works and exposition projects, educational facilities (including the
California State University and University of California systems), housing,
health facilities and pollution control facilities.
C-6
<PAGE>
LITIGATION
The State is a party to numerous legal proceedings. In addition, the State is
involved in certain other legal proceedings that, if decided against the State,
might require the State to make significant future expenditures or impair
future revenue sources. Examples of such cases include challenges to certain
vehicle license fees and challenges to the State's use of Public Employee
Retirement System funds to offset future State and local pension contributions.
Other cases which could significantly impact revenue or expenditures involve
challenges of payments of wages under the Fair Labor Standards Act, the method
of determining gross insurance premiums involving health insurance, property
tax challenges, challenges of transfer of moneys from State Treasury special
fund accounts to the State's General Fund pursuant to 1991, 1992, 1993 and 1994
Budget Acts. Because of the prospective nature of these proceedings, it is not
presently possible to predict the outcome of such litigation or estimate the
potential impact on the ability of the State to pay debt service on its
obligation.
RATINGS
During 1996, the ratings of California's general obligation bonds was
upgraded by the following rating agencies. Recently Standard & Poor's Ratings
Group upgraded its rating of such debt to A+; the same rating has been assigned
to such debt by Fitch Investors Service. Moody's Investors Service has assigned
such debt an A1 rating. Any explanation of the significance of such ratings may
be obtained only from the rating agency furnishing such ratings. There is no
assurance that such ratings will continue for any given period of time or that
they will not be revised downward or withdrawn entirely if, in the judgment of
the particular rating agency, circumstances so warrant.
The Sponsor believes the information summarized above describes some of the
more significant aspects relating to the California Trust. The sources of such
information are Preliminary Official Statements and Official Statements
relating to the State's general obligation bonds and the State's revenue
anticipation notes, or obligations of other issuers located in the State of
California, or other publicly available documents. Although the Sponsor has not
independently verified this information, it has no reason to believe that such
information is not correct in all material respects.
CALIFORNIA TAXES --
In the opinion of LeBoeuf, Lamb, Greene & MacRae L.L.P., Los Angeles,
California, special counsel on California tax matters, under existing law:
The California Trust is not taxable as a corporation for California tax
purposes. Interest on the underlying Securities owned by the California
Trust that is exempt from personal income taxes imposed by the State of
California will retain its status as interest exempt from personal income
tax imposed by the State of California.
Each Unit Holder of the California Trust will recognize gain or loss on
the sale, redemption or other disposition of Securities within the
California Trust, or on the sale or other disposition of Unit Holders
interest in the California Trust. As a result, a Unit Holder may incur
California tax liability upon the sale, redemption or other disposition of
Securities within the California Trust or upon the sale or other
disposition of his or her Units.
It is notable that the exemption of interest income with respect to
Securities within the California Trust under the California personal income
tax law does not necessarily result in exemption under the income tax laws
of the federal government or any other state or political subdivision. The
laws of state and local taxing authorities vary with respect to the
taxation of such obligations and each Unit Holder should consult his or her
own tax advisor as to the tax consequences of his or her investment in the
California Trust under other applicable federal, state and local tax laws.
C-7
<PAGE>
TAX FREE VS. TAXABLE INCOME
The following tables show the approximate yields which taxable securities
must earn in various income brackets to equal tax exempt yields under combined
Federal and state individual income tax rates. This table reflects projected
Federal income tax rates and tax brackets for the 1997 taxable year and state
income tax rates that were available on the date of the Prospectus. Because
the Federal rate brackets are subject to adjustment based on changes in the
Consumer Price Index, the taxable equivalent yields for subsequent years may
be lower than indicated. A table is computed on the theory that the taxpayer's
highest bracket tax rate is applicable to the entire amount of any increase or
decrease in taxable income (after allowance for any resulting change in state
income tax) resulting from a switch from taxable to tax-free securities or
vice versa. Variations between state and Federal allowable deductions and
exemptions are generally ignored. The state tax is thus computed by applying
to the Federal taxable income bracket amounts shown in the table the
appropriate state rate for those same dollar amounts. For example, a married
couple living in the State of California and filing a Joint Return with
$53,000 in taxable income for the 1997 tax year would need a taxable
investment yielding 9.06% in order to equal a tax-free return of 6.00%. Use
the appropriate table to find your tax bracket. Read across to determine the
approximate taxable yield you would need to equal a return free of Federal
income tax and state income tax.
STATE OF CALIFORNIA
1997 TAX YEAR
<TABLE>
<CAPTION>
APPROX. COMBINED TAX EXEMPT YIELD
TAXABLE FEDERAL & STATE 4.00% 4.50% 5.00% 5.50% 6.00% 6.50%
INCOME BRACKET TAX RATE
TAXABLE EQUIVALENT YIELD
JOINT RETURN
<S> <C> <C> <C> <C> <C> <C> <C>
$0-9,816 15.85% 4.75% 5.35% 5.94% 6.54% 7.13% 7.72%
$9,817-23,264 16.70 4.80 5.40 6.00 6.60 7.20 7.80
$23,265-36,714 18.40 4.90 5.51 6.13 6.74 7.35 7.97
$36,715-41,200 20.10 5.01 5.63 6.26 6.88 7.51 8.14
$41,201-50,968 32.32 5.91 6.65 7.39 8.13 8.87 9.60
$50,969-64,414 33.76 6.04 6.79 7.55 8.30 9.06 9.81
$64,415-99,600 34.70 6.13 6.89 7.66 8.42 9.19 9.95
$99,601-121,200 37.42 6.39 7.19 7.99 8.79 9.59 10.39
$121,201-151,750 38.26 6.48 7.29 8.10 8.91 9.72 10.53
$151,751-271,050 42.93 7.01 7.89 8.76 9.64 10.51 11.39
Over $271,050 46.29 7.45 8.38 9.31 10.24 11.17 12.10
<CAPTION>
SINGLE RETURN
<S> <C> <C> <C> <C> <C> <C> <C>
$0-4,908 15.85% 4.75% 5.35% 5.94% 6.54% 7.13% 7.72%
$4,909-11,632 16.70 4.80 5.40 6.00 6.60 7.20 7.80
$11,633-18,357 18.40 4.90 5.51 6.13 6.74 7.35 7.97
$18,358-24,650 20.10 5.01 5.63 6.26 6.88 7.51 8.14
$24,651-25,484 32.32 5.91 6.65 7.39 8.13 8.87 9.60
$25,485-32,207 33.76 6.04 6.79 7.55 8.30 9.06 9.81
$32,208-59,750 34.70 6.13 6.89 7.66 8.42 9.19 9.95
$59,751-121,200 37.42 6.39 7.19 7.99 8.79 9.59 10.39
$121,201-124,650 38.26 6.48 7.29 8.10 8.91 9.72 10.53
$124,651-271,050 42.93 7.01 7.89 8.76 9.64 10.51 11.39
Over $271,050 46.29 7.45 8.38 9.31 10.24 11.17 12.10
</TABLE>
- -------
Note: This table reflects the following:
1 The above tax rates represent 1997 Federal income tax rates and 1996
California Income tax rates. California has not yet published its
1997 personal income tax rates.
2 Taxable income, as reflected in the above table, equals Federal
adjusted gross income (AGI), less personal exemptions and itemized
deductions (including the deduction for state income tax). However,
certain itemized deductions are reduced by the lesser of (i) three
percent of the amount of the taxpayer's AGI over $121,200, or (ii) 80
percent of the amount of such itemized deductions otherwise
allowable. The effect of the three percent phase out on all itemized
deductions and not just those deductions subject to the phase out is
reflected above in the combined Federal and state tax rates through
the use of higher effective Federal tax rates. In addition, the
effect of the 80 percent cap on overall itemized deductions is not
reflected on this table. Federal income tax rules also provide that
personal exemptions are phased out at a rate of two percent for each
$2,500 (or fraction thereto) of AGI in excess of $181,800 for married
taxpayers filing a joint tax return and $121,200 for single
taxpayers. The effect of the phase out of personal exemptions is not
reflected in the table above.
3 Interest earned on municipal obligations may be subject to the
federal alternative minimum tax. The effect of this provision is not
incorporated into the table.
4 The taxable equivalent yield table does not incorporate to the
effect of graduated rate structures in determining yields. Instead,
the tax rates used are the highest rates applicable to the income
levels indicated within each bracket.
5 Interest earned on municipal obligations may cause certain investors
to be subject to tax on a portion of their Social Security and/or
railroad retirement benefits. The effect of this provision is not
included in the above table.
C-8
<PAGE>
PROSPECTUS
THIS PROSPECTUS CONTAINS INFORMATION CONCERNING THE TRUST AND THE SPONSOR, BUT
DOES NOT CONTAIN ALL THE INFORMATION SET FORTH IN THE REGISTRATION STATEMENTS
AND EXHIBITS RELATING THERETO, WHICH THE TRUST HAS FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION, WASHINGTON, D.C., UNDER THE SECURITIES ACT OF 1933 AND
THE INVESTMENT COMPANY ACT OF 1940, AND TO WHICH REFERENCE IS HEREBY MADE.
INDEX:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUMMARY OF ESSENTIAL INFORMATION........................................... A-2
PORTFOLIO SUMMARY AS OF DATE OF DEPOSIT.................................... A-4
UNDERWRITING............................................................... A-5
INDEPENDENT AUDITORS' REPORT............................................... A-6
STATEMENTS OF FINANCIAL CONDITION OF THE TAX EXEMPT SECURITIES TRUST....... A-7
NOTES TO PORTFOLIOS OF SECURITIES.......................................... A-12
TAX EXEMPT SECURITIES TRUST................................................ B-1
THE TRUSTS................................................................ B-1
OBJECTIVES................................................................ B-1
PORTFOLIO................................................................. B-1
RISK FACTORS.............................................................. B-2
THE UNITS................................................................. B-12
TAXES..................................................................... B-12
EXPENSES AND CHARGES...................................................... B-14
PUBLIC OFFERING............................................................ B-15
OFFERING PRICE............................................................ B-15
METHOD OF EVALUATION...................................................... B-15
DISTRIBUTION OF UNITS..................................................... B-16
MARKET FOR UNITS.......................................................... B-16
EXCHANGE OPTION........................................................... B-16
REINVESTMENT PROGRAMS..................................................... B-17
SPONSOR'S AND UNDERWRITERS' PROFITS....................................... B-17
RIGHTS OF UNIT HOLDERS..................................................... B-18
CERTIFICATES.............................................................. B-18
DISTRIBUTION OF INTEREST AND PRINCIPAL.................................... B-18
REPORTS AND RECORDS....................................................... B-19
REDEMPTION OF UNITS....................................................... B-19
SPONSOR.................................................................... B-20
LIMITATIONS ON LIABILITY.................................................. B-21
RESPONSIBILITY............................................................ B-21
RESIGNATION............................................................... B-21
TRUSTEE.................................................................... B-21
LIMITATIONS ON LIABILITY.................................................. B-21
RESIGNATION............................................................... B-22
EVALUATOR.................................................................. B-22
LIMITATIONS ON LIABILITY.................................................. B-22
RESPONSIBILITY............................................................ B-22
RESIGNATION............................................................... B-22
AMENDMENT AND TERMINATION OF THE TRUST AGREEMENT........................... B-22
AMENDMENT................................................................. B-22
TERMINATION............................................................... B-23
LEGAL OPINION.............................................................. B-23
AUDITORS................................................................... B-23
BOND RATINGS............................................................... B-23
FEDERAL TAX FREE VS. TAXABLE INCOME........................................ B-25
THE STATE TRUSTS........................................................... C-1
TAX FREE VS. TAXABLE INCOME................................................ C-8
</TABLE>
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN
OFFER TO BUY, SECURITIES IN ANY STATE TO ANY PERSON TO WHOM IT IS NOT LAWFUL TO
MAKE SUCH OFFER IN SUCH STATE.
TAX EXEMPT
SECURITIES
TRUST
------------
15,000 UNITS
------------
Prospectus
Dated January 15, 1997
------------
SPONSOR
SMITH BARNEY INC.
388 GREENWICH STREET
23RD FLOOR
NEW YORK, NEW YORK 10013
(800) 223-2532
