<PAGE>
Registration Nos. 333-62527
333-59697
Rule No. 497(g)
---------------------------------------------------------
TAX EXEMPT
SECURITIES
TRUST
California Trust 166 New York Trust 170
- ---------------------- ---------------------------------------------------
8,000 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 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 California Trust 166 and New York Trust 170 (the
"California Trust," and the "New York 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. In addition, during the initial public
offering period, cash in an amount sufficient to reimburse the Sponsor for the
per Unit portion of all or part of the estimated organization costs (the
"organization costs") of a Trust will be added to the Public Offering Price per
Unit. 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 November 4, 1998, the Public Offering Price per
Unit (including the sales charge and estimated organization costs) would have
been $1,039.55, and $1,041.50 for the California Trust and the New York 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.
- --------------------------------------------------------------------------------
SALOMON SMITH BARNEY
----------------------------
A member of citigroup [LOGO]
The date of this Prospectus is November 5, 1998
<PAGE>
TAX EXEMPT SECURITIES TRUST
SUMMARY OF ESSENTIAL INFORMATION AS OF NOVEMBER 4, 1998 +
SPONSOR RECORD DATES
Salomon Smith Barney Inc. The first day of each month,
commencing December 1, 1998
TRUSTEE
DISTRIBUTION DATES
The Chase Manhattan Bank
The fifteenth day of each
month,** commencing December
15, 1998
EVALUATOR
Kenny S & P Evaluation Services,
a business unit of J.J. Kenny EVALUATION TIME
Company, Inc.
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
November 4, 1998 EVALUATOR'S FEE
MANDATORY TERMINATION DATE* The Evaluator will receive a
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 $3.56, and $3.64 for the
California Trust and New York Trust, respectively, will be made on
December 15, 1998.
*** 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>
CALIFORNIA NEW YORK
TRUST 166 TRUST 170
---------- ----------
<S> <C> <C>
Principal Amount of Bonds in Trust..................... $4,000,000 $4,000,000
Number of Units........................................ 4,000 4,000
Principal Amount of Bonds in Trust per Unit............ $ 1,000 $ 1,000
Fractional Undivided Interest in Trust per Unit........ 1/4,000 1/4,000
Minimum Value of Trust:
Trust Agreement may be Terminated if Principal Amount
is less than........................................ $2,000,000 $2,000,000
Calculation of Public Offering Price per Unit*:
Aggregate Offering Price of Bonds in Trust........... $3,953,250 $3,960,693
========== ==========
Divided by Number of Units........................... $ 988.31 $ 990.17
Plus: Sales Charge (4.70% of the Public Offering
Price).............................................. $ 48.74 $ 48.83
---------- ----------
Public Offering Price per Unit....................... $ 1,037.05 $ 1,039.00
Plus: Estimated Organization Expenses**.............. $ 2.50 $ 2.50
Plus: Accrued Interest*.............................. $ .79 $ .81
---------- ----------
Total.............................................. $ 1,040.34 $ 1,042.31
========== ==========
Sponsor's Initial Repurchase Price per Unit (per Unit
Offering Price of Bonds)***......................... $ 988.31 $ 990.17
Approximate Redemption Price per Unit (per Unit Bid
Price of Bonds)***.................................. $ 984.33 $ 986.17
---------- ----------
Difference Between per Unit Offering and Bid Prices of
Bonds................................................. $ 3.98 $ 4.00
========== ==========
Calculation of Estimated Net Annual Income per Unit:
Estimated Annual Income per Unit..................... $ 49.25 $ 50.37
Less: Estimated Trustee's Annual Fee****............. $ 1.11 $ 1.12
Less: Other Estimated Annual Expenses................ $ .62 $ .65
---------- ----------
Estimated Net Annual Income per Unit................. $ 47.52 $ 48.60
========== ==========
Calculation of Monthly Income Distribution per Unit:
Estimated Net Annual Income per Unit................ $ 47.52 $ 48.60
Divided by 12........................................ $ 3.96 $ 4.05
Accrued interest from the day after the Date of Deposit
to the first record date***......................... $ 3.56 $ 3.64
First distribution per unit............................ $ 3.56 $ 3.64
Daily Rate (360-day basis) of Income Accrual per Unit.. $ .1320 $ .1350
Estimated Current Return based on Public Offering
Price*****............................................ 4.57% 4.67%
Estimated Long-Term Return*****........................ 4.50% 4.57%
</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).
** Investors will reimburse the Sponsor, on a per Unit basis, all or a
portion of the estimated costs incurred in organizing the Trust--
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's portfolios. The
estimated organization costs will be paid to the Sponsor from the assets
of a Trust as of the close of the initial public offering period. To the
extent that actual organization costs are less than the estimated
amount, only the actual organization costs will be deducted from the
assets of a Trust.
*** 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 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. As of the close of the initial offering period, the
Redemption Price per Unit and the Sponsor's Repurchase Price per Unit
for each Trust will be reduced to reflect the payment of the per Unit
organization costs. (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.").
***** 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 THE DATE OF DEPOSIT
CALIFORNIA TRUST 166
The Portfolio of the California Trust contains 15 issues of Bonds of issuers
located in the State of California. Two of the issues (representing
approximately 10.5%* of the Bonds in the Trust) are general obligations of
governmental entities and are backed by the taxing power of those entities.
The remaining 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: 17.1%; power facilities: 2.6%; transportation facilities:
2.5%; water and sewer facilities: 10.0%; convention facilities: 12.3%; special
tax: 12.2%; tax allocation: 11.4%; and lease rental payments: 21.4%. 85.6% of
the Bonds in this Trust are insured as to timely payment of principal and
interest by certain insurance companies (AMBAC, 52.2%, FGIC,8.1%; and
MBIA,25.3%) (see Part B, "Tax Exempt Securities Trust--Risk Factors--
Insurance"). Thirteen 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 California Trust is 27.4 years.
As of the Date of Deposit, 97.4% of the Bonds in this Trust are rated by
Standard & Poor's (88.0% rated AAA, and 9.4% rated A); and 2.6% are rated Aa
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.
34.4% 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.")
NEW YORK TRUST 170
The Portfolio of the New York Trust contains 15 issues of Bonds of issuers
located in the State of New York. One of the issues (representing
approximately 6.4%* of the Bonds in the Trust) is a general obligation of a
governmental entity and is backed by the taxing power of that entity. The
remaining 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: 19.3%; housing facilities: 9.6%; power facilities: 6.4%;
transportation facilities: 2.9%; industrial development facilities: 8.3%;
educational facilities: 28.1%; water and sewer facilities: 6.1%; and
correctional facilities: 12.9%. The Trust is considered to be concentrated in
educational issues.+ (See Part B, "Tax Exempt Securities Trust--Risk Factors"
for a brief summary of additional considerations relating to certain of these
issues.) 34.9% of the Bonds in this Trust are insured as to timely payment of
principal and interest by certain insurance companies (AMBAC, 4.0%; FGIC,
9.0%; FSA, 6.3%; and MBIA, 15.6%) (see Part B, "Tax Exempt Securities Trust--
Risk Factors--Insurance"). Fourteen 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 New York Trust is 27.0 years.
- -------
* 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>
As of the Date of Deposit, 65.2% of the Bonds in this Trust are rated by
Standard & Poor's (34.9% rated AAA, 9.6% rated AA and 20.7% rated A); and
34.8% are rated A by Fitch. 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.
6.4% of the Bonds in the New York 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.")
A-5
<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
--------------------
CALIFORNIA NEW YORK
TRUST 166 TRUST 170
---------- ---------
<S> <C> <C>
Salomon Smith Barney Inc. ................................. 3,650 3,800
388 Greenwich Street
New York, New York 10013
Gruntal & Co. Incorporated................................. 250 100
1 Liberty Plaza
New York, New York 10006
Oppenheimer & Co., Inc. ................................... 100 100
Oppenheimer Tower
One World Financial Center
New York, New York 10281
------ ------
Total...................................................... 4,000 4,000
====== ======
</TABLE>
A-6
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Sponsor, Trustee and Unit Holders of Tax Exempt Securities Trust,
California Trust 166 and New York Trust 170:
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, California Trust 166 and New York
Trust 170 as of November 4, 1998. 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 November 4, 1998, 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, California
Trust 166 and New York Trust 170 as of November 4, 1998, in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
New York, New York
November 4, 1998
A-7
<PAGE>
TAX EXEMPT SECURITIES TRUST
STATEMENTS OF FINANCIAL CONDITION
AS OF DATE OF DEPOSIT, NOVEMBER 4, 1998
<TABLE>
<CAPTION>
TRUST PROPERTY
---------------------
CALIFORNIA NEW YORK
TRUST 166 TRUST 170
---------- ----------
<S> <C> <C> <C> <C>
Investment in Tax-Exempt Securities:
Bonds represented by purchase contracts backed
by letter of credit (1)....................... $3,953,250 $3,960,693
Accrued interest through the Date of Deposit on
underlying bonds (1)(2)......................... 43,513 49,427
Cash (3)......................................... 10,000 10,000
---------- ----------
Total........................................ $4,006,763 $4,020,120
========== ==========
<CAPTION>
LIABILITIES AND
INTEREST OF UNIT
HOLDERS
---------------------
<S> <C> <C> <C> <C>
Liabilities:
Accrued interest through the Date of Deposit on
underlying bonds (1)(2)....................... $ 43,513 $ 49,427
Reimbursement to Sponsor for Organization Costs
(3)........................................... 10,000 10,000
---------- ----------
53,513 59,427
---------- ----------
Interest of Unit Holders:
Units of fractional undivided interest out-
standing (California Trust 166: 4,000; New
York Trust 170: 4,000) Cost to investors (4).. 4,158,216 4,166,014
Less--Gross underwriting commission (5)....... 194,966 195,321
Less--Organization Costs (3).................. 10,000 10,000
---------- ----------
Net amount applicable to investors............ 3,953,250 3,960,693
---------- ----------
Total........................................ $4,006,763 $4,020,120
========== ==========
</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 November 4, 1998, the Date of Deposit, determined by
the Evaluator on the basis set forth in Part B, "Public Offering--Offering
Price." Svenska Handelsbanken issued an irrevocable letter of credit in
the aggregate principal amount of $9,000,000 which was deposited with the
Trustee for the purchase of $8,000,000 principal amount of Bonds in all of
the Trusts, pursuant to contracts to purchase such Bonds at the aggregate
cost of $7,913,943 plus $92,940 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) A portion of the Public Offering Price consists of cash in an amount
sufficient to reimburse the Sponsor for the per Unit portion of all or a
part of the organization costs of establishing a Trust. These costs have
been estimated at $2.50 and $2.50 per Unit for the California Trust and
New York Trust, respectively. A payment will be made as of the close of
the initial public offering period to an account maintained by the Trustee
from which the obligation of the investors to the Sponsor will be
satisfied. To the extent that actual organization expenses are less than
the estimated amount, only the actual organization expenses will be
deducted from the assets of a Trust.
(4) Aggregate public offering price (exclusive of interest) computed on 4,000,
and 4,000 Units of California Trust and New York Trust, respectively, on
the basis set forth in Part B, "Public Offering--Offering Price."
(5) Sales charge of 4.70% computed on 4,000 and 4,000 Units of California
Trust and New York 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-8
<PAGE>
TAX EXEMPT SECURITIES TRUST
CALIFORNIA TRUST 166--PORTFOLIO OF SECURITIES AS OF NOVEMBER 4, 1998
<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. $ 460,000 California Health AAA 10/1/08 @ 102 $ 427,851 4.950% $ 20,700
Facilities Financing SF 10/1/21 @ 100
Authority, Insured
Revenue Bonds, Little
Company of Mary Health
Services, AMBAC Insured,
4.50% Due 10/1/2028
2. 500,000 Community Facilities AAA 9/1/08 @ 102 484,460 4.950 23,750
District No. 92-1 of the SF 9/1/21 @ 100
RNR School Financing
Authority, County of
Kern, California,
Special Tax Bonds, AMBAC
Insured, 4.75% Due
9/1/2028
3. 250,000 State of California, AAA 12/1/05 @ 101 242,100 4.950 11,875
Department of Water SF 12/1/26 @ 100
Resources, Central
Valley Project, Water
System Revenue Bonds,
MBIA Insured, 4.75% Due
12/1/2029
4. 100,000 The Metropolitan Water AAA 3/1/08 @ 101 96,573 4.950 4,750
District of Southern SF 3/1/29 @ 100
California, Waterworks
General Obligation
Bonds, 4.75% Due
3/1/2037
5. 305,000 Glendale, California, AAA 9/1/07 @ 102 319,649 4.800 16,394
Unified School District, SF 9/1/18 @ 100
County of Los Angeles,
California, Election
General Obligation
Bonds, FGIC Insured,
5.375% Due 9/1/2022
6. 100,000 Department of Water and Aa3* 9/1/03 @ 102 103,012 4.850 5,375
Power of The City of Los SF 9/1/14 @ 100
Angeles, California,
Electric Plant Revenue
Bonds, 5.375% Due
9/1/2023
7. 500,000 Convention Center AAA 10/1/08 @ 101 484,570 4.950 23,750
Expansion Financing SF 4/1/19 @ 100
Authority, Lease Revenue
Bonds, City of San
Diego, California, AMBAC
Insured, 4.75% Due
4/1/2028
8. 150,000 San Diego, California, AAA 5/15/03 @ 102 154,165 4.750 7,875
Sewer Revenue Bonds, SF 5/15/14 @ 100
AMBAC Insured, 5.25% Due
5/15/2020
9. 105,000 San Francisco, AAA 1/1/08 @ 102 97,711 4.950 4,725
California, City & SF 5/1/26 @ 100
County Airport Community
International Airport
Revenue Bonds, MBIA
Insured, 4.50% Due
5/1/2028
10. 500,000 San Francisco, AAA 12/1/06 @ 102 513,760 4.900 26,250
California, State SF 12/1/17 @ 100
Building Authority,
Lease Revenue Bonds,
State of California San
Francisco Civic Center
Complex, AMBAC Insured,
5.25% Due 12/1/2021
</TABLE>
A-9
<PAGE>
TAX EXEMPT SECURITIES TRUST
CALIFORNIA TRUST 166--PORTFOLIO OF SECURITIES AS OF NOVEMBER 4, 1998
<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>
11. $ 120,000 Redevelopment Agency of A 8/1/08 @ 102 $ 122,630 5.000% $ 6,300
the City of San Jose, SF 8/1/27 @ 100
California, Merged Area
Redevelopment Project,
Tax Allocation Bonds,
5.25% Due 8/1/2029
12. 170,000 Soledad Redevelopment AAA 12/1/07 @ 102 $ 177,953 4.800 $ 9,095
Agency, Monterey County, SF 12/1/09 @ 100
California, Soledad
Redevelopment Project,
Tax Allocation Refunding
Bonds, MBIA Insured,
5.35% Due 12/1/2028
13. 250,000 City of Upland, A 1/1/04 @ 102 246,947 5.100 12,500
California, Certificates SF 1/1/14 @ 100
of Participation, San
Antonio Community
Hospital, 5.00% Due
1/1/2018
14. 155,000 Redevelopment Agency of AAA 9/1/08 @ 102 150,778 4.950 7,362
the City of West
Sacramento, California,
West Sacramento
Redevelopment Project,
Tax Allocation Bonds,
MBIA Insured, 4.75% Due
9/1/2021
15. 335,000 County of Yolo, AAA 11/1/08 @ 101 331,091 4.950 16,331
California, Certificates SF 11/1/20 @ 100
of Participation, County
Office Facilities, MBIA
Insured, 4.875% Due
11/1/2028
---------- ---------- --------
$4,000,000 $3,953,250 $197,032
========== ========== ========
</TABLE>
The Notes following the Portfolios are an integral part of each Portfolio of
Securities.
A-10
<PAGE>
TAX EXEMPT SECURITIES TRUST
NEW YORK TRUST 170--PORTFOLIO OF SECURITIES
AS OF NOVEMBER 4, 1998
<TABLE>
<CAPTION>
COST OF YIELD ON ANNUAL
REDEMPTION SECURITIES DATE OF INTEREST
AGGREGATE SECURITIES REPRESENTED RATINGS PROVISIONS TO TRUST DEPOSIT INCOME
PRINCIPAL BY PURCHASE CONTRACTS (1) (2) (3)(4) (4) TO TRUST
--------- ------------------------ ------- ---------------- ---------- -------- --------
<C> <C> <S> <C> <C> <C> <C> <C>
1. $ 250,000 The City of New York, A- 8/1/07 @ 101 $ 252,433 5.130% $ 13,125
General Obligation SF 8/1/18 @ 100
Bonds, 5.25% Due
8/1/2021
2. 375,000 New York City Housing AA 11/1/08 @ 101.5 379,995 5.100 19,687
Development Corporation, SF 5/1/19 @ 100
Multifamily Housing
Revenue Bonds, 5.25% Due
11/1/2031
3. 250,000 New York, New York City, AAA 7/1/08 @ 101 235,763 4.900 11,250
Industrial Development SF 7/1/19 @ 100
Agency, Civic Facility
Refunding and Equipment
Revenue Bonds,
Lighthouse International
Project, MBIA Insured,
4.50% Due 7/1/2023
4. 100,000 New York, New York City, AAA 7/1/08 @ 101 93,355 4.900 4,500
Industrial Development SF 7/1/24 @ 100
Agency, Civic Facility
Refunding and Equipment
Revenue Bonds,
Lighthouse International
Project, MBIA Insured,
4.50% Due 7/1/2033
5. 500,000 City University System A** 1/1/08 @ 102 511,550 5.100 26,875
Consolidated, Third SF 7/1/20 @ 100
General Resolution
Revenue Bonds, 5.375%
Due 7/1/2024
6. 250,000 New York City, Municipal AAA 6/15/08 @ 101 239,982 5.000 11,875
Water Finance Authority, SF 6/15/30 @ 100
Water and Sewer System
Revenue Bonds, FGIC
Insured, 4.75% Due
6/15/2031
7. 165,000 Dormitory Authority of AAA 2/1/08 @ 101 158,732 5.000 7,837
the State of New York, SF 8/1/24 @ 100
The New York and
Presbyterian Hospital,
FHA-Insured Mortgage
Hospital Revenue Bonds,
AMBAC Insured, 4.75% Due
8/1/2027
8. 350,000 Dormitory Authority of A** 2/15/08 @ 101.5 354,420 5.150 18,550
the State of New York, SF 2/15/17 @ 100
Secured Hospital Revenue
Refunding Bonds, Wyckoff
Heights Medical Center,
5.30% Due 8/15/2021
9. 325,000 Dormitory Authority of A- 5/15/08 @ 101 312,523 5.000 15,437
the State of New York, SF 5/15/21 @ 100
State University
Educational Facilities
Revenue Bonds, 4.75% Due
5/15/2028
10. 300,000 Dormitory Authority of AAA 7/1/08 @ 101 288,447 5.000 14,250
the State of New York, SF 7/1/26 @ 100
St. John's University,
Insured Revenue Bonds,
MBIA Insured, 4.75% Due
7/1/2028
11. 250,000 New York State Urban A** 1/1/04 @ 102 251,760 5.130 13,125
Development Corporation, SF 1/1/17 @ 100
Correctional Capital
Facilities Revenue
Refunding Bonds, 5.25%
Due 1/1/2021
12. 250,000 New York State Urban A** 1/1/07 @ 102 261,758 5.100 14,250
Development Corporation, SF 1/1/17 @ 100
Correctional Capital
Facilities Revenue
Bonds, 5.70% Due
1/1/2027
13. 250,000 Long Island Power A- 6/1/08 @ 101 253,235 5.100 13,125
Authority, Electric SF 12/1/23 @ 100
System General Revenue
Bonds, 5.25% Due
12/1/2026
14. 120,000 Metropolitan AAA 7/1/08 @ 101 115,523 5.000 5,700
Transportation SF 7/1/19 @ 100
Authority, Commuter
Facilities Revenue
Bonds, FGIC Insured,
4.75% Due 7/1/2026
15. $ 265,000 County of Otsego, New AAA 10/1/08 @ 102 $ 251,217 4.900% $ 11,925
York, Industrial SF 10/1/18 @ 100
Development Agency,
Civic Facility Revenue
Bonds, Aurelia Osborn
Fox Memorial Hospital
Society Project, FSA
Insured, 4.50% Due
10/1/2019
---------- ---------- --------
$4,000,000 $3,960,693 $201,512
========== ========== ========
</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., Moody's Investors Service(*) and Fitch Investor Services, Inc.(**),
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 September
8, 1998, through November 4, 1998, with the settlement date on November 10,
1998, except for one delayed settlement Bond in the New York Trust, with
final settlement on November 18, 1998. The Profit to the Sponsor on Deposit
totals $28,330 and $23,900 for the California Trust and New York 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
California Trust and New York Trust on November 4, 1998, was $3,937,333,
and $3,944,693, 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 Salomon 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.
B-1
<PAGE>
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 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 or (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.
B-2
<PAGE>
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 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 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. 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,
B-4
<PAGE>
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.
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
B-5
<PAGE>
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.
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
B-6
<PAGE>
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.
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
B-7
<PAGE>
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 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
B-8
<PAGE>
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.
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.
CORRECTIONAL FACILITY BONDS. The Portfolio of a Trust may contain Bonds of
issuers in the correctional facilities category. Bonds in the correctional
facilities category include special limited obligation securities issued to
construct, rehabilitate and purchase correctional facilities payable from
governmental rental payments and/or appropriations.
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 fully integrated with that of the mainland United States.
During fiscal year 1997, approximately 88% of Puerto Rico's exports were to
the United States mainland, which was also the source of 62% of Puerto Rico's
imports. In fiscal 1997, Puerto Rico experienced a $2.7 billion positive
adjusted merchandise trade balance. The dominant sectors of the Puerto Rico
economy are manufacturing and services. Puerto Rico's more than decade-long
economic expansion continued throughout the five-year period from fiscal 1993
through fiscal 1997. Factors behind this expansion included government-
sponsored economic development programs, periodic declines in the exchange
value of the United States dollar, increases in the level of federal
transfers, and the relatively low cost of borrowing. Gross product in fiscal
1993 was $25.1 billion ($24.5 billion in 1992 prices) and gross product in
fiscal 1997 was $32.1 billion ($27.7 billion in 1992 prices). This represents
an increase in gross product of 27.7% from fiscal 1993 to 1997 (13.0% in 1992
prices). Since fiscal 1985, personal income, both aggregate and per capita,
has increased consistently each fiscal year. In fiscal 1997, aggregate
personal income was $32.1 billion ($30.0 billion in 1992 prices) and personal
income per capita was $8,509 ($7,957 in 1992 prices). Personal income includes
transfer payments to individuals in Puerto Rico under various social programs.
Total federal payments to Puerto Rico, which include transfers to local
government entities and expenditures of federal agencies in Puerto Rico, in
addition to federal transfer payments to individuals, are lower on a per
capita basis in Puerto Rico than in any state. Transfer payments to
individuals in fiscal 1997 were $7.3 billion, of which $5.2 billion, or 71.6%,
represented entitlements to individuals who had previously performed services
or made contributions under programs such as Social Security, Veterans'
Benefits, Medicare and U.S. Civil Service retirement pensions. Average
employment increased from 999,000 in fiscal 1993, to 1,128,300 in fiscal 1997.
Average unemployment decreased from 16.8% in fiscal 1993, to 13.1% in fiscal
1997. According to the Labor Department's Household Employment Survey, during
the first eight months of fiscal 1998, total employment increased 0.4% over
the same period in fiscal 1997. Total monthly employment averaged 1,129,000
during the first eight months of fiscal 1998, compared to 1,124,500 in the
same period of fiscal 1997. The Puerto Rico Planning Board's gross product
forecast for fiscal 1998 projected an increase of 3.0% over fiscal 1997.
YEAR 2000 ISSUE. The Trusts, like other businesses and entities, could be
adversely affected if the computer systems used by the Sponsor and Trustee or
other service providers to a Trust do not properly process and calculate date-
related information and data from and after January 1, 2000. This is commonly
known as the "Year 2000 Problem." The Sponsor and Trustee are taking steps
that they believe are reasonably designed to address the Year 2000 Problem
with respect to computer systems that they use and to obtain reasonable
assurances that comparable steps are being taken by the Trusts' other service
providers. However, there can be no assurance that the Year 2000 Problem will
be properly or timely resolved so to avoid any adverse impact to each Trust.
The Year 2000 Problem may thus also adversely affect issuers of the Bonds
contained in the Trust, to varying degrees based upon various factors. The
Sponsor is unable to predict what affect, if any, the Year 2000 Problem will
have on such issuers.
INSURANCE. Certain Bonds (the "Insured Bonds") may be insured or guaranteed
by American Capital Access Corporation ("ACA"), Asset Guaranty Insurance Co.
("AGI"), 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
B-9
<PAGE>
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.
ACA is a wholly owned subsidiary of American Capital Access Holdings, Inc.
("Holdings"), which, in turn is owned by American Capital Access Holdings,
L.L.C. ACA is a Maryland domiciled financial guaranty insurance company and
the major operating entity of Holdings; Holdings also owns American Capital
Access Service Corp., which provides primarily personnel-related services to
ACA.
ACA was initially capitalized in 1997, with $117,000,000 in policyholders'
surplus. Additionally, Zurich Reinsurance (North America) Inc. has provided a
$50,000,000 soft capital facility and Capital Reinsurance Co. has written ACA
a $75,000,000 excess of loss treaty. Standard & Poor's has assigned an A
claims-paying ability to ACA.
AGI and its affiliate company Enhance Reinsurance Co. are managed by
essentially the same management team and are direct, wholly owned subsidiaries
of Enhance Financial Services Group Inc.
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, the Territory
of Guam and the Commonwealth of Puerto Rico, with admitted assets of
approximately $3,073,000,000 (unaudited) and statutory capital of
approximately $1,769,000,000 (audited) as of June 30, 1998. 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.
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
monoline 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.
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.
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.
B-10
<PAGE>
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, 1998, total shareholders equity of FSA and its wholly-owned
subsidiaries was (unaudited) $949,625,000 and total unearned premium reserves
was (unaudited) $457,615,000.
Connie Lee, a Wisconsin stock insurance corporation, is wholly-owned
subsidiary of Connie Lee Holdings, Inc. (formerly Construction Loan Insurance
Corporation, and herein, "Holdings"). On December 18, 1997, AMBAC acquired all
of the outstanding capital stock of Holdings. Holdings and Connie Lee are now
wholly-owned subsidiaries of AMBAC. Connie Lee, which guaranteed bonds issued
primarily for college and hospital infrastructure projects, is not expected to
write any new business. AMBAC and Connie Lee have arrangements in place to
assure that Connie Lee maintains a level of capital sufficient to support
Connie Lee's outstanding obligations and for Connie Lee insured bonds to
retain their triple-A rating.
As of December 31, 1997, the qualified statutory capital of Connie Lee was
$112,742,860 (unaudited) and total admitted assets were $46,792,234
(unaudited), as reported to the Commissioner of Insurance of the State of
Wisconsin.
Financial Guaranty Insurance Company ("Financial Guaranty") is a wholly-
owned subsidiary of FGIC Corporation ("Corporation"), a Delaware holding
company. The Corporation is a wholly-owned subsidiary of General Electric
Capital Corporation ("GECC"). Neither the Corporation nor GECC is obligated to
pay the debts of or the claims against Financial Guaranty. Financial Guaranty
is a monoline financial guaranty insurer domiciled in the State of New York
and is subject to regulation by the State of New York Insurance Department. As
of June 30, 1998, the total capital and surplus of Financial Guaranty was
$1,282,692,798. In addition, Financial Guaranty is currently licensed to write
insurance in all 50 states and the District of Columbia.
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
December 31, 1997, MBIA had admitted assets of approximately $5,300,000,000
(audited), total liabilities of approximately $3,500,000,000 (audited), and
policyholders' surplus of approximately $1,800,000,000 (audited), prepared in
accordance with statutory accounting practices prescribed or permitted by
insurance regulatory authorities.
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'
B-11
<PAGE>
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 Date of Deposit in respect of any Bonds which
might reasonably be expected to have a material adverse effect upon the Trust.
At any time after the 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
regular 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.
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."
B-12
<PAGE>
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"). The total cost to a Holder of its Units, including sales charges,
is allocated to its pro rata portion of each Bond, in proportion to the
fair market values thereof on the date the Holder purchases its Units, in
order to determine its tax cost for his pro rata portion of each Bond. 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". In order for a Holder who purchases its Units on the Date of
Deposit to determine the fair market value of its 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 its 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 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 its 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 its pro
rata portion of the Bond at an "acquisition premium." A Holder's adjusted
tax basis for its pro rata portion of a Bond issued with original issue
discount will include original issue discount accrued during the period
such Holder held its Units. Such increases to the Holder's tax basis in its
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 its 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 its
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 its 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 its pro rata portion of a Bond is disposed of for an amount equal to
or less than its original tax basis therefor.
A Holder will recognize taxable gain or loss when all or part of its pro
rata portion of a Bond in its Trust is disposed of by the Trust for an
amount greater or less than its adjusted tax basis. A Holder will also be
considered to have disposed of all or part of its pro rata portion of each
Bond when it sells or redeems all or some of its Units. Any such taxable
gain or loss will be capital gain or loss (assuming that the Units are held
as capital assets), 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 its pro rata
B-13
<PAGE>
portion of the Bond (plus any original issue discount that 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.
Under Section 265 of the Code, a Holder (except a corporate Holder) is
not entitled to a deduction for its 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 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.
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
Investors will reimburse the Sponsor on a per Unit basis, all or a portion
of the estimated costs incurred in organizing each Trust--including the cost
of the initial preparation of documents relating to a Trust, Federal and State
registration fees, the initial
B-14
<PAGE>
fees and expenses of the Trustee, legal expenses and any other out-of-pocket
expenses. The estimated organization costs will be paid to the Sponsor from
the assets of a Trust as of the close of the initial public offering period.
To the extent that actual organization costs are less than the estimated
amount, only the actual organization costs will be deducted from the assets of
a Trust. Any balance of the costs 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."
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. In addition, during the initial public offering
period a portion of the Public Offering Price per Unit also consists of cash
in an amount sufficient to pay the per Unit portion of all or a part of the
cost incurred in organizing and offering a Trust, see "Expenses and Charges--
Initial Expenses". 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.")
B-15
<PAGE>
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.
- -------
+ 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.
Units held in the name of the spouse of the purchaser or in the name of a
child of the purchaser under 21 years of age are deemed to be registered in
the name of the purchaser for purposes of calculating the applicable sales
charge.
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. 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 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."
- -------
* Current offering or bid prices of the Deposited Units, if any, are based on
prevailing weekly evaluations of the obligations underlying such Deposited
Units.
B-16
<PAGE>
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 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
B-17
<PAGE>
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").
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.")
B-18
<PAGE>
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 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, 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.
B-19
<PAGE>
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 4 New York Plaza, New York, New York 10004, 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.
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.
B-20
<PAGE>
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. As of the close of the initial public offering
period the Redemption Price per Unit will be reduced to reflect the
organization costs per Unit of a Trust. To the extent that actual organization
costs are less than the estimated amount, only the actual organization costs
will be deducted from the assets of a Trust. 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
Salomon Smith Barney Inc., 388 Greenwich Street, New York, New York 10013
("Salomon Smith Barney"), was incorporated in Delaware in 1960 and traces its
history through predecessor partnerships to 1873. On September 1, 1998,
Salomon Brothers Inc. merged with and into Smith Barney Inc. ("Smith Barney")
with Smith Barney surviving the merger and changing its name to Salomon Smith
Barney Inc. The merger of Salomon Brothers Inc. and Smith Barney followed the
merger of their parent companies in November 1997. Salomon 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. Salomon Smith Barney is an indirect wholly-
owned subsidiary of The Travelers Inc.
Salomon 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. Salomon 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 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
B-21
<PAGE>
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 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.
B-22
<PAGE>
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.
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.
B-23
<PAGE>
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 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
- -------
+As described by the rating agencies.
B-24
<PAGE>
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-25
<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 effective Federal income tax rates and tax brackets for the
1998 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.
1998 TAX YEAR
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TAXABLE INCOME BRACKET TAX EXEMPT YIELD
FEDERAL EFFECTIVE
TAX FEDERAL
JOINT RETURN SINGLE RETURN BRACKET 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> <C> <C>
$ 0- 42,350 $ 0- 25,350 15.00% 15.00% 4.71% 5.29% 5.88% 6.47% 7.06% 7.65%
$ 42,351-102,300 $ 25,351- 61,400 28.00% 28.00% 5.56 6.25 6.94 7.64 8.33 9.03
$102,301-124,500 $ 61,401-124,500 31.00% 31.00% 5.80 6.52 7.25 7.97 8.70 9.42
$124,501-155,950 $124,501-128,500 31.00% 31.93% 5.88 6.61 7.35 8.08 8.81 9.55
$155,951-278,450 $128,501-278,450 36.00% 37.08% 6.36 7.15 7.95 8.74 9.54 10.33
Over $278,450 Over $278,450 39.00% 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 $124,500, 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 Federal 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 $186,800 for
married taxpayers filing a joint tax return and $124,500 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-26
<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 "1995-96 Budget"
the subsequent fiscal year. For a discussion of the 1995-96 State Budget,
1996-97 State Budget, the 1997-98 State Budget and the Proposed 1998-99 State
Budget, see the sub-captions "1995-96 Budget," "1996-97 Budget," "Proposed
1997-98 Budget" and the Proposed 1998-99 State Budget, respectively, herein.
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.
However, California has experienced recent economic expansion, with growth in
employment and in early 1998 the state recorded its lowest unemployment rate
since 1990. There can be no assurance this growth trend will continue.
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.
C-1
<PAGE>
The Department of Finance 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 Budget Act contained 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 were 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.
2. Proposed cuts in health and welfare totaling $660 million. All of
these cuts required 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.
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. General Fund support for the Department of Corrections was increased
by about 7 percent over the prior year, reflecting estimates of increased
prison population.
5. 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 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.
C-2
<PAGE>
1997-98 BUDGET
On January 9, 1997, the Governor 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, and included a plan to
increase spending for elementary and secondary schools.
On August 11, 1997, the State Legislature approved a 1997-98 State Budget of
approximately $68 billion which included approximately $32 billion for public
schools, an increase of approximately $4 billion over the prior year. The
Budget also included approximately $100 million for local law enforcement and
approximately $75 million in spending to subsidize hospitals that care for
large numbers of uninsured patients, as well as approximately $40 million for
legal immigrants and an increase of approximately $223 million in welfare
spending, including job training. The education portion of the State Budget
approved by the Legislature for 1997-98 included approximately $850 million to
expand the class-size reduction program and full statutory funding of the
Revenue Limit COLA comprising a 2.65% COLA, consistent with the May Revision.
Revenue Limit Equalization is as funded in the amount of approximately $261
million for the school district revenue limit equalization for 1996-97.
The final State Budget was signed by the Governor on August 18, 1997 after
using his line-item veto authority to veto, with reservation until an
acceptable school testing bill is passed, a significant amount of education
funding from the State Budget approved by the Legislature. Vetoes which would
be restored if a testing bill acceptable to the Governor is passed include
approximately $955,000 in Department of Education spending, and approximately
$900 million in local assistance. Vetoes not relating to the testing issue,
but which need legislation in order to restore the vetoed funds, included more
than $20 million in Department of Education spending. The final State Budget
also provided approximately $377 million for child care programs administered
by the Department of Education and the Department of Social Services,
approximately $160 million for welfare-to-work programs, approximately $25
million in adult education funding and approximately $50 million to California
community colleges, approximately $100 million to cities and counties to
enhance local law enforcement, approximately $55 million in federal funds to
local government for the construction of detention facilities and
approximately $1.2 billion in deferred general fund contributions to the
Public Employees Retirement System. The final State Budget did not include the
Governor's proposed 10% tax cut for bank and corporations.
PROPOSED 1998-99 BUDGET
In 1997, California experienced employment growth exceeding 3 percent--
approximately 400,000 new jobs--and income rose by more than 7 percent. The
State's unemployment rate fell during 1997 to a low of 5.8 percent in
November. In fiscal year 1996-97, the State's General Fund collections grew by
over 6 percent to reach $49.2 billion, and revenue for the 1997-98 and 1998-99
fiscal years is expected to reach $52.9 billion and $55.4 billion
respectively. This represents an annual growth of $3.7 billion (7.5 percent)
for 1997-98 and $2.5 billion (4.7 percent) for 1998-99.
The 1998-99 Governor's Budget provides $50 million in General Fund and $200
million in a proposed bond issue to capitalize the Infrastructure and
Development Bank, which will provide capital to local governments to help
businesses locate and expand in California, and $3 million for the small
business loan guarantee program. The Budget also includes an Early Childhood
Development Initiative, which is designed to improve the health and
development of children from birth to age three and provides additional funds
for anti-gang programs and for the apprehension of sexual predators. The
Budget proposes an approximately $7 billion investment plan to maintain and
build the State's system of schools, water supply, prisons, natural resources,
and other infrastructure.
In addition, the Budget includes approximately $40 billion to be devoted to
California's 999 school districts and 58 county offices of education,
resulting on estimated total per-pupil expenditures from all sources of $6,620
in fiscal year 1997-98 and $6,749 in 1998-99. Projected state revenues will
contribute to a 7 percent increase in Proposition 98 General Fund support for
K-12 education in 1998-99. This level of resources results in K-12 Proposition
98 per-pupil expenditures of $5,636 in 1998-99, up from $5,114 in 1996-97 and
$5,414 in 1997-98. In addition, approximately $350 million has been allocated
to lengthen the school year to 180 days while maintaining sufficient funds for
staff development days. The State Budget includes a 2.22% COLA for revenue
limit, special education, and child development in an amount of $657.4 million
which includes school district and county office of education apportionments
($470.6 million), summer school ($4.0 million), special education ($57.8
million), child development ($14.6 million), class size reduction ($33.6
million), and categorical program COLA and growth ($73.7 million); enrollment
growth funding of $564.5 million; class size reduction funding in the amount
of $547 billion for all pupils in grades K-3 at $818 per pupil; and
approximately $2 billion in state bonds for the 1998 election and $2.0 billion
for each two years thereafter in 2000, 2002, and 2004 and an additional $135
million for deferred maintenance to be matched locally.
C-3
<PAGE>
FUTURE BUDGETS
It cannot be predicted what actions will be taken in the future by the State
Legislature and the Governor to deal with changing State revenues and
expenditures. The State budget will be affected by national and state economic
conditions and other factors.
THE FOREGOING DISCUSSION IS BASED ON OFFICIAL STATEMENTS AND OTHER
INFORMATION PROVIDED BY THE STATE OF CALIFORNIA. THE STATE HAS INDICATED THAT
ITS DISCUSSION OF BUDGETARY INFORMATION IS BASED ON ESTIMATES AND
PROJECTIONS 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.
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.
FUTURE INITIATIVES
Articles XIIIA, XIIIB, XIIIC and XIIID were each adopted as measures that
qualified for the ballot pursuant to the State's initiative process. From time
to time, other initiative measures could be adopted which could affect
revenues of the State or public agencies within the State.
C-4
<PAGE>
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 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 to schools and to community colleges, to be repaid from future
Proposition 98 entitlements. The 1993-94 Budget also provided new loans to K-
12 schools and community colleges to maintain ADA funding. These loans have
been combined with the 1992-93 fiscal year loans into one loan of $1.760
billion, to be repaid from future years' Proposition 98 entitlements, and
conditioned upon maintaining current funding levels per pupil at K-12 schools.
A Sacramento County Superior Court in California Teachers' Association, et
al. v Gould, et al., ruled that the 1992-93 loans to K-12 schools and
community colleges violate Proposition 98. As part of the negotiations leading
to the 1995-96 Budget Act, an oral agreement was reached to settle this case.
The parties reached a conditional final settlement of the case in April, 1996.
The settlement required adoption of legislation satisfactory to the parties to
implement its terms.
The settlement provided, among other things, that both the State and K-14
schools share in the repayment of prior years' emergency loans to schools. Of
the total $1.76 billion in loans, the State was obligated to repay $935
million by forgiveness of the amount owed, while schools were required to
repay $825 million. The State share of the repayment is reflected as
expenditures above the current Proposition 98 base circulation. The schools'
share of the repayment counts as appropriations toward satisfying the
Propositions 98 guarantee, or from "below" the current base. Repayments are
spread over the eight-year period beginning 1994-95 through 2002-03.
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.
C-5
<PAGE>
STATE INDEBTEDNESS
As of August 1, 1998, the State had over $15.9 billion aggregate amount of
its general obligation bonds outstanding. General obligation bond
authorizations in an aggregate amount of approximately $4.8 billion remained
unissued as of August 1, 1998. As of April 1, 1998 the State Finance Committee
had authorized the issuance of approximately $2.6 billion of general
obligation commercial paper notes, but as of that date only $1.3 billion
aggregate principal amount of which was issued and outstanding. The State also
builds and acquires capital facilities through the use of lease purchase
borrowing. As of April 1, 1998, the State had approximately $6.5 billion of
outstanding General Fund-supported Lease-Purchase Debt.
In addition to the general obligation bonds, State agencies and authorities
had approximately $22.49 billion aggregate principal amount of revenue bonds
and notes outstanding as of April 1, 1998. Revenue bonds represent both
obligations payable from State revenue-producing enterprises and projects,
which are not payable from the General Fund, and conduit obligations payable
only from revenues paid by private users of facilities financed by such
revenue bonds. Such enterprises and projects include transportation projects,
various public works and exposition projects, educational facilities
(including the California State University and University of California
systems), housing, health facilities and pollution control facilities.
LITIGATION
The State is a party to numerous legal proceedings. In addition, the State
is involved in certain other legal proceedings that, if decided against the
State, might require the State to make significant future expenditures or
impair future revenue sources. Examples of such cases include 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 its Budget Acts for certain fiscal years. 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. 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.
C-6
<PAGE>
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.
NEW YORK TRUST
RISK FACTORS--The information set forth below is derived from the official
statements and/or preliminary drafts of official statements prepared in
connection with the issuance of New York State and New York City municipal
bonds. The Sponsor has not independently verified this information.
ECONOMIC TRENDS. Over the long term, the State of New York (the "State") and
the City of New York (the "City") face serious economic problems. The City
accounts for approximately 41% of the State's population and personal income,
and the City's financial health affects the State in numerous ways. The State
historically has been one of the wealthiest states in the nation. For decades,
however, the State has grown more slowly than the nation as a whole, gradually
eroding its relative economic affluence. Statewide, urban centers have
experienced significant changes involving migration of the more affluent to
the suburbs and an influx of generally less affluent residents. Regionally,
the older Northeast cities have suffered because of the relative success that
the South and the West have had in attracting people and business. The City
has also had to face greater competition as other major cities have developed
financial and business capabilities which make them less dependent on the
specialized services traditionally available almost exclusively in the City.
The State has for many years had a very high State and local tax burden
relative to other states. The State and its localities have used these taxes
to develop and maintain their transportation networks, public schools and
colleges, public health systems, other social services and recreational
facilities. Despite these benefits, the burden of State and local taxation, in
combination with the many other causes of regional economic dislocation, has
contributed to the decisions of some businesses and individuals to relocate
outside, or not locate within, the State.
Notwithstanding the numerous initiatives that the State and its localities
may take to encourage economic growth and achieve balanced budgets, reductions
in Federal spending could materially and adversely affect the financial
condition and budget projections of the State and its localities.
NEW YORK CITY. The City, with a population of approximately 7.4 million, is
an international center of business and culture. Its non-manufacturing economy
is broadly based, with the banking and securities, life insurance,
communications, publishing, fashion design, retailing and construction
industries accounting for a significant portion of the City's total employment
earnings. Additionally, the City is the nation's leading tourist destination.
The City's manufacturing activity is conducted primarily in apparel and
printing.
For each of the 1981 through 1997 fiscal years, the City had an operating
surplus, before discretionary transfers, and achieved balanced operating
results as reported in accordance with then applicable generally accepted
accounting principles ("GAAP"), after discretionary transfers. The City has
been required to close substantial gaps between forecast revenues and forecast
expenditures in order to maintain balanced operating results. There can be no
assurance that the City will continue to maintain balanced operating results
as required by State law without tax or other revenue increases or reductions
in City services or entitlement programs, which could adversely affect the
City's economic base.
As required by law, the City prepares a four-year annual financial plan,
which is reviewed and revised on a quarterly basis and which includes the
City's capital, revenue and expense projections and outlines proposed gap-
closing programs for years with projected budget gaps. The City's current
financial plan projects a surplus in each of the 1998 and 1999 fiscal years,
before discretionary transfers, and budget gaps for each of the 2000, 2001 and
2002 fiscal years. This pattern of current year surplus operating results and
projected subsequent year budget gaps has been consistent through the entire
period since 1982, during which the City has achieved surplus operating
results, before discretionary transfers, for each fiscal year.
The City depends on aid from the State of New York (the "State") both to
enable the City to balance its budget and to meet its cash requirements. There
can be no assurance that there will not be reductions in State aid to the City
from amounts currently projected; that State budgets will be adopted by the
April 1 statutory deadline, or interim appropriations enacted; or that any
such reductions or delays will not have adverse effects on the City's cash
flow or expenditures. In addition, the Federal budget negotiation process
could result in a reduction in or a delay in the receipt of Federal grants
which could have additional adverse effects on the City's cash flow or
revenues.
C-7
<PAGE>
The Mayor is responsible for preparing the City's financial plan, including
the City's current financial plan for the 1999 through 2002 fiscal years (the
"1999-2002 Financial Plan" or "Financial Plan"). The City's projections set
forth in the Financial Plan are based on various assumptions and contingencies
which are uncertain and which may not materialize. Such assumptions and
contingencies include the condition of the regional and local economies, the
provision of State and Federal aid and the impact on City revenues and
expenditures of any future Federal or State policies affecting the City.
Implementation of the Financial Plan is dependent upon the City's ability to
market its securities successfully. The City's financing program for fiscal
years 1999 through 2002 contemplates the issuance of $5.2 billion of general
obligation bonds and $5.4 billion of bonds to be issued by the New York City
Transitional Finance Authority (the "Finance Authority") to finance City
capital projects. The Finance Authority was created as part of the City's
effort to assist in keeping the City's indebtedness within the forecast level
of the constitutional restrictions on the amount of debt the City is
authorized to incur. In addition, the City issues revenue and tax anticipation
notes to finance its seasonal working capital requirements. The success of
projected public sales of City bonds and notes, New York City Municipal Water
Finance Authority ("Water Authority") bonds and Finance Authority bonds will
be subject to prevailing market conditions. The City's planned capital and
operating expenditures are dependent upon the sale of its general obligation
bonds and notes, and the Water Authority and Finance Authority bonds. Future
developments concerning the City and public discussion of such developments,
as well as prevailing market conditions, may affect the market for outstanding
City general obligation bonds and notes.
For the 1997 fiscal year, the City had an operating surplus, before
discretionary transfers, and achieved balanced operating results, after
discretionary transfers, in accordance with GAAP. The 1997 fiscal year is the
seventeenth year that the City has achieved an operating surplus, before
discretionary transfers, and balanced operating results, after discretionary
transfers. The most recent quarterly modification of the City's financial plan
for the 1998 fiscal year, submitted to the Control Board on April 30, 1998
(the "1998 Modification"), projects a balanced budget in accordance with GAAP
for the 1998 fiscal year.
On April 24, 1998, the City released the Financial Plan for the 1999 through
2002 fiscal years, which relates to the city and certain entitles which
receive funds from the City, and which is based on the Executive Budget and
Budget Message for the City's 1999 fiscal year (the "Executive Budget"). The
Financial Plan is consistent with the Executive Budget and has not been
revised to reflect changes subsequent to the date of the Financial Plan. The
Executive Budget and Financial Plan projet revenues and expenditures for the
1999 fiscal year balanced in accordance with GAAP, and project gaps of $1.5
billion, $2.1 billion and $1.6 billion for the 2000, 2001 and 2002 fiscal
years, respectively.
Changes since the June Financial Plan include: (i) an increase in projected
tax revenues of $1.3 billion, $1.1 billion, $955 million, $897 million and
$1.7 billion in the 1998 through 2002 fiscal years, respectively; (ii) a
reduction in assumed State aid of $283 million in the 1998 fiscal year and of
between $134 million and $142 million in each of the 1999 through 2002 fiscal
years, reflecting the adopted budget for the State's 1998 fiscal year; (iii) a
delay in the assumed collection of $350 million of projected rent payments for
the City's airports in the 19999 fiscal year to fiscal years 2000 through
2002; (iv) a reduction in projected debt service expenditures totaling $197
million, $361 million, $204 million and $226 million in the 1998 through 2001
fiscal years, respectively; (v) an increase in the Board of Education (the
"BOE") spending of $266 million, $26 million, $58 million and $193 million in
the 1999 through 2002 fiscal years; (vii) other agency net spending
initiatives totaling $112 million, $443 million $281 million, $273 million and
$677 million in fiscal years 1998 through 2002, respectively; and (viii)
reduced pension costs of $116 million, $168 million and $404 million in fiscal
years 2000 through 2002, respectively. The Financial Plan also sets forth gap-
closing actions for the 1998 through 2002 fiscal years, which include: (i)
additional agency actions totaling $176 million, $595 million, $516 million,
$494 million and $552 million in fiscal years 1998 through 2002, respectively,
and (ii) assumed additional Federal and State aid of $100 million in each of
fiscal years 1999 through 2002.
The 1998 Modification and the 1999-2002 Financial Plan include a proposed
discretionary transfer in the 1998 fiscal year of approximately $2.0 billion
to pay debt service due in the 1999 fiscal year, and a proposed discretionary
transfer in the 1999 fiscal year of $416 million to pay debt service due in
fiscal year 2000, included in the Budget Stabilization Accounts for the 1998
and 1999 fiscal years, respectively, In addition, the Financial Plan reflects
proposed tax reduction programs totaling $237 million, $537 million, $657
million and $666 million in fiscal years 1999 through 2002, respectively,
including the elimination of the City sales tax on all clothing as of December
1, 1999, a City-funded acceleration of the State funded personal income tax
reduction for the 1999 through 2001 fiscal years, the extension of current tax
reductions for owners of cooperative and condominium apartments starting in
fiscal year 2000 and a personal income tax credit for child care and for
resident holders of Subchapter S corporations, which are subject to State
legislative approval, and reduction of the commercial rent tax commencing in
fiscal year 2000.
The Financial Plan assumes (i) approval by the governor and the State
Legislature of the extension of the 14% personal income tax surcharge, which
is schedules to expire December 31, 1999, and the extension of which is
projected to provide revenue of
C-8
<PAGE>
$172 million, $500 million and $514 million in 2000, 2001 and 2002 fiscal
years, respectively, and of the extension of the 12.5% personal income tax
surcharge, which is scheduled to expire on December 31, 1998, and the
extension of which is projected to provide revenue of $201 million, $546
million, $568 million and $593 million in the 1999 through 2002 fiscal years,
respectively; (ii) collection of the projected rent payments for the City's
airports, totaling $15 million, $365 million, $155 million and $185 million in
the 1999 through 2002 fiscal years, respectively, which may depend on the
successful completion of negotiations with The Port Authority of New York and
New Jersey (the "Port Authority") or the enforcement of the City's rights
under the existing leases through pending legal actions; and (iii) State
approval of the repeal of the Wicks Law relating to contracting requirements
for City construction projects and the additional State funding assumed in the
Financial Plan, and State and Federal approval of the State and Federal gap-
closing actions assumed in the Financial Plan. The Financial Plan provides no
additional wage increase for City employees after their contracts expire in
fiscal years 2000 and 2001. In addition, the economic and financial condition
of the City may be affected by various financial, social, economic and
political factors which could have a material effect on the City.
On June 5, 1998, the City Council adopted a budget which re-allocated
expenditures from those provided in the Executive Budget in the amount of $409
million. The re-allocated expenditures, which include $116 million from the
Budget Stabilization Account, $82 million from debt service, $45 million from
pension contributions, $54 million from social services spending and $112
million from other spending, were re-allocated to uses set forth in the City
Council's adopted budget. Such uses include a revised tax reduction program at
a revenue cost in the 1999 fiscal year of $45 million, additional expenditures
for various programs of $199 million and provision of $165 million to retire
high interest debt. The revised tax reduction program in the City Council's
adopted budget assumes the expiration of the 12.5% personal income tax
surcharge, rather than the implementation of the personal income tax reduction
program proposed in the Executive budget. The changes reflected in the City
Council's adopted budget would increase the gaps forecast between revenues and
expenditures in the future years of the Financial Plan.
On June 5, 1998, in accordance with the City Charter, the Mayor certified to
the City Council revised estimates of the City's revenues (other than property
tax) for fiscal year 1999. Consistent with this certification, the property
tax levy was estimated by the Mayor to require an increase to realize
sufficient revenue from this source to produce a balanced budget within
generally accepted accounting principles. On June 8, 1998, the City Council
adopted a property tax levy that was $237.7 million lower than the levy
estimated to be required by the Mayor. The City Council, however, maintained
that the revenue to be derived from the levy it adopted would be sufficient to
achieve a balanced budget because the property tax reserve for uncollectibles
could be reduced. Property tax bills for fiscal year 1999 are expected to be
mailed in the near future by the City's Department of Finance at the rates
adopted by the City Council for fiscal year 1998, subject to later adjustment.
On July 16, 1998, Standard & Poor's revised its rating of City bonds upward
from BBB+ to A-. Moody's rating of City bonds was revised in February 1998 to
A3 from Baa1. Moody's, Standard & Poor's and Fitch currently rate the City's
outstanding general obligations bonds A3, A- and A-, respectively.
NEW YORK STATE AND ITS AUTHORITIES. The State currently projects that it
will end its 1997-1998 fiscal year balanced on a cash basis, with a reported
surplus of $2.04 billion resulting from revenue growth and lower than expected
entitlement spending. The Governor presented his 1998-1999 Executive Budget to
the Legislature on January 20, 1998. The Governor's Executive Budget, as
amended on February 13, 1998, projected balanced on a cash basis in the
General Fund. The Legislature passed a State budget for the 1998-1999 fiscal
year on April 14, 1998, and on April 26, 1998 the Governor vetoed certain of
the increased spending in the State budget passed by the Legislature.
The Executive Budget, as amended, contains projections of a potential
imbalance in the 1999-2000 fiscal year of $1.66 billion and in the 2000-2001
fiscal year of $3.72 billion, assuming implementation of the 1998-1999
Executive Budget recommendations and implementation of $600 million and $800
million of unspecified efficiency initiatives and other actions in the 1999-
2000 and 2000-2001 fiscal years, respectively. The Executive Budget stated
that the assumed unspecified efficiency initiatives and other actions for such
fiscal years are comparable with reductions over the past several years, and
the Governor plans to make additional proposals to limit State spending and to
take such other actions as are necessary in order to address any potential
remaining gap. As a result of the budget passed by the State Legislature and
the subsequent vetoes by the Governor, the potential imbalance in the 1999-
2000 fiscal year is expected to be somewhat less than projected in the
Executive Budget. The projections in the Executive Budget reflect constant
income tax liability growth of approximately 5.3% and sales tax growth
averaging slightly less than 5%, while business tax receipts are projected to
rise slowly over the two years. The Executive Budget identifies various risks,
including either a financial market or broader economic correction during the
period, which risks are heightened by the relatively lengthy expansion
currently underway, and the financial turmoil in Asia. In addition, the
Executive budget notes that a normal forecast error of one percentage point in
the expected growth rate could raise or lower receipts by over $1 billion by
the last year of the projection period, and that funding is not included for
any costs associated with new collective bargaining agreements after the
expiration of the current contracts at the end of the 1998-1999 fiscal year.
C-9
<PAGE>
The 1997-1998 adopted State budget and the 1998-1999 Executive Budget
include multi-year tax reductions, including a State funded property and local
income tax reduction program, estate tax relief, utility gross receipts tax
reductions, permanent reductions in the State sales tax on clothing, and
elimination of assessments on medical providers. The various elements of the
State and local tax and assessment reductions have little or no impact on the
1997-1998 State Financial Plan, but reduce projected revenues by greater than
$3.0 billion in the 2000-2001 fiscal year.
On February 3, 1998, the New York State Comptroller issued a report which
noted that a significant cause for concern is the budget gaps in the 1999-2000
and 2000-2001 fiscal years, which the State Comptroller projected at $2.6
billion and $4.8 billion, respectively, reflecting uncertainty concerning the
receipt by the State of $250 million of funds from the tobacco settlement
assumed for each of such fiscal years, as well as the unspecified actions
assumed in the State's projections. The State Comptroller also stated that if
the economy slows, the size of the gaps would increase.
Standard & Poor's rates the State's general obligation bonds A, and Moody's
rates the State's general obligation bonds A2. On August 28, 1997, Standard &
Poor's revised its rating on the State's general obligation bonds from A- to
A.
LITIGATION. A number of court actions have been brought involving State
finances. The court actions in which the State is a defendant generally
involve State programs and miscellaneous tort, real property, and contract
claims. While the ultimate outcome and fiscal impact, if any, on the State of
those proceedings and claims are not currently predictable, adverse
determinations in certain of them might have a material adverse effect upon
the State's ability to carry out the 1999-2002 Financial Plan. The City has
estimated that its potential future liability on account of outstanding claims
against it as of June 30, 1997 amounted to approximately $3.5 billion.
NEW YORK TAXES--
In the opinion of Battle Fowler LLP, special counsel for the Sponsor, under
existing New York law:
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 the
Trust will be treated as the income of the Holders in the same manner as
for Federal income tax purposes. Accordingly, each Holder will be
considered to have received the interest on its 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 the Bond, such interest
will be exempt from New York State and City personal income taxes except
where such interest is subject to Federal income taxes (see Taxes). A
noncorporate Holder of Units of the Trust who is a New York State (and
City) resident will be subject to New York State (and City) personal income
taxes on any gain recognized when it disposes of all or part of its pro
rata portion of a Bond. A noncorporate Holder who is not a New York State
resident will not be subject to New York State or City personal income
taxes on any such gain unless such Units are attributable to a business,
trade, profession or occupation carried on in New York. A New York State
(and City) resident should determine its tax basis for its pro rata portion
of each Bond for New York State (and City) income tax purposes in the same
manner as for Federal income tax purposes. Interest income on, as well as
any gain recognized on the disposition of, a Holder's pro rata portion of
the Bonds is generally not excludable from income in computing New York
State and City corporate franchise taxes.
C-10
<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 1998 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 1998 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
1998 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>
$0-10,032 15.85% 4.75% 5.35% 5.94% 6.54% 7.13% 7.72%
$10,033-23,776 16.70 4.80 5.40 6.00 6.60 7.20 7.80
$23,777-37,522 18.40 4.90 5.51 6.13 6.74 7.35 7.97
$37,523-42,350 20.10 5.01 5.63 6.26 6.88 7.51 8.14
$42,351-52,090 32.32 5.91 6.65 7.39 8.13 8.87 9.60
$52,091-65,832 33.76 6.04 6.79 7.55 8.30 9.06 9.81
$65,833-102,300 34.70 6.13 6.89 7.66 8.42 9.19 9.95
$102,301-124,500 37.42 6.39 7.19 7.99 8.79 9.59 10.39
$124,501-155,950 38.26 6.48 7.29 8.10 8.91 9.72 10.53
$155,951-278,450 42.93 7.01 7.89 8.76 9.64 10.51 11.39
OVER $278,450 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>
$0-5,016 15.85% 4.75% 5.35% 5.94% 6.54% 7.13% 7.72%
$5,017-11,888 16.70 4.80 5.40 6.00 6.60 7.20 7.80
$11,889-18,761 18.40 4.90 5.51 6.13 6.74 7.35 7.97
$18,762-25,350 20.10 5.01 5.63 6.26 6.88 7.51 8.14
$25,351-26,045 32.32 5.91 6.65 7.39 8.13 8.87 9.60
$26,046-32,916 33.76 6.04 6.79 7.55 8.30 9.06 9.81
$32,917-61,400 34.70 6.13 6.89 7.66 8.42 9.19 9.95
$61,401-124,500 37.42 6.39 7.19 7.99 8.79 9.59 10.39
$124,501-128,100 38.26 6.48 7.29 8.10 8.91 9.72 10.53
$128,101-278,450 42.93 7.01 7.89 8.76 9.64 10.51 11.39
OVER $278,450 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 1998 Federal income tax rates and 1997
California Income tax rates. California has not yet published its 1998
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 $124,500, 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 $186,800 for married
taxpayers filing a joint tax return and $124,500 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-11
<PAGE>
STATE OF NEW YORK
1998 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>
$0-16,000 18.40% 4.90% 5.51% 6.13% 6.74% 7.35% 7.97%
$16,001-22,000 18.83% 4.93 5.54 6.16 6.78 7.39 8.01
$22,001-26,000 19.46% 4.97 5.59 6.21 6.83 7.45 8.07
$26,001-40,000 20.02% 5.00 5.63 6.25 6.88 7.50 8.13
$40,001-42,350 20.82% 5.05 5.68 6.31 6.95 7.58 8.21
$42,351-102,300 32.93% 5.96 6.71 7.46 8.20 8.95 9.69
$102,301-124,500 35.73% 6.22 7.00 7.78 8.56 9.34 10.11
$124,501-155,900 36.59% 6.31 7.10 7.89 8.67 9.46 10.25
$155,951-$278,450 41.39% 6.82 7.68 8.53 9.38 10.24 11.09
OVER $278,450 44.84% 7.25 8.16 9.07 9.97 10.88 11.78
<CAPTION>
SINGLE RETURN
<S> <C> <C> <C> <C> <C> <C> <C>
$0-8,000 18.40% 4.90% 5.51% 6.13% 6.74% 7.35% 7.97%
$8,001-11,000 18.83% 4.93 5.54 6.16 6.78 7.39 8.01
$11,001-13,000 19.46% 4.97 5.59 6.21 6.83 7.45 8.07
$13,001-20,000 20.02% 5.00 5.63 6.25 6.88 7.50 8.13
$20,001-25,350 20.82% 5.05 5.68 6.31 6.95 7.58 8.21
$25,351-61,400 32.93% 5.96 6.71 7.46 8.20 8.95 9.69
$61,401-124,500 35.73% 6.22 7.00 7.78 8.56 9.34 10.11
$124,501-128,100 36.59% 6.31 7.10 7.89 8.67 9.46 10.25
$128,101-$278,450 41.39% 6.82 7.68 8.53 9.38 10.24 11.09
OVER $278,450 44.84% 7.25 8.16 9.07 9.97 10.88 11.78
- ------------
</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
(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 $124,500, 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 used 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 effective Federal tax
rates. 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 $186,800 for married taxpayers filing a joint tax
return and $124,500 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 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.
C-12
<PAGE>
CITY OF NEW YORK
1998 TAX YEAR
<TABLE>
<CAPTION>
APPROX. COMBINED
FEDERAL, STATE & TAX EXEMPT YIELD
TAXABLE NEW YORK CITY 4.00% 4.50% 5.00% 5.50% 6.00% 6.50% 7.00% 7.50% 8.00%
INCOME BRACKET TAX RATE
TAXABLE EQUIVALENT YIELD
JOINT RETURN
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0- 16,000 21.02% 5.06% 5.70% 6.33% 6.96% 7.60% 8.23% 8.86% 9.50% 10.13%
$ 16,001- 21,600 21.44 5.09 5.73 6.36 7.00 7.64 8.27 8.91 9.55 10.18
$ 21,601- 22,000 22.02 5.13 5.77 6.41 7.05 7.69 8.34 8.98 9.62 10.26
$ 22,001- 26,000 22.66 5.17 5.82 6.46 7.11 7.76 8.40 9.05 9.70 10.34
$ 26,001- 40,000 23.21 5.21 5.86 6.51 7.16 7.81 8.46 9.12 9.77 10.42
$ 40,001- 42,350 24.02 5.26 5.92 6.58 7.24 7.90 8.55 9.21 9.87 10.53
$ 42,351- 45,000 35.64 6.21 6.99 7.77 8.55 9.32 10.10 10.88 11.65 12.43
$ 45,001- 90,000 35.68 6.22 7.00 7.77 8.55 9.33 10.11 10.88 11.66 12.44
$ 90,001- 102,300 35.73 6.22 7.00 7.78 8.56 9.33 10.11 10.89 11.67 12.45
$102,301- 124,500 38.40 6.49 7.31 8.12 8.93 9.74 10.55 11.36 12.18 12.99
$124,501- 155,900 39.23 6.58 7.41 8.23 9.05 9.87 10.70 11.52 12.34 13.17
$155,951-$278,450 43.83 7.12 8.01 8.90 9.79 10.68 11.57 12.46 13.35 14.24
Over $278,450 47.14 7.57 8.51 9.46 10.41 11.35 12.30 13.24 14.19 15.13
<CAPTION>
SINGLE RETURN
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0- 8,000 21.02% 5.06% 5.70% 6.33% 6.96% 7.60% 8.23% 8.86% 9.50% 10.13%
$ 8,001- 11,000 21.44 5.09 5.73 6.36 7.00 7.64 8.27 8.91 9.55 10.18
$ 11,001- 12,000 22.08 5.13 5.78 6.42 7.06 7.70 8.34 8.98 9.63 10.27
$ 12,001- 13,000 22.66 5.17 5.82 6.46 7.11 7.76 8.40 9.05 9.70 10.34
$ 13,001- 20,000 23.21 5.21 5.86 6.51 7.16 7.81 8.46 9.12 9.77 10.42
$ 20,001- 25,000 24.02 5.26 5.92 6.58 7.24 7.90 8.55 9.21 9.87 10.53
$ 25,001- 25,350 24.07 5.27 5.93 6.58 7.24 7.90 8.56 9.22 9.88 10.54
$ 25,351- 50,000 35.68 6.22 7.00 7.77 8.55 9.33 10.11 10.88 11.66 12.44
$ 50,001- 61,400 35.73 6.22 7.00 7.78 8.56 9.33 10.11 10.89 11.67 12.45
$ 61,401- 124,500 38.40 6.49 7.31 8.12 8.93 9.74 10.55 11.36 12.18 12.99
$124,501- 128,100 39.23 6.58 7.41 8.23 9.05 9.87 10.70 11.52 12.34 13.17
$128,101-$278,450 43.83 7.12 8.01 8.90 9.79 10.68 11.57 12.46 13.35 14.24
Over $278,450 47.14 7.57 8.51 9.46 10.41 11.35 12.30 13.24 14.19 15.13
</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
(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 $124,500, 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 effective Federal tax
rates. 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 AIG in excess of $186,800 for married taxpayers filing a joint tax
return and $124,500 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. The effect of 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 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.
C-13
<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-6
INDEPENDENT AUDITORS' REPORT............................................... A-7
STATEMENTS OF FINANCIAL CONDITION OF THE TAX EXEMPT SECURITIES TRUST....... A-8
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-13
EXPENSES AND CHARGES...................................................... B-14
PUBLIC OFFERING............................................................ B-15
OFFERING PRICE............................................................ B-15
METHOD OF EVALUATION...................................................... B-16
DISTRIBUTION OF UNITS..................................................... B-17
MARKET FOR UNITS.......................................................... B-17
EXCHANGE OPTION........................................................... B-17
REINVESTMENT PROGRAMS..................................................... B-18
SPONSOR'S AND UNDERWRITERS' PROFITS....................................... B-18
RIGHTS OF UNIT HOLDERS..................................................... B-18
CERTIFICATES.............................................................. B-18
DISTRIBUTION OF INTEREST AND PRINCIPAL.................................... B-18
REPORTS AND RECORDS....................................................... B-20
REDEMPTION OF UNITS....................................................... B-20
SPONSOR.................................................................... B-21
LIMITATIONS ON LIABILITY.................................................. B-21
RESPONSIBILITY............................................................ B-21
RESIGNATION............................................................... B-22
TRUSTEE.................................................................... B-22
LIMITATIONS ON LIABILITY.................................................. B-22
RESIGNATION............................................................... B-22
EVALUATOR.................................................................. B-23
LIMITATIONS ON LIABILITY.................................................. B-23
RESPONSIBILITY............................................................ B-23
RESIGNATION............................................................... B-23
AMENDMENT AND TERMINATION OF THE TRUST AGREEMENT........................... B-23
AMENDMENT................................................................. B-23
TERMINATION............................................................... B-23
LEGAL OPINION.............................................................. B-23
AUDITORS................................................................... B-24
BOND RATINGS............................................................... B-24
FEDERAL TAX FREE VS. TAXABLE INCOME........................................ B-26
THE STATE TRUSTS........................................................... C-1
TAX FREE VS. TAXABLE INCOME................................................ C-11
</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
-----------
8,000 UNITS
-----------
Prospectus
Dated November 5, 1998
-----------
SALOMON SMITH BARNEY
----------------------------
A member of citigroup [LOGO]
SPONSOR
SALOMON SMITH BARNEY INC.
388 GREENWICH STREET
23RD FLOOR
NEW YORK, NEW YORK 10013
(800) 223-2532
- -------
Salomon Smith Barney is the service mark used by Salomon Smith Barney Inc.
