File No. 33-10216
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
POST EFFECTIVE AMENDMENT NO. 9
TO
FORM S-6
For Registration Under the Securities Act of 1933 of Securities of
Unit Investment Trusts Registered on Form N-8B-2.
A. Exact name of Trust:
THE MUNICIPAL BOND TRUST, INSURED SERIES 38
B. Name of Depositor:
PAINEWEBBER INCORPORATED
C. Complete address of Depositor's principal executive office:
PAINEWEBBER INCORPORATED
1285 Avenue of the Americas
New York, New York 10019
D. Name and complete address of agents for service:
PAINEWEBBER INCORPORATED
Attention: Mr. Robert E. Holley
1200 Harbor Blvd.
Weehawken, New Jersey 07087
(x) Check if it is proposed that this filing should become effective
(immediately upon filing or on MAY 7, 1996) pursuant to paragraph
(b) of Rule 485.
E. Total and amount of securities being registered:
6,137 Units for the NATIONAL TRUST
2,298 Units for the CALIFORNIA TRUST
F. Proposed maximum offering price to the public of the securities being
registered:
$6,305,644.76 for the NATIONAL TRUST*
$1,886,520.12 for the CALIFORNIA TRUST*
* Estimated solely for the purpose of calculating the registration fee, at
$1,027.48 per unit for the NATIONAL TRUST
$820.94 per unit for the CALIFORNIA TRUST .
G. Amount of filing fee, computed at one-twenty-ninth of 1 percent of the
proposed maximum aggregate offering price to the public:
$100.00*
H. Approximate date of proposed sale to public:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THE
REGISTRATION STATEMENT.
* The method of calculation is made pursuant to Rule 24e-2 under the
Investment Company Act of 1940.The total amount of units redeemed or
repurchased during the previous fiscal year ending 1995 is 5,996 for the
NATIONAL TRUST and 2,122 for the CALIFORNIA TRUST . There
have been no previous filings of post-effective amendments during the
current fiscal year 8,118 redeemed or repurchased units are being used
to reduce the filing fee for this amendment.
THE MUNICIPAL BOND TRUST, INSURED SERIES 38
Cross Reference Sheet
Pursuant to Rule 404(c) of Regulation C
under the Securities Act of 1933
(Form N-8B-2 Items required by Instruction 1
as to Prospectus on Form S-6)
Form N-8B-2 Form S-6
Item Number Heading in Prospectus
I. Organization and General Information
1. (a)Name of Trust ) Front Cover
(b)Title of securities issued )
2. Name and address of ) Back Cover
Depositor
3. Name and address of ) Back Cover
Trustee
4. Name and address of ) Back Cover
Principal
Underwriter )
5. Organization of Trust ) Nature of Trust
6. Execution and ) Nature of Trust
termination of
Trust Agreement ) Termination of the Trust
7. Changes of name ) *
8. Fiscal Year ) *
9. Litigation ) *
II. General Description of the Trust and Securities of the Trust
10. General Information ) The Trust Portfolio
regarding
Trust's Securities and ) Rights of Certificate-
Rights
of Holders ) holders
(a) Type of Securities ) Nature of Trust
(Registered or Bearer) )
(b) Type of Securities ) Nature of Trust
(Registered or Bearer) )
* Not applicable, answer negative or not required.
(c) Rights of Holders as to ) Rights of Certificate-
Withdrawal or ) holders
Redemption
) Redemption of Units by
) the Trustee
) The Municipal Bond Trust
) Reinvestment Program
(d) Rights of Holders as to ) Secondary Market for
conversion, transfer, etc. ) Units Exchange Option
(e) Rights of Trust issues )
periodic payment plan ) *
certificates )
(f) Voting rights as to ) Rights of Certificate-
Securi-
ties, under the Indenture ) holders
(g) Notice to Holders as to )
change in )
(1)Assets of Trust ) Amendment of the
Indenture
(2)Terms and Conditions ) Supervision of Trust
of Trust's Securities ) Investments
(3)Provisions of Trust ) Amendment of the
Indenture
(4)Identity of Depositor ) Administration of the and
Trustee
) Trust
(h) Consent of Security )
Holders
required to change )
(1)Composition of assets ) Amendment of the
Indenture
of Trust )
(2)Terms and conditions ) Amendment of the
Indenture
of Trust's Securities )
(3)Provisions of Indenture ) Amendment of the
Indenture
(4)Identity of Depositor ) Administration of the Trust
and Trustee )
(i) Other provisions ) The Trust-Part B
11. Type of Securities ) Front Cover-The Trust-
Comprising Units Portfolio
12. Type of securities ) *
comprising
periodic payment )
certificates
13. (a)Load, fees, expenses, etc. ) Public Offering Price of
) Units; Expenses of the
) Trust
* Not applicable, answer negative or not required.
(b)Certain information ) *
regarding periodic payment ) *
certificates )
(c)Certain percentages ) *
(d)Certain other fees, etc. ) Expenses of the Trust
payable by holders )
(e)Certain profits receivable ) Public Offering Price of
by depositor, principal ) Units
underwriters, trustee or ) Public Offering of Units
affiliated persons )
(f)Ratio of annual charges to ) *
income )
14. Issuance of Trust's ) Nature of the Trust
securities
) Public Offering of Units
15. Receipt and handling of ) *
payments from )
purchasers
16. Acquisition and ) Acquisition of Securities
disposition of
underlying securities ) for the Trust; Supervision
) of Trust Investments.
17. Withdrawal or ) Redemption of Units
redemption
) by Trustee
18. (a)Receipt and disposition of ) Distributions of Certifi-
income ) cateholders
(b)Reinvestment of distritions ) *
(c)Reserves or special fund ) Distributions to Certifi-
) cateholders
(d)Schedule of distribution ) *
19. Records, accounts and ) Statements to Certificate-
report
) holders; Administration
) of the Trust
20. Certain miscellaneous ) Administration of the Trust
pro-
visions of Trust )
agreement
21. Loans to security ) *
holders
22. Limitations on liability ) Limitation of Liabilities
23. Bonding arrangements ) Included in Form N-8B-2
24. Other material ) *
provisions of
trust agreement )
* Not applicable, answer negative or not required.
III. Organization Personnel and
Affiliated Persons of Depositor
25. Organization of ) Sponsor
Depositor
26. Fees received by ) Public Offering Price of
Depositor
) Units Expenses of the Trust
27. Business of Depositor ) Sponsor
28. Certain information as to ) Sponsor
officials and affiliated )
persons of Depositor )
29. Voting securities of ) *
Depositor
30. Persons controlling ) Sponsor
Depositor
31. Payments by Depositor ) *
for
certain other services )
rendered to Trust )
32. Payments by Depositor ) *
for
certain other services )
rendered to Trust )
33. Remuneration of ) *
employees of
Depositor for certain )
services
rendered to Trust )
34. Remuneration of other ) *
persons
for certian services )
rendered
to Trust )
IV. Distribution and Redemption of Securities
35. Distribution of Trust's ) Public Offering of Units
securities by states )
36. Suspension of sales of ) *
Trust's
securities )
37. Revocation of authority ) *
to
distribute )
38. (a)Method of distribution ) Public Offering of Units
(b)Underwriting agreements )
(c)Selling agreements )
* Not applicable, answer negative or not required.
39. (a)Organization of principal ) Sponsor
underwriter )
(b)N.A.S.D. membership of ) Sponsor
principal underwriter )
40. Certain fees received by ) Public Offering Price of
principal underwriter ) Units
41. (a)Business of principal ) Sponsor
underwriter )
(b)Branch officers of ) *
principal underwriter )
(c)Salesman of principal ) *
underwriter )
42. Ownership of Trust's ) *
securities
by certain persons )
43. Certain brokerage ) *
commissions
received by principal )
underwriter )
44. (a)Method of valuation ) Public Offering Price of
) Units
(b)Schedule as to offering ) *
price )
(c)Variation in Offering ) Public Offering Price of
price to certain persons ) Units
45. Suspension of ) *
redemption rights
46. (a)Redemption valuation ) Redemption of Units by
) Trustee
(b)Schedule as to redemption ) *
price )
V. Information concerning the Trustee or Custodian
47. Maintenance of position ) Secondary Market for Units
in
underlying securities ) Redemption of Units by
) Trustee
) Evaluation of the Trust
48. Organization and ) Administration of the Trust
regulation of
Trustee ) Trustee
49. Fees and expenses of ) Expenses of the Trust
Trustee
50. Trustee's lien ) Expenses of the Trust
* Not applicable, answer negative or not required.
VI. Information concerning Insurance of Holders of Securities
51. (a)Name and address of ) *
Insurance Company )
(b)Type of policies ) *
(c)Type of risks insured and ) *
excluded )
(d)Coverage of policies ) *
(e)Beneficiaries of policies ) *
(f)Terms and manner of ) *
cancellation )
(g)Method of determining ) *
premiums )
(h)Amount of aggregate ) *
premiums paid )
(i)Who receives any part of ) *
premiums )
(j)Other material provisions ) *
of the Trust relating to )
insurance )
VII. Policy of Registrant
52. (a)Method of selecting and ) Acquisition of Securities
eliminating securities ) for the Trust
from the Trust )
(b)Elimination of securities ) *
from the Trust )
(c)Policy of Trust regarding ) Supervision of Trust
substitution and ) Investments
elimination of securities )
(d)Description of any funda- ) Acquisition of Securities
mental policy of the Trust ) for the Trust
) Supervision of Trust
) Investments
53. (a)Taxable status of the ) Tax status of the Trust
Trust )
(b)Qualification of the Trust ) Tax status of the Trust
as a mutual investment )
company )
* Not applicable, answer negative or not required.
VIII. Financial and Statistical Information
54. Information regarding ) *
the
Trust's past ten fiscal )
years
55. Certain information ) *
regarding
periodic payment plan )
certificates )
56. Certain information ) *
regarding
periodic payment plan )
certificates )
57. Certain information ) *
regarding
periodic payment plan )
certificates )
58. Certain information ) *
regarding
periodic payment plan )
certi-
ficates )
59. Financial statements ) Statement of Financial
(Instruction 1(c) to ) Condition
Form S-6)
* Not applicable, answer negative or not required.
THE MUNICIPAL BOND TRUST
INSURED SERIES 38
This Prospectus consists of two parts. Part A
contains Essential Information Regarding the
Trusts including descriptive material relating to
the Trusts, Financial Statements of the Trusts
and Schedules of Investments. Part B contains
general information about the Trusts. Part A may
not be distributed unless accompanied by Part B.
Interest income to the Trust and to
Certificateholders is excludable, in the opinion
of counsel, from gross income for
8,646
Federal income tax purposes under existing law,
and exempt from California state income taxes
for resident UNITS
purchasers of California, but may be subject to
state and local taxation. Capital gains, if any,
are subject to tax.
THE INITIAL PUBLIC OFFERING OF UNITS IN THE TRUST
HAS BEEN COMPLETED. THE UNITS OFFERED HEREBY ARE
ISSUED AND OUTSTANDING UNITS WHICH HAVE BEEN
ACQUIRED BY THE SPONSOR EITHER BY PURCHASE FROM
THE TRUSTEE OF UNITS TENDERED FOR REDEMPTION OR
IN THE SECONDARY MARKET.
THE OBJECTIVES OF THE MUNICIPAL BOND TRUST,
INSURED SERIES 38--The Municipal Bond Trust,
Insured Series 38 (the "Trusts" or the "Trust")
consists of two separate unit investment trusts
designated the National Trust and the California
Trust. The Trusts are formed for the purpose of
gaining Federally tax-exempt interest income
consistent with the preservation of capital and
diversification of risk through investment in a
fixed insured portfolio comprised of "AAA rated"
(as of the Date of Deposit) interest-bearing
municipal bonds (the "Bonds"). The payment of
interest and the preservation of capital is
dependent upon the continuing ability of the
respective issuers of the Bonds and the
respective insurers thereof (the "Insurers") to
meet their obligations. Since PaineWebber
Incorporated (the "Sponsor") and The Chase
Manhattan Bank, N.A. (the "Trustee") do not have
control over the source of payment of the Bonds
or insurance policies, they cannot guarantee that
the objectives of the Trusts will be achieved.
Each Unit of each Trust represents a fractional
undivided interest in the principal amount of
underlying bonds and net income of such Trust in
the ratio of 1 Unit for each $1,005.49 and
$830.40 principal amount of underlying bonds
deposited in the following Trusts, respectively.
Number of Units Principal Amount
National Trust 6,370 $6,405,000
California Trust 2,276 1,890,000
INSURANCE--Insurance guaranteeing the payment of
principal and interest, at their stated payment
dates, on all of the Bonds in the Trust has been
obtained from the bond insurers indicated under
"Essential Information Regarding the Trust",
herein. Because of this insurance the Units are
rated AAA by Standard & Poor's Corporation. (See
"Summary of Portfolio").
PUBLIC OFFERING PRICE--The Public Offering Price
of Units is equal to the aggregate of the bid
prices of the underlying Bonds divided by the
number of Units outstanding plus a sales charge
of up to 5.82% of the net amount invested for the
National and California Trusts, (5.50% of the
Public Offering Price). Units are offered at the
Public Offering Price plus accrued interest. (See
"Public Offering Price of Units" and "Secondary
Market for Units" in Part B).
MARKET FOR UNITS--Although under no obligation to
do so, the Sponsor intends to maintain a market
for Units at prices based on the aggregate bid
price of the Bonds in the Trust. If such market
is terminated, a Certificateholder may be able to
dispose of his Units only through redemption.
(See "Secondary Market for Units" and "Redemption
of Units by Trustee" in Part B).
DISTRIBUTIONS--Distributions of interest received
by the Trust, less expenses, will be made on a
monthly basis unless the Certificateholder elects
to receive interest on a semi-annual basis.
Distribution of principal, if any, will be made
on a semi-annual or more frequent basis. See
"Essential Information-Plan of Distribution", in
Part A, "Distributions to Certificateholders" in
Part B and "Essential Information" in Part A for
details of optional interest distributions.
ESTIMATED CURRENT RETURN--The Estimated Current
Return per Unit is determined by dividing the net
annual interest income per Unit by the Public
Offering Price per Unit. Any change in either
amount will result in a change in Estimated
Current Return. (See "Estimated Current Return
per Unit" in Part A and "Essential Information"
in Part B).
THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
SPONSOR:
PaineWebber
Incorporated
Read and retain both parts of this
prospectus for future reference.
Prospectus Part A dated May 7, 1996
ESSENTIAL INFORMATION REGARDING THE TRUST
Securities in the Trust Portfolios
The Trust consists of the Bonds indicated under
"Schedule of Investments", all undistributed
interest received or accrued on the Bonds, and
any undistributed cash realized from the sale,
redemption or other disposition of the Bonds.
Each of the Bonds has been insured against loss
of principal and against non-payment of interest
by the Insurers. The National Trust portfolio
contains 14 issues of interest-bearing bonds
issued by issuers located in 12 states of the
United States. The California Trust contains 8
issues of interest-bearing Bonds issued by
entities located entirely in the state of
California. All of the Bonds in the Trust were,
as of the Date of Deposit, AAA rated municipal
bonds.
An investment in the Trust should be made with
an understanding that the value of the underlying
Trust portfolio may decline with interest rates.
The aggregate market values of the Bonds in each
Trust, based on the bid side of the market were
as follows at February 1, 1996:
National Trust California Trust
Aggregate Market Value $6,696,757 $1,902,663
The principal and interest on the Bonds are
payable either from ad valorem taxes, from
revenues to be derived by an issuer from a
specific project or projects or from other
revenues to be received by an issuer. A
discussion of such other types of bonds is set
forth under "Summary of Portfolio--Additional
Considerations Regarding the Trusts" contained in
Part B for a summary of the investment risks
associated with the Securities contained in the
Trust. Each Trust consists of the types of Bonds
set forth in the chart below.
National Trust California Trust
Category Number of Issues Number of Issues
Electric and Power 2 2
Health and Hospitals 1 -
Water & Sewer 1 -
School/University 1 -
Refunded Bonds 6 4
Escrowed to Maturity 3 -
Convention Center - 1
General Obligation - 1
Each Trust may be considered concentrated in the
categories of bonds identified below:
National Trust California Trust
Approximate Approximate
Percentage of Percentage of
Aggregate Aggregate
Category Market Value Market Value
Refunded Bonds 31% 49%
Insurance
Insurance guaranteeing the payment of principal
and interest, at their stated payment dates, on
certain Bonds in the Trusts has been obtained
from the bond insurers indicated below and on the
Schedules of Investments, and has been paid for
by the issuers of the Bonds in the Trusts or, in
certain cases, by third parties other than the
issuers (the "Insurance to Maturity"). Insurance
to Maturity is non-cancelable and will remain in
force as long as the Bonds so insured remain
outstanding. Insurance to Maturity does not
protect against changes in the market value of
Units due to changes in prevailing interest
rates.
Portfolio Insurance
Insurance guaranteeing the scheduled payment of
principal and interest on those Bonds in the
Trusts not insured to maturity has been obtained
by each Trust from Financial Guaranty Insurance
Company ("Financial Guaranty") on the Date of
Deposit and applies only while those Bonds are
retained in the Trust (the "Portfolio
Insurance"). The premiums for such insurance are
paid by the respective Trust. Portfolio Insurance
is non-cancelable and will remain in force so
long as the Bonds so insured are held in the
Trust. Pursuant to an irrevocable commitment (the
"Irrevocable Commitment") Financial Guaranty has
agreed to provide insurance to maturity
("Permanent Insurance") upon the sale of any Bond
so insured from the Trust under certain
conditions set forth below. Portfolio Insurance
does not protect against changes in the market
value of Units due to changes in prevailing
interest rates.
Nonpayment of premiums on the Portfolio
Insurance policy will not result in the
cancellation of insurance but will permit the
insurer to take action against the Trustee to
recover premium payments due it. Premiums are
payable monthly in advance by the Trustee on
behalf of the appropriate Trust. As Bonds covered
by the Portfolio Insurance in any Trust are
redeemed by their respective issuers or are sold
by the Trustee, the amount of premium will be
reduced in respect of those Bonds no longer owned
by and held in such Trust.
Under the terms of the Irrevocable Commitment,
at the time of sale of any Bond covered by the
Portfolio Insurance from any Trust, the Trustee
will be able to obtain Permanent Insurance on
such Bond at a predetermined premium rate (the
"Permanent Insurance Premium"). Such Permanent
Insurance is available upon sale of any bond
covered by the Portfolio Insurance in such Trust
and will only be exercised whenever the value of
that Bond insured to its maturity less the
Permanent Insurance Premium exceeds the value of
such Bond without such insurance. Any amount paid
for Permanent Insurance will be accounted for as
an offset to the amount received on the sale. The
amount of the Permanent Insurance Premiums will
decline over the life of the Bonds covered by the
Portfolio Insurance. The Permanent Insurance
Premium rate with respect to each Bond covered by
the Portfolio Insurance is determined based upon
the insurability of each Bond as of the Date of
Deposit and will not be increased or decreased
due to any subsequent change in the
creditworthiness of such Bond.
Under the provisions of the Portfolio Insurance,
Financial Guaranty unconditionally and
irrevocably agrees to pay Citibank, N.A., or its
successor, as its agent (the "Fiscal Agent"),
that portion of the principal of and interest on
the Bonds covered by the Portfolio Insurance
which shall become due for payment but shall be
unpaid by reason of nonpayment by the issuer of
such Bonds. The term "due for payment" means,
when referring to the principal of such a Bond,
its stated maturity date or the date on which it
shall have been called for mandatory sinking fund
redemption and does not refer to any earlier date
on which payment is due by reason of call for
redemption (other than by mandatory sinking fund
redemption), acceleration or other advancement of
maturity and means, when referring to interest on
such a Bond, the stated date for payment of
interest, except that when the interest on such a
Bond shall have been determined, as provided in
the underlying documentation relating to such
Bond, to be subject to Federal income taxation,
"due for payment" also means, when referring to
the principal of such Bond, the date on which
such Bond has been called for mandatory
redemption as a result of such determination of
taxability, and when referring to interest on
such Bond, the accrued interest at the rate
provided in such documentation to the date on
which such Bond has been called for such
mandatory redemption, together with any
applicable redemption premium.
Financial Guaranty will make such payments to
the Fiscal Agent on the date such principal or
interest becomes due for payment or on the
business day next following the day on which
Financial Guaranty shall have received notice of
nonpayment, whichever is later. The Fiscal Agent
will disburse to the Trustee the face amount of
principal and interest which is then due for
payment but is unpaid by reason of nonpayment by
the issuer but only upon receipt by the Fiscal
Agent (i) evidence of the Trustee's right to
receive payment of the principal or interest due
for payment and (ii) evidence, including any
appropriate instruments of assignment, that all
of the rights to payment of such principal or
interest due for payment shall thereupon vest in
Financial Guaranty. Upon such disbursement,
Financial Guaranty shall become the owner of the
Bond, appurtenant coupon or right to payment of
principal or interest on such Bond and shall be
fully subrogated to all of the Trustee's rights
thereunder, including the rights to payment
thereof and to the benefits of any previous
insurance.
The Sponsor decides whether a Bond will be
deposited in the Trust. However, in order to be
deposited in the Trust, Bonds, if not insured to
maturity, must be covered by the Portfolio
Insurance obtained from Financial Guaranty. In
determining whether to insure bonds, Financial
Guaranty has applied its own standards which are
not necessarily the same as the criteria used in
regard to the selection of Bonds by the Sponsor.
This decision is made prior to or on the Date of
Deposit.
The Bonds in the Trusts which have Insurance to
Maturity coverage are insured by the following
insurers (see "Summary of the Portfolio-Insurance
on the Bonds in the Portfolio" in Part B for a
description of each of the insurers) and the
following bonds are covered by Portfolio
Insurance at February 1, 1996.
National Trust Approximate
Percentage of
Lot Aggregate
Insurer Nos. Market Value
Insurance to Maturity
AMBAC 7 & 9 19%
MBIA 1, 2, 3, 6 & 13 37
BIGI 4, 8 & 11 20
Financial Guaranty 5, 10, 12 & 14 24
California Trust Approximate
Percentage of
Lot Aggregate
Insurer Nos. Market Value
Insurance to Maturity
AMBAC 1 12%
MBIA 2, 6 & 8 41
BIGI 5 & 7 16
Financial Guaranty 3 16
Financial Guaranty Portfolio Insurance 4 15
Ratings
Standard & Poor's Corporation rated each of the
Units of the Trust "AAA" because Bond Insurers
have issued Insurance policies in respect of the
Bonds. The assignment of such "AAA" ratings was
due solely to Standard & Poor's assessment of the
creditworthiness of the insurers and their
respective abilities to pay claims on its
policies of insurance. This is the highest rating
assigned by Standard & Poor's. (See "Bond
Ratings", herein). This rating should not be
construed as an approval of the offering of the
Units by Standard & Poor's Corporation or as a
guarantee of the market value of the Trust or of
the Units. Standard & Poor's has been compensated
by the Sponsor for its services in rating Units
of the Trust.
SPECIAL CONSIDERATIONS REGARDING CALIFORNIA
SECURITIES
The financial condition of the State of
California (the "State"), its public authorities
and local governments could affect the market
values and marketability of, and therefore the
net asset value per share and the interest income
of, the Portfolio, or result in the default of
existing obligations, including obligations which
may be held by the Portfolio. The following
section provides only a brief summary of the
complex factors affecting the financial condition
of California, and is based on information
obtained from the State, as publicly available on
the date of this Prospectus. The information
contained in such publicly available documents
has not been independently verified. It should be
noted that the creditworthiness of obligations
issued by local issuers may be unrelated to the
creditworthiness of obligations issued by the
State, and that there is no obligation on the
part of the State to make payment on such local
obligations in the event of default in the
absence of a specific guarantee or pledge
provided by the State.
The State of California is experiencing
significant financial difficulties, which have
reduced its credit standing. The ratings of
certain related debt of other issuers for which
the State has an outstanding lease purchase,
guarantee or other contractual obligation (such
as for State-insured hospital bonds) are
generally linked directly to the State's rating.
Should the financial condition of the State
deteriorate, its credit ratings could be further
reduced, and the market value and marketability
of all outstanding notes and bonds issued by the
State, its public authorities or local
governments could be adversely affected. As of
June 22, 1994, the State Legislature had not
adopted a budget for the 1994-95 Fiscal Year. If
the budget is not passed by early July, the State
may be required to issue registered warrants to
pay State bills. See the discussion regarding the
1994-95 Fiscal Year budget below.
Economic Factors. California's economy is the
largest among the 50 states and one of the
largest in the world. As of July 1, 1993, the
State's population of almost 32 million
represents over 12% of the total United States
population. While the State's substantial
population growth during the 1980s stimulated
local economic growth and diversification, it
also increased demands on State services.
Recently, population growth has slowed, even
while substantial immigration has continued, due
to a significant increase in outmigration by
California residents. Generally, the household
incomes of new residents have been substantially
lower (and their education and welfare
utilization higher) than those of departing
households, which may have a major long-term
socioeconomic and fiscal impact.
Total employment is approximately 14 million,
and in many respects mirrors the national
distribution among industries. Aerospace
manufacturing, high technology, foreign trade
(especially with Pacific Rim nations), banking,
agriculture, construction and tourism are
especially important factors in California. The
California economy traditionally benefited from
U.S. Department of Defense spending on both
contract awards (which have been of particular
benefit to the State's aerospace and high
technology industries) and base siting, and has
been disproportionately affected by spending
reductions in recent years.
Since the start of FY1990-91, the state has
faced the worst economic, fiscal and budget
conditions since the 1930s. The California
economy is experiencing by far the longest and
deepest downturn of the post World War II era,
losing 850,000 payroll jobs in the State since
May 1990. Major cuts in federal defense spending
are now recognized as the main source of the
recession and the largest obstacle to recovery.
The principal question in the California outlook
for 1994 and the next several years is when and
whether other elements in the State's economy can
muster sufficient strength to overcome the
continuing drag of defense cuts. The 1994-95
Governor's budget, released January 7, 1994,
assumes the State will remain in a recessionary
state through 1994, with a modest upturn
beginning in late 1994 or in 1995. The major
elements of the forecast include (1) further
declines in aerospace and electronics
manufacturing, albeit at a reduced pace compared
to 1993; (2) a modest pickup in homebuilding and
a stabilization in nonresidential construction;
(3) continuing restructuring in finance, the
utilities and air transportation; and (4) slow
gains in retail sales and wholesale and retail
trade employment.
Absent the Northridge earthquake, the State's
economy began showing the first signs of recovery
in February, March and April of 1994; for
example, the State's nonfarm employment rose in
three consecutive months and the unemployment
rate fell to 8.6 percent in March from the
January high of 10.1 percent. Evidence points to
reaching the bottom of the recession in 1994.
Factors which may impede an economic recovery in
California include: (i) continued cutbacks in
defense spending, although the rate of decline is
forecast to moderate slowly over the next several
years, and the impact of previously announced
base closings with the impact in 1995 estimated
to be twice as large as that in 1994; (ii)
corporate downsizing with a substantial portion
expected to have run its course by 1995; (ii)
huge oversupplies of commercial office, retail
and hotel space and consequent constraints on
real estate lenders; (iii) competition from lower
cost areas for business investment, particularly
by high technology manufacturers; (iv) the
ability of foreign markets to absorb California
exports, particularly since California has a
disproportionate share of export oriented jobs in
manufacturing and other industries; (v) continued
cost containment efforts and "downsizing" by
finance and service industries; and (vi) loss of
market share in attracting tourists to
California. Although the Northridge earthquake
caused significant property damage to public and
private facilities in a four-county area of
southern California, including northern Los
Angeles County, the vast majority of structures
in the affected area survived the earthquake with
minimal or no damage. The federal government has
undertaken to provide substantial earthquake
assistance.
State Debt. Under the California Constitution,
debt service on outstanding general obligation
bonds is the second charge to the General Fund
after support of the public school system and
public institutions of higher education. Total
outstanding general obligation bonds and lease
purchase debt of the State increased from $9.4
billion at June 30, 1988 to $21.6 billion at June
30, 1993. State agencies and authorities had
approximately $22.7 billion of revenue bonds and
notes outstanding at June 30, 1993; the State has
no liability with respect to such indebtedness.
State Finances. Throughout the 1980's, State
spending increased rapidly as the State
population and economy also grew rapidly. In the
early 1980s, the voter-initiated indexing of
personal income tax rates (to adjust for
inflation), the voter-initiated elimination of
certain inheritance and gift taxes, and the
increase of exemption levels for certain other
taxes had a moderating impact on growth in State
revenues. In recent years, State spending,
particularly for primary school education and
public assistance programs (including Medi-Cal),
has grown at a significantly higher rate than
State revenues due to substantial enrollment and
caseload increases arising from immigration and
other demographic changes and the recession. The
recession seriously affected State tax revenues,
with revenues declining in FY1990-91 over FY1989-
90 for the first time since the 1930s. As a
result of such structural imbalance in the
General Fund, the State entered a period of
chronic budget imbalance, with expenditures
exceeding revenues for four of the past five
fiscal years, and had an accumulated General Fund
deficit, on a budget basis, of approximately $2.8
billion at June 30, 1993.
A further consequence of the large budget
imbalances in FY1990-91 and FY1991-92 was that
the State used up all of its available cash
resources. In late June 1992, the State was
required to issue $475 million of short-term
revenue anticipation warrants to cover
obligations coming due on June 30. With the
failure of the Governor and Legislature to adopt
a FY1992-93 budget on time, the State was not
able to carry out its usual seasonal cash flow
borrowing for the fiscal year. The resultant
shortfall of cash forced the State Controller to
issue approximately $3.8 billion of interest-
bearing "registered warrants" in lieu of regular
warrants redeemable for cash between July 1, 1992
and September 4, 1992 (following adoption of the
FY1992-93 budget, which led to the subsequent
redemption of such warrants using the proceeds of
interim notes). Registered warrants had not been
issued by the State since the 1930s, and were
issued to State vendors, suppliers, and
employees, and to local government agencies to
pay prior year obligations and certain current
year obligations pursuant to special
appropriations and court orders. Many State
vendors, however, remained unpaid during such
period. To cover continuing cash flow needs, the
State issued an additional $3.0 billion of
revenue anticipation notes on April 26, 1993 that
were redeemed on June 24, 1993. On June 23, 1993,
the State issued $2.0 billion in revenue
anticipation warrants that matured on December
23, 1993. On July 28, 1993, the State issued $2.0
billion in revenue anticipation notes that will
mature on July 28, 1994. Finally, on February 23,
1994, the State issued $1.2 billion of Revenue
Anticipation Warrants Series A, maturing on
December 21, 1994 and $2.0 billion 1994 Revenue
Anticipation Warrants Series B, maturing July 26,
1994. The proceeds were needed to complete the
Governor's deficit retirement plan and to fund
additional cash flow shortfalls.
To balance the budget in FY1993-94 in the face
of declining revenues, the Governor proposed a
series of revenue shifts from local government,
reliance on increased federal aid and reductions
in state spending. The Governor's FY 1993-94
Budget and May Revision did not calculate a "gap"
to be closed, but rather set forth revenue and
expenditure forecasts and proposals designed to
produce a balanced budget. Revenues were forecast
at $40.6 billion, about $400 million below 1992-
93, the second consecutive year of actual
decline. Declining revenues were due to the
continued weak economy, the expiration of a half
cent temporary sales tax, a deferral of operating
loss carry forwards and repeal by initiative of a
sales tax on candy and snack foods. General Fund
expenditures in the FY 1993-94 Budget Act were
budgeted at $38.5 billion, a 6.3 percent
reduction from projected 1992-93 expenditures.
Other than a two-year suspension of the renters'
tax credit, the 1993-94 Budget Act did not
contain any General Fund tax/revenue. Midway
through FY 1993-94, revenues were projected to be
$39.7 billion, about $900 million less than
budget and expenditures were projected to be
$39.3 billion, about $800 million above budget.
The principal reasons for these variances are
increased health and welfare caseloads, lower
local property taxes (which require State support
for K-14 education to make up the shortfall), and
lower than expected federal government payments
for immigration related costs. The Commission on
State Finance issued a February update to its
December 1993 report indicating that the combined
1994-94 and 1994-95 budget would be an estimated
$4.5 billion out of balance by June 30, 1995.
The 1994-95 Fiscal Year presents the fourth
consecutive year the Governor and Legislature are
faced with a very difficult budget environment to
produce a balanced budget. Many program cuts and
budgetary adjustments have already been made in
the last three years. The FY 1994-95 Governor's
budget predicts that population growth in the
1990s will keep upward pressure on major state
programs, such as K-14 education, health, welfare
and corrections outstripping projected revenue
growth in an economy only very slowly emerging
from a deep recession. The Governor's Budget
projects General Fund revenues and transfers of
$41.3 billion, approximately $1.4 billion above
1993-94, and a 1.3 percent reduction in
expenditures to $38.8 billion. As proposed, the
Governor's budget projects a General Fund balance
of $260 million on June 30, 1995 which includes
paying off the accumulated deficit. To achieve
the balanced budget, the Governor's budget
assumes increased federal funds for health and
welfare costs, a State-local government
realignment proposal which calls for transfer of
0.5 percent State sales tax to counties, transfer
of significant health and welfare costs to
counties, and increased State support for K-12
education due to a property tax shift from school
districts to counties, and various miscellaneous
cuts.
On June 13, 1994, the Governor issued a revised
budget for FY1994-95 that includes a two year
plan to eliminate an estimated $4.0 billion
deficit. The revised budget includes expenditure
reductions and other adjustments to reduce the
deficit by $3.0 billion in FY1994-95. Under the
plan, the remaining $1.0 billion deficit would be
eliminated in FY1995-96. Additionally, the
revised budget includes a proposal to issue $5.0
billion of revenue anticipation warrants that
would mature in April 1996 and $2.0 billion of
revenue anticipation notes that would mature in
June 1995. If the State does not adopt a budget
for FY1994-95 in early July, it may be required
to issue interest bearing registered warrants in
lieu of regular warrants as it did in the summer
of 1992.
There can be no assurance that the State will
not face budget gaps in future years, resulting
from a disparity between tax revenues projected
from a lower revenue base and the spending
required to maintain State programs at current
levels. To achieve a balanced budget, the
enactment of legislation will be required to
enlarge the State's revenue base or to curtail
current program expenditures. Certain major
budgetary considerations affecting the State are
outlined below.
Revenue Base. The recession has seriously
affected State tax revenue, which basically
mirror general economic conditions. The principal
sources of General Fund revenues are economically
sensitive, and include the California personal
income tax (44% of total FY1992-93 revenues), the
sales tax (38%), bank and corporation taxes
(12%), and the gross premium tax on insurance
(3%). Personal income tax receipts are generated
disproportionately by relatively few taxpayers
(the top 4% of taxpayers paid 49% of the total
tax in 1990), and capital gains are a significant
component of such collections. Auto sales and
building materials are significant components of
retail sales tax collections. Tax rates,
increased in 1991, are relatively high, and may
impose political and economic constraints on the
ability of the State to further increase its
taxes. By statute, certain recent increases in
the income tax rates will expire, unless
extended, by June 1995 reducing the State's tax
base in future years. In November 1993, the
voters approved a constitutional amendment to
permanently extend 0.5 percent of the sales tax
for local law enforcement and thus, it will not
be available as General Fund revenues. The 1994-
95 Governor's budget proposes that an additional
0.5 percent be transferred from the State to
counties to assist counties in paying for their
increased share of health and welfare programs.
Budgetary Flexibility. Article XIIIB of the
California Constitution, adopted by voter
initiative, established an "Appropriations Limit"
for the State; excess revenues are to be divided
equally between transfers to K-14 districts and
refunds to taxpayers. A taxpayer refund has not
been required since FY1986-87.
Proposition 98 established a minimum expenditure
base for State aid to K-14 districts, currently
requiring allocation of over 40% of General Fund
revenues to such districts.
For several years the State has maintained a
Special Fund for Economic Uncertainties (SFEU) as
a reserve fund which was depleted (and
subsequently replenished) to finance the FY1989-
90, FY1990-91, FY1991-92 and FY1992-93 operating
deficits. In FY1994-95, the Governor's budget and
the deficit retirement plan projects the June 30,
1995 ending balance of the SFEU to be about $260
million.
Labor Costs. The State government workforce is
mostly unionized, subject to the law which
authorizes collective bargaining and prohibits
strikes and work slowdowns. Most of the State's
collective bargaining agreements expire June 30,
1995, and funds were budgeted in FY1993-94 for a
5% wage increase effective January 1, 1994. State
employees are participating in or have
participated in salary reduction programs and are
paying a greater share of their health, dental
and vision benefit premium costs will absorb
increases in health benefit premiums. The State
has a substantial unfunded liability for future
pension benefits, and has utilized changes in its
pension fund policies to reduce current
contribution requirements. If the investment
assumptions used in determining required State
contributions are not sustained by actual
results, additional State contributions would be
required in future years.
Public Assistance. California has the largest
number of persons receiving public assistance
(AFDC and General Relief) of any state. AFDC
costs are shared among the federal government,
the State and its counties by statutory formula.
Caseloads tend to rise significantly during
economic downturns, but are also significantly
affected by changing demographic and social
trends which may impede the reduction of
caseloads during an economic recovery.
Medi-Cal. California participates in the
federal Medicaid program under a state plan
approved by the Health Care Financing
Administration. The federal government provides
certain of the eligible program costs, with the
remainder shared by the State and its counties.
Basic program eligibility and benefits are
determined by federal guidelines, but the State
currently provides a number of optional benefits
and expanded eligibility. Program costs have
increased substantially in recent years, and
account for a large share of the State budget.
Federal law requires the State adopt
reimbursement rates for hospitals and nursing
homes that are reasonable and adequate to meet
the costs that must be incurred by efficiently
and economically operated facilities in providing
patient care.
Litigation. The State is involved in certain
legal proceedings (described in the State's
recent financial statements) that, if decided
against the State, may require the State to make
significant future expenditures or may
substantially impair revenues.
State Assistance to Localities. Property tax
revenues received by local governments declined
more than 50% following voter approval of Article
XIIIA of the California Constitution (commonly
known as "Proposition 13") in 1978. Subsequently,
the California Legislature enacted measures to
provide for the redistribution of the State's
General Fund surplus to local agencies, the
reallocation of certain State revenues to local
agencies and the assumption of certain
governmental functions by the State to assist
municipal issuers to raise revenues. In response
to the State's current fiscal difficulties, the
State has reduced its financial assistance to
counties and cities, and adopted measures to
transfer certain governmental functions to its
counties, accompanied by new funding sources. The
Governor's FY1993-94 budget eliminated the
remaining Proposition 13 assistance. Such actions
could compound the serious fiscal constraints
already experienced by many local governments,
several of which have been compelled to seek
special assistance from the State.
Tax Status of the Trust - California
In the opinion of Orrick, Herrington &
Sutcliffe, Special California council on
California tax matters, under existing law
applicable to individuals who are California
residents:
1. The California Trust is not an association
taxable as a corporation. Under the income tax
laws of California, income of the California
Trust will be treated as income of
Certificateholders.
2. Interest on the underlying Securities that is
exempt from California personal income tax and
property tax when received by the California
Trust will retain its status as exempt from such
taxes when distributed to Certificateholders.
However, interest on the underlying Securities
attributed to a Certificateholder that is a
corporation subject to the California franchise
tax laws may be includable in its gross income
for purposes of determining its California
franchise tax.
3. Under the income tax laws of California, each
Certificateholder in the California Trust will
have a taxable event when the California Trust
disposes of a Security (whether by sale,
exchange, redemption, or payment at maturity), or
when the Certificateholder redeems or sells
Units. Because of the requirement that tax cost
basis be reduced to reflect amortization of bond
premium, under some circumstances a
Certificateholder may realize taxable gain when
Units are sold or redeemed for an amount equal to
or less than their original cost. The total cost
of each Unit to a Certificateholder is allocated
among each of the bond issues held in the
California Trust, in accordance with the
proportion of the California Trust comprised by
each bond issue, to determine its per Unit tax
cost for each bond issue. The tax cost reduction
requirements relating to amortization of bond
premium will apply separately to the per Unit
cost of each bond issue. Certificateholders may
be required to adjust the bases of their Units
and the bases of their fractional interests in
each California Trust asset to reflect their pro
rata shares of accrued interest, if any, received
on Securities delivered after the
Certificateholders' respective settlement dates.
4. Bonds, including Securities, or any interests
therein, are exempt from California personal
property tax.
5. Any Proceeds representing maturing interest
on defaulted obligations derived by
Certificateholders from insurance policies will
be exempt from California personal income tax and
property tax if, and to the same extent as, such
interest would have been so exempt if paid by the
issuer of such defaulted obligations.
Tax Status of the Trust
The following discussion applies to each Trust
offered by this document.
At the time of issuance of the Securities,
opinions regarding the validity of such
Securities and the exemption from federal income
tax of interest on such Securities were rendered
by bond counsel to the respective issuers. Except
in certain instances in which Orrick, Herrington
& Sutcliffe acted as bond counsel to issuers of
Securities, neither the Sponsor, the Trustee, nor
counsel to either has made any review of the
proceedings relating to the issuance of the
Securities or the basis for such opinions. In the
case of certain Securities in the Trust, the
opinions of bond counsel indicate that interest
on such obligations received by a "substantial
user" of the facilities being financed with the
proceeds of such obligations, or "related
person," for periods such obligations are held by
such "substantial user" or "related person," will
not be exempt from federal income tax. Interest
income attributable to such Securities received
by a Unitholder who is a "substantial user" or
"related person" may be taxable to such
Unitholder.
In the opinion of Orrick, Herrington &
Sutcliffe, counsel to the Sponsor, under existing
law:
1. The Trust is not an association taxable as a
corporation for Federal income tax purposes.
Under the Internal Revenue Code of 1986, as
amended (the "Code"), each holder of a
certificate of ownership (a "Certificateholder")
will be treated as the owner of a pro rata
portion of the Trust, and income of the Trust
will be treated as income of the
Certificateholders. Interest on Securities in the
Trust that is excludable from gross income for
federal income tax purposes when received by the
Trust will retain its status as excludable when
distributed to Certificateholders, except that no
opinion is expressed regarding the character of
interest on any Security in the case of any
Certificateholder who is a "related person" or a
"substantial user", both as defined in Code
Section 147(a).
2. Each Certificateholder will have a taxable
event when the Trust disposes of a Security
(whether by sale, exchange, redemption, or
payment at maturity), or when the
Certificateholder redeems or sells its
Certificates. For purposes of determining gain or
loss, the total tax cost of each Unit to a
Certificateholder is allocated among each of the
Securities in accordance with the proportion of
the Trust comprised by each Security, to
determine the Certificateholder's per Unit tax
cost for each Security. Further, the tax cost
reduction requirements of the Code relating to
amortization of bond premium will apply
separately to the per Unit tax cost of each
Security.
3. The Trust is not an association taxable as a
corporation for New York State income tax
purposes. Under New York State law, each
Certificateholder will be treated as the owner of
a pro rata portion of the Trust, and income of
the Trust will be treated as income of the
Certificateholders. Interest on Securities in the
Trust that is exempt from personal income tax
under New York State law when received by the
Trust will retain its tax-exempt status when
distributed to Certificateholders.
4. Any proceeds representing maturing interest
on defaulted obligations derived by
Certificateholders from insurance policies will
be excluded from gross income for federal income
tax purposes if, and to the same extent as, such
interest would have been so excluded if paid by
the issuer of such defaulted obligations.
Additional Tax Considerations
Recognition of Gain. The Code, by virtue of the
Tax Reform Act of 1986, effects a substantial
reduction in the number of income tax brackets
and rate levels for individuals and corporations
and adversely modifies the preferential treatment
accorded the net gain from the sale or exchange
of capital assets. The maximum rate for net
capital gain of individuals in 1987 is limited to
28%. Net capital gain recognized by corporations
after 1986 and by individuals after 1987 will be
taxed at the same tax rates applicable to
ordinary income.
As a result of the tax cost reduction
requirements of the Code relating to amortization
of bond premium, under certain circumstances
Unitholders may realize a taxable gain upon
disposition of Units even though such Units are
sold or redeemed for an amount equal to or less
than their original cost.
Original Issue Discount and Market Discount.
The portfolio may contain Securities originally
issued at a discount ("original issue discount").
In general, original issue discount is defined as
the difference between the price at which a bond
is issued and its stated redemption price at
maturity. With respect to tax-exempt obligations
issued on or before September 3, 1982, original
issue discount is deemed to accrue (be "earned")
as tax-exempt interest ratably over the life of
the obligations and is apportioned among the
original holder of the obligation and subsequent
purchasers in accordance with a ratio the
numerator of which is the number of calendar days
the obligation is owned by the holder and the
denominator of which is the total number of
calendar days from the date of issuance of the
obligation to its maturity date. With respect to
tax-exempt obligations issued after September 3,
1982, original issue discount is deemed earned in
a geometric progression over the life of the
obligations, taking into account the semi-annual
compounding of accrued interest, resulting in an
increasing amount of interest in each year.
In general, if a Unitholder acquires a pro rata
interest in a Security for a price that is less
than its stated redemption price at maturity (or
less than the original issue price plus accrued
original issue discount, if such Security was
issued with original issue discount), such pro
rata interest will be treated as having been
purchased at a "market discount". If gain is
realized upon the sale or other disposition of
such pro rata interest, the market discount will
constitute taxable gain. Such gain generally will
be long-term capital gain to Unitholders, other
than dealers in securities and certain financial
institutions, if the Securities are held by the
Trust for more than six months and such
Unitholders have held their Units for more than
one year.
Interest on Borrowed Funds. Interest paid on
funds borrowed to purchase or carry units of a
unit investment trust that distributes tax-exempt
interest income during a tax year is not
deductible. Under rules of the Internal Revenue
Service for determining when borrowed funds are
considered used for the purpose of purchasing or
carrying particular assets, the purchase of Units
may be considered to have been made with borrowed
funds even though the borrowed funds are not
directly traceable to the purchase of Units.
Social Security Benefits. Code Section 86
provides that a portion of social security
benefits received after December 31, 1983, are
includible in taxable income for taxpayers whose
"modified adjusted gross income", combined with
50% of their social security benefits, exceeds a
base amount. The base amount is $25,000 for an
individual, $32,000 for a married couple filing a
joint return, and zero for married persons filing
separate returns. Under Code Section 86, interest
on tax-exempt bonds is to be added to adjusted
gross income for purposes of determining whether
an individual's income exceeds the base amount
above which a portion of the benefits would be
subject to tax. The amount of social security
benefits that could be includible in taxable
income would be the lesser of one-half of the
benefits or one-half of the excess of the
taxpayer's combined income (modified adjusted
gross income plus one-half of benefits) over the
base amount.
Tax Reform Act of 1986--Effects on Tax-Exempt
Interest. The Tax Reform Act of 1986, among other
items, provided for the following: (1) Effective
for taxable years beginning after December
31,1986, the alternative minimum tax rate for
individuals is increased to 21%, and the interest
on certain Private Activity Bonds issued after
August 7, 1986 is included in the calculation of
the individual alternative minimum tax. Each
Security in the Trust received or will receive an
opinion of bond counsel to the effect that it is
not a Private Activity Bond the interest on which
is subject to the alternative minimum tax. (2)
Effective for taxable years beginning after
December 31, 1986, the alternative minimum tax
rate for corporations is increased from 15% to
20%, and for purposes of this tax, interest on
certain Private Activity Bonds issued after
August 7, 1986, and 50% of the excess of a
corporation's net book income (adjusted) over its
alternative minimum taxable income (adjusted) are
classified as tax preference items. Net book
income includes interest on all tax-exempt bonds,
such as the Securities. In taxable years
beginning after 1989, the use of adjusted net
book income in determining such alternative
minimum tax is to be replaced by the use of
adjusted current earnings, and 75% of the amount
by which adjusted current earnings exceed
alternative minimum taxable income, as modified
for this calculation, will be included in
alternative minimum taxable income. Interest on
the Securities is includible in the adjusted net
book income and adjusted current earnings of a
corporation for purposes of such alternative
minimum tax. The Tax Reform Act of 1986 does not
otherwise require corporations, and does not
require taxpayers other than corporations,
including individuals, to treat interest on the
Securities as an item of tax preference in
computing alternative minimum tax. (3) Subject to
certain exceptions, financial institutions may
not deduct that portion of the institution's
interest expense allocable to tax-exempt interest
on tax-exempt bonds acquired after August 7,
1986. (4) The amount of the deduction allowed to
property and casualty insurance companies for
underwriting loss is decreased by an amount
determined with regard to tax-exempt interest
income and the deductible portion of dividends
received by such companies, effective for taxable
years beginning after December 31, 1986. (5) All
taxpayers are required to report for
informational purposes on their federal income
tax returns the amount of tax-exempt interest
they receive, effective for taxable years
beginning after December 31, 1986. (6) An issuer
must meet certain requirements on a continuing
basis in order for interest on a tax-exempt bond
to be tax exempt; failure to meet such
requirements results in loss of tax exemption.
(7) For taxable years beginning after December
31, 1986, a branch profits tax is imposed on the
U.S. branches of foreign corporations which,
because of the manner in which the branch profits
tax is calculated, may have the effect of
subjecting the U.S. branch of a foreign
corporation to federal income tax on the interest
on bonds otherwise exempt from such tax.
The Tax Reform Act of 1986 also significantly
curtailed a taxpayer's ability to offset income
with deductions and losses. In general, a lower
overall rate of income taxation could make tax-
exempt bonds less attractive to investors and
could decrease the value of tax-exempt Securities
held by the Trust, while the limitations on the
ability to offset taxable income may have the
opposite effect. In addition, certain "S
Corporations" may have a tax imposed on passive
income including tax-exempt interest, such as
interest on the Securities.
Alternative Minimum Tax. Interest on the
Securities in the Trust is not treated as a
preference item for purposes of calculating the
individual and corporate alternative minimum tax.
However, the Code provides that for taxable years
1988 and 1989, 50% (75% for taxable years
beginning after 1989) of the excess of a
corporation's adjusted net book income over its
adjusted alternative minimum taxable income will
be treated as a preference item in the
calculation of alternative minimum taxable
income. For taxable years beginning after 1989,
the use of adjusted net book income will be
replaced by the use of adjusted current earnings.
The adjusted net book income and adjusted current
earnings of a corporation include the amount of
any income received that is otherwise exempt from
tax, such as interest on the Securities.
Superfund Revenue Act of 1986. The Superfund
Revenue Act of 1986 (the "Superfund Act") imposed
a deductible, broad-based tax on a corporation's
alternative minimum taxable income (before net
operating losses and any deduction for the tax)
at a rate of $12 per $10,000 (0.12%) of
alternative minimum taxable income in excess of
$2,000,000. The tax is imposed for tax years
beginning after 1986 and beginning before 1992.
The tax is imposed even if the corporation pays
no alternative minimum tax. For purposes of the
Superfund Act, alternative minimum taxable income
includes interest on all tax-exempt bonds to the
same extent and in the same manner as does the
Tax Reform Act of 1986. The Superfund Act does
not impose an alternative minimum tax on
taxpayers other than corporations.
Branch Profits Tax. The Code provides that
interest on exempt obligations such as the
Securities is included in effectively connected
earnings and profits for purposes of computing
the branch profits tax on certain foreign
corporations doing business in the United States.
Property and Casualty Companies. The Code
contains provisions relating to property and
casualty companies whereunder the amount of
certain loss deductions otherwise allowed is
reduced (in certain cases below zero) by a
specified percentage of, among other things,
interest on tax-exempt obligations acquired after
August 7, 1986.
Financial Institutions. The Code provides that
commercial banks, thrift institutions and other
financial institutions may not deduct the portion
of their interest expense allocable to tax-exempt
obligations after August 7, 1986 (other than
certain "qualified" obligations). The Securities
are not qualified for this purpose.
S Corporations. The Code imposes a tax on excess
net passive income of certain S corporations that
have subchapter C earnings and profits. Passive
investment income includes interest on tax-exempt
obligations.
Information Reporting. All taxpayers are
required to report for informational purposes on
their federal income tax returns the amount of
tax-exempt interest they receive.
Future Legislation. Various proposals have been
introduced before Congress from time to time to
restrict or eliminate the federal income tax
exemption for interest on municipal securities
such as those deposited in the Trust. Such
proposals may be introduced in the future. The
Sponsor cannot predict what additional
legislation, if any, may be proposed with respect
to the tax-exempt status of interest on municipal
securities, nor can it predict whether any
legislation, if enacted, would apply to
Securities in the Trust.
State Tax. The exemption from gross income of
interest on municipal bonds for federal income
tax purposes does not necessarily result in an
exemption under the income tax laws of any state
or local government. The laws of the several
states vary with respect to the taxation of
municipal bonds, and Unitholders are advised to
consult with their tax advisors regarding such
taxation.
Plan of Distribution
Certificateholders may elect to receive interest
distributions on a monthly or semi-annual basis
and may make such election at the time of
purchase during the initial public offering
period and prior to the initial Record Date. The
plan of distribution selected by such
Certificateholders will remain in effect until
changed as provided below. Those not indicating a
choice will be deemed to have chosen the monthly
distribution plan. See "Essential Information"
for information concerning interest distributions
under the optional payment plans. The amounts of
such distributions may change as Securities
mature, are called for redemption, or are sold or
if the expenses of the Trust change.
Certificateholders purchasing Units in the
secondary market will receive interest
distributions in accordance with the election of
the prior owner. In March and September of each
year the Trustee will furnish all registered
Certificateholders with a card to be returned to
the Trustee not later than the following May 1
and November 1 respectively. Certificateholders
desiring to change the plan of distribution in
which they are participating may so indicate on
the card and return it, with their Certificate,
to the Trustee. If the card and Certificate are
returned to the Trustee, the change in the
interest distribution plan will become effective
on May 2 and November 2 for the following 6
months. If the card is not returned to the
Trustee, the Certificateholder will be deemed to
have elected to continue with the same plan for
the following 6 months.
Trustee
The Trustee is The Chase Manhattan Bank, N.A.
(formerly, United States Trust Company of New
York), 770 Broadway, New York, New York 10003.
The Trustee is a member of the New York Clearing
House Association and is subject to supervision
and examination 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.
NATIONAL TRUST
ESSENTIAL INFORMATION REGARDING THE TRUST
AS OF FEBRUARY 1, 1996
Date of Deposit and of Trust Indenture and Agreement
February 12, 1987
Principal amount of Bonds in Trust
$6,405,000
Number of Units Outstanding
6,370
Minimum Purchase
1 Unit
Fractional undivided interest in Trust represented
by each Unit
1/6,370th
Public Offering Price
Aggregate Bid Price of Bonds in Trust $6,695,511 *~
Divided By 6,370 Units $1,051.10 *~
Plus Sales Charge of
2.05% of Public Offering Price 22.04
Public Offering Price per Unit $1,073.14 *~
Redemption Value per Unit
$1,051.10 *~
Excess of Public Offering Price per Unit over
Redemption Value Per Unit
$22.04
Sponsor's Repurchase Price per Unit
$1,051.10 *~
Excess of Public Offering Price per Unit over
Sponsor's Repurchase Price Per Unit
$22.04
Minimum Principal Distribution
No distribution need be made from Principal
Account if balance in Account is less than $8,000.
Evaluation Time
4 P.M. New York Time
Mandatory Termination Date * *
January 1, 2037
Discretionary Termination
Indenture may be terminated if value of Trust is
less than $16,000,000.
<TABLE>
INFORMATION BASED UPON INTEREST DISTRIBUTION PLAN ELECTED
<CAPTION>
Monthly Semi-Annual
Option Option
<S> <C> <C>
Gross annual interest income per unit $68.79 $68.79
Less estimated annual fees and expenses per unit * * * * 1.95 1.36
Estimated net annual interest income per unit $66.84 $67.43
Estimated interest distribution per unit $5.57 $33.71
Daily rate at which estimated net interest accrues per unit $.1856 $.1872
Estimated current return * * * 6.23% 6.28%
Record dates 1st of each Nov./May 1
month
Interest distribution dates 15th of each Nov./May 15
month
Trustee's annual fee per $1,000 principal amount of bonds * * * * $1.06 $.56
Evaluator's daily fee per bond * * * * .30 .30
__________________
* Plus accrued interest.
* * The actual termination of the Trust
may be considerably earlier (see "Termination
of the Trust" in Part B).
* * * The estimated current return is
increased for transactions entitled to a
reduced sales charge (see "Public
Offering Price of Units" in Part B).
* * * * See "Expenses of the Trust" in
Part B.
~ Includes overdistributed principal
funds.
</TABLE>
CALIFORNIA TRUST
ESSENTIAL INFORMATION REGARDING THE TRUST
AS OF FEBRUARY 1, 1996
Date of Deposit and of Trust Indenture and Agreement
February 12, 1987
Principal amount of Bonds in Trust
$1,890,000
Number of Units Outstanding
2,276
Minimum Purchase
1 Unit
Fractional undivided interest in Trust represented
by each Unit
1/2,276th
Public Offering Price
Aggregate Bid Price of Bonds in Trust $2,116,881 *~
Divided By 2,276 Units $930.09 *~
Plus Sales Charge of
1.25% of Public Offering Price 11.79
Public Offering Price per Unit $941.88 *~
Redemption Value per Unit
$930.09 *~
Excess of Public Offering Price per Unit over
Redemption Value Per Unit
$11.79
Sponsor's Repurchase Price per Unit
$930.09 *~
Excess of Public Offering Price per Unit over
Sponsor's Repurchase Price Per Unit
$11.79
Minimum Principal Distribution
No distribution need be made from Principal
Account if balance in Account is less than $3,000.
Evaluation Time
4 P.M. New York Time
Mandatory Termination Date * *
January 1, 2037
Discretionary Termination
Indenture may be terminated if value of Trust is
less than $6,000,000.
<TABLE>
INFORMATION BASED UPON INTEREST DISTRIBUTION PLAN ELECTED
<CAPTION>
Monthly Semi-Annual
Option Option
<S> <C> <C>
Gross annual interest income per unit $53.07 $53.07
Less estimated annual fees and expenses per unit * * * * 2.26 1.58
Less Insurance Premium per unit * * * * .12 .12
Estimated net annual interest income per unit $50.69 $51.37
Estimated interest distribution per unit $4.22 $25.68
Daily rate at which estimated net interest accrues per unit $.1406 $.1426
Estimated current return * * * 5.38% 5.45%
Record dates 1st of each Nov./May 1
month
Interest distribution dates 15th of each Nov./May 15
month
Trustee's annual fee per $1,000 principal amount of bonds * * * * $1.06 $.56
Evaluator's daily fee per bond * * * * .30 .30
__________________
* Plus accrued interest.
* * The actual termination of the trust
may be considerably earlier (see "Termination
of the Trust" in Part B).
* * * The estimated current return is
increased for transactions entitled to a
reduced sales charge (see "Public
Offering Price of Units" in Part B).
* * * * See "Expenses of the Trust" in Part B.
~ Includes undistributed principal funds.
</TABLE>
<TABLE>
FINANCIAL SUMMARY
NATIONAL TRUST
The following sets forth a summary of
distributions and redemption values per unit
for The Municipal Bond Trust, Insured Series
38 National Trust.
<CAPTION>
INCOME
DISTRIBUTIONS
YEAR ENDING PER UNIT
<S> <C> <C>
MONTHLY February 1, 1994 $67.81
February 1, 1995 67.47
February 1, 1996 67.40
SEMI-ANNUAL February 1, 1994 68.40
February 1, 1995 68.05
February 1, 1996 67.97
As of December 31, 1994, 1995 and February 1,
1996, the redemption values per unit were
$1,009.90, $1,053.63, and $1,051.10 plus
accrued interest to the respective dates.
FINANCIAL SUMMARY
CALIFORNIA TRUST
The following sets forth a summary of
distributions and redemption values per unit
for The Municipal Bond Trust, Insured Series
38 California Trust.
<CAPTION>
DISTRIBUTIONS
YEAR ENDING PER UNIT
<S> <C> <C>
MONTHLY February 1, 1994 $63.52
February 1, 1995 63.35
February 1, 1996 60.98
SEMI-ANNUAL February 1, 1994 64.21
February 1, 1995 64.00
February 1, 1996 62.52
PRINCIPAL February 1, 1994 1.28
February 1, 1995 ---
February 1, 1996 75.53
As of December 31, 1994, 1995 and February 1,
1996, the redemption values per unit were
$982.99, $926.20, and $930.09 plus accrued
interest to the respective dates.
</TABLE>
<TABLE>
REPORT OF INDEPENDENT AUDITORS
<C> <S>
THE CERTIFICATEHOLDERS, SPONSOR AND TRUSTEE
THE MUNICIPAL BOND TRUST, INSURED SERIES 38:
We have audited the accompanying statement of
financial condition, including the schedule of
investments, of The Municipal Bond Trust, Insured
Series 38 (comprising, respectively, the National
Trust and California Trust) as of February 1,
1996 and the related statements of operations and
changes in net assets for each of the three years
in the period then ended. These financial
statements are the responsibility of the Trustee.
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 financial statements are free of
material misstatement. An audit includes
examining, on a test basis, evidence supporting
the amounts and disclosures in the financial
statements. Our procedures included confirmation
of the securities owned as of February 1, 1996 as
shown in the statement of financial condition and
schedule of investments by correspondence with
the Trustee. An audit also includes assessing
the accounting principles used and significant
estimates made by the Trustee, as well as
evaluating the overall financial statement
presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the financial statements
referred to above present fairly, in all material
respects, the financial position of The Municipal
Bond Trust, Insured Series 38 at February 1, 1996
and the results of their operations and changes
in their net assets for each of the three years
in the period then ended, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
New York, New York
April 29, 1996
</TABLE>
<TABLE>
THE MUNICIPAL BOND TRUST
INSURED SERIES 38
NATIONAL TRUST
STATEMENT OF FINANCIAL CONDITION
February 1, 1996
ASSETS
<S> <C> <C>
Investment in municipal bonds - at market value (Cost $6,310,163)
(note 3 to schedule of investments) $6,696,757
Accrued interest receivable 78,374
Cash 43,322
Total Assets $6,818,453
LIABILITIES AND NET ASSETS
Distribution payable (note E) $57,758
Accrued expenses payable 791
Total Liabilities 58,549
Net assets (6,370 units of fractional undivided interest outstanding):
Cost to Investors (note B) $6,677,415
Less gross underwriting commissions (note C) (367,252)
6,310,163
Net unrealized market appreciation of investments (note D) 386,594
6,696,757
Undistributed investment income-net 64,393
Overdistributed proceeds from bonds sold or redeemed (1,246)
Net Assets 6,759,904
Total Liabilities and Net Assets $6,818,453
Net Asset Value Per Unit $1,061.21
STATEMENT OF OPERATIONS
<CAPTION>
Year Ended February 1,
1996 1995 1994
<S> <C> <C> <C>
Investment Income - Interest $452,484 $474,588 $504,547
Less Expenses:
Trustee's fees and expenses 8,526 9,336 9,435
Evaluator's fees 1,175 1,335 1,238
Total expenses 9,701 10,671 10,673
Investment Income-net 442,783 463,917 493,874
Realized and unrealized gain (loss) on investments-net:
Net realized gain (loss) on securities transactions (11,109) (12,890) 61,702
Net change in unrealized market appreciation (depreciation) 179,695 (524,864) 269,476
Net gain (loss) on investments 168,586 (537,754) 331,178
Net increase (decrease) in net assets resulting from operations $611,369 ($73,837) $825,052
See accompanying notes to financial statements.
</TABLE>
<TABLE>
THE MUNICIPAL BOND TRUST
INSURED SERIES 38
NATIONAL TRUST
STATEMENT OF CHANGES IN NET ASSETS
<CAPTION>
Year Ended February 1,
1996 1995 1994
<S> <C> <C> <C>
Operations:
Investment Income-net $442,783 $463,917 $493,874
Net realized gain (loss) on securities transactions (11,109) (12,890) 61,702
Net change in unrealized market appreciation (depreciation) 179,695 (524,864) 269,476
Net increase (decrease) in net assets resulting from operations 611,369 (73,837) 825,052
Less: Distributions to Certificateholders
Investment Income-net 439,742 463,844 491,534
Total Distributions 439,742 463,844 491,534
Less: Units Redeemed by Certificateholders (Note F)
Value of units at date of redemption 473,341 128,798 517,633
Accrued interest at date of redemption 7,708 1,709 7,348
Total Redemptions 481,049 130,507 524,981
Decrease in net assets (309,422) (668,188) (191,463)
Net Assets:
Beginning of period 7,069,326 7,737,514 7,928,977
End of period $6,759,904 $7,069,326 $7,737,514
See accompanying notes to financial statements.
NOTES TO FINANCIAL STATEMENTS
February 1, 1996
(A) The financial statements of the Trust are
prepared on the accrual basis of accounting.
Security transactions are accounted for on the
date the securities are purchased or sold.
(B) Cost to the investors represents the initial
public offering price as of the date of deposit
computed on the basis set
forth under "Public Offering Price Of Units"
included in Part B, adjusted for bonds called or
sold since the date of
deposit.
(C) The aggregate sales charge was computed on
the basis set forth under "Public Offering Price
of Units" included in
Part B.
(D) At February 1, 1996 the gross unrealized
market appreciation was $401,534 and the gross
unrealized market
depreciation was ($14,940). The net unrealized
market appreciation was $386,594.
(E) Distributions of the net investment income to
Certificateholders are declared and paid in
accordance with the
distribution option (monthly or semi-annually)
selected by the investor. See the Financial
Summary included in
Part A.
(F) The following units were redeemed with
proceeds of bonds sold as follows:
<CAPTION>
Year Ended February 1,
1996 1995 1994
<S> <C> <C> <C>
Number of units redeemed 452 124 474
Redemption amount $481,049 $130,507 $524,981
</TABLE>
<TABLE>
THE MUNICIPAL BOND TRUST
INSURED SERIES 38
CALIFORNIA TRUST
STATEMENT OF FINANCIAL CONDITION
February 1, 1996
ASSETS
<S> <C> <C>
Investment in municipal bonds - at market value (Cost $1,824,708)
(note 3 to schedule of investments) $1,902,663
Accrued interest receivable 21,286
Cash 229,595
Total Assets $2,153,544
LIABILITIES AND NET ASSETS
Distribution payable (note E) $21,343
Accrued expenses payable 323
Total Liabilities 21,666
Net assets (2,276 units of fractional undivided interest outstanding):
Cost to Investors (note B) $1,930,906
Less gross underwriting commissions (note C) (106,198)
1,824,708
Net unrealized market appreciation of investments (note D) 77,955
1,902,663
Undistributed investment income-net 14,997
Undistributed proceeds from bonds sold or redeemed 214,218
Net Assets 2,131,878
Total Liabilities and Net Assets $2,153,544
Net Asset Value Per Unit $936.68
STATEMENT OF OPERATIONS
<CAPTION>
Year Ended February 1,
1996 1995 1994
<S> <C> <C> <C>
Investment Income - Interest $148,148 $161,830 $167,134
Less Expenses:
Trustee's fees and expenses 3,531 3,783 3,710
Evaluator's fees 801 972 825
Insurance Premiums 325 325 325
Total expenses 4,657 5,080 4,860
Investment Income-net 143,491 156,750 162,274
Realized and unrealized gain (loss) on investments-net:
Net realized gain (loss) on securities transactions (16,749) (1,477) 4,778
Net change in unrealized market appreciation (depreciation) 51,552 (166,741) 81,906
Net gain (loss) on investments 34,803 (168,218) 86,684
Net increase (decrease) in net assets resulting from operations $178,294 ($11,468) $248,958
See accompanying notes to financial statements.
</TABLE>
<TABLE>
THE MUNICIPAL BOND TRUST
INSURED SERIES 38
CALIFORNIA TRUST
STATEMENT OF CHANGES IN NET ASSETS
<CAPTION>
Year Ended February 1,
1996 1995 1994
<S> <C> <C> <C>
Operations:
Investment Income-net $143,491 $156,750 $162,274
Net realized gain (loss) on securities transactions (16,749) (1,477) 4,778
Net change in unrealized market appreciation (depreciation) 51,552 (166,741) 81,906
Net increase (decrease) in net assets resulting from operations 178,294 (11,468) 248,958
Less: Distributions to Certificateholders
Investment Income-net 142,932 156,223 161,136
Proceeds from securities sold or redeemed 179,096 --- 3,240
Total Distributions 322,028 156,223 164,376
Less: Units Redeemed by Certificateholders (Note F)
Value of units at date of redemption 118,636 97,840 133,621
Accrued interest at date of redemption 1,964 1,338 1,877
Total Redemptions 120,600 99,178 135,498
Decrease in net assets (264,334) (266,869) (50,916)
Net Assets:
Beginning of period 2,396,212 2,663,081 2,713,997
End of period $2,131,878 $2,396,212 $2,663,081
See accompanying notes to financial statements.
NOTES TO FINANCIAL STATEMENTS
February 1, 1996
(A) The financial statements of the Trust are
prepared on the accrual basis of accounting.
Security transactions are accounted for on the
date the securities are purchased or sold.
(B) Cost to the investors represents the initial
public offering price as of the date of deposit
computed on the basis set
forth under "Public Offering Price Of Units"
included in Part B, adjusted for bonds called or
sold since the date of
deposit.
(C) The aggregate sales charge was computed on
the basis set forth under "Public Offering Price
of Units" included in
Part B.
(D) At February 1, 1996 the gross unrealized
market appreciation was $90,583 and the gross
unrealized market
depreciation was ($12,628). The net unrealized
market appreciation was $77,955.
(E) Distributions of the net investment income to
Certificateholders are declared and paid in
accordance with the
distribution option (monthly or semi-annually)
selected by the investor. See the Financial
Summary included in
Part A.
(F) The following units were redeemed with
proceeds of bonds sold as follows:
<CAPTION>
Year Ended February 1,
1996 1995 1994
<S> <C> <C> <C>
Number of units redeemed 126 98 128
Redemption amount $120,600 $99,178 $135,498
</TABLE>
<TABLE>
THE MUNICIPAL BOND TRUST, INSURED SERIES 38 NATIONAL TRUST
Schedule of Investments as of February 1, 1996
<CAPTION>
Coupon Redemption
Aggregate Rate/ Features(3)
Lot Principal Maturity C-Callable Market
No. Amount Description Rating(1) Date(5) S.F.-Sinking Fund Value(4)
<C> <C> <S> <C> <C> <C> <C>
1. $600,000 THE SPECIAL CARE FACILITIES
FINANCING AUTHORITY OF THE CITY
OF BIRMINGHAM-MEDICAL CENTER
EAST HEALTH CARE FACILITY
REVENUE REFUNDING BONDS
MEDICAL CENTER EAST SERIES 1986
(BIRMINGHAM, ALABAMA) (MBIA INS.)AAA 7 1/4% C.07/01/96@102 $620,502
07/01/2015 S.F. 07/01/2001
2. 35,000 CITY OF NORTH LITTLE ROCK,
ARKANSAS ELECTRIC SYSTEM
REFUNDING REVENUE BONDS
(MURRAY LOCK AND DAM
HYDROELECTRIC PROJECT) SERIES
1986 (MBIA INS.) (REFUNDED) AAA 7.40% C.07/01/96@1 36,285
07/01/1996 S.F. NONE
3. 410,000 COBB COUNTY KENNESTONE
HOSPITAL AUTHORITY (GEORGIA)
REVENUE CERTIFICATES, SERIES
1986A (MBIA INS.) AAA 7 3/4% (5) 472,508
02/01/2007 S.F. 02/01/2001
4. 300,000 THE HOSPITAL AUTHORITY OF THE
CITY OF FORT WAYNE, INDIANA
HOSPITAL REVENUE REFUNDING
BONDS (ANCILLA SYSTEMS
INCORPORATED) SERIES 1986 (BIGI
INS.) AAA 7.00% (5) 319,062
07/01/2018 S.F. 07/01/2005
5. 500,000 CITY OF SHREVEPORT, LOUISIANA
WATER AND SEWER REVENUE
BONDS 1986 REFUNDING SERIES C
(FINANCIAL GUARANTY INS.) AAA 7 1/8% C.12/01/96@1 529,125
12/01/2014 S.F. NONE
6. $600,000 STATE OF MONTANA THE BOARD OF
REGENTS OF HIGHER EDUCATION
MONTANA STATE UNIVERSITY
FACILITIES REFUNDING REVENUE
BONDS SERIES A 1986 (MBIA INS.) AAA 7.40% C.11/15/96@103 $634,980
11/15/2009 S.F. 11/15/2004
7. 685,000 MUNICIPAL ENERGY AGENCY OF
NEBRASKA POWER SUPPLY SYSTEM
REVENUE REFUNDING BONDS 1986
SERIES B (AMBAC INS.) AAA 6.00% C.04/01/97@102 705,790
04/01/2017 S.F. 04/01/2016
8. 600,000 CITY OF LAS VEGAS DOWNTOWN
REDEVELOPMENT AGENCY TAX
INCREMENT REVENUE BONDS (CITY
OF LAS VEGAS DOWNTOWN
REDEVELOPMENT PROJECT) SERIES
1986A (NEVADA) (BIGI INS.) AAA 7.10% (5) 638,796
06/01/2006 S.F. 06/01/2002
9. 550,000 CUSHING MUNICIPAL AUTHORITY
(CUSHING, OKLAHOMA) UTILITY
SYSTEM REVENUE BONDS, 1986
SERIES A (AMBAC INS.) (REFUNDED) AAA 7 3/8% C.07/01/96@1 570,135
07/01/1996 S.F. NONE
(Continued)
</TABLE>
<TABLE>
THE MUNICIPAL BOND TRUST, INSURED SERIES 38 NATIONAL TRUST
Schedule of Investments as of February 1, 1996
<CAPTION>
Coupon Redemption
Aggregate Rate/ Features(3)
Lot Principal Maturity C-Callable Market
No. Amount Description Rating(1) Date(5) S.F.-Sinking Fund Value(4)
<C> <C> <S> <C> <C> <C> <C>
10. $600,000 THE INDUSTRIAL DEVELOPMENT
BOARD OF THE COUNTY OF
HAMILTON, TENNESSEE LEASE
RENTAL REVENUE REFUNDING
BONDS (CITY OF CHATTANOOGA
AND COUNTY OF HAMILTON,
TENNESSEE, LESSEES) SERIES 1986
(FINANCIAL GUARANTY INS.)
(REFUNDED) AAA 7.20% C.09/01/96@1 $625,338
09/01/1996 S.F. NONE
11. 365,000 TEXAS MUNICIPAL POWER AGENCY
REFUNDING REVENUE BONDS,
SERIES 1987 (BIGI INS.) (REFUNDED) AAA 6 1/4% C.09/01/97@1 387,517
09/01/1997 S.F. NONE
12. 210,000 TRINITY RIVER AUTHORITY OF
TEXAS REGIONAL WASTEWATER
SYSTEM REVENUE BONDS, SERIES
1986 (FINANCIAL GUARANTY INS.)
(REFUNDED) AAA 7.70% C.08/01/96@1 214,597
08/01/1996 S.F. NONE
13. 725,000 INTERMOUNTAIN POWER AGENCY (A
POLITICAL SUBDIVISION OF THE
STATE OF UTAH) POWER SUPPLY
REVENUE REFUNDING BONDS, 1987
SERIES A (MBIA INS.) AAA 5.00% C.01/01/97@100 705,186
07/01/2012 S.F. 07/01/2010
14. 225,000 SALT LAKE CITY, UTAH HOSPITAL
REVENUE BONDS (HOLY CROSS
HOSPITAL OF SALT LAKE CITY)
SERIES 1986 (FINANCIAL GUARANTY
INS.) (REFUNDED) AAA 7 3/8% C.12/01/96@1 236,936
12/01/1996 S.F. NONE
$6,405,000 $6,696,757
(1) All ratings are by Standard &
Poor's Corporation unless otherwise
indicated. A brief description of
applicable rating symbols is given under
"Bond Ratings" included in Part B. For
concentration of credit risk, see
"Securities in the Trust Portfolio" in
Part A.
(2) C._Indicates the first year in
which an issue of bonds is redeemable in
whole, or in part, by the operation of
the optional call provisions, and the
redemption price for that year; unless
otherwise indicated, each issue
continues to be redeemable at declining
prices thereafter but not below par.
S.F._Indicates the next date in which
an issue of bonds is subject to
scheduled sinking fund redemption and
the redemption price for that date;
unless otherwise indicated, such issue
of bonds is subject to scheduled sinking
fund redemption at par.
Bonds listed as non-callable, as well
as those listed as callable, may also be
redeemable at par, under certain
circumstances, from special redemption
payments.
(3) The Market Value is
determined by the Evaluator on the bid
side of the market, on a basis identical
to that set forth under "Public Offering
Price of Units" included in Part B.
(4) The Maturity Date noted for all
Refunded Bonds is the date on which such
Bonds have been irrevocably called for
redemption by the issuers thereof.
(5) Escrowed to maturity.
</TABLE>
<TABLE>
THE MUNICIPAL BOND TRUST, INSURED SERIES 38 CALIFORNIA TRUST
Schedule of Investments as of February 1, 1996
<CAPTION>
Coupon Redemption
Aggregate Rate/ Features(3)
Lot Principal Maturity C-Callable Market
No. Amount Description Rating(1) Date(5) S.F.-Sinking Fund Value(4)
<C> <C> <S> <C> <C> <C> <C>
1. $220,000 1987 REFUNDING CERTIFICATES OF
PARTICIPATION (CIVIC CENTER
REFUNDING PROJECT) EVIDENCING
A PROPORTIONATE INTEREST OF
THE OWNERS THEREOF IN BASE
RENTAL PAYMENTS TO BE MADE BY
THE CITY OF BIG BEAR LAKE,
CALIFORNIA AS THE RENTAL FOR
CERTAIN PROPERTY PURSUANT TO
A LEASE AGREEMENT WITH THE BIG
BEAR LAKE IMPROVEMENT AGENCY
(AMBAC INS.) AAA 6 3/4% C.08/01/96@102 $227,680
02/01/2016 S.F. 02/01/2002
2. 195,000 CALIFORNIA HEALTH FACILITIES
AUTHORITY MERCY HEALTH SYSTEM
INSURED VARIABLE RATE DEMAND
REVENUE BONDS 1985 SERIES B
(MBIA INS.) (REFUNDED) AAA 7.00% C.11/03/96@1 204,343
11/03/1996 S.F. NONE
3. 300,000 WATER FACILITIES AUTHORITY
REFUNDING CERTIFICATES OF
PARTICIPATION 1986 SERIES A
(AGUA DE LEJOS PROJECT)
(CALIFORNIA) (FINANCIAL GUARANTY
INS.) AAA 6 3/4% C.10/01/96@102 311,907
10/01/2011 S.F. 10/01/2001
4. 335,000 THE METROPOLITAN WATER
DISTRICT OF SOUTHERN
CALIFORNIA GENERAL OBLIGATION
WATERWORKS BONDS, ELECTION
1967, SERIES A (FINANCIAL
GUARANTY PORTFOLIO INS) AAA 4.10% C.03/01/96@100 1 288,134
03/01/2017 S.F. 03/01/2005
5. 135,000 NORTHERN CALIFORNIA POWER
AGENCY GEOTHERMAL PROJECT
NUMBER 3 REVENUE BONDS, 1987
REFUNDING SERIES A (BIGI INS.) AAA 6 1/2% C.07/01/96@101 1 137,025
07/01/2003 S.F. 07/01/2001
6. 295,000 CERTIFICATES OF PARTICIPATION
(COUNTY CENTER/JUSTICE CENTER
REFUNDING AND CAPITAL
IMPROVEMENTS PROJECTS)
EVIDENCING PROPORTIONATE
INTERESTS OF THE OWNERS
THEREOF IN LEASE PAYMENTS TO
BE MADE BY THE COUNTY OF SAN
BERNARDINO, CALIFORNIA AS THE
RENTAL FOR CERTAIN PROPERTY
PURSUANT TO A LEASE AGREEMENT
WITH THE INLAND EMPIRE PUBLIC
FACILITIES CORPORATION (MBIA
INS.) (REFUNDED) AAA 7 1/2% C.07/01/96@1 306,065
07/01/1996 S.F. NONE
(Continued)
</TABLE>
<TABLE>
THE MUNICIPAL BOND TRUST, INSURED SERIES 38 CALIFORNIA TRUST
Schedule of Investments as of February 1, 1996
<CAPTION>
Coupon Redemption
Aggregate Rate/ Features(3)
Lot Principal Maturity C-Callable Market
No. Amount Description Rating(1) Date(5) S.F.-Sinking Fund Value(4)
<C> <C> <S> <C> <C> <C> <C>
7. $150,000 SOUTHERN CALIFORNIA PUBLIC
POWER AUTHORITY (A PUBLIC
ENTITY ORGANIZED UNDER THE
LAWS OF THE STATE OF
CALIFORNIA) TRANSMISSION
PROJECT REVENUE BONDS, 1986
REFUNDING SERIES B (SOUTHERN
TRANSMISSION PROJECT) (BIGI INS.)
(REFUNDED) AAA 7.00% C.07/01/96@10 $156,059
07/01/1996 S.F. NONE
8. 260,000 CERTIFICATES OF PARTICIPATION
EVIDENCING FRACTIONAL
INTERESTS OF THE OWNERS
THEREOF IN PURCHASE PAYMENTS
TO BE PAID BY THE CITY OF WALNUT
CREEK, CALIFORNIA AS THE
PURCHASE PRICE OF CERTAIN
PROPERTY PURSUANT TO THE
AGREEMENT WITH JOHN MUIR
MEMORIAL HOSPITAL (MBIA INS.)
(REFUNDED) AAA 6 1/2% C.11/01/96@1 271,450
11/01/1996 S.F. NONE
$1,890,000 $1,902,663
(1) All ratings are by Standard &
Poor's Corporation unless otherwise
indicated. A brief description of
applicable rating symbols is given under
"Bond Ratings" included in Part B. For
concentration of credit risk, see
"Securities in the Trust Portfolio" in
Part A.
(2) C._Indicates the first year in
which an issue of bonds is redeemable in
whole, or in part, by the operation of
the optional call provisions, and the
redemption price for that year; unless
otherwise indicated, each issue
continues to be redeemable at declining
prices thereafter but not below par.
S.F._Indicates the next date in which
an issue of bonds is subject to
scheduled sinking fund redemption and
the redemption price for that date;
unless otherwise indicated, such issue
of bonds is subject to scheduled sinking
fund redemption at par.
Bonds listed as non-callable, as well
as those listed as callable, may also be
redeemable at par, under certain
circumstances, from special redemption
payments.
(3) The Market Value is
determined by the Evaluator on the bid
side of the market, on a basis identical
to that set forth under "Public Offering
Price of Units" included in Part B.
(4) The Maturity Date noted for all
Refunded Bonds is the date on which such
Bonds have been irrevocably called for
redemption by the issuers thereof.
</TABLE>
MUNICIPAL BOND TRUST
INSURED SERIES PROSPECTUS PART B
PART B OF THIS PROSPECTUS MAY NOT BE DISTRIBUTED
UNLESS ACCOMPANIED BY PART A.
NATURE OF THE TRUST
Each series of The Municipal Bond Trust,
Insured Series, is a unit investment trust formed
for the purpose of obtaining federally tax-exempt
interest consistent with the preservation of
capital and diversification of risk through
investment in a fixed portfolio comprised of
"investment grade" (as of the Date of Deposit)
insured interest-bearing Bonds. State Trusts were
formed for the additional purpose of obtaining
interest income exempt from state income taxes
for purchasers who qualify as residents of the
state for which each such Trust is named. The
Sponsor and the Trustee do not have control over
the course of payment of the principal of and
interest on the Securities, or any insurance
proceeds due thereon; therefore, they cannot
guarantee that the objectives of the Trust will
be achieved. The interest on the Bonds, in the
opinion of counsel to the issuers of such Bonds,
is, or upon their issuance and delivery will be,
exempt from present Federal income taxes. Capital
gains, if any, will be subject to taxation.
The portfolio of the Trust consists of
interest-bearing Securities, issued by or on
behalf of states, counties and municipalities
within the United States, and their authorities,
agencies and other such political subdivisions.
CREATION OF THE TRUST
The Trust was created under the laws of the
State of New York pursuant to a Trust Indenture
and Agreement* (the "Indenture"), dated as of the
Date of Deposit, among PaineWebber Incorporated,
as Sponsor, the Trustee identified in Part A of
this prospectus and Kenny Information Systems, a
Division of J.J. Kenny Co., Inc. as Evaluator.
On the Date of Deposit, the Sponsor deposited
with the Trustee the Securities or confirmations
of contracts for the purchase of the Bonds at
prices determined by the Evaluator on the basis
of current offering prices of the Securities.
Confirmations of contracts for the purchase of
the Bonds were delivered to the Trustee together
with an irrevocable letter of credit drawn on a
commercial bank in an amount sufficient for their
purchase. Following the deposit, the Trustee
delivered to the Sponsor registered Certificates
for Units evidencing entire ownership of the
Trust. On the date of Deposit each Unit
represented a fractional undivided interest in
the Trust in an amount equal to one divided by
the total number of Units outstanding. On the
Date of Deposit there was one Unit for each
$1,000 face amount of Securities deposited in the
appropriate Trust.
SUMMARY OF PORTFOLIO
An investment in Units of the Trust should be
made with an understanding of the risks which an
investment in fixed rate long-term debt
obligations may entail, including the risk that
the value of the Trust portfolio and hence of the
Units will decline with increases in interest
rates. The recent period of high inflation,
together with the fiscal measures adopted to
attempt to deal with it, has seen wide
fluctuations in interest rates and thus in the
value of fixed rate long-term debt obligations
generally. The Sponsor cannot predict whether
such fluctuations will continue in the future.
As set forth under "Essential Information" and
"Schedule of Investments" in Part A, the Trust
may contain or be concentrated in one or more of
the categories of Securities referred to below.
The types of issuers and percentages of any
concentrations for this Trust are set forth in
Part A. These categories are described in Part B
because an investment in Units of the Trust
should be made with an understanding of the risks
which these investments may entail. Part B also
contains a description of the features of this
Trust.
The Portfolio
Insurance guaranteeing the payment of
principal and interest, on their stated payment
dates, in respect of the Bonds has been obtained
either by the issuer at the time of issuance of
the Bonds from one of the independent insurance
companies described herein, by third-party
purchasers of the Securities or by the Sponsor on
the Date of Deposit from the insurers identified
in Part A in an effort to protect Unitholders
against loss of principal and against non-payment
of interest. The insurance policies are non-
cancellable and certain policies (as more fully
disclosed under "Essential Information" in Part
A) will continue in force so long as the Bonds so
insured are outstanding (regardless of whether
the Bonds remain in the Trust) (hereinafter
"Insurance to Maturity"). The remainder of the
insurance policies will continue in force only so
long as the Bonds so insured are held in the
Trust (hereinafter "Portfolio Insurance"). The
premium for the Insurance to Maturity has been
paid either by the issuer at the time of
issuance, by third-party purchasers of the
Securities or by the Sponsor and therefore is not
an expense of the Trust. Portfolio Insurance
premiums are an expense of the Trust. There is no
assurance that the objectives of the Trust will
be met because they
_________
*References are hereby made to said Trust
Indenture and Agreement and any statements
contained herein are qualified in their entirety
by provisions of said Trust Indenture and
Agreement.
are subject to the continuing ability of the
issuers of the Securities held in the Trust (the
"Issuers" or the "Issuer") to meet their
principal and interest payments and of the
insurers to meet their obligations under the
insurance policies. (See "Essential Information
Regarding the Trust-Insurance".) On the Date of
Deposit, an insurance policy or policies were
obtained by the Sponsor in respect of certain of
the Securities listed in the "Schedule of
Investments" herein. That policy takes effect for
each Security which it covers as and when it is
delivered to the Trustee for deposit in the
Trust.
General Obligation Bonds
General obligation debt of an issuer that is
a political subdivision or instrumentality of a
state is typically secured by the full faith and
credit of the issuer, encompassing its ability to
levy an unlimited ad valorem tax on real property
or other revenue streams, such as sales or income
taxes. The fiscal condition of an Issuer may be
affected by socioeconomic factors beyond the
Issuer's control (such as relocation by a major
employer) or other unanticipated events,
including: imposition of tax rate decreases or
appropriations limitations by legislation or
initiative; increased expenditures mandated by
federal or state law or by judicial decree;
reduction of unrestricted federal or state aid
and of revenue-sharing programs due to subsequent
legislative changes in appropriations or aid
formulas; or disallowances by the federal or
state governments for categorical grants. The
fiscal condition of an Issuer that is a political
subdivision or instrumentality of a state (such
as a county, city, school district or other
entity providing public services) is related to
the size and diversification of its tax and
revenue base and to such other factors as: the
effect of inflation on the general operating
budget and of other costs, including salaries and
fringe benefits, energy and solid waste disposal;
changes in state law and statutory
interpretations affecting traditional home rule
powers (which vary from state to state); levels
of unrestricted state aid or revenue-sharing
programs and state categorical grants subject to
annual appropriation by a state legislature;
increased expenditures mandated by state law or
judicial decree; and disallowances for expenses
incurred under Federal or state categorical grant
programs. The local economy may be or become
concentrated (i) in a single industry, which may
be affected by natural or other disasters or by
fluctuations in commodity prices, or (ii) in a
particular company, the operations of which may
be impaired due to labor disputes, relocation,
bankruptcy or corporate take-over. Such economic
factors may, in turn, affect local tax
collections and service demands. The ability of
an Issuer to levy additional taxes may be subject
to state constitutional provisions, assent of the
state legislature or voter approval in a local
referendum, or constrained by economic or
political considerations.
Housing Facility Securities
These Securities are typically secured by
mortgage revenues derived by state housing
finance agencies, municipal housing authorities
or certain non-profit organizations from
repayments on mortgage and home improvement loans
made by such entities. Special considerations
affecting housing securities include: the
condition of the local housing market,
competition from conventional mortgage lenders,
fluctuations in interest rates, increasing
construction costs and the ability of the
Issuers, lenders, servicers and borrowers to
maintain program compliance under applicable
statutory provisions. Securities issued on or
before April 24, 1979 are subject to few
restrictions on the use of proceeds. Federal tax
legislation adopted during the 1980s imposed
progressively more restrictive requirements for
post-issuance compliance necessary to maintain
the tax exemption on both single family and
multi-family housing securities. IRS regulations
provide, however, that retroactive taxation will
not occur if the issuer corrects any
noncompliance occurring after the issuance of a
security within a reasonable period after such
noncompliance is first discovered or should have
been discovered by the Issuer. To maintain the
security's tax exemption, the Issuer may be
required pursuant to the legal documents
governing the Security to redeem all or a portion
of such obligations at par from (i) unexpended
proceeds of the issue within a stated period that
typically does not exceed three years from the
date of issuance of such security or (ii)
optional prepayments by mortgagors. If the
Issuers of such securities are unable to or
choose not to reloan these monies, they will
generally redeem such securities at par in an
amount approximately equal to such unexpended
proceeds or prepayments. The Sponsor is unable to
predict whether such redemptions will occur, or
what effect, if any, such redemptions would have
on any such Securities in the Trust.
Single Family Housing Securities
Securites issued after April 24, 1979 and
prior to August 15, 1986 are subject to the
requirements of Section 103A of the Internal
Revenue Code of 1954, as amended (the "1954
Code"). Enacted in 1980 and subsequently amended,
Section 103A established stringent criteria for
the origination or assumption of mortgage loans
and subjected Issuers to annual IRS reporting
requirements. The Techenical and Miscellaneous
Revenue Act of 1988 may inhibit the ability of
Issuers to make home mortgage loans after
December 31, 1990 (and thereby increase the
likelihood of redemptions from unexpended
proceeds). Additional considerations include: the
underwriting and management ability of the
Issuers, lenders and servicers (i.e., the initial
soundness of the loan and the effective use of
available remedies should there be a default in
loan payments); the financial condition and
credit rating of the private mortgage insurer
underwriting the insurance on the underlying
mortgage or pool of mortgages; and special risks
attendent to lending to mortgagors, most of whom
are first time home buyers of low or moderate
means. During periods of declining interest
rates, there may be increased redemptions of
single family housing Securities from unexpended
proceeds due to insufficient demand, because
conventional mortgage loans may become available
at interest rates equal to or less than the
interest rates charged on the mortgage loans made
available from bond proceeds. In addition,
certain mortgage loans may be prepaid earlier
than their maturity dates, because mortgage loans
made with bonds proceeds usually do not carry
prepayment penalties.
Multi-Family Housing Securities
Enacted in 1980, Section 103(b)(4)(A) of the
1954 Code, among other things, required that at
least 20% of the units in each rental housing
project financed pursuant to its provisions be
occupied, in effect, by persons with low and
moderate incomes. The 1986 Code further
restricted the amount of bond proceeds that can
be spent on unqualified costs in a housing
project, and extended existing and added certain
post-issuance compliance requirements, such as
the low or moderate income occupancy
requirements, the determination of income
limitations, continuous rental requirements,
annual current income determinations and the
arbitrage rebate requirement. The IRS has
undertaken a review of a representative
statistical sample of multi-family housing bonds
issued in 1984, primarily to determine post-
issuance compliance matters. If a bond issue is
determined by the IRS to not be in compliance
with the Code, income derived from such
securities may be deemed to be taxable income.
The Sponsor is unable to determine whether the
IRS will expand its review, the outcome of any
such review, or whether such review will have an
impact on any of the Securities in the Trust.
Authorizing state statutes may have imposed
additional program requirements. Additional
considerations include: increasing operating
costs; the ability or failure to increase rental
charges; and the financial condition of housing
authority Issuers and their ability to meet
certain requirements under the Section 8 program
of the United States Housing Act of 1937, as
amended.
Multi-family housing securities may also be
subject to full or partial redemption at par from
the proceeds of the sale, assignment or
disposition of a defaulted mortgage loan or
acceleration of principal payments thereunder; a
condemnation or insurance award; or a result of
the reduction of a required reserve fund.
Airport Facilities
Bonds in the airport facilities category are
payable from and secured by revenues derived from
the gross airport operating income. 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 be affected by local
economic conditions, air traffic patterns, noise
abatement restrictions or 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 deregulation, recent
consolidations through mergers and acquisitions,
fair competition, excess industry capacity,
fluctuations in fuel and other costs, traffic
constraints and other factors. In particular,
facilities with use agreements involving airlines
experiencing financial difficulty may experience
a reduction in revenue due to the possible
inability of these airlines to meet their use
agreement obligations. Additionally the FAA has
established a schedule for retrofiling certain
existing aircraft to comply with operating noise
standards. The Sponsor is now unable to predict
what effect, if any, air transport industry
conditions will have on the airport Bonds in the
Trust.
Hospital Facility Securities
Bonds in the hospital facilities category are
payable from revenues derived from hospital and
health care facilities which, generally, were
constructed or are being constructed from bond
proceeds. The continuing availability of
sufficient revenues is dependent upon several
factors affecting all such facilities generally,
including, among other factors: utilization
rates; the cost and availability of malpractice
insurance and the outcome of malpractice
litigation; curtailment of operations due to
shortages in qualified medical staff or labor
disputes; and changes in federal, state and
private insurance reimbursement regulations and
health care delivery programs. The extent of the
AIDS epidemic is undetermined, and the Sponsor
cannot predict its full impact on the health care
system or particular issuers. Utilization rates
for a particular facility may be determined by
cost containment programs implemented by third
party governmental providers or private insurers;
long-term advances in health care delivery
reducing demand for in-patient services;
technological developments which may be
effectively rationed by the scarcity of equipment
or specialists; governmental approval and the
ability to finance equipment acquisitions;
increased competition due to elimination of
certain certificate of need requirements in some
states; and physicians' and public perceptions as
to standards of care. Requirements for Federal or
state licenses, certifications and contract
eligibility and for accreditation are subject to
change, and may require participating facilities
to effect costly modifications in operations.
Prior to June 30, 1984, participating facilities
in the Medicare program were reimbursed for their
reasonable costs of furnishing services;
thereafter, the Social Security Amendments Act of
1983 mandated implementation over a four year
period of a prospective payment system, based
upon diagnosis related groups ("DRGs"), for most
in-patient services. DRG re- imbursement rates,
because they are set by the Federal government,
may not fully cover the actual cost of furnishing
services by any particular hospital, and Federal
law prohibits health care providers from passing
along the excess costs to Medicare beneficiaries.
Medicare payments have been, and may continue to
be, reduced under legislation adopting deficit
reduction measures. Additionally, certain states
have recently implemented prospective payment
systems for their Medicaid programs, and have
adopted other changes, including enrollment
restrictions. The Sponsor cannot predict the
effect, if any, of the DRG system or of further
reductions in Medicare and Medicaid payments on
the revenues of Issuers of hospital Securities in
the Trust. Many hospitals, including certain
Issuers (or the conduit obligors) of Securities
in the Trust, have been experiencing significant
financial difficulties in recent years. The
number of hospital closings has increased during
the late 1980s, particularly among smaller
institutions located in rural or inner-city
areas. Hospital revenues nationwide are primarily
derived from private insurers, many of which have
experienced significant operating losses in
recent years. The Medicare program accounts for
an increasing share of hospital revenues
nationwide, and is financed by the Hospital
Insurance Trust Fund through payroll taxes. Based
upon preliminary projections including increased
payroll taxes effective in 1991 (but not
accounting for any recession) the Fund's trustees
have forecast that expenditures will exceed tax
revenues by 1995 and that the Fund will be
insolvent in 2005. Generally, a number of
additional legislative proposals concerning
health care may be introduced in Congress at any
time. Recently, these proposals have covered a
wide range of topics, including cost controls,
national health insurance, incentives for
competition in the provisions of health care
services, tax incentives and penalties related to
health care insurance premiums, and promotion of
prepaid health care plans. The Sponsor is unable
to predict the effect of any of these proposals,
if enacted, on any of the Bonds in the Trust
portfolio.
Power and Electric Facility Securities
These Securities are typically secured by
revenues derived from power generating
facilities, which generally include revenues from
the sale of electricity generated and distributed
by power agencies using hydroelectric, nuclear,
fossil fuel or other power sources. Certain
aspects of the operation of such facilities,
particularly with regard to generation and
transmission at the wholesale level, are
regulated by the Federal Energy Regulartory
Commission ("FERC"); more extensive regulation
(affecting retail rate structures) is provided by
state public service commissions. Special
considerations include: restrictions on
operations and increased costs and delays
attributable to environmental statutes and
regulations; the difficulties of the utilities in
financing or refinancing large construction
programs and of the capital markets in absorbing
utility debt and equity securities; fluctuations
in fuel supplies and costs, and costs associated
with conversion to alternate fuel sources;
uncertainties with regard to demand projections
due to changing economic conditions,
implementation of energy conservation measures
and competitive cogeneration projects; and other
technical and cost factors. Recent scientific
breakthroughs in fusion energy and
superconductive materials may cause current
technologies for the generation and transmission
of electricity to become obsolete during the life
of the Securities in the Portfolio. Issuers
relying upon hydroelectric generation may
encounter contests when applying for periodic
renewal of licenses from FERC to operate dams.
Issuers relying upon coal as a fuel source may be
subject to significant costs and operating
restrictions to comply with emission standards
which may be adopted to alleviate the problems
associated with acid rain. Issuers relying upon
fossil fuel sources and located in air quality
regions designated as nonattainment areas may
become subject to pollution control measures
(which could include abandonment of construction
projects in progress, plant shutdowns or
relocation of facilities) ordered pursuant to the
Clean Air Act. In addition, such Securities are
sometimes secured by payments to be made to state
and local joint action power agencies pursuant to
"take or pay" agreements. Such agreements have
been held unenforceable by state courts in Idaho,
Vermont and Washington, which may cause an
examination of the legal structure of certain
projects in other states and could possibly lead
to litigation challenging the enforceability of
such agreements.
Some of the Issuers of Securities in the Trust
may own, operate or participate on a contractual
basis with nuclear generating facilities, which
are licensed and regulated by the Nuclear
Regulatory Commission (the "NRC"). Issuers of
such securities may incur substantial
expenditures as a result of complying with NRC
requirements. Additional considerations include;
the frequency and duration of plant shutdowns and
associated costs due to maintenance or safety
considerations; the problems and associated costs
related to the use and disposal of radioactive
materials and wastes in compliance with Federal
and local law; the implementation of emergency
evacuation plans for areas surrounding nuclear
facilities; and other issues associated with
construction, licensing, regulation, operation
and eventual decommissioning of such facilities.
These Securities may be subject to industry-wide
fluctuations in market value as a consequence of
market perception of certain highly publicized
events, as in the Washington Public Power Supply
System's defaults on its Project 4 and 5 revenue
bonds and the 1988 bankruptcy filing by the
Public Service Corporation of New Hampshire.
Federal, state or municipal governmental
authorities, or voters by initiative, may from
time to time impose additional regulations or
take such other governmental action which might
cause delays in the licensing, construction or
operation of nuclear power plants, or the
suspension or cessation of operations of
facilities which have been or are being financed
by proceeds of certain Securities in the Trust.
Industrial Development/Pollution Control
Securities
These Securities were generally issued prior
to the enactment of 1986 Code restrictions, and
are typically secured by payments made under a
loan agreement entered into between the Issuer
and the obligor. In some cases, the Securities
were additionally secured by guarantees provided
by corporate guarantors or by a stand-by letter
of credit issued by a bank. Special
considerations include: the financial condition
of the corporate obligor (or guarantor),
especially as it may be affected by subsequent
corporate restructuring or changes in corporate
control.
Public Facilities Securities
These Securities are typically secured by
revenues derived from either (i) payments
appropriated by governmental entities for the use
of equipment or facilities, such as
administrative or correctional buildings, or (ii)
user charges or other revenues derived from such
operations as parking facilities, convention
centers or sports arenas. In the first instance,
the pledged revenues may be subject to annual
appropriation by a legislative body. In the
latter case, the collection of revenues may be
dependent upon the reliability of feasibility
forecasts and assumptions concerning utilization
rates.
Resource Recovery/Solid Waste Securities
These Securities are typically secured by
revenues derived from the sale of electricity or
steam generated as a by-product of the process of
incinerating solid waste, and from contractual
tipping fees, user charges and ancillary
recycling earnings. Special considerations
include: the supply of solid waste at levels
sufficient for the facility to operate at design
capacity; the frequency and duration of plant
shutdowns for maintenance; the treatment and
disposal of fly ash which contains toxic
substances, especially dioxin; compliance with
air pollution control standards; unanticipated
problems associated with the use of developing
technologies; and the continuation of FERC
policies facilitating congeneration and its
certification of any particular qualifying
facility. Governmental service contract payments
may be subject to annual appropriation by a
legislative body. Older facilities may require
retrofitting to accommodate new technological
developments or to comply with environmental
standards.
Water and Sewer Facility Securities
Bonds described as "water and sewer"
facilities Bonds are typically secured by a
pledge of the net revenues derived from
connection fees and user charges imposed by the
enterprise. Such Bonds are subject to the risks
typically associated with construction projects.
Among the factors which may affect net revenues
are the destruction of facilities due to natural
or other disasters; relocation out of the service
area by a major customer or customers due to
economic factors beyond the Issuer's control; or
costs incurred due to prior periods of deferred
maintenance or compliance with Federal or state
environmental standards. Water system revenues
may be additionally affected by the terms of
supply allocations and service agreements with
major wholesale customers and the imposition of
mandatory conservation measures in response to
drought. Sewer system revenues may be
additionally affected by costs to comply with
effluent and other standards pursuant to the
Federal and State laws.
Refunded Bonds
Refunded bonds (including bonds escrowed to a
call date or maturity date) are bonds that
originally had been issued generally as revenue
bonds but have been refunded for reasons which
may include changing the issuer's debt service
requirements and removing restrictive bond
covenants. Typically, a refunded bond is no
longer secured by a pledge of revenues received
by an issuer but rather by an escrow fund
consisting of U.S. Government Obligations. In
such cases the issuer establishes an escrow fund
which is irrevocable and which cannot be depleted
by the issuer so long as debt service on the
refunded bonds is required to be paid. Each
escrow fund is funded with U.S. Government
Obligations which are designed to make payments
on the refunded bonds and which cannot be
affected by a default of the issuer. An escrow
agent pays principal, redemption premium, if any,
and interest on the refunded bond from the
principal of and interest on the U.S. Government
Obligations in the escrow fund. The Trust, as
holder of the refunded bonds, is entitled to
receive such payment of principal, redemption
premium, if any, and interest on the refunded
bonds as it is paid by the escrow agents out of
the respective refunded bond escrow funds.
Student Loan Securities
Student loan revenue securities are issued
either by non-profit corporations organized for
the purpose of acquiring student loans originated
under the Higher Education Act or public agencies
or instrumentalities of a state created to
provide loans for educational purposes. Proceeds
of securities issued by such entities generally
are used to make or acquire student loans which
are guaranteed by guaranty agencies; the
obligation of such guaranty agency is reinsured
by the U.S. Secretary of Education (the
"Secretary"); such reinsurance obligation may
range from 80% to 100% based on the default
levels for loans serviced by such a guaranty
agency. In addition, some loans may be insured
directly by the Secretary. Bonds issued by such
entities are generally secured by and dependent
upon such state guarantee programs, Federal
insurance and reimbursement programs, the
proceeds from payment of principal and interest
on the underlying student loans and federal
interest subsidy and/or special allowance
payments. Failure by the servicers of student
loans or the guaranty agencies guaranteeing such
loans to properly service and enforce the loans
may cause the reimbursements to decline or be
withheld by the Secretary.
Both the Higher Education Act and the
regulations promulgated thereunder have been the
subject of extensive amendments in recent years,
and the Sponsor can give no assurance that
further amendment will not materially change the
provisions or the effect thereof. There can be no
assurance that the other provisions of the Higher
Education Act affecting the Federal Guaranteed
Student Loan Program will be continued in their
present form.
The availability of various Federal payments
in connection with the Federal Guaranteed Student
Loan Program is subject to federal budgetary
appropriation. In recent years, legislation has
been enacted which has provided, subject to
certain Federal budget expenditures (including
expenditures in connection with the Federal
Guaranteed Student Loan Program), for the
recovery of certain advances previously made by
the Federal government to state guaranty agencies
in order to achieve deficit reduction. No
representation is made as to the effect, if any,
or future Congressional appropriation or
legislation upon expenditures by the Department
of Education or upon the financial condition of
any guaranty agency.
Lease Payment Bonds
Certain Bonds may be principally secured by
governmental lease payments which in turn are
subject to the budget appropriations of the
participating governmental entity. A governmental
entity that enters into a lease agreement cannot
obligate future governments to make lease
payments but generally will covenant to take such
action as is necessary to include all lease
payments due under an agreement in its annual
budgets and to make the appropriations therefor.
The failure of a governmental entity to meet its
obligations under a lease could result in an
insufficient amount of funds to cover payment of
the Bonds secured by such lease payments.
Tax Allocation Bonds
Bonds described as "tax allocation"
securities are payable from and secured by
incremental (increased) tax revenues collected on
property within the areas where redevelopment
projects, financed by bond proceeds, are located
("project areas"). Payments on these bonds are
expected to be made from projected increases in
tax revenues derived from higher assessed value
of property resulting from development in the
particular project area and not from an increase
in the tax rates. Among the factors which could
result in a reduction of the allocated tax
revenues which secure a tax allocation Bond are:
(i) reduction of, or a less than anticipated
increase in, taxable values of property in the
project area, caused either by economic factors
beyond the Issuer's control (such as a relocation
out of the project area by one or more major
property owners) or by destruction of property
due to natural or other disasters; (ii)
successful appeals by property owners of assessed
valuations; (iii) substantial delinquencies in
the payment of property taxes; or (iv) imposition
of any constitutional or legislative property tax
rate decrease. Such reduction of tax revenues
could have an adverse effect on an Issuer's
ability to make timely payments of principal and
of interest on the Bonds.
Crossover Refunding Bonds
Certain Bonds in the Trust may be cross-over
refunding Bonds. Prior to a specified date, (the
"Crossover Date"), such bonds are payable solely
from an escrow fund invested in specified
securities. After the Crossover Date the Bonds
are payable from a designated source of revenues.
Such bonds are categorized in Part A as payable
from such source of revenues.
Bonds Backed by Letters of Credit
The Trust may contain securities that are
secured by letters of credit issued by commercial
or savings banks which may be drawn upon (i) if
an Issuer fails to make payments of principal of,
premium, if any, or interest on a Bond backed by
such a letter of credit or (ii) in the event
interest on a Bond is deemed to be taxable and
full payment of principal and any premium due is
not made by the Issuer. The letters of credit are
irrevocable obligations of the issuing banks.
Banks are subject to extensive governmental
regulations. The profitability of the banking
industry is largely dependent upon the
availability and cost of capital funds for the
purpose of financing lending operations under
prevailing money market conditions. Also, general
economic conditions play an important part in the
operations of the banking industry and exposure
to credit losses arising from possible financial
difficulties of borrowers or other issuers having
letters of credit might affect a bank's ability
to meet its obligations under a letter of credit.
****
An amendment to the Federal Bankruptcy Act
relating to the adjustment of indebtedness owed
by any political subdivision or public agency or
instrumentality of any state, including
municipalities, became effective in 1979. Among
other things, this amendment facilitates the use
of proceedings under the Federal Bankruptcy Act
by any such entity 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 at
this time what effect, if any, this legislation
will have on the Trust.
****
Insurance on the Bonds in the Portfolio
Certain of the Bonds in the Trust may have
been insured to maturity by AMBAC, MBIA, MBIAC,
Financial Guaranty, BIG, Capital Guaranty,
National Union or USFG as to payment of principal
and interest by the issuer at the time of
issuance, or by a third party purchaser of Bonds
subsequent to issuance. For those bonds which
were not so insured at the time of issuance, the
Sponsor has obtained an insurance policy or
policies (except as otherwise set forth in Part
A). The policies obtained by the Sponsor provide
either for insurance as long as the Bonds so
insured remain outstanding ("Insurance to
Maturity") or which continue in force only so
long as the Bonds so insured remain in the Trust
("Portfolio Insurance"). (See Part A, "Essential
Information-Insurance"). Portfolio Insurance, if
any, has been obtained from Financial Guaranty.
Any Trust which has obtained Portfolio Insurance
has additionally obtained an irrevocable
commitment (the "Irrevocable Commitment") of
Financial Guaranty to provide insurance to
maturity ("Permanent Insurance") upon the sale of
any Bond covered by the Portfolio Insurance from
the Trust and upon payment of a premium (the
"Permanent Insurance Premium") under certain
conditions set forth in Part A under the heading
"Essential Information Regarding the Trust". The
value of the Bonds covered by the Portfolio
Insurance and, therefore, the Units may decline
in the event of declining credit quality.
However, because of the Irrevocable Commitment to
provide Permanent Insurance, whenever the value
of a Bond which is below investment grade and
which is covered by the Portfolio Insurance and
insured to its maturity (less the Permanent
Insurance Premium) exceeds the value of that Bond
without such insurance, the value of that Bond
will be higher, insured to maturity value (See
"Evaluation of the Trust"). The insurance
policies are non-cancellable and will remain in
force as long as the Bonds insured by such
policies remain outstanding. Premiums for
Insurance to Maturity has been paid either at the
time of issuance by the Issuer, by third-party
purchasers or by the Sponsor on the Date of
Deposit (see "Summary of Portfolio-Insurance
Premiums"). Premiums for Portfolio Insurance are
an expense of the Trust. (See "Expenses of the
Trust"). Insurance does not guarantee the market
value of the Bonds or the value of the Units.
Although the insurance represents an element of
market value with respect to the Bonds covered by
Insurance to Maturity, the exact effect, if any,
of this insurance on the market value cannot be
predicted. No value is attributed to Portfolio
Insurance unless the Bond so insured is rated
below investment grade. See "Essential
Information Regarding the Trust-Securities in the
Trust Portfolio" in Part A for information on the
insurance features of this Trust and a
description of the percentages of the Bonds
covered by each of the insurers.
Payment under all of these insurance policies
will be made in respect of principal of and
interest on Bonds which shall be due for payment
under the provisions of each policy, but shall be
unpaid. All such policies provide for payment of
the principal or interest due to a trustee or
paying agent on the date such payment is due. In
turn, such trustee or paying agent will make
payment to the bondholder (in this case, the
Trustee) upon presentation of satisfactory
evidence of such Bondholder's right to receive
such payment. Policies issued by Industrial
Indemnity Insurance Company prior to December 17,
1984 permit the Company, at its option, to
accelerate payments under the insurance policies.
Financial Guaranty. Financial Guaranty, a New
York stock insurance company, is located at 551
Fifth Avenue, New York, New York 10017. In
determining whether to insure the Bonds,
Financial Guaranty has applied its own standards
which correspond generally to the standards it
has established for determining the insurability
of new issues of municipal Bonds and which are
not necessarily the criteria used in regard to
the selection of Bonds by the Sponsor. To the
extent standards of Financial Guaranty are more
restrictive than those of the Sponsor, the
Sponsor's investment criteria have been limited
to the more restrictive standards.
Financial Guaranty is a wholly-owned
subsidiary of FGIC Corporation, which is wholly-
owned by General Electric Capital Corporation.
The investors of FGIC Corporation are not
obligated to pay the debts of or the claims
against Financial Guaranty. Financial Guaranty is
domiciled in the State of New York and is subject
to regulation by the State of New York Insurance
Department. As of December 31, 1993, the total
admitted assets were approximately $1.947 billion
and its policyholder's surplus was approximately
$777 million. Financial Guaranty is licensed in
Vermont, currently authorized to write insurance
in 49 states and the District of Columbia, files
reports with state insurance regulatory agencies,
and is subject to audit and review by such
authorities. Standard & Poor's Corporation has
rated the claims-paying ability of Financial
Guaranty "AAA".
AMBAC Indemnity Corporation. AMBAC Indemnity
is a Wisconsin-domiciled stock insurance company,
regulated by the Insurance Department of
Wisconsin, and licensed to do business in various
states, with admitted assets (unaudited) of
approximately $1.956 billion and statutory
capital (unaudited) of approximately $737 million
as of December 31, 1993. AMBAC Indemnity is a
wholly-owned subsidiary of AMBAC Inc., a
financial holding company which is publicly owned
following a complete divestiture by Citibank
during the first quarter of 1992. The address of
AMBAC Indemnity administrative offices and its
telephone number are One State Street Plaza, 17th
Floor, New York, New York 10004 and (212) 668-
0340. Copies of certain statutorily required
filings of AMBAC Indemnity can be obtained
through AMBAC Indemnity at the address and
telephone number specified in this paragraph.
Standard & Poor's Corporation has rated the
claims-paying ability of AMBAC Indemnity "AAA".
Bonds insured by AMBAC Indemnity are rated "AAA"
by Moody's Investors Service, Inc.
Municipal Bond Insurance Association The
insurance companies comprising the Municipal Bond
Insurance Association ("MBIA") are: The Aetna
Casualty and Surety Company, Fireman's Fund
Insurance Company, The Travelers Indemnity
Company, Aetna Insurance Company, and The
Continental Insurance Company. As an obligor,
each such insurance company will be obligated
only to the extent of its percentage of any claim
under the policy or policies and will not be
obligated to pay any unpaid obligation of any
other member. All policies are individual
obligations of the participating insurance
companies and their obligations thereunder cannot
be increased beyond their percentage commitment,
each company's participation is backed by its
entire resources. The MBIA companies listed above
or their parent organizations have been in the
insurance business from seventy to well over a
hundred years. Municipal Bond Investors
Assurance Corporation. Municipal Bond Investors
Assurance Corporation ("MBIAC") is the principal
operating subsidiary of MBIA, Inc. The principal
shareholders of MBIA, Inc., owning approximately
13% of its outstanding common stock are Aetna
Life and Casualty Company, the Fund American
Companies Inc., subsidiaries of CIGNA Corporation
and Credit Local de France, CAECL, S.A.,
following a series of four public equity
offerings over a five-year period. As of December
31, 1993 MBIAC had admitted assets of
approximately $3,051,000,000 and policyholders'
surplus of approximately $978,000,000. Neither
MBIA, Inc. nor its shareholders are obligated to
pay the debts of or claims against MBIAC. MBIAC,
which commenced municipal bond insurance
operations on January 5, 1987, is a limited
liability corporation rather than a several
liability association. MBIAC is domiciled in the
State of New York and licensed to do business in
all 50 states, the District of Columbia, and the
Commonwealth of Puerto Rico. Copies of MBIAC's
financial statement prepared in accordance with
statutory accounting practices are available from
MBIAC. The address of MBIAC is 445 Hamiliton
Avenue, White Plains, New York 10601. Some of the
shareholders of MBIA, Inc. are among the members
of MBIA; however, MBIAC is a separate and
distinct entity from MBIA. Standard & Poor's
Corporation rates all new issues insured by MBIAC
"AAA" Prime Grade. Moody's Investors Service,
Inc. rates all bond issues insured by MBIAC
"Aaa", designated to be one of the highest
quality.
Bond Investors Guaranty Insurance Company. In
1989, Bond Investors Guaranty Insurance Company
(BIG), was purchased by Municipal Bond Investors
Assurance Corporation (MBIAC). Bonds originally
insured by BIG have been reinsured by MBIAC (see
MBIAC above).
United States Fidelity and Guaranty Company.
United States Fidelity and Guaranty Company
("USF&G") is a Maryland-domiciled property and
casualty insurance company and a wholly-owned
subsidiary of USF&G Corporation. The
administrative offices of USF&G Company are
located at 100 Light Street, Baltimore, Maryland
21202 (telephone (301) 547-3000). As of December
31, 1989, USF&G had total assets (unaudited) of
approximately $13.604 billion and stockholder's
equity of approximately $2.007 billion. USF&G is
subject to regulation by the Maryland Insurance
Commission and other governmental authorities,
and is required to make certain public filings
with such authorities. Copies of such filings may
be obtained from USF&G upon request. Bonds
insured by USF&G are rated "BBB+" by Standard &
Poor's Corporation. Reinsurance and assumption
agreements effectively replace USF&G with Capital
Guaranty Insurance Co. as the primary insurer.
See "Capital Guaranty" for a discussion of
reinsurance arrangements with USF&G.
National Union. National Union Fire Insurance
Company of Pittsburgh, Pa. ("National Union"), a
wholly-owned subsidiary of American International
Group, Inc., was organized in 1901, is a stock
insurance company and is incorporated in
Pennsylvania. In addition to municipal bond
insurance, National Union's business includes
fire and casualty insurance. National Union's
claims-paying ability is rated AAA by Standard &
Poor's Corporation and as of December 31, 1990,
its total capital and surplus as regards
policyholders was approximately $1,162. million
(unaudited) as reported to the State of New York
Insurance Department. National Union is currently
licensed to provide insurance in 50 states and
the District of Columbia, files reports with the
state insurance regulatory agencies and is
subject to regulation, audit and review by such
authorities including the State of New York
Insurance Department. Industrial Indemnity
Insurance Company. Certain of the Bonds in the
Portfolio may be insured under the Health
Industry Bond Insurance ("HIBI") Program of
Industrial Indemnity Company ("Industrial
Indemnity"). Industrial Indemnity is a wholly-
owned subsidiary of Crum & Forester, Inc., ("Crum
& Forester") which is ultimately owned by Xerox
Corporation. Effective September 30, 1985, Xerox
Corporation announced that the operations of
Industrial Indemnity Corporation would be
discontinued, but that Industrial Indemnity
Corporation would fully honor all insurance
contracts. Crum & Forester accrued $86,400,100,
net of an income tax benefit of $73,600,000, for
expected operating losses during the phase-out
period. Industrial Indemnity's results of
operations and the provision for estimated losses
during the phase-out period resulted in a 1985
charge, after income tax benefits of
$111,300,000. At December 31, 1985, Industrial
Indemnity had a $212.2 million excess of
liabilities over assets. Crum & Forester's claim-
paying ability rating is "A+" and the short term
liquidity rating for commercial paper backed by
surety bonds from Industrial Indemnity Insurance
Company is "A-1+". Crum & Forester is required by
statute to maintain a net premium/statutory
surplus ratio of 3:1. Xerox Corporation
contributed $366 million to Crum & Forester
during the years 1984 and 1985 to maintain that
ratio. For the fiscal years ending December 31,
1988 and 1989, Crum & Forester, Inc. generated
statutory net income of (in millions) $340. and
$364., and statutory policyholders surplus
amounted to (in millions) $1,409 and $1,551,
respectively.
Capital Guaranty Insurance Company. Capital
Guaranty Insurance Company ("Capital Guaranty")
is a wholly-owned subsidiary of Capital Guaranty
Corp. and a California-domiciled insurance
company. The investors of Capital Guaranty Corp.
are Constellation Investments Inc., Fleet
Financial Group, Inc., Norstar Bancorp Inc.,
Safeco Corporation, Sibag Finance Corporation and
United States Fidelity and Guaranty Company.
These investors are not obligated to pay the
debts or claims against Capital Guaranty. As of
December 31, 1993 Capital Guaranty had total
admitted assets of $285 million and policyholders
surplus of approximately $168 million
(unaudited). Standard & Poor's Corporation has
assigned "AAA" claims-paying ability to Capital
Guaranty. The successful structuring of
reinsurance and assumption agreements in 1987
effectively replaced USF&G with Capital Guaranty
Insurance Co. as the primary insurer. Capital
Guaranty services the portfolio and will honor
any claims. The address of Capital Guaranty's
administrative offices and its telephone number
are 601 Montgomery Street, Suite 1410, San
Francisco, California 94111-2618 and (415)392-
4913.
The financial information relating to the
above insurance companies has been obtained from
publicly available information. No representation
is made herein as to the accuracy or adequacy of
such information, or as to the absence of
material adverse changes in such information
subsequent to the dates thereof, but the Sponsor
is not aware that the information herein is
inaccurate or incomplete.
Ratings
On the Date of Deposit Standard & Poor's
Corporation rated each of the Bonds in the
Portfolio and the Units of the Trust "AAA"
because the insurers have issued insurance
policies to insure each of the Bonds. The Units
of the Trust (with the exception of Units of the
Trusts identified in part A) continue to be rated
"AAA". See Part A for the current ratings on the
Bonds and Units. (See also "Bond Ratings",
herein). The Bond and Unit ratings should not be
construed as an approval of the offering of the
Units by Standard & Poor's Corporation or as a
guarantee of the market value of the Trust or of
the Units. Standard & Poor's has been compensated
by the Sponsor for its services in rating Units
of the Trust.
Insurance Premiums
The cost of the Insurance to Maturity has
been paid either by the issuers at the time of
issuance, by third-party purchasers or by the
Sponsor. Portfolio Insurance premiums are a Trust
expense.
ACQUISITION OF SECURITIES FOR THE TRUST
In selecting Securities for deposit in the
Trust, many factors were considered, and based
upon the experience and judgment of the Sponsor,
the following requirements, among others, were
deemed to be of primary importance.
1. Insurance guaranteeing scheduled payments
of principal and interest and a Standard & Poor's
Corporation's rating of "AAA" or, in the case of
Securities not insured when acquired by the
Sponsor, (i) a minimum of Standard & Poor's
Corporation's rating of "A", (ii) a minimum
Moody's Investors Service, Inc.'s rating of "A"
or (iii) Bonds which the Sponsor reasonably
believes will obtain such minimum ratings in the
near future.
2. Reasonable value relative to other issues
of similar quality and maturity;
3. Diversification as to the purpose of each
issue and the location of each issuer;
4. Availability and cost of insurance for the
scheduled payment of principal and interest on
the Securities not insured when acquired by the
Sponsor; and
5. Income to the Unitholders of the Trust.
Cash, if any, received from Unitholders prior
to the settlement date for the purchase of Units
or prior to the payment for Bonds upon their
delivery may be used in the Sponsor's business
subject to the limitations of 17 C.F.R., Section
240, 15c3-3 under the Securities and Exchange Act
of 1934 and may be of benefit to the Sponsor.
The Trustee has not participated in the
selection of Securities for the Trust, and
neither the Sponsor nor the Trustee will be
liable in any way for any default, failure or
defect in any Securities.
To the best knowledge of the Sponsor, there is
no litigation pending as of the Date of Deposit
in respect of any Securities 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 with respect to Securities in
the Trust. Such litigation may affect the
validity of such Securities or the tax-exempt
status of the interest thereon. While the outcome
of litigation of such nature cannot be predicted,
opinions of bond counsel are delivered with
respect to each Security on the date of issuance
to the effect that such Security has been validly
issued and that the interest thereon is exempt
from Federal income tax. If legal proceedings are
instituted after the Date of Deposit seeking,
among other things, to restrain or enjoin the
payment of any of the Securities or attacking
their validity or the authorization or existence
of the Issuer, the Sponsor may, in accordance
with the Indenture, direct the Trustee to sell
such securities and distribute the proceeds of
such sale to Unitholders. In addition, other
factors may arise from time to time which
potentially may impair the ability of Issuers to
meet obligations undertaken with respect to
Securities.
PUBLIC OFFERING PRICE OF UNIT
The Public Offering Price per Unit during the
secondary market will be computed by dividing the
aggregate of the bid prices of the Bonds in the
Trust plus any money in the principal account
other than money required to redeem the tendered
Units, by the number of Units outstanding, and
then adding the appropriate sales charge. In the
primary offering period, the Public Offering
Price was determined on the basis of the offering
prices of bonds plus a sales charge ranging from
3.5% to 5.5% of the Public Offering Price.
The sales charge is determined in accordance
with the table set forth below based upon the
number of years remaining to the maturity of each
Bond. There is no sales charge with respect to
cash held in the Interest or Principal Accounts.
For purposes of this calculation, Bonds will be
deemed to mature on their stated maturity dates
unless: (a) the Bonds have been called for
redemption or funds or securities have been
placed in escrow to redeem them on an earlier
call date ("Refunded Bonds"), in which case such
call date shall be deemed to be the date upon
which they mature; or (b) such Bonds are subject
to a "mandatory put", in which case such
mandatory put date shall be deemed to be the date
upon which they mature. The effect of this method
of sales charge calculation will be that
different sales charge rates will be applied to
the various Bonds in a Trust portfolio based upon
the maturities of such Bonds, in accordance with
the following schedule:
Maximum
Percent of
Remaining Public Percent of
Years to Offering Net Mount
Maturity Price Invested
Less than 1 0% 0%
1 but less than 6 3.50 3.63
6 but less than 11 4.00 4.17
More than 11 5.50 5.82
For example, the sales charge on a Trust
consisting entirely of Bonds maturing in 13 to 16
years would be 5.50% (5.82% of the net amount
invested) and that on a Trust consisting entirely
of Bonds maturing in three to five years would be
3.50% (3.63% of the net amount invested). The
actual sales charge included in the Public
Offering Price of any particular Trust will
depend on the maturities of the Bonds in the
portfolio of such Trust.
Due to the realization of economies of scale
in sales effort and sales-related expenses with
respect to the purchase of Units by employees of
the Sponsor, the Sponsor intends to permit
employees of the Sponsor and certain of their
relatives to purchase Units of the Trust at a
price equal to the bid side evaluation of the
Securities in the Trust, divided by the number of
Units outstanding plus a reduced sales charge of
$5.00 per Unit.
A proportionate share of accrued interest and
undistributed interest on the Units to the
Unitholder's settlement date (the Unitholder's
settlement date is the date so specified in the
confirmation of sale of the Units to a
Unitholder, normally five business days after
purchase) is added to the Public Offering Price.
Such proportionate share will be an asset of the
Unitholder and will be received in subsequent
distributions and upon the sale of his Units.
Aggregate bid prices of the Securities will be
determined for the Trust by the Evaluator on the
basis of: (1) the current bid prices for the
Securities; (2) the current bid prices for
comparable bonds, if bid prices are not available
for any of the Securities; (3) determining the
value of the Securities on the bid side of the
market by appraisal; or (4) any combination of
the above. Evaluations for purposes of secondary
market transactions by the Sponsor and
redemptions by the Trustee will be made each
business day as of the Evaluation Time, effective
for all sales or redemptions made subsequent to
the last preceding determination.
In addition to the sales charge on the Date of
Deposit, the Sponsor will realize a profit or
loss resulting from the difference between the
purchase price paid by the Sponsor to buy the
Securities and the cost of the securities to the
Trust as determined by the Evaluator. In
addition, the Sponsor may receive placement fees
or may realize profits or sustain losses with
respect to Securities acquired from underwriting
syndicates of which the Sponsor is a member. The
Sponsor may realize additional profit or loss as
a result of the possible change in the daily
evaluation of the Bonds in the Trust. All
proceeds received from purchasers of Units of the
Trust will be retained by the Sponsor.
PUBLIC OFFERING OF UNITS
The Sponsor intends to qualify Units for sale
in all of the states of the United States, except
that for state trusts, the Sponsor intends to
qualify Units for sale only to residents of that
state. Sales may be made to dealers who are
members of the National Association of Securities
Dealers, Inc. at prices which include a
concession of 75% of the applicable sales charge,
subject to change from time to time. The
difference between the dealer concession and
sales charges will be retained by the Sponsor.
The Sponsor reserves the right to reject, in
whole or part, any order for the purchase of
Units.
Initial Offering of Units. During the initial
public offering period, Units will be offered to
the public by the Sponsor at the Public Offering
Price calculated on each business day, plus
accrued interest.
Secondary Offering of Units. Upon the
termination of the initial public offering
period, unsold Units or Units acquired by the
Sponsor in the secondary market referred to below
may be offered to the public by the Sponsor by
this Prospectus at the then current Public
Offering Price, calculated daily, plus accrued
interest.
SECONDARY MARKET FOR UNIT
While not obligated to do so, it is the
Sponsor's present intention to maintain, at its
expense, a secondary market for Units of this
Series and to continuously offer to repurchase
Units from Unitholders at the "Sponsor's
Repurchase Price". The Sponsor's Repurchase Price
is computed by dividing the value of the Trust
(see "Evaluation of the Trust") by the number of
Units outstanding (see "Evaluation of the
Trust"). There is no sales charge incurred when a
Unitholder sells Units back to the Sponsor. Any
Units repurchased by the Sponsor at the Sponsor's
Repurchase Price may be reoffered to the public
by the Sponsor at the then current Public
Offering Price, plus accrued interest. Any profit
or loss resulting from the resale of such Units
will belong to the Sponsor.
If the supply of Units exceeds demand, or for
some other business reason, the Sponsor may at
any time or occasionally from time to time
discontinue the repurchase of Units of this
Series at the Sponsor's Repurchase Price. In such
event, although under no obligation to do so, the
Sponsor may, as a service to Unitholders, offer
to repurchase Units at the "Redemption Value", a
price based on the current bid price for the
Securities, plus accrued interest. If the Sponsor
repurchases Units in the secondary market at the
"Redemption Value", it may reoffer these Units in
the secondary market at the "Public Offering
Price". In no event will the price offered by the
Sponsor for the repurchase of Units be less than
the current Redemption Value for those Units. See
"Redemption of Units by Trustee" and "Comparison
of Public Offering Price and Redemption Value".
Estimated Current Return and Estimated Long Term Return
The Sponsor may from time to time give
investors Estimated Current Return and Estimated
Long Term Return information, each of which give
investors different information about the return.
Estimated Current Return on a Unit represents
annual cash receipts from coupon-bearing debt
obligations in the Trust (after estimated annual
expenses) divided by the Public Offering Price
(including the sales charge).
Unlike Estimated Current Return, Estimated
Long Term Return is a measure of the estimated
return to the investor earned over the estimated
life of the Trust. Estimated Long Term Return is
calculated using a formula which (1) takes into
consideration, and determines and factors in the
relative weightings of, the market values, yields
(which takes into account the amortization of
premiums and the accretion of discounts) and
estimated retirements of all of the Securities in
the Trust and (2) takes into account the expenses
and maximum sales charge associated with each
Unit. The Estimated Long Term Return calculation
does not take into account certain delays in
distributions of income and the timing of other
receipts and distributions on Units and may,
depending on maturities, over or understate the
impact of sales charges. Both of these factors
may result in a lower figure.
Both Estimated Current Return and Estimated
Long Term Return are subject to fluctuation with
changes in Trust composition, changes in market
value of the underlying Securities and changes in
fees and expenses, including sales charges. The
size of any difference between Estimated Current
Return and Estimated Long Term Return can also be
expected to fluctuate at least as frequently. In
addition, both return figures may not be directly
comparable to yield figures used to measure other
investments, and, since the return figures are
based on certain assumptions and variables, the
actual returns received by a Unitholder may be
higher or lower.
ESTIMATED NET ANNUAL INTEREST INCOME PER UNIT
The estimated Net Annual Interest Income per
Unit of the Trust is computed by dividing the
total gross annual interest income to the Trust
by the number of Units outstanding and then
subtracting the per Unit estimated annual fees
and expenses of the Trustee, the Sponsor and the
Evaluator (see "Essential Information").
The estimated Net Annual Interest Income per
Unit will be higher for Unitholders electing the
semi-annual interest distribution plan than those
electing the monthly plan. This is the result of
the differing expenses and fees of the Trustee in
administering the distributions of interest. See
"Essential Information" and "Distributions to
Unitholders". The estimated Net Annual Interest
Income per Unit will change whenever Securities
mature, are called for redemption, or are sold.
In addition, any change in the Trustee's or
Evaluator's fees or expenses will result in a
change in the estimated Net Annual Interest
Income per Unit (see "Expenses of the Trust").
DISTRIBUTIONS TO UNITHOLDERS
The Trustee will collect the interest on the
Securities as it becomes payable (including all
interest accrued and unpaid prior to the Date of
Deposit of the Securities and including that part
of proceeds of the sale, liquidation or maturity
of any Security which represents accrued interest
thereon including interest attributable to a
Failed Security for which no Replacement Security
has been obtained and including all moneys paid,
if any, pursuant to the Insurance policy
providing for such payment, representing interest
on Securities in the Trust) and credit such
interest to a separate Interest Account created
by the Indenture. All moneys received by the
Trustee from sources other than interest will be
credited to a separate Principal Account. All
funds collected or received will be held by the
Trustee in trust without interest to Unitholders
as part of the Trust or the Reserve Account
referred to below until required to be disbursed
in accordance with the provisions of the
Indenture. Such funds will be segregated by
separate recordation on the Trust ledger of the
Trustee so long as such practice preserves a
valid preference under applicable law, or if such
preference is not preserved, the Trustee shall
handle such funds in such other manner as shall
constitute the segregation and holding thereof in
trust within the meaning of the Investment
Company Act of 1940, as the same may be from time
to time amended. To the extent permitted by the
Indenture and applicable banking regulations,
such funds are available for use by the Trustee
pursuant to normal banking procedures.
The Trustee is authorized by the Indenture to
withdraw from the Principal and/or Interest
Accounts such amounts as it deems necessary to
establish a reserve for any taxes or other
governmental charges that may be payable out of
the Trust, which amounts will be deposited in a
separate Reserve Account. If the Trustee
determines that the amount that is in the Reserve
Account is greater than the amount necessary for
payment of any taxes or other governmental
charges, it will promptly deposit the excess in
the Account for which it was withdrawn.
The settlement date for the purchase of Units
must occur on or prior to the Record Date in
order for a purchaser to receive a distribution
on the next Distribution Date. If the settlement
date for the purchase of Units occurs after the
Record Date, distribution will not occur until
the second following Distribution Date.
Interest Account
After deduction of the fees and expenses of
the Trustees and the Evaluator, the Trustee will
distribute on each Distribution Date or shortly
thereafter, to Unitholders of record on the
preceding Record Date, an amount approximately
equal to either one-twelfth or one-half of such
Unitholder's pro rata share (depending on the
plan of distribution selected) of the estimated
annual amount to be deposited in the Interest
Account, computed as of the preceding Record
Date. However, all Unitholders of record on the
initial Record Date will receive the initial
interest distribution on the initial Interest
Distribution Date. The Trustee's fee and expenses
will be higher for monthly interest distributions
than for semi-annual interest distributions.
Therefore, the amount distributed per Unit to
Unitholders electing the monthly plan will be
correspondingly lower than under the semi-annual
plan. All interest distributions following the
initial interest distribution will be in
approximately the amounts shown under "Essential
Information", depending on the plan of
distribution selected. See "Essential
Information-Plan of Distribution" in Part A for
details on selecting interest distributions.
Because the Securities in the Trust pay
interest at varying semi-annual intervals and
Units pay interest at constant monthly or semi-
annual intervals, the interest accrued on Units
of the Trust will be greater than the amount
available for distribution from the Interest
Account. The Trustee will distribute on each
Distribution Date an amount which will be less
than the interest accrued to each Unitholder on a
Record Date. Pursuant to the Indenture, in order
to accommodate regular interest distributions,
the Trust will contain undistributed cash
balances. The difference between the amount
accrued to each Unitholder on a Record Date and
the amount distributed on the following
Distribution Date is an asset of the Unitholder
and will be included as part of accrued interest
which will be received in subsequent interest
distributions, upon the sale of his Units or, in
part, upon the sale, redemption, or maturity of
Securities in the Trust
Principal Account
The Trustee will distribute on each semi-
annual Distribution Date, or shortly thereafter,
to Unitholders of record on the preceding Record
Date, an amount equal to such Unitholder's pro
rata share of the cash balance, if any, in the
Principal Account computed as of the proceeding
Record Date. Except for monies used to redeem
tendered Units, proceeds received upon the
disposition of any Securities subsequent to a
Record Date and prior to the following semi-
annual Distribution Date will be held in the
Principal Account and will not be distributed
until the next succeeding semi-annual
Distribution Date. However, in the event of an
early redemption of bonds, sale of bonds upon the
occurrence of events set forth under "Supervision
of Trust Investments", or maturity of bonds,
there may occur a special principal distribution.
Any special principal distribution will be made
within 60 days of such event to Unitholders of
record on the Record Date selected therefore by
the Trustee as provided in the Indenture. No
distribution need be made from the Principal
Account if the cash balance therein is less than
one-tenth of one per cent of the total principal
amount of the Securities on the Date of Deposit.
Certain of the Bonds in the Trust are subject
to sinking fund or special redemption by their
issuers, as set forth under "Redemption Features"
on the "Schedule of Investments". The redemption
price for Bonds in the Trust called by an issuer
pursuant to sinking fund or special redemption is
normally equal to the principal amount of such
Bonds, while the redemption price for Bonds
called at the option of the issuer may include a
redemption premium. In most cases Bonds are
selected from among Bonds of like series and
maturity either by lot or by such method as the
bond trustee may adopt. A capital gain or loss
may occur depending upon the price at which a
Bond called was acquired by the Trust and the
amount received by the Trust upon redemption (see
"Tax Status of the Trust"). In general, optional
redemption provisions are more likely to be
exercised by an Issuer when the offering side
valuation is greater than par than when offering
side valuation is less than par. If future
interest rates decline, an issuer of Bonds might
find it advantageous to exercise its option to
call Bonds prior to maturity even though, in most
cases, the Issuer must pay a premium.
Reinvestment Program
Distributions are made to Unitholders
monthly. The Unitholder has the option of
receiving the monthly interest and/or principal
distribution or reinvesting at net asset value in
the PaineWebber Tax-Exempt Income Fund (the
"Fund") an open-end investment company registered
under the Investment Company Act. The Fund's
investment objective is to provide high current
income exempt from federal income tax, consistent
with the preservation of capital and liquidity
within the Fund's quality standards. Except under
unusual market conditions, the Fund will invest
at least 80% of its assets in municipal
obligations with varying maturities, the interest
from which, in the opinion of bond counsel to
their respective issuers, is exempt from both
federal income tax and the federal alternative
minimum tax. There can be no assurance that the
Fund will achieve its objective. For more
information about the Fund, including a
prospectus, Unitholders should contact their
PaineWebber Investment Executive or call the
Fund's shareholder service number at 1(800)544-
9300.
To participate in the Reinvestment Program,
Unitholders must hold Units in their own name,
must fill out an application establishing an
account and notify the Trustee of the account
number at least 10 days before the Record Date.
Elections may be revoked upon similar notice.
EXCHANGE OPTION
Unitholders may elect to exchange any or all
of their Units of this series for units of one or
more of any series of PaineWebber Municipal Bond
Fund First Series; PaineWebber Municipal Bond
Fund Second Series; PaineWebber Municipal Bond
Fund Third Series (the "PaineWebber Series"); The
Municipal Bond Fund, Series One through Series
Forty-Three; The Municipal Bond Trust, Series
Forty-Four and subsequent series (the "Multi-
State Series"); The Municipal Bond Trust,
California Series A and subsequent series (the
"California Series"); The Corporate Bond Trust,
Series One and subsequent series (the "Corporate
Series"); The Municipal Bond Trust, Insured
Series 1 and subsequent series (the "Insured
Series"); and The PaineWebber Pathfinders Trust
Treasury and Growth Stock Series 1 and subsequent
series (the "Pathfinders Series"), The
PaineWebber Federal Government Trust, GNMA Series
1 and subsequent series (the "Federal Government
Series") or the PaineWebber Equity Trust, Growth
Stock Series 1 and subsequent series (the "Equity
Trust") (collectively referred to as the
"Exchange Trusts") at a Public Offering Price for
the units of the Exchange Trusts to be acquired
based on a reduced sales charge of $15 per unit.
The purpose of such reduced sales charge is to
permit the Sponsor to pass on to the Unitholder
who wishes to exchange Units the cost savings
resulting from reductions in time and expense
related to advice, financial planning and
operational expense required for the Exchange
Option. Each Exchange Trust has different
investment objectives, therefore a Unitholder
should read the prospectus for the applicable
Exchange Trust carefully prior to exercising this
option. Exchange Trust having as their objective
the receipt of tax exempt interest income would
not be suitable for tax deferred investment
plans, such as Individual Retirement Accounts and
a Unitholder who purchased Units of a series and
paid a per unit sales charge that was less than
the per unit sales charge of the series of
Exchange Trusts into which such Unitholder
desires to exchange, will be allowed to exercise
the Exchange Option at the Unit Offering Price
plus the reduced sales charge, provided the
Unitholder has held the Units for at least five
months. Any such Unitholder who has not held the
Units to be exchanged for the five-month period
will be required to exchange them at the Unit
Offering Price plus a sales charge based on the
greater of the reduced sales charge, or an amount
which, together with initial sales charge paid in
connection with the acquisition of the Units
being exchanged, equals the sales charge of the
series of the Exchange Trust for which such
Unitholder desires to exchange into, determined
as of the date of the exchange.
The Sponsor will permit exchanges at the
reduced sales charge provided there is a market
maintained by the Sponsor in both the Units of
this series and units of the applicable Exchange
Trust, and there are units of applicable Exchange
Trust available for sale. While the Sponsor has
indicated that it intends to maintain a market
for the units of the respective Trusts, there is
no obligation on its part to maintain such a
market. Therefore, there is no assurance that a
market for units will in fact exist on any given
date at which a Unitholder wishes to sell his
Units of this series and thus there is no
assurance that the Exchange Option will be
available to a Unitholder. Exchanges will be
effected in whole units only. Any excess proceeds
from Unitholders' units being surrendered will be
returned. Unitholders will be permitted to
advance new money in order to complete an
exchange.
An exchange of units pursuant to the Exchange
Option will generally constitute a "taxable
event" under the Code, i.e., a Unitholder will
recognize a tax gain or loss at the time of
exchange. However, under the position taken by
the Internal Revenue Service in Revenue Ruling
81-204 (relating to the exchange of pools of
residential mortgage loans by several savings and
loan associations), an exchange of units for
units of any other similar series of the
PaineWebber Municipal Bond Trust, may not
constitute a taxable event if the units exchanged
do not differ materially either in kind or in
extent from each other or if the exchange has no
significant economic or business purpose or
utility apart from the anticipated tax
consequences. Unitholders are advised to consult
their own tax advisors as to the tax consequences
of exchanging Units in their particular case. The
Sponsor reserves the right to modify, suspend or
terminate this plan at any time without further
notice to Unitholders. In the event the Exchange
Option is not available to a Unitholder at the
time he wishes to exercise it, the Unitholder
will be immediately notified and no action will
be taken with respect to his Units without
further instruction from the Unitholder.
To exercise the Exchange Option, a Unitholder
should notify the Sponsor of his desire to
exercise the Exchange Opition and to use the
proceeds from the sale of his Units of this
series to purchase units of one or more of the
Exchange Trusts. If units of the applicable
outstanding series of the Exchange Trust are at
that time available for sale, and if such units
may lawfully be sold in the state in which the
Unitholder is resident, the Unitholder may select
the series or group of series for which he
desires his investment to be exchanged. The
Unitholder will be provided with a current
prospectus or prospectuses relating to each
series in which he indicates interest.
The exchange transaction will operate in a
manner essentially identical to any secondary
market transaction, i.e., units will be
repurchased at a price based on the aggregate bid
price per Unit of the securities in the portfolio
of the Trust. Units of the Exchange Trust,
however, will be sold to the Unitholder at a
reduced sales charge. Units sold under the
Exchange Option will be sold at the bid prices
per unit of the underlying securities in the
particular portfolio involved plus a fixed charge
of $15 per unit. Exchange transactions will be
effected only in whole units; thus, any proceeds
not used to acquire whole units will be paid to
the selling Unitholder.
For example, assume that a Unitholder, who has
three units of a trust with a current price of
$1,030 per unit based on the bid prices of the
underlying securities, desires to sell his units
and seeks to exchange the proceeds for units of a
series of an Exchange Trust with a current price
of $890 per unit based on the bid prices of the
underlying securities. In this example, which
does not contemplate rounding up to the next
highest number of units, the proceeds from the
Unitholder's units will aggregate $3,090. Since
only whole units of an Exchange Trust may be
purchased under the Exchange Option, the
Unitholder would be able to acquire three units
in the Exchange Trust for a total cost of $2,715
($2,670 for the units and $45 for the sales
charge). The remaining $375 would be returned to
the Unitholder in cash.
CONVERSION OPTION
Owners of units of any registered unit
investment trust sponsored by others which was
initially offered at a maximum applicable sales
charge of at least 3.0% ( a Conversion Trust) may
elect to apply the cash proceeds of the sale or
redemption of those units directly to acquire
available units of any Exchange Trust at a
reduced sales charge of $15 per Unit, per 100
Units in the case of Exchange Trusts having a
Unit price of approximately $10, or per 1,000
Units in the case of Exchange Trusts having a
Unit price of approximately $1, subject to the
terms and conditions applicable to the Exchange
Option (except that no secondary market is
required for Conversion Trust units). To exercise
this option, the owner should notify his retail
broker. He will be given a prospectus for each
series in which he indicates interest and for
which units are available. The dealer must sell
or redeem the units of the Conversion Trust. Any
dealer other than PaineWebber must certify that
the purchase of units of the Exchange Trust is
being made pursuant to and is eligible for the
Conversion Option. The dealer will be entitled to
two-thirds of the applicable reduced sales
charge. The Sponsor reserves the right to modify,
suspend or terminate the Conversion Option at any
time without further notice, including the right
to increase the reduced sales charge applicable
to this option (but not in excess of $5 more per
Unit, per 100 Units or per 1,000 Units, as
applicable than the corresponding fee then being
charged for the Exchange Option). For a
description of the tax consequences of a
conversion reference is made to the Exchange
Option section herein.
EXPENSES OF THE TRUST
The cost of the preparation and printing of
the Certificates, the Indenture and this
Prospectus, the initial fees of the Trustee and
the Trustee's counsel, the Evaluator's fees
during the initial offering period, advertising
expenses incurred in establishing the Trust,
including insurance premiums for the Insurance to
Maturity obtained by the Sponsor and legal and
auditing fees, are paid by the Sponsor and not by
the Trust. The Sponsor will receive no fee from
the Trust for its services as Sponsor.
The cost of Portfolio Insurance on the Bonds
covered thereby while held in the Trust is
accounted for as an expense of the Trust. Any
amount paid for Permanent Insurance on a Bond
sold by the Trust will be accounted for as an
offset to the amount received on the sale.
For services performed under the Indenture,
the Trustee will be paid by the Trust at the rate
set forth under "Essential Information" in Part
A. Such compensation will be computed monthly or
semi-annually on the basis of the greatest
principal amount of the Securities in the Trust
at any time during the preceding monthly or semi-
annual period. In no event will the Trustee be
paid less than $2,000 in any one year. The
Evaluator's fee for each daily evaluation is also
set forth under "Essential Information" in Part
A. The fees of the Evaluator will be payable by
the Trust. See "Essential Information" in Part A
for the estimated annual fees and expenses per
Unit under the various optional interest
distribution plans.
The Trustee's fees are payable monthly and
semi-annually, and the Evaluator's fees are
payable monthly on or before each Distribution
Date from the Interest Account, to the extent
funds are available, then from the Principal
Account. Any of such fees may be increased
without approval of the Unitholders by an amount
not exceeding a proportionate increase in the
category entitled "All Services Less Rent" in the
Consumer Price Index published by the United
States Department of Labor. In addition to the
above, the following charges are or may be
incurred by the Trust and paid from the Interest
Account, or, to the extent funds are not
available in such Account, from the Principal
Account: (1) fees for the Trustee for
extraordinary services; (2) expenses of the
Trustee (including legal and auditing expenses)
and of counsel; (3) various governmental charges;
(4) expenses and costs of any action taken by the
Trustee to protect the Trust and the rights and
interest of the Unitholders; (5) indemnification
of the Trustee for any loss, liabilities or
expenses incurred by it in the administration of
the Trust without negligence, bad faith or
willful misconduct on its part; and (6) expenses
incurred in contacting Unitholders upon
termination of the Trust. The fees and expenses
set forth above are payable out of the Trust and
when unpaid will be secured by a lien on the
Trust.
The accounts of the Trust shall be audited not
less than annually by independent public
accountants selected by the Sponsor. The expenses
of the audit shall be an expense of the Trust. So
long as Sponsor maintains a secondary market.
Sponsor will bear any audit expense which exceeds
$.50 per Unit. Unitholders covered by the audit
during the year may receive a copy of the audited
financials upon request.
DESCRIPTION OF CERTIFICATES
Ownership of Units is evidenced by registered
Certificates, executed by the Trustee and the
Sponsor, issued in denominations of one Unit or
any integral multiple thereof. A Unitholder may
transfer his Certificate by presenting it to the
Trustee at its corporate trust office. Such
Certificate must be properly endorsed or
accompanied by a written instrument or
instruments of transfer executed by the
Unitholder or his duly authorized attorney. A
Unitholder may be required to pay $2.00 per
Certificate transferred to cover the Trustee's
cost in implementing such transfer and to pay any
tax or other governmental charge that may be
imposed in connection with such transfer. The
Trustee is required to execute and deliver a new
Certificate in exchange and substitution for any
Certificate mutilated, destroyed, stolen or lost,
if and when the Unitholder furnishes the Trustee
with proper identification and satisfactory
indemnity, and pays such expenses as the Trustee
may reasonably incur. Any mutilated Certificate
must be presented to the Trustee before any
substitute Certificate will be issued.
STATEMENTS TO UNITHOLDERS
With each distribution from the Interest and
Principal Accounts, the Trustee will furnish each
Unitholder with a statement setting forth the
amount being distributed from each Account
expressed as a dollar amount per Unit. Promptly
after the end of each calendar year, the Trustee
will furnish to each person who at any time
during the calendar year was a registered
Unitholder a statement setting forth:
1. As to the Interest Account:
(a) the amount of Interest received on the
Securities and the percentage of such
amount by states and territories in which
the issuers of the Bonds are located;
(b) the amount paid from the Interest Account
representing accrued interest for any
Certificates redeemed;
(c) the deductions from the Interest Account
for fees and expenses of the Trustee, the
Sponsor and the Evaluator or for other
various fees, charges or expenses relating
to the Trust;
(d) the deductions from the Interest Account
for payment into the Reserve Account; and
(e) the net amount remaining after such
payments and deductions expressed as a
total dollar amount outstanding on the last
business day of such calendar year.
2. As to the Principal Account:
(a) the dates of the redemption, sale or
maturity of any of the Securities and the
net proceeds received therefrom, excluding
any portion credited to the Interest
Account;
(b) the amount paid from the Principal Account
representing the principal of any
Certificates redeemed;
(c) the deductions from the Principal Account
for fees and expenses of the Trustee, the
Sponsor and the Evaluator or for other
various fees, charges or expenses relating
to the Trust;
(d) the deductions from the Principal Account
for payment into the Reserve Account; and
(e) the net amount remaining after such
payments and deductions expressed as a
total dollar amount outstanding on the last
business day of such calendar year.
3. The following information:
(a) a list of the Securities as of the last
business day of such calendar year;
(b) the number of Units outstanding on the
last business day of such calendar year;
(c) the Unit Value based on the last
evaluation of the Trust made on the last
business day during such calendar year; and
(d) the amounts actually distributed during
such calendar year from the Interest and
Principal Account, separately stated,
expressed both as total dollar amounts and
as dollar amounts per Unit outstanding on
the Record Dates for such distributions.
REDEMPTION OF UNITS BY TRUSTEE
A Unitholder who wishes to dispose of its
Units should inquire through its broker as to the
current market price for such Units prior to
making a tender for redemption to the Trustee in
order to determine if there is a market for Units
in excess of the then current Redemption Value or
Sponsor's Repurchase Price. After the initial
offering period the Redemption Value will be the
same as the Sponsor's Repurchase Price.
During the period in which the Sponsor
maintains a secondary market for Units as the
Sponsor's Repurchase Price, the Sponsor has
agreed to repurchase any Unit presented for
tender to the Trustee for redemption no later
than the close of business on the second business
day following such presentation.
The Trustee is irrevocably authorized in its
discretion, in lieu of redeeming Units presented
for tender at the redemption value, to sell such
Units in the over-the-counter market for the
account of a tendering Unitholder at prices which
will return to the Unitholder amounts in cash,
net after brokerage commissions, transfer taxes
and other charges, equal to or in excess of the
Redemption Value for such Units. In the event of
any such sale the Trustee will pay the net
proceeds thereof to the Unitholder on the day he
would otherwise be entitled to receive payment of
the Redemption Value.
One or more Units represented by a Certificate
may be redeemed at the Redemption Value upon
tender of such Certificate to the Trustee at its
corporate trust office in the City of New York,
properly endorsed or accompanied by a written
instrument of transfer in form satisfactory to
the Trustee, and executed by the Unitholder or
its authorized attorney. A Unitholder may tender
its Units for redemption at any time after the
settlement date for purchase, whether or not it
has received a definitive Certificate. The
Redemption Value per Unit is calculated by
dividing the current bid prices for the
Securities in the Trust (see "Evaluation of the
Trust") plus any money in the Principal Account
other than money required to redeem tendered
Units, by the number of Units outstanding, plus a
proportionate share of accrued interest and
undistributed interest income on the Securities
determined to the day of tender. There is no
sales charge incurred when a Unitholder tenders
his Units to the Trustee for redemption. Subject
to the payment of any applicable tax or
governmental charges, the Redemption Value of
Units redeemed by the Trustee will be paid on the
seventh calendar day following the day of tender.
If such day of payments is not a business day,
the Redemption Value will be paid on the first
business day prior thereto.
The Trustee may, in its discretion, and will
when so directed by the Sponsor, suspend the
right of redemption, or postpone the date of
payment of the Redemption Value, for more than
seven calendar days following the day of tender
for any period during which New York Stock
Exchange, Inc. is closed other than for weekend
and holiday closings; or for any period during
which the Securities and Exchange Commission
determines that trading on the New York Stock
Exchange, Inc. is restricted or for any period
during which an emergency exists as a result of
which disposal or evaluation of the Securities is
not reasonably practicable; or for such other
period as the Securities and Exchange Commission
may by order permit for the protection of
Unitholders. The Trustee is not liable to any
person or in any way for any loss or damages
which may result from any such suspension or
postponement.
Any amounts paid on the redemption
representing interest will be withdrawn from the
Interest Account to the extent that funds are
available for such purpose. All other amounts
paid on redemption will be withdrawn from the
Principal Account. The Trustee is empowered to
sell Securities out of the Portfolio as selected
by the Sponsor in order to make funds available
for the redemption of Certificates, and, to the
extent Securities are sold for such purpose, the
size and diversity of the Trust will be reduced.
Such sales may be required at a time when
Securities would not otherwise be sold and may
result in lower prices than might otherwise be
realized. In addition, because of the minimum
principal amount in which securities may be
required to be sold, the proceeds of such sales
may exceed the amount necessary for payment of
Units redeemed. Such excess proceeds will be
distributed pro rata to all remaining Unitholders
of record.
EVALUATION OF THE TRUST
The Evaluator is Kenny Information Systems, a
Division of J.J. Kenny Co., Inc., 65 Broadway,
New York, New York 10006.
The value of the Trust is computed as of the
Evaluation Time shown under "Essential
Information" (1) on each June 30 and December 31
(or at last business day prior thereto), (2) on
each business day as long as the Sponsor is
maintaining a bid in the secondary market, (3) on
the day which any Unit is tendered for redemption
and (4) on any other day desired by the Sponsor
or the Trustee, by adding:
1. The aggregate value of Securities in the
Trust, as determined by the Evaluator:
(a) on the basis of current bid prices for the
Securities;
(b) on the basis of current bid prices for
comparable bonds, if bid prices are not available
for any of the Securities;
(c) by determining the value of the Securities
on the bid side of the market by appraisal; or
(d) by any combination of the above.
2. Money on hand in the Trust, other than
money deposited to purchase Securities or money
credited to the Principal Account which is
required to redeem tendered Units; and
3. Accrued but unpaid interest on the
Securities at the close of business on the date
of such Evaluation.
The Trustee will deduct from the resulting
figure: amounts representing any applicable taxes
or governmental charges payable by the Trust for
the purpose of making an addition to the Reserve
Account; amounts representing estimated accrued
expenses of the Trust; amounts representing
unpaid fees of the Trustee, the Sponsor and the
Evaluator; and cash held for distribution to
Unitholders of record as of the business day
prior to the Evaluation being made on the days or
dates set forth above.
For the purpose of the redemption of Units,
the value per Unit is computed by the Trustee by
dividing the result of the above computation by
the total number of Units outstanding on the date
of such Evaluation.
The Evaluator's evaluation of the Securities
takes into account Insurance to Maturity
insurance policies in respect of those Securities
and the rating assigned to those Securities as a
result of such insurance. Insurance to Maturity
determined the quality of the insurance issued by
each insurer, and then compared the Securities to
other securities which had comparable insurance
and which were of comparable quality. In
addition, in the case of Securities not insured
when acquired by the Sponsor and which are
insured by Portfolio Insurance, the Evaluator has
attributed no value to the Portfolio Insurance.
Bonds rated below investment grade and insured by
Portfolio Insurance will be valued at the greater
of (i) the market value of such Securities with
Permanent Insurance (less the Permanent Insurance
Premium therefor) or (ii) the market value of
such Securities uninsured. In addition, the
Evaluator will consider the ability of Financial
Guaranty to meet its commitments under the
Portfolio Insurance, including the ability to
issue Permanent Insurance. It is the position of
the Sponsor that this is a fair method of valuing
the Securities and reflects a proper valuation
method in accordance with the provisions of the
Investment Company Act of 1940.
COMPARISON OF PUBLIC OFFERING PRICE AND REDEMPTION VALUE
While the Public Offering Price of Units
during the initial offering period is determined
on the basis of the current offering prices of
the Securities, the Public Offering Price of
Units in the secondary market and the Redemption
Value is determined on the basis of the current
bid prices of such Securities. On the business
day prior to the Date of Deposit, the Public
Offering Price per Unit (which figure includes
the sales charge) exceeded the Redemption Value
by the amount shown under "Essential
Information". The difference between the bid and
offering prices of the Securities is expected to
average 1 1/2% to 2% of principal amount. This
difference may vary between 3% or more of
principal amount for inactively traded Securities
and as little as 1/2 of 1% for actively traded
Securities. For this reason and others, including
the fact that the Public Offering Price includes
the sales charge, the amount realized by a
Unitholder upon redemption of Units may be less
than the price paid by the Unitholder for such
Units.
SUPERVISION OF TRUST INVESTMENTS
The acquisition by the Trust of any
securities other than the Securities initially
deposited (except for the limited right to
replace securities in the case of a fail.
Replacement Securities as provided herein) is
prohibited by the Indenture. The Sponsor may
direct the Trustee to sell and to liquidate any
of the Securities upon the happening of any of
the following events:
1. Default by an issuer in the payment of
principal of or interest on such Securities,
or any other outstanding obligations of such
issuer, when due and payable and such
payment is not guaranteed by a valid
Insurance policy which, in the opinion of
the Sponsor, will provide adequate payment;
2. Institution of legal proceedings seeking to
restrain or enjoin the payment of any of the
Securities or attacking their validity;
3. A breach of a covenant or warranty which
could adversely affect the payment of debt
service on the Securities;
4. In the case of revenue bonds, if the
revenues, based upon official reports, fall
substantially below the estimated revenues
calculated to be necessary to pay principal
of and interest on the Bonds;
5. A decline in market price, or such other
market or credit factor, as in the opinion
of the Sponsor would make retention of any
of the Securities detrimental to the
Unitholders; or
6. In the event that any of the Bonds are the
subject of an advance refunding.
It is not anticipated or expected that
disposal of any of the Bonds in the Trust for the
reason described in (1) above will occur as long
as the Bonds are insured. The Trustee will not be
liable or responsible in any way for depreciation
or loss incurred by reason of any sale made by it
either pursuant to a direction of the Sponsor or
by reason of a failure of the Sponsor to give any
such direction.
The Sponsor is required to instruct the
Trustee to reject any offer made by an Issuer of
any of the Bonds to issue new obligations in
exchange and substitution for the Bonds pursuant
to a refunding or refinancing plan; however, the
Sponsor may instruct the Trustee to accept or
reject such an offer or to take any other action
with respect thereto as the Sponsor deems proper
if the Issuer is in default with respect to the
Securities or the Issuer will, in the written
opinion of the Sponsor, probably default with
respect to the Bonds in the reasonably
foreseeable future.
Any obligations received by the Trust in the
event of such an exchange or substitution will be
held by the Trustee and will be subject to the
terms and conditions of the Indenture to the same
extent as the Securities originally deposited.
Within five days after any exchange and deposit,
notice of such will be mailed by the Trustee to
each registered Unitholder, which identifies the
Securities eliminated and the Securities
substituted.
ADMINISTRATION OF THE TRUST
Records and Accounts. Pursuant to the
Indenture, the Trustee is required to keep proper
books or records and accounts of all transactions
relating to the Trust at its office. Such records
will include the name and address of every
Unitholder, a list of the Certificate numbers and
the number of Units of each Certificate issued to
Unitholders. The Trustee is also required to keep
a certified copy or duplicate original of the
Indenture and current list of Securities held in
the Trust on file at its office which will be
open to inspection by any Unitholder during usual
business hours.
The Trustee is required to make annual or
other reports as may from time to time be
required under any applicable state or Federal
statute, rule or regulation.
Successor Trustee. Under the Indenture, the
Trustee may resign and be discharged of the trust
created by the Indenture by executing a notice of
resignation in writing and filing it with the
Sponsor. The resigning Trustee must also mail a
copy of the notice of resignation to all
Unitholders then on record, not less than sixty
days before the effective resignation date
specified in such notice. Such resignation will
become effective only upon the appointment of
that acceptance of the Trust by a successor
Trustee. The Sponsor, upon receiving notice of
such registration, is obligated to appoint a
successor Trustee promptly.
If within thirty days after notice of
resignation has been received by the Sponsor, no
successor Trustee has been appointed or, if
appointed, has not accepted the appointment, the
resigning Trustee may apply to a court of
competent jurisdiction for the appointment of a
successor. In case the Trustee becomes incapable
of acting as such or is adjudged a bankrupt or is
taken over by any public authority, the Sponsor
may discharge the Trustee and appoint a successor
Trustee as provided in the Indenture. Notice of
such discharge and appointment shall be mailed to
each Unitholder by the Sponsor.
Upon a successor Trustee's execution of a
written acceptance of an appointment as Trustee
for the Trust, such successor Trustee will become
vested with all the rights, powers, duties and
obligations of the original Trustee.
A successor Trustee is required to be a
corporation organized and doing business under
the laws of the United States or of the State of
New York; to be authorized under such laws to
exercise corporate trust powers; to have at all
times an aggregate capital, surplus and undivided
profit of not less than $5,000,000; and to have
its principal office in New York City.
Successor Sponsor. If at any time the Sponsor
shall fail to undertake or perform or become
incapable of undertaking or performing any of the
duties which by the terms of the Indenture are
required of it to be undertaken or performed, or
if the Sponsor resigns, the Trustee may either
appoint a successor Sponsor or Sponsors as will
be satisfactory to the Trustee or it may
terminate the Indenture and liquidate the Trust.
Any successor Sponsor may be compensated at rates
deemed by the Trustee to be reasonable.
The dissolution of the Sponsor or its ceasing
to exist as a legal entity from, or for, any
cause whatsoever will not cause the termination
of the Indenture of the Trust unless the Trust
deems termination to be in the best interests of
Unitholders.
Successor Evaluator. The Evaluator may resign
or may be removed by the Sponsor or the Trustee,
and the Sponsor and the Trustee are to use their
best efforts to appoint a satisfactory successor.
Such resignation or removal will 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.
Notice of such registration or removal and
appointment will be mailed by the Trustee to each
Unitholder.
LIMITATION OF LIABILITIES
The Sponsor. The Indenture provides that the
Sponsor will not be liable to the Trustee, the
Trust or to the Unitholders for taking any action
or for refraining from taking any action made in
good faith or for errors in judgment, but will be
liable or responsible in any way for depreciation
or loss incurred by reason of the sale of any
Securities in the Trust.
The Trustee. The Indenture provides that the
Trustee will not be liable for any action taken
in good faith in reliance on properly executed
documents or for the disposition of moneys,
Securities or Certificates, except by reason of
its own gross negligence, bad faith or willful
misconduct, nor will the Trustee be liable or
responsible in any way for depreciation or loss
incurred by reason of the sale by the Trustee of
any Securities in the Trust. In the event of the
failure of the Sponsor to act, the Trustee may
act and will no be liable for any such action
taken by it in good faith. The Trustee will not
be personally liable for any taxes or other
governmental charges imposed upon or in respect
to the Securities or upon the interest thereon or
upon it as Trustee or upon or in respect of the
Trust which the Trustee may be required to pay
under a present or future law of the United
States of America or of any other taxing
authority having jurisdiction. In addition, the
Indenture contains other customary provisions
limiting the liability of the Trustee. The
Trustee will be indemnified and held harmless
against any loss or liability accruing to it
without negligence, bad faith or willful
misconduct on its part, arising out of or in
connection with its acceptance or administration
of the Trust, including the costs and expenses
(including counsel fees) of defending itself
against any claim of liability.
The Evaluator. The Trustee, Sponsor and
Unitholders may rely on any evaluation furnished
by the Evaluator and will have no responsibility
for the accuracy thereof. The Indenture provides
that the determinations made by the Evaluator
will be made in good faith upon the basis of the
best information available to it provided,
however, that the Evaluator will be under no
liability to the Trustee, Sponsor or Unitholders
for errors in judgment, but will be liable only
for its gross negligence, lack of good faith or
willful misconduct.
AMENDMENT OF THE INDENTURE
The Indenture may be amended by the Trustee
and the Sponsor without the consent of any of the
Unitholders to cure any ambiguity or to correct
or supplement any provision which may be
defective or inconsistent or to make such other
provisions as will not adversely affect the
interest of the Unitholders; provided, however,
that after the deposit of the Securities the
Indenture may not be amended to increase the
number of Units issued thereunder or to permit
the deposit or acquisition of securities either
in addition to or in substitution for any of the
Securities initially deposited in the Trust,
except for the substitution of certain refunding
securities for the Securities. The Trustee will
promptly notify Unitholders of the substance of
any such amendment.
RIGHT OF UNITHOLDERS
A Unitholder may at any time tender his
Certificate to the Trustee for redemption.
The death or incapacity of any Unitholder will
not operate to terminate the Trust nor entitle
his legal representatives or heirs to claim an
accounting or to take any action proceeding in
any court for a partition of winding up of the
Trust.
No Unitholder will have the right to vote
concerning the Trust, except with respect to
termination, or in any manner control the
operation and management of the Trust, nor shall
any Unitholder ever be liable to any other person
by reason of any action taken by the Sponsor or
the Trustee.
TERMINATION OF THE TRUST
The Indenture provides that the Trust will
terminate upon the maturity, redemption, sale or
other disposition of the last of the Securities
held in the Trust. If the value of the Trust as
shown by any evaluation is less than twenty per
cent (20%) of the par value of the Securities
originally deposited in the Trust, the Trustee
may in its discretion, and will when so directed
by the Sponsor, terminate the Trust. The Trust
may also be terminated at any time by the written
consent of 100% of the Certficateholders or by
the Trustee upon the resignation or removal of
the Sponsor if the Trustee determines termination
to be in the best interest of the Unitholders. In
no event will the Trust continue beyond the
Mandatory Termination Date. Upon termination, the
Trustee will sell the Securities then held in the
Trust and credit the moneys derived from such
sale to the Principal Account and the Interest
Account. The Trustee will then, after deduction
of any fees and expenses of the Trust and payment
into Reserve Account of any amount required for
taxes or other governmental charges that may be
payable by the Trust, distribute to each
Unitholder, upon surrender for cancellation of
this Certificate after due notice of such
termination, such Unitholders pro rata share in
the Interest and Principal Accounts. The sale of
securities in the Trust upon termination may
result in a lower amount than might otherwise be
realized if such sale were not required at such
time. For this reason, among others, the amount
realized by a Unitholder upon termination may be
less than the principal amount of Securities
represented by the Units held by such Unitholder.
SPONSOR
The Sponsor, PaineWebber Incorporated, is a
corporation organized under the laws of the State
of Delaware. The Sponsor is a member firm of the
New York Stock Exchange, Inc. as well as other
major securities and commodities exchanges and is
a member of the National Association of
Securities Dealers, Inc. The Sponsor is engaged
in a security and commodity brokerage business as
well as underwriting and distributing new issues.
The Sponsor also acts as a dealer in unlisted
securities and municipal bonds and, in addition
to participating as a member of various selling
groups or as agent of other investment companies,
executes orders on behalf of investment companies
for the purchase and sale of securities of such
companies and sells securities to such companies
in its capacity as a broker or dealer in
securities.
LEGAL OPINION
The legality of the Units offered hereby has
been passed upon by Orrick, Herrington &
Sutcliffe, 666 Fifth Avenue, New York, New York,
as counsel for the Sponsor.
INDEPENDENT AUDITORS
The financial statements, including the
schedule of investments, of the Trust included in
Part A of this Prospectus have been audited by
Ernst & Young LLP, independent auditors, for the
period indicated in their report appearing
herein. The financial statements audited by Ernst
& Young LLP have been included in reliance on
their report given on their authority as experts
in accounting and auditing.
BOND RATINGS*
Standard & Poor's Corporation
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. The assessment of
creditworthless may take into consideration
obligors such as guarantors, insurers or lessees.
The bond rating is not a recommendation to
purchase or sell a security, inasmuch as it does
not comment as to market price.
The ratings are based on current information
furnished to Standard & Poor's by the Issuer and
obtained by Standard & Poor's from other sources
it considers reliable. The ratings may be
changed, suspended or withdrawn as a result of
changes in, or unavailability of, such
information.
The ratings are based, in varying degrees, on
the following considerations:
I. Likelihood of default-capacity and
willingness of the obligor as to the timely
payment of interest and repayment of principal in
accordance with the terms of the obligation
II. Nature of and provisions of the obligation
III. Protection afforded by, and relative
position of, the obligation in event of
bankruptcy, reorganization or other arrangement
under the laws of bankruptcy and other laws
affecting creditors' rights.
AAA - This is the highest rating assigned by
Standard & Poor's to a debt obligation and
indicates an extremely strong capacity to pay
principal and interest.
AA - Bonds rated AA also have quality as high-
quality debt obligations. Capacity to pay
principal and interest is very strong, and in the
majority of instances they differ from AAA
issuers only in small degree.
A - Bonds rated A have a strong capacity to
pay principal and interest, although they are
somewhat more susceptible to the adverse effects
of changes in circumstances and economic
conditions.
BBB - Bonds rated BBB are regarded as having
an adequate capacity to pay principal and
interest. Whereas they normally exhibit adequate
protection parameters, adverse economic
conditions or changing circumstances are more
likely to lead to a weakened capacity to pay
principal and interest for bonds in this category
than for bonds in the A category.
Plus (+) or Minus (-):To provide more detailed
indications of credit quality, the ratings from
"AA" to "BB" may be modified by the addition of a
plus or minus sign to show relative standing
within the major rating categories.
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.
Moody's Investor Service, Inc.
A brief description of the applicable Moody's
Investors Service, Inc.'s rating symbols and
their meanings is as follows:
Aaa - Bonds which are rated Aaa are judged to
be of the best quality. They carry the smallest
degree of investment risk and are generally
referred to as "gilt edge". Interest payments are
protected by a large or by an exceptionally
stable margin and principal is secure. While the
various protective elements are likely to change,
such changes as can be visualized are most
unlikely to impair the fundamentally strong
position of such issues.
Aa - Bonds which are rated Aa are judged to be
of high quality by all standards. Together with
the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower
than the best bonds because margins of protection
may not be as large as in Aaa securities or
fluctuation of protective elements may be of
greater amplitude or there may be other elements
present which make the long-term risk 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.
___________
*As described by Standard & Poor's
Corporation.
Conditional ratings, indicated by "Con", are
given to bonds for which the security depends
upon the completion of some act on the
fulfillment of some condition. These are bonds
secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned
in operating experience, (c) rentals which begin
when facilities are completed, or (d) payments to
which some other limiting condition attaches. A
parenthetical rating denotes probable credit
stature upon completion of construction or
elimination of basis of condition.
The following summarizes the applicable
designations used by Moody's for short-term notes
and short-term loans:
MIG1 - Loans bearing this designation are of
the best quality, enjoying strong protection from
established cash flows of funds for their
servicing or from established and broad-based
access to the market for refinancing, or both.
MIG2 - Loans bearing this designation are of
high quality, with margins of protection ample
although not so large as the preceding group.
Description of Rating of Units*
A Standard & Poor's Corporation's rating on
the units of an investment trust (hereinafter
referred to collectively as "units" and "fund")
is current assessment of creditworthiness with
respect to the investments held by such fund. The
assessment takes into consideration the financial
capacity of the Issuers and of any guarantors,
issuers, lessees, or mortgagors with respect to
such investments. The assessment, however, does
not take into account the extent to which fund
expenses or Portfolio asset sales for less than
the Fund's purchase price will reduce payment to
the Unitholder of the interest and principal
required to be paid on the Portfolio assets. In
addition, the rating is not a recommendation to
purchase, sell, or hold Units, inasmuch as the
rating does not comment as to market price of the
Units or suitability for a particular investor.
Funds rated "AAA" are composed exclusively of
assets that are rated "AAA", by Standard & Poor's
or have, in the opinion of Standard & Poor's,
credit characteristics comparable to assets that
are rated "AAA", or certain short-term
investments. Standard & Poor's defines its "AAA"
rating for such assets as the highest rating
assigned by Standard & Poor's to a debt
obligation. Capacity to pay interest and repay
principal is very strong. Funds which are
composed of assets that are rated below "AAA" by
Standard & Poor's Corporation do not carry a
Standard & Poor's Corporation rating on their
Units.
___________
*As described by Standard & Poor's Corporation
CONTENTS OF REGISTRATION STATEMENT
This registration statement comprises the following
documents:
The facing sheet.
The Prospectus.
The signatures.
The following exhibits:
EX-99.2 Opinion of Counsel as to legality of securities
being registered
EX-27 Financial Data Schedules
EX-99.C2 Consent of Kenny Information Systems
EX-99.C2 Consent of Standard & Poor's Corporation
EX-99.C1 Consent of Independent Auditors
FINANCIAL STATEMENTS
1. Statement of Condition of the Trust as shown in
the current Prospectus for this series.
2. Financial Statements of the Depositor.
PaineWebber Incorporated - Financial Statements
incorporated by reference to Form 10-k and
Form 10-Q (File No. 1-7367) respectively.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant, The Municipal Bond Trust, Insured Series 38 certifies that
it meets all of the requirements for effectiveness of this Registration
Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this registration statement to be signed on its
behalf by the undersigned thereunto duly authorized, and its seal to
be hereunto affixed and attested, all in the City of New York, and the
State of New York on the 7th day of May, 1996.
THE MUNICIPAL BOND TRUST, INSURED
SERIES 38
(Registrant)
By: PaineWebber Incorporated
(Depositor)
/s/ ROBERT E. HOLLEY
Robert E. Holley
Senior Vice President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed on behalf of PaineWebber
Incorporated, the Depositor, by the following persons in the
following capacities and in the City of New York, and State of New
York, on this 7th day of May, 1996.
PAINEWEBBER INCORPORATED
Name Office
Donald B. Marron Chairman, Chief Executive Officer,
Director & Member of the Executive
Committee *
Regina A. Dolan Senior Vice President, Chief Financial Officer
and Director *
Joseph J. Grano, Jr. President, Retail Sales & Marketing,
Director and Member of the Executive
Committee *
By:/s/ ROBERT E. HOLLEY
Attorney-in-fact*
* Executed copies of the powers of attorney have been filed with the
Securities and Exchange Commission in connection with the Registration
Statement for File No. 33-19786.
May 7, 1996
PaineWebber Incorporated
1200 Harbor Blvd.
Weehawken, New Jersey 07087
Ladies and Gentlemen:
We have served as counsel for PaineWebber Incorporated as
sponsor and depositor (the "Depositor") of The Municipal Bond
Trust, Insured Series 38 (hereinafter referred to as the "Trust"). The
Depositor seeks by means of Post-Effective Amendment No. 9 to
register for reoffering 8,435 Units acquired by the Depositor in the
secondary market (hereinafter referred to as the "Units").
In this regard, we have examined executed originals or copies of the
following:
(a) The Restated Certificate of Incorporation, as amended, and the
By-Laws of the Depositor, as amended;
(b) Resolutions of the Board of Directors of the Depositor adopted on
December 3, 1971 relating to the Trust and the sale of the Units;
(c) Resolutions of the Executive Committee of the Depositor adopted
on September 24, 1984;
(d) Powers of Attorney referred to in the Amendment;
(e) Post-Effective Amendment No. 9 to the Registration Statement on
Form S-6 (File No. 33-10216) to be filed with the Securities and
Exchange Commission (the "Commission") in accordance with
the Securities Act of 1933, as amended, and the rules and
regulations of the Commission promulgated thereunder
(collectively, the "1933 Act") proposed to be filed on or about the
date hereof (the "Amendment");
(f) The Notification of Registration of the Trust filed with the
Commission under the Investment Company Act of 1940, as
amended (collectively, the "1940 Act") on Form N-8A, as
amended;
(g) The registration of the Trust filed with the Commission under the
1940 Act on Form N-8B-2 (File No. 811-2599), as amended;
(h) The prospectus included in the Amendment (the "Prospectus");
(i) The Standard Terms and Conditions of the Trust dated as of
February 8, 1984, as amended, among the Depositor, The Chase Manhattan
Bank, N.A., formerly, United States Trust Company of New York
(the "Trustee"), and Standard & Poor's Corporation and Kenny Information
Systems, a division of J.J. Kenny Co., Inc. (the "Evaluator")
(the "Standard Terms");
(j) The Trust Indenture dated as of the Date of Deposit, among the
Depositor, the Trustee and the Evaluator (the "Trust Indenture"
and, collectively with the Standard Terms, the "Indenture and
Agreement");
(k) The form of certificate of ownership for units (the "Certificate") to
be issued under the Indenture and Agreement; and
(l) Such other pertinent records and documents as we have deemed
necessary.
With your permission, in such examination, we have assumed
the following: (a) the authenticity of original documents and the
genuineness of all signatures; (b) the conformity to the originals of
all documents submitted to us as copies; (c) the truth, accuracy,
and completeness of the information, representations, and warranties
contained in the records, documents, instruments and certificates we
have reviewed; (d) except as specifically covered in the opinions set
forth below, the due authorization, execution, and delivery on behalf
of the respective parties thereto of documents referred to herein and
the legal, valid, and binding effect thereof on such parties; and (e)
the absence of any evidence extrinsic to the provisions of the written
agreement(s) between the parties that the parties intended a
meaning contrary to that expressed by those provisions. However,
we have not examined the securities deposited pursuant to the
Indenture and Agreement (the "Securities") nor the contracts for the
Securities.
We express no opinion as to matters of law in jurisdictions other
than the States of New York and California and the United States,
except to the extent necessary to render the opinion as to the
Depositor in paragraph (i) below with respect to Delaware law. As
you know we are not licensed to practice law in the State of
Delaware, and our opinion in paragraph (i) and (iii) as to Delaware
law is based solely on review of the official statutes of the State of
Delaware.
Based upon such examination, and having regard for legal
considerations which we deem relevant, we are of the opinion that:
(i) The Depositor is a corporation duly organized, validly existing, and
in good standing under the laws of the State of Delaware with full
corporate power to conduct its business as described in the
Prospectus;
(ii) The Depositor is duly qualified as a foreign corporation and is in
good standing as such within the State of New York;
(iii)The terms and provisions of the Units conform in all material
respects to the description thereof contained in the Prospectus;
(iv) The consummation of the transactions contemplated under the
Indenture and Agreement and the fulfillment of the terms thereof
will not be in violation of the Depositor's Restated Certificate of
Incorporation, as amended, or By-Laws, as amended and will not
conflict with any applicable laws or regulations applicable to the
Depositor in effect on the date hereof; and
(v) The Certificates to be issued by the Trust, when duly executed by
the Depositor and the Trustee in accordance with the Indenture
and Agreement, upon delivery against payment therefor as
described in the Prospectus will constitute fractional undivided
interests in the Trust enforceable against the Trust in accordance
with their terms, will be entitled to the benefits of the Indenture
and Agreement and will be fully paid and non-assessable.
Our opinion that any document is valid, binding, or enforceable in
accordance with its terms is qualified as to:
(a) limitations imposed by bankruptcy, insolvency, reorganization,
arrangement, fraudulent conveyance, moratorium, or other laws
relating to or affecting the enforcement of creditors' rights
generally;
(b) rights to indemnification and contribution which may be limited by
applicable law or equitable principles; and
(c) general principles of equity, regardless of whether such
enforceability is considered in a proceeding in equity or at law.
We hereby represent that the Amendment contains no disclosure
which would render it ineligible to become effective immediately
upon filing pursuant to paragraph (b) of Rule 485 of the
Commission.
We hereby consent to the filing of this opinion as an exhibit to
the Amendment and to the use of our name wherever it appears in
the Amendment and the Prospectus.
Very truly yours,
/s/ ORRICK, HERRINGTON & SUTCLIFFE
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<SERIES>
<NUMBER> 38
<NAME> THE MUNICIPAL BOND TRUST INSURED
<MULTIPLIER> 1
<CURRENCY> U.S.Dollars
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> FEB-01-1996 FEB-01-1995 FEB-01-1994
<PERIOD-START> FEB-02-1995 FEB-02-1994 FEB-02-1993
<PERIOD-END> FEB-01-1996 FEB-01-1995 FEB-01-1994
<EXCHANGE-RATE> 1 1 1
<INVESTMENTS-AT-COST> 6,310,163 0 0
<INVESTMENTS-AT-VALUE> 6,696,757 0 0
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<ACCUMULATED-NET-GAINS> 0 0 0
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<INTEREST-INCOME> 452,484 474,588 504,547
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<REALIZED-GAINS-CURRENT> (11,109) (12,890) 61,702
<APPREC-INCREASE-CURRENT> 179,695 (524,864) 269,476
<NET-CHANGE-FROM-OPS> 661,369 (73,837) 825,052
<EQUALIZATION> 0 0 0
<DISTRIBUTIONS-OF-INCOME> 439,742 463,844 491,534
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<SHARES-REINVESTED> 0 0 0
<NET-CHANGE-IN-ASSETS> (309,422) (668,188) (191,463)
<ACCUMULATED-NII-PRIOR> 0 0 0
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<EXPENSE-RATIO> 0 0 0
<AVG-DEBT-OUTSTANDING> 0 0 0
<AVG-DEBT-PER-SHARE> 0 0 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 38
<NAME> THE MUNICIPAL BOND TRUST CALIFORNIA INSURED
<MULTIPLIER> 1
<CURRENCY> U.S.Dollars
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> FEB-01-1996 FEB-01-1995 FEB-01-1994
<PERIOD-START> FEB-02-1995 FEB-02-1994 FEB-02-1993
<PERIOD-END> FEB-01-1996 FEB-01-1995 FEB-01-1994
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<INVESTMENTS-AT-VALUE> 1,902,663 0 0
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</TABLE>
KENNY INFORMATION SYSTEMS
(A Division of J.J. Kenny Co., Inc.)
May 7, 1996,
PaineWebber Incorporated
Unit Trust Department
1200 Harbor Blvd.
Weehawken, New Jersey 07087
RE: THE MUNICIPAL BOND TRUST, INSURED SERIES 38
Gentlemen:
We have examined the post-effective Amendment to the Registration
Statement File No. 33-10216 for the above-captioned trust. We
hereby acknowledge that Kenny Information Systems, a division of
J.J. Kenny Co., Inc. is currently acting as the evaluator for the trust.
We hereby consent to the use in the Amendment of the reference to
Kenny Information Systems, a division of J.J. Kenny Co., Inc. as
evaluator.
In addition, we hereby confirm that the ratings indicated in the
above-referenced Amendment to the Registration Statement for the
respective bonds comprising the trust portfolio are the ratings
currently indicated in our KENNYBASE database.
You are hereby authorized to file a copy of this letter with the
Securities and Exchange Commission.
Sincerely,
/s/ JOHN R. FITZGERALD
John R. Fitzgerald
Senior Vice President
May 7, 1996
Kathleen H. Moriarty
Orrick, Herrington & Sutcliffe
666 Fifth Avenue - 19th Floor
New York, New York 10103
RE: The Municipal Bond Trust, Insured Series 38
We have received the post-effective amendment to the registration
statment SEC file number 33-10216 for the above captioned trust.
Since the portfolio is composed solely of securities covered by bond
insurance policies that insure against default in the payment of
principal and interest on the securities for so long as they remain
outstanding and such policies have been issued by one or more
insurance companies which have been assigned 'AAA' claims paying
ability rating by S&P, we reaffirm the assignment of a 'AAA' rating to
the units of the trust and a 'AA' rating to the securities contained in
the trust.
You have permission to use the name Standard & Poor's
Corporation and the above-assigned ratings in connection with your
dissemination of information relating to these units, provided that it
is understood that the ratings are not "market" ratings nor
recommendations to buy, hold,or sell the units of the trust or the
securities in the trust. Further, it should be understood that the
rating of the units does not take into account the extent to which
fund expenses or portfiolio asset sales for less than the fund's
purchase price will reduce payment to the unitholders of the interest
and principal required to be paid on the portfolio assets. S&P
reserves the right to advise its own clients, subscribers, and the
public of the ratings. S&P relies on the sponsor and its counsel,
accountants, and other experts for the accuracy and completeness
of the information submitted in connection with the ratings. S&P
does not independently verify the truth or accuracy of any such
information.
This letter evidences our consent to the use of the name of Standard
& Poor's Corporation in connection with the rating assigned to the
units in the amendment referred to above. However, this letter
should not be construed as a consent by us, within the meaning of
Section 7 of the Securities Act of 1933, to the use of the name of
Standard and Poor's Corporation in connection with the ratings
assigned to the securities contained in the trust. You are hereby
authorized to file a copy of this letter with the Securities and
Exchange Commission.
We are pleased to have had the opportunity to be of service to you.
If we can be of further help, please do not hesitate to call upon us.
STANDARD AND POOR'S CORPORATION
/S/Vincent S.Orgo
INDEPENDENT AUDITORS' CONSENT
We consent to the reference to our firm under the caption
"Independent Auditors" and to the use of our report dated April 29,
1996, in the Registration Statement and related Prospectus of The
Municipal Bond Trust, Insured Series 38.
/s/ ERNST & YOUNG LLP
New York, New York
May 7, 1996
