<PAGE>
Registration No. 33-2743
S E C U R I T I E S A N D E X C H A N G E C O M M I S
S I O
N
Washington, D.C. 20549
POST-EFFECTIVE AMENDMENT NO. 8
to
F O R M 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:
TAX EXEMPT SECURITIES TRUST,
Insured Series 13
B.
Name of Depositor:
SMITH BARNEY INC.
<TABLE>
<S> <C>
C. Complete address of depositor's principal executive
office:
SMITH BARNEY
INCORPORATED
1345 Avenue of the Americas
New York, New York 10105
D. Name and complete address of agent for service:
STEPHEN J. TREADWAY
Smith Barney
Incorporated
1345 Avenue of the Americas
New York, New York 10105
</TABLE>
It is proposed that this filing will become effective February 20,
1995
pursuant to paragraph (b) of Rule 485.
<PAGE>
TAX EXEMPT SECURITIES TRUST
CROSS-REFERENCE SHEET
Pursuant to Regulation C
under the Securities Act of 1933
(Form N-8B-2 Items required by Instruction
as to the Prospectus in Form S-6)
<TABLE>
Form N-89B-2 Form S-6
Item Number Heading in Prospectus
I. Organization and General Information
<C> <S> <C>
1. . . . . . . . . (a) Name of trust Prospectus front cover
(b) Title of securities issued . .
2.Name and address of each depositor Sponsors: Prospectus back
cover
3. . . . Name and address of trustee Trustee
4.Name and address of each principal underwriterSponsors:
Prospectus back cover
5. . .State of organization of trust Tax Exempt Securities
Trust
6.Execution and termination of trust agreementTax Exempt
Securities Trust - The
Trust:
Amendment and Termination
of the Trust Agreement 7. .
. . . . . . . . Changes of name *
8. . . . . . . . . . . . Fiscal year *
9. . . . . . . . . . . . .Litigation *
II. General Description of the Trust and
Securities of the Trust
10.(a) Registered or bearer securities Rights of Unit Holders
(b) Cumulative or distributive securities
(c) Redemption . . . . . . . . . .
(d) Conversion, transfer, etc. . .
(e) Periodic payment plan. . . . . *
(f) Voting rights. . . . . . . . .
(g) Notice to certificate holders Rights of Unit Holders -
Reports and Records:
Sponsors -
Responsibility: Trustee -
Resignation: Amendment
and Termination of the
Trust Agreement -
Amendment
(h) Consents required. . . . . . . Sponsors - Responsibility:
Amendment and Termination
of the Trust Agreement (i) Other
provisions . . . . . . . Tax Exempt Securities Trust - Tax Status
11.Type of securities comprising units Prospectus front cover:
Tax Exempt Securities
Trust - Portfolio
12.Certain information regarding periodic
payment certificates. . . . . . . *
13.. .(a) Load, fees, expenses, etc. Prospectus front cover:
Summary of Essential
Information; Public
Offering - Offering
Price; Public Offering -
Sponsors' and
Underwriters' Profits:
Tax Exempt Securities
Trust - Expenses and
Charges
<PAGE>
Form N-89B-2 Form S-6
Item Number Heading in Prospectus
II. General Description of the Trust and
Securities of the Trust
<C> <S> <C>
(b) Certain information regarding periodic
payment certificates . . . . *
(c) Certain percentages. . . . . . Public Offering - Offering
Price
(d) Certain other fees, etc, payable by holders
Rights of Unit Holders - Certificates
(e) Certain profits receivable by depositors,
principal underwriters, trustee or
affiliated persons . . . . . . Public Offering - Sponsors'
and Underwriters' Profits:
Rights of Unit Holders -
Redemption of Units -
Purchase by the Sponsors of
Units Tendered for
Redemption
(f) Ratio of annual charges to income*
14.. .Issuance of trust's securities Tax Exempt Securities
Trust - The Trust: Rights
of Unit Holders -
Certificates
15.Receipt and handling of payments from purchasers*
16.Acquisition and disposition of underlying
securities . . . . . . . . . . . . Tax Exempt Securities Trust
- Portfolio: Sponsors -
Responsibility
17.. . . . .Withdrawal or redemption Rights of Unit Holders -
Redemption of Units
18.(a) Receipt, custody and disposition of incomeRights of Units
Holders - Distribution of
Interest and Principal:
Rights of Unit Holders -
Reports and Records
(b) Reinvestment of distributions *
(c) Reserves or special funds. . . Rights of Unit Holders -
Distribution of Interest
and Principal: Tax Exempt
Securities Trust - Expenses
and Charges - Other Charges (d) Schedule of
distributions. . . *
19.. . Records, accounts and reports Rights of Unit Holders -
Reports and Records:
Rights of Unit Holders -
Distribution of Interest
and Principal
20.Certain miscellaneous provisions of trust agreementAmendment
and Termination of the Trust
(a) Amendment. . . . . . . . . . . Agreement: Trustee -
Resignation: Trustee -
(b) Termination . . . . . . . . . Resignation: Trustee -
Limitations on Liability:
(c) and (d) Trustee, removal and successorSponsors -
Responsibility: Sponsors - Resignation
(e) and (f) Depositors, removal and successor
21.. . . . Loans to security holders *
22.. . . . .Limitations on liability Sponsors - Limitations on
Liability: Trustee -
Limitations on Liability:
Tax Exempt Securities
Trust - Portfolio
23.. . . . . . .Bonding arrangements *
24.Other material provisions of trust agreement*
______
* Inapplicable, answer negative or not required.
<PAGE>
<PAGE> Form N-89B-2 Form S-6
Item Number Heading in Prospectus
III. Organization, Personnel and
Affiliated Persons of Depositor
<C> <S> <C>
25.. . . .Organization of depositors Sponsors
26.. . . Fees received by depositors *
27.. . . . . .Business of depositors Sponsors
28.Certain information as to officials and
affiliated persons of depositors [Contents of Registration
Statement]
29.. Voting securities of depositors *
30.. .Persons controlling depositors *
31.Payments by depositor for certain services
rendered to trust . . . . . . . . *
32.Payments by depositors for certain other services
rendered to trust . . . . . . . . *
33.Remuneration of employees of depositors for
certain services rendered to trust *
34.Remuneration of other persons for certain services
rendered to trust . . . . . . . . *
IV. General Description of the Trust and
Securities of the Trust
35.Distribution of trust's securities by statesPublic Offering -
Distribution of Units
36.Suspension of sales of trust's securities*
37.Revocation of authority to distribute*
38.. . . .(a) Method of distribution Public Offering -
Distribution of Units
(b) Underwriting agreements. . . .
(c) Selling agreements . . . . . .
39.(a) Organization of principal underwritersSponsors
(b) N.A.S.D. membership of principal underwriters
40.Certain fees received by principal underwriters*
41.(a) Business of principal underwritersSponsors
(b) Branch offices of principal underwriters*
(c) Salesmen of principal underwriters*
42.Ownership of trust's securities by certain persons*
43.Certain brokerage commissions received by principal
underwriters. . . . . . . . . . . *
44.. . . . . (a) Method of valuation Prospectus front cover:
Public Offering -
Offering Price: Public
Offering - Distribution
of Units
(b) Schedule as to offering price *
(c) Variation in offering price to certain personsPublic
Offering - Distribution of Units
45.. Suspension of redemption rights *
46.. . . . .(a) Redemption Valuation Rights of Unit Holders -
Redemption of Units -
Computation of Redemption
Price per Unit
(b) Schedule as to redemption price *
47.Maintenance of position in underlying securities
Public Offering - Market for Units: Rights of Unit Holders -
Redemption of Units - Purchase by the Sponsors of Units
tendered for Redemption; Rights of Unit Holders - Redemption
of Units - Computation of Redemption Price per Unit
______
* Inapplicable, answer negative or not required.<PAGE>
<PAGE> Form N-89B-2 Form S-6
Item Number Heading in Prospectus
V. Information Concerning the Trustee
or Custodian
<C> <S> <C>
48.Organization and regulation of trusteeTrustee
49.. . .Fees and expenses of trustee Tax Exempt Securities
Trust - Expenses and
Charges
50.. . . . . . . . . .Trustee's lien Tax Exempt Securities
Trust - Expenses and
Charges - Other Charges
VI. Information Concerning Insurance of
Holders of Securities
51.Insurance of holders of trust's securities*
VI. Policy of Registrant
52. (a) Provisions of trust agreement with respect to
selection or elimination of underlying securitiesProspectus
front cover: Sponsors-Responsibility
(b)Transactions involving elimination of
underlying securities . . . . . *
(c)Policy regarding substitution or elimination
of underlying securities. . . . Sponsors - Responsibility
(d)Fundamental policy not otherwise covered*
53. Tax status of trust . . . . . . Prospectus front cover: Tax
Exempt Securities Trust -
Tax Status
VIII. Financial and Statistical Information
54. Trust's securities during last ten years*
55. . . . . . . . . . . . . . . . . *
56. Certain information regarding periodic payment
securities . . . . . . . . . . . . *
57. . . . . . . . . . . . . . . . . *
58. . . . . . . . . . . . . . . . . *
59. Financial statements (Instruction 1(c) to form S-6)
Statement of Financial Condition of The Tax Exempt Securities
Trust
______
* Inapplicable, answer negative or not required.
<PAGE>
</TABLE>
INSURED SERIES 13
[S] [C]
In the opinion of counsel, under existing law interest income to the
Trust and, with certain exceptions, to Unit holders is exempt from
all Federal income tax. In addition, in the opinion of counsel, the
interest income of the California Trust is exempt, to the extent
indicated, from State and local taxes when held by residents of the
state where the issuers of bonds in such Trust are located but the
interest income of the National Trust may be subject to State and
local taxes. Capital gains, if any, are subject to tax. Investors
should read and retain this Prospectus for future reference.
THE INITIAL PUBLIC OFFERING OF UNITS IN THE TRUSTS
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. SEE
PART B, "RIGHTS OF UNIT HOLDERS--REDEMPTION OF
UNITS--PURCHASE BY THE SPONSOR OF UNITS TENDERED
FOR REDEMPTION" AND "MARKET FOR UNITS". THE
PRICE AT WHICH THE UNITS OFFERED HEREBY WERE
ACQUIRED WAS NOT LESS THAN THE REDEMPTION
PRICE DETERMINED AS PROVIDED HEREIN. SEE PART B,
"RIGHTS OF UNIT HOLDERS --REDEMPTION OF UNITS--
COMPUTATION OF REDEMPTION PRICE PER UNIT".
INSURED SERIES 13 consists of 1 underlying separate unit
investment trust (the "Trust") designated as National Trust, each
formed for the purpose of obtaining for its Unit holders tax-exempt
interest income and conservation of capital through investment in a
fixed portfolio of municipal bonds rated at the time of deposit AAA by
Standard & Poor's Corporation, as a result of either the Financial
Guaranty Insurance Company ("Financial Guaranty") insurance on the
bonds or the insurance covering the bonds paid for by the issuers at
their issuance. (See "Portfolio of Securities".) The National Trust is
comprised of a fixed portfolio of interest bearing obligations issued on
behalf of states, counties, territories, possessions and municipalities of
the United States and authorities or political subdivisions thereof.
THE OBJECTIVES of the Insured Series are tax-exempt income and
conservation of capital through an investment in a diversified portfolio
consisting primarily of insured municipal bonds. There is, of course,
no guarantee that the Trusts' objectives will be achieved since the
payment of interest and preservation of principal are dependent upon
the continued ability of the issuers of the bonds to meet such
obligations. The insurance does not protect Unit holders from the risk
that the value of the Units may decline.
INSURANCE has been obtained, guaranteeing the scheduled
payments, when due, of principal and interest on all Bonds in the
portfolio of the Trust either at the cost of the issuer at the time of
issuance or at the cost of the Sponsor at the Date of Deposit. On the
Date of Deposit, the Units of the Trusts were rated "AAA" by
Standard & Poor's Corporation. The Sponsor have been advised that
the basis for the "AAA" rating on the Units of the Trusts was the
"AAA" claims-paying ability rating of the Insurers of the Bonds in
such Trusts. The Sponsor have not sought to confirm the rating on the
Units subsequent to the Date of Deposit. (See Part B "Insurance".)
THE PUBLIC OFFERING PRICE of the Units of the Trust is equal
to the aggregate bid price of the underlying securities in the Trust's
portfolio divided by the number of Units outstanding, plus a sales
charge equal to 5% of the Public Offering Price (5.263% of the
aggregate bid price of the securities per Unit). A proportional share
of accrued and undistributed interest on the securities at the date of
delivery of the Units to the purchaser is also added to the Public
Offering Price.
THE SPONSOR, although not obligated to do so, intend to maintain
a market for the Units of the Trust at prices based upon the aggregate
bid price of the underlying securities, as more fully described in Part
B, "Market for Units". If such a market is not maintained, a Unit
holder may be able to dispose of his Units only through redemption at
prices based upon the aggregate bid price of the underlying securities.
The market value of the underlying securities includes the value
attributable to the insurance on the securities. (See Part B
"Insurance".)
MONTHLY DISTRIBUTIONS of principal and interest received by
the Trust will be made on or shortly after the fifteenth day of each
month to holders of record on the first day of that month. For further
information regarding the distributions by each Trust, see the
"Summary of Essential Information".
THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION,
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Prospectus Part A dated February 20, 1995
Note: Part A of this Prospectus may not be distributed unless
accompanied by Part B.
<PAGE>
<TABLE>TAX EXEMPT SECURITIES TRUST, NATIONAL INSURED SERIES 13
SUMMARY OF ESSENTIAL INFORMATION AS OF NOVEMBER 21, 1994+
Sponsor: SMITH BARNEY INC.
Trustee: UNITED STATES TRUST COMPANY OF NEW YORK
Evaluator: KENNY S&P EVALUATION SERVICES
<S> <C>
Principal Amount of Securities in Trust $7,520,000
Number of Units 8,262
Fractional Undivided Interest in Trust per Unit 1/8,262
Principal Amount of Securities in Trust per Unit $910.19
Public Offering Price per Unit #* $ 945.31
Sales Charge (5% of Public Offering Price)# 47.26
Approximate Redemption and Sponsor's Repurchase
Price per Unit
(per Unit Bid Price of Securities)#** $ 898.05
Calculation of Estimated Net Annual Income per Unit:
Estimated Annual Income per Unit $ 65.50
Estimated Annual Insurance Expense per
Unit .72
Less Estimated Annual Expenses per
Unit 1.53
Estimated Net Annual Income per Unit $63.25
Monthly Income Distribution per Unit $5.27
Daily Rate (360-day basis) of Income Accrual per Unit $
.1756
Estimated Current Return Based on Public Offering
Price# 6.69%
Estimated Long-Term Return# 6.21%
<FN>
#Subject to changes in the prices of the underlying
securities. The aggregate bid price of the securities is determined
on each business day as of the Evaluation Time.
*Plus $14.65 per Unit representing accrued interest and
the net of cash on hand, accrued expenses and amounts
distributable to Unit holders through the expected date of
settlement (five business days after November 21, 1994). (See
"Public Offering--Offering Price".)
**Plus $13.25 per Unit representing accrued interest and
the net of cash on hand, accrued expenses and amounts
distributable to Unit holders of record as of November 21, 1994
on a pro rata basis. (See "Redemption of Units--Computation of
Redemption Price per Unit".)
</TABLE>
Record Dates: The first day of each month
Distribution Dates: The fifteenth day of each month
Evaluation Time: Close of trading on the New York Stock
Exchange (currently 4:00 P.M. New York time)
Date of Deposit and Trust Agreement: December 2, 1986
Mandatory Termination Date: December 31, 2036
Minimum Value of Trust: Trust may be terminated if the value
of the Trust is less than $5,000,000 and must be terminated if the
value of the Trust is less than $2,500,000
Trustee's Annual Fee: $1.16 per $1,000 principal amount of bonds
($8,723 per year on the basis of bonds in the principal amount of
$7,520,000) plus expenses.
Evaluator's Fee: $.30 per bond per evaluation
Percentage of the Portfolio consisting of General Obligation
Bonds: 6%
Number of General Obligation Bonds: 2 Number of issues:
24 Number of States: 15
As of November 21, 1994, 23 (98%) of the Bonds were rated
by Standard & Poor's Corporation (85% being rated AAA, 2%
being rated AA and 11% being rated A) and 1 (2%) was rated
Aaa by Moody's Investors Service. Ratings assigned by the bond
rating services are subject to change from time to time.<PAGE>
<PAGE>
Additional Considerations - Investment in the Trust should be
made with an understanding that the value of the underlying Portfolio
may decline with increases in interest rates. Approximately 10% of
the Bonds in the Trust consist of hospital revenue bonds (including
obligations of health care facilities). Approximately 3% of the Bonds
in the Trust consist of obligations of municipal housing authorities.
Approximately 1% of the Bonds in the Trust consist of bonds which
are subject to the Mortgage Subsidy Bond Tax Act of 1980.
Approximately 51% of the Bonds in the Trust consist of bonds in the
power facilities category. (See Part B, "Tax Exempt Securities Trust-
Portfolio" for a brief summary of additional considerations relating to
certain of these issues.)
+ The percentages referred to in this summary are each computed
on the basis of the aggregate bid price of the Bonds as of November
21, 1994.
<TABLE>
FINANCIAL AND STATISTICAL INFORMATION
Selected data for each Unit outstanding
IncomePrincipal
Units Net AssetDistributions
Distributions
Period Ended Outstanding Value Per UnitPer Unit
Per Unit
<S> <C> <C> <C> <C>
October 31, 1992 8,317 $ 1,034.60$ 68.61 $
4.26
October 31, 1993 8,262 1,042.6568.14 39.35
October 31, 1994 8,262 930.1764.25 41.36
</TABLE>
INDEPENDENT AUDITORS' REPORT
To the Unit Holders, Sponsor and Trustee of
Tax Exempt Securities Trust, National Insured Series 13:
We have audited the accompanying balance sheet of Tax Exempt
Securities Trust, National Insured Series 13, including the portfolio
of securities, as of October 31, 1994, and the related statements of
operations and changes in net assets for each of the years in the
three-year period ended October 31, 1994. These financial
statements are the responsibility of the Trustee (see Note 6). 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 securities owned as of October 31, 1994 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 Tax Exempt
Securities Trust, National Insured Series 13 as of October 31, 1994,
and the results of its operations and changes in its net assets for each
of the years in the three-year period ended October 31, 1994, in
conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
New York, New York
January 9, 1995<PAGE>
<PAGE>
<TABLE>
TAX EXEMPT SECURITIES TRUST, NATIONAL INSURED
SERIES 13
BALANCE SHEET
October 31, 1994
ASSETS
<S> <C>
Investments in tax exempt bonds, at market value
(Cost $7,479,214) (Note 3 to Portfolio of Securities) $7,558,783
Accrued interest 163,414
Total Assets $7,722,197
LIABILITIES AND NET ASSETS
Overdraft payable $ 36,110
Accrued expenses 987
Total Liabilities 37,097
Net Assets (8,262 units of fractional undivided
interest outstanding):
Original cost to investors (Note 1) $ 10,415,979
Less initial underwriting commission (sales charge)
(Note 1) 489,551
9,926,428
Cost of securities sold or redeemed since date
of deposit (December 2, 1986) (2,447,214)
Net unrealized market appreciation 79,569
7,558,783
Undistributed net investment income 126,272
Undistributed proceeds from securities sold or
redeemed 45
Net Assets 7,685,100
Total Liabilities and Net Assets $7,722,197
Net asset value per unit $930.17
STATEMENTS OF OPERATIONS
For the years ended October 31, 1994, 1993 and 1992
1994 1993 1992
<S> <C>
<C> <C>
Investment Income-interest (Note 2) . . . . . . . . . . . . . . . . . . . . . . $ 549,595$
585,551 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
592,707
Less expenses:
Insurance expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,031 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,239 7,353
Trustee's fees and expenses. . . . . . . . . . . . . . . . . . . . . . . .
10,953 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11,397 11,298
Evaluator's fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,223
1,866
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . .
18,984 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,859
20,517
Net investment income. . . . . . . . . . . . . . . . . . . . . . . . . . . 530,611
564,692 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
572,190
Realized and unrealized gain (loss) on investments:
Net realized gain (loss) on securities transactions
(Note 5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(1,299)
54,716 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,782
Net increase (decrease) in unrealized market appreciation (586,078)
340,710 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
108,320
Net gain (loss) on investments . . . . . . . . . . . . . . . . . . . . . . (587,377)
395,426 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
111,102
Net increase (decrease) in net assets resulting from
operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(56,766)$
960,118 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 683,292
The accompanying Notes are an integral part of these statements.
<PAGE>
TAX EXEMPT SECURITIES TRUST, NATIONAL INSURED
SERIES 13
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended October 31, 1994, 1993 and 1992
1994 1993 1992
Operations:
Net investment income. . . . . . . . . . . . . . . . . . . . . . . . . . . $530,611$
564,692 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 572,190
Net realized gain (loss) on securities transactions
(Note 5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(1,299)
54,716 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,782
Net increase (decrease) in unrealized market appreciation (586,078)
340,710 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
108,320
Net increase (decrease) in net assets resulting from
operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (56,766)
960,118 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
683,292
Distributions to Unit Holders:
Net investment income (Note 4) . . . . . . . . . . . . . . . . . . . . . .(530,834)
(566,074) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(572,657)
Proceeds from securities sold or redeemed. . . . . . . . . . . . . . . . . (341,717)
(325,110) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(35,430)
Total Distributions. . . . . . . . . . . . . . . . . . . . . . . . . (872,551)
(891,184) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(608,087)
Unit Redemptions by Unit Holders (Note 3):
Accrued interest at date of redemption . . . . . . . . . . . . . . . . . . -
(678) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (822)
Value of Units at date of redemption . . . . . . . . . . . . . . . . . . . -
(58,633). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(60,032)
Total Redemptions. . . . . . . . . . . . . . . . . . . . . . . . . . -
(59,311). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(60,854)
Increase (decrease) in net assets. . . . . . . . . . . . . . . . . . . . .(929,317)
9,623 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14,351
Net Assets:
Beginning of year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,614,417
8,604,794 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8,590,443
End of year (including undistributed net
investment income of $126,272, $126,495 and
$128,555, respectively). . . . . . . . . . . . . . . . . . . . . . . . . $7,685,100$
8,614,417 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
8,604,794
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) The original cost to the investors represents the aggregate initial
public offering price as of the date of deposit (December 2,
1986), exclusive of accrued interest, computed on the basis of
the aggregate offering price of the securities. The initial
underwriting commission (sales charge) was 4.70% of the
aggregate public offering price (4.932% of the aggregate
offering price of the securities).
(2) Interest income represents interest earned on the Trust's
portfolio and has been recorded on the accrual basis.
(3) 114 Units were redeemed by the Trustee during the three years
ended October 31, 1994 (55 Units being redeemed in 1993 and
59 Units being redeemed in 1992).
(4) Interest received by the Trust is distributed to Unit holders on
the fifteenth day of each month, after deducting applicable
expenses.
(5) The gain (loss) from the sale or redemption of securities is
computed on the basis of average cost of the issue sold or
redeemed.
(6) The Trustee has custody of and responsibility for all accounting
and financial books, records, financial statements and related
data of each Trust and is responsible for establishing and
maintaining a system of internal control directly related to, and
designed to provide reasonable assurance as to the integrity and
reliability of, financial reporting of each Trust. The Trustee is
also responsible for all estimates of expenses and accruals
reflected in each Trust's financial statements. The Evaluator
determines the price for each underlying Bond included in each
Trust's Portfolio of Securities on the basis set forth in Part B,
"Public Offering - Offering Price". Under the Securities Act of
1933, as amended (the "Act"), the Sponsor is deemed to be
issuer of each Trust's Units. As such, the Sponsor has the
responsibility of issuer under the Act with respect to financial
statements of each Trust included in the Registration Statement.
<PAGE>
<TABLE>
TAX EXEMPT SECURITIES TRUST, NATIONAL INSURED
SERIES 13
PORTFOLIO OF SECURITIES - October 31, 1994
Ratings
Redemption Principal
Market
Security Description (1)
Provisions (2) Amount
Value (3)
<S> <C> <C> <C>
Municipality of Anchorage, Alaska,
Senior Lien Refunding Electric
Revenue Bonds, 7.625% due 12/1/2015 AAA 6/1/96 @
102 $ 360,000$382,270
(MBIA Ins.) (Note 4) (p)
City and County of Denver, Colorado,
The Children's Hospital Association
Project, 8.00% due 10/1/2015 AAA 10/1/96 @
101 500,000531,180
(Financial Guaranty Ins.) (Note 4) (p)
City of Alachua, Florida, Utility
Refunding Revenue Bonds, AAA 4/1/96 @
102 250,000258,600
7.80% due 4/1/2016 (AMBAC Ins.) (Note 4) S.F. 4/1/08
@ 100
City of Sanford, Florida,
Water and Sewer Revenue Bonds,
7.875% due 10/1/2011 AAA 10/1/96 @
102 475,000510,449
(AMBAC Ins.) (Note 4) (p)
City of Indianapolis, Indiana, Gas
Utility System Revenue Refunding Bonds,
4.00% due 6/1/2009 AAA --
300,000223,167
(Financial Guaranty Ins.) (Note 4)
4.00% due 6/1/2010 AAA --
150,000109,731
(Financial Guaranty Ins.) (Note 4)
4.00% due 6/1/2008 AAA --
500,000384,345
(Financial Guaranty Ins.) (Note 4)
The Trustees of Indiana University,
Hospital Facilities Revenue Bonds, A+ 1/1/96 @
102 175,000180,911
7.75% due 1/1/2006 S.F. 1/1/01
@ 100
The Turnpike Authority of Kentucky,
Toll Road Revenue Bonds,
8.50% due 7/1/2004 Aaa* 7/1/96 @
102 150,000161,619
S.F. 1/1/99
@ 100
8.50% due 7/1/2004 A 7/1/96 @
102 100,000
107,604
Jefferson Sales Tax District, Jefferson
Parish, Louisiana, Special Sales Tax
Revenue Bonds, 8.00% due 7/1/2005 AAA 7/1/99 @
100 500,000553,590
(BIG Ins.) (Note 4) (p)
Nebraska Public Power District,
Power Supply Revenue Bonds, AAA 1/1/96 @
102 225,000236,047
7.50% due 1/1/2020 (p)
New Jersey Housing and Mortgage Finance
Agency, Home Mortgage Purchase Revenue
Bonds, 7.875% due 10/1/2016 AAA 10/1/96 @
103 50,00052,951
(MBIA Ins.) (Note 4) S.F.
10/1/07 @ 100
A-6
<PAGE>
TAX EXEMPT SECURITIES TRUST, NATIONAL INSURED
SERIES 13
PORTFOLIO OF SECURITIES - October 31, 1994
(Continued)
Ratings
Redemption Principal
Market
Security Description (1)
Provisions (2) Amount
Value (3)
National Trust (cont'd):
City of Farmington, New Mexico,
Utility System Revenue Bonds,
9.75% due 5/15/2013 AAA 5/15/96 @
102 $ 250,000$274,060
(Financial Guaranty Ins.) (Note 4) (p)
South Carolina Public Service Authority
Electric System, Santee Cooper Expansion
Revenue Bonds, 5.75% due 7/1/2017 AA- 11/30/94
@ 101 1/2 145,000128,998
S.F. 7/1/03
@ 100
9.20% due 7/1/2021 (p) AAA 7/1/95 @
103 200,000211,756
Piedmont Municipal Power Agency,
South Carolina, Electric Revenue AAA 1/1/96 @
101 1/2 490,000516,921
Refunding Bonds, 8.00% due 1/1/2023 (p)
Sam Rayburn Municipal Power Agency,
Texas, Power Supply System Revenue AAA --
500,000486,025
Refunding Bonds, 6.00% due 9/1/2010 S.F. 9/1/09
@ 100
(MBIA Ins.) (Note 4)
Dallas County, Texas, Utility and
Reclamation District, Unlimited Ad
Valorem Tax Refunding Bonds,
7.75% due 2/15/2011 AAA 8/15/96 @
100 245,000257,436
(MBIA Ins.) (Note 4) (p)
Houston, Texas, Sewer System Prior
Lien Revenue Bonds, AAA 12/1/96 @
102 500,000542,660
8.20% due 12/1/2015 (p)
Intermountain Power Agency, Utah,
Special Obligation Bonds,
7.25% due 7/1/2017 AAA 7/1/96 @
102 250,000255,783
(Financial Guaranty Ins.) (Note 4) S.F. 1/1/16
@ 100
Chelan County, Washington, Public
Utility District No. 1, Columbia
River-Rock Island Hydro-Electric
System Refunding Revenue Bonds, A+ 11/30/94
@ 102 585,000545,992
6.375% due 6/1/2029 S.F.
11/1/07 @ 100
Wood County, West Virginia, Single
Family Residential Mortgage
Revenue Bonds, 7.20% due 3/1/2011 AAA --
195,000193,863
(Financial Guaranty Ins.) (Note 4) S.F. 3/1/01
@ 100
District of Columbia, General Obligation
Refunding Bonds, 7.875% due 6/1/2006 AAA 6/1/96 @
102 425,000 452,825
(Financial Guaranty Ins.) (Note 4) (p)
$7,520,000$7,558,783
The accompanying Notes are an integral part of this Portfolio.
A-7<PAGE>
<PAGE>
TAX EXEMPT SECURITIES TRUST, NATIONAL INSURED
SERIES 13
PORTFOLIO OF SECURITIES - October 31, 1994
(Continued)
At October 31, 1994 the net unrealized market appreciation of all tax
exempt bonds was comprised of the following:
<S> <C>
Gross unrealized market appreciation $ 157,412
Gross unrealized market depreciation (77,843)
Net unrealized market appreciation $ 79,569
</TABLE>
NOTES TO PORTFOLIO OF SECURITIES:
(1) All Ratings are by Standard & Poor's Corporation, except those
identified by an asterisk (*) which are by Moody's Investors
Service. The meaning of the applicable rating symbols is set
forth in Part B, "Ratings".
(2) There is shown under this heading the year in which each issue
of bonds initially or currently is redeemable and the redemption
price for that year; unless otherwise indicated, each issue
continues to be redeemable at declining prices thereafter, but
not below par. "S.F." indicates a sinking fund has been or will
be established with respect to an issue of bonds. The prices at
which bonds may be redeemed or called prior to maturity may
or may not include a premium and, in certain cases, may be less
than the cost of the bonds to the Trust. Certain bonds in the
portfolio, including bonds not listed as being subject to
redemption provisions, may be redeemed in whole or in part
other than by operation of the stated redemption or sinking
fund provisions under certain unusual or extraordinary
circumstances specified in the instruments setting forth the
terms and provisions of such bonds. For example, see
discussion of obligations of municipal housing authorities under
"Tax Exempt Securities Trust-Portfolio" in Part B.
(3) The market value of securities as of October 31, 1994 was
determined by the Evaluator on the basis of bid prices for the
securities at such date.
(4) Insurance to maturity has been obtained previously from the
listed Insurance Company for these Bonds. The AAA ratings
on these Bonds are based in part on the creditworthiness and
claims-paying ability of the Insurance Company insuring such
Bond to maturity. No premium is payable therefore by the
Trust. All other bonds in the portfolio are insured by the
Portfolio Insurance Policy obtained by the Trust. (See Part B,
"Insurance on the Bonds in the Portfolio of a Trust").
(p) It is anticipated that these bonds will be redeemed prior
to their scheduled maturity, pursuant to a pre-refunding,
as reflected under the column "Redemption Provisions".
A-8
<PAGE>
<PAGE>
<PAGE>
PROSPECTUS-PART B
Note that Part B of the Prospectus may not be distributed
unless accompanied by Part A.
TAX EXEMPT SECURITIES TRUST--INSURED SERIES
The Trusts
Each Trust is one of a series of similar but
separate unit investment trusts created under the laws of the State
of New York by a Trust
Indenture and Agreement and related Reference Trust Agreement,
dated the Date of Deposit (collectively, the "Trust Agreement"),
among Smith Barney Inc. (the "Sponsor"), United States Trust
Company of New York, as Trustee, and J.J. Kenny Co., Inc., as
Evaluator. Each trust containing Bonds of a State for
which such Trust is named (a "State Trust") and each National Trust
and Selected Term Trust is referred to herein as the "Trust" or
"Trusts," unless the context requires otherwise. On the Date of
Deposit the Sponsor deposited with the Trustee interest-bearing
obligations (the "Bonds"), including contracts and
funds (represented by a certified check or checks and/or an
irrevocable letter or letters of credit, issued by a major
commercial bank) for the purchase of certain
such obligations (such Bonds being referred to herein as the
"Securities"). The Trustee thereafter delivered to the Sponsor
registered certificates of beneficial
interest (the "Certificates") representing the units (the "Units")
comprising the entire ownership of each Trust. The initial public
offering of Units in each 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. See
"Rights of Unit Holders--Redemption of Units--Purchase by the
Sponsor of Units Tendered for Redemption" and "Public
Offering--Market for Units".
Objectives
The objectives of a Trust in the Insured Series
are tax-exempt income and conservation of capital through an
investment in a diversified
portfolio of insured municipal bonds. There is, of course, no
guarantee that a Trust's objectives will be achieved since the
payment of interest and the
preservation of principal are dependent upon the continued ability
of the issuers of the bonds or the creditworthiness of the insurers
to meet such obligations. The insurance does not protect Unit
holders from the risk that the value of the
Units may decline before the ratings of the Bonds subsequent to the
Date of Deposit, set forth in Part A - "Portfolio of Securities"
may have declined due to, among other factors (including a decline
<PAGE>
in the creditworthiness of an insurer
in the case of an insured trust which may also result in a decline
in the AAA ratings of the Units of an insured trust), a decline in
the creditworthiness of the issuer of said Bonds.
Portfolio
The following factors, among others, were
considered in selecting Bonds for each Trust: (1) all the Bonds of
the National Trust and the
Selected Term Trust are obligations of the states, counties,
territories, or municipalities of the United States and authorities
or political subdivisions
thereof, so that the interest on them will, in the opinion of
recognized bond counsel to the issuing governmental authorities, be
exempt from Federal income
tax under existing law to the extent described in "Taxes", (2) all
the Bonds deposited in a State Trust are obligations of the State
for which such Trust is named or of the counties, territories or
municipalities of such State, and
authorities or political subdivisions thereof, or of the Territory
of Guam or the Commonwealth of Puerto Rico, so that the interest on
them will, in the opinion
of recognized bond counsel to the issuing governmental authorities,
be exempt from Federal income tax under existing law to the extent
described in "Taxes" and from state income taxes in the state for
which such State Trust is named to
the extent described in Part C - "Tax Exempt Securities Trust -
Taxes," (3) the Bonds are diversified as to purpose of issue and
location of issuer, except in the
case of a State Trust where the Bonds are diversified only as to
purpose of issue, (4) in the opinion of the Sponsor, the Bonds are
fairly valued relative to other bonds of comparable quality and
maturity, and (5) whether insurance guaranteeing the timely
payment, when due, of all principal and interest on the
Bonds was available.
The Bonds in the Portfolio of a Trust were chosen
in part on the basis of their respective maturity dates. The
Selected Term Trust will contain
Bonds which will have a dollar-weighted average portfolio maturity
of more than three years but not more than ten years from the Date
of Deposit. The National Trust or a State Trust not specified as
to term will have a dollar-weighted
average portfolio maturity of more than ten years from the Date of
Deposit. For the actual maturity dates of each of the Bonds
contained in each Trust, see Part A, "Portfolio or Securities". A
sale or other disposition of a Bond by the
Trust prior to the maturity of such Bond may be at a price which
results in a loss to the Trust. The inability of an issuer to pay
the principal amount due upon
the maturity of a Bond would result in a loss to the Trust.
<PAGE>
Additional Considerations Regarding the Trusts
Most of the Bonds in the Portfolio of a State
Trust are subject to redemption prior to their stated maturity date
pursuant to sinking fund or call
provisions. (See Part A-"Portfolio Summary as of Date of Deposit"
for information relating to the particular State Trust described
therein.) In general, a call or redemption provision is more likely
to be exercised when the offering
price valuation of a bond is higher than its call or redemption
price, as it might be in periods of declining interest rates, than
when such price valuation is less
than the bond's call or redemption price. To the extent that a Bond
was deposited in a State Trust at a price higher than the price at
which it is redeemable, redemption will result in a loss of capital
when compared with the
original public offering price of the Units. Conversely, to the
extent that a Bond
was acquired at a price lower than the redemption price, redemption
will result in an increase in capital when compared with the
original public offering price
of the Units. Monthly distributions will generally be reduced by
the amount of the income which would otherwise have been paid with
respect to redeemed
bonds. The Estimated Current Return and Estimated Long-Term Return
of the Units may be affected by such redemptions. Each Portfolio of
Securities in Part A contains a listing of the sinking fund and
call provisions, if any, with respect
to each of the Bonds in a State Trust. Because certain of the Bonds
may from time to time under certain circumstances be sold or
redeemed or will mature in accordance with their terms and the
proceeds from such events will be
distributed to Unit holders and will not be reinvested, no
assurance can be given that a State Trust will retain for any
length of time its present size and
composition. Neither the Sponsor nor the Trustee shall be liable in
any way for any default, failure or defect in any Bond.
The Portfolio of the State Trust may consist of
some Bonds whose current market values were below face value on the
Date of Deposit. A primary reason for the market value of such
Bonds being less than face value at maturity is that the interest
coupons of such Bonds are at lower rates than the
current market interest rate for comparably rated Bonds, even
though at the time of the issuance of such Bonds the interest
coupons thereon represented then
prevailing interest rates on comparably rated Bonds then newly
issued. Bonds selling at market discounts tend to increase in
market value as they approach
maturity when the principal amount is payable. A market discount
tax-exempt Bond held to maturity will have a larger portion of its
total return in the form of taxable ordinary income and less in the
form of tax-exempt income than a
<PAGE>
comparable Bond bearing interest at current market rates. Under the
provisions of the Internal Revenue Code in effect on the date of
this Prospectus any
ordinary income attributable to market discount will be taxable but
will not be realized until maturity, redemption or sale of the
Bonds or Units.
As set forth under "Portfolio Summary as of Date
of Deposit", the State Trust may contain or be concentrated in one
or more of the classifications of Bonds referred to below. A State
Trust is considered to be "concentrated" in a particular category
when the Bonds in that category constitute 25% or more of the
aggregate value of the Portfolio. (See Part A-"Portfolio Summary as
of Date of Deposit" for information relating to the particular
State Trust described therein.) An investment in Units of the State
Trust should be made with an understanding of the risks that these
investments may entail, certain of which are described below.
General Obligation Bonds. Certain of the Bonds in
the Portfolio may be general obligations of a governmental entity
that are secured by the
taxing power of the entity. General obligation bonds are backed by
the issuer's pledge of its full faith, credit and taxing power for
the payment of principal and
interest. However, the taxing power of any governmental entity may
be limited by provisions of state constitutions or laws and an
entity's credit will depend on
many factors, including an erosion of the tax base due to
population declines, natural disasters, declines in the state's
industrial base or inability to attract new
industries, economic limits on the ability to tax without eroding
the tax base and the extent to which the entity relies on Federal
or state aid, access to capital markets or other factors beyond the
entity's control.
As a result of the recent recession's adverse
impact upon both their revenues and expenditures, as well as other
factors, many state and local
governments are confronting deficits and potential deficits which
are the most severe in recent years. Many issuers are facing highly
difficult choices about significant tax increases and/or spending
reductions in order to restore budgetary
balance. Failure to implement these actions on a timely basis could
force the issuers to depend upon market access to finance deficits
or cash flow needs.
In addition, certain of the Bonds in the State
Trust may be obligations of issuers (including California issuers)
who rely in whole or in part
on ad valorem real property taxes as a source of revenue. Certain
proposals, in the form of state legislative proposals or voter
initiatives, to limit ad valorem
real property taxes have been introduced in various states, and an
<PAGE>
amendment to the constitution of the State of California, providing
for strict limitations on
ad valorem real property taxes, has had a significant impact on the
taxing powers of local governments and on the financial conditions
of school districts
and local governments in California. It is not possible at this
time to predict the final impact of such measures, or of similar
future legislative or constitutional
measures, on school districts and local governments or on their
abilities to make future payments on their outstanding debt
obligations.
Industrial Development Revenue Bonds ("IDRs").
IDRs, including pollution control revenue bonds, are tax-exempt
securities issued by states, municipalities, public authorities or
similar entities ("issuers") to finance
the cost of acquiring, constructing or improving various projects,
including pollution control facilities and certain industrial
development facilities. These
projects are usually operated by corporate entities. IDRs are not
general obligations of governmental entities backed by their taxing
power. Issuers are only obligated to pay amounts due on the IDRs to
the extent that funds are
available from the unexpended proceeds of the IDRs or receipts or
revenues of the issuer under arrangements between the issuer and
the corporate operator of a project. These arrangements may be in
the form of a lease, installment sale
agreement, conditional sale agreement or loan agreement, but in
each case the payments to the issuer are designed to be sufficient
to meet the payments of amounts due on the IDRs.
IDRs are generally issued under bond resolutions,
agreements or trust indentures pursuant to which the revenues and
receipts payable under the
issuer's arrangements with the corporate operator of a particular
project have been assigned and pledged to the holders of the IDRs
or a trustee for the benefit
of the holders of the IDRs. In certain cases, a mortgage on the
underlying project has been assigned to the holders of the IDRs or
a trustee as additional
security for the IDRs. In addition, IDRs are frequently directly
guaranteed by the corporate operator of the project or by another
affiliated company.
Regardless of the structure, payment of IDRs is solely dependent
upon the creditworthiness of the corporate operator of the project
or corporate guarantor. Corporate operators or guarantors that are
industrial companies may be affected
by many factors which may have an adverse impact on the credit
quality of the particular company or industry. These include
cyclicality of revenues and
earnings, regulatory and environmental restrictions, litigation
resulting from accidents or environmentally-caused illnesses,
extensive competition (including that of low-cost foreign
<PAGE>
companies), unfunded pension fund liabilities or
off-balance sheet items, and financial deterioration resulting from
leveraged buy-outs or takeovers. However, certain of the IDRs in
the Portfolio may be additionally insured or secured by letters of
credit issued by banks or otherwise
guaranteed or secured to cover amounts due on the IDRs in the event
of default in payment by an issuer.
Hospital and Health Care Facility Bonds. The
ability of hospitals and other health care facilities to meet their
obligations with respect to revenue
bonds issued on their behalf is dependent on various factors,
including the level of payments received from private third-party
payors and government programs
and the cost of providing health care services.
A significant portion of the revenues of hospitals
and other health care facilities is derived from private
third-party payors and government
programs, including the Medicare and Medicaid programs. Both
private third-party payors and government programs have undertaken
cost containment measures designed to limit payments made to health
care facilities. Furthermore,
government programs are subject to statutory and regulatory
changes, retroactive rate adjustments, administrative rulings and
government funding restrictions, all
of which may materially decrease the rate of program payments for
health care facilities. There can be no assurance that payments
under governmental programs will remain at levels comparable to
present levels or will, in the
future, be sufficient to cover the costs allocable to patients
participating in such programs. In addition, there can be no
assurance that a particular hospital or other health care facility
will continue to meet the requirements for participation in such
programs.
The costs of providing health care services are
subject to increase as a result of, among other factors, changes in
medical technology and increased labor costs. In addition, health
care facility construction and operation
is subject to federal, state and local regulation relating to the
adequacy of medical care, equipment, personnel, operating policies
and procedures, rate-setting, and compliance with building codes
and environmental laws. Facilities are subject to periodic
inspection by governmental and other authorities
to assure continued compliance with the various standards necessary
for licensing and accreditation. These regulatory requirements are
subject to change and, to comply, it may be necessary for a
hospital or other health care facility
to incur substantial capital expenditures or increased operating
expenses to effect changes in its facilities, equipment, personnel
and services.
<PAGE>
Hospitals and other health care facilities are
subject to claims and legal actions by patients and others in the
ordinary course of business.
Although these claims are generally covered by insurance, there can
be no assurance that a claim will not exceed the insurance coverage
of a health care facility or that insurance coverage will be
available to a facility. In addition, a
substantial increase in the cost of insurance could adversely
affect the results of operations of a hospital or other health care
facility. The Clinton Administration
may impose regulations which could limit price increases for
hospitals or the level of reimbursements for third-party payors or
other measures to reduce
health care costs and make health care available to more
individuals, which
would reduce profits for hospitals. Some states, such as New
Jersey, have significantly changed their reimbursement systems. If
a hospital cannot adjust to the new system by reducing expenses or
raising rates, financial difficulties may arise. Also, Blue Cross
has denied reimbursement for some hospitals for services other than
emergency room services. The lost volume would reduce revenues
unless replacement patients were found.
Certain hospital bonds may provide for redemption
at par at any time upon the sale by the issuer of the hospital
facilities to a non-affiliated
entity, if the hospital becomes subject to ad valorem taxation, or
in various other circumstances. For example, certain hospitals may
have the right to call bonds
at par if the hospital may be legally required because of the bonds
to perform procedures against specified religious principles or to
disclose information that
is considered confidential or privileged. Certain FHA-insured bonds
may provide that all or a portion of these bonds, otherwise
callable at a premium, can be
called at par in certain circumstances. If a hospital defaults upon
a bond obligation, the realization of Medicare and Medicaid
receivables may be uncertain and, if the bond obligation is secured
by the hospital facilities, legal
restrictions on the ability to foreclose upon the facilities and
the limited alternative uses to which a hospital can be put may
severely reduce its collateral value.
The Internal Revenue Service is currently engaged
in a program of intensive audits of certain large tax-exempt
hospital and health care facility
organizations. Although these audits have not yet been completed,
it has been reported that the tax-exempt status of some of these
organizations may be revoked. At this time, it is uncertain whether
any of the hospital and health care facility bonds held by the
State Trust will be affected by such audit proceedings.
<PAGE>
Single Family and Multi-Family Housing Bonds.
Multi-family housing revenue
bonds and single family mortgage revenue bonds are state and local
housing issues that have been issued to provide financing for
various housing projects. Multi-family housing revenue bonds are
payable primarily from the revenues
derived from mortgage loans to housing projects for low to moderate
income families. Single-family mortgage revenue bonds are issued
for the purpose of acquiring from originating financial
institutions notes secured by mortgages on residences.
Housing obligations are not general obligations of
the issuer although certain obligations may be supported to some
degree by Federal, state or local
housing subsidy programs. Budgetary constraints experienced by
these programs as well as the failure by a state or local housing
issuer to satisfy the
qualifications required for coverage under these programs or any
legal or administrative determinations that the coverage of these
programs is not available to a housing issuer, probably will result
in a decrease or elimination
of subsidies available for payment of amounts due on the issuer's
obligations. The ability of housing issuers to make debt service
payments on their obligations
will also be affected by various economic and non-economic
developments including, among other things, the achievement and
maintenance of sufficient occupancy levels and adequate rental
income in multi-family projects, the rate
of default on mortgage loans underlying single family issues and
the ability of mortgage insurers to pay claims, employment and
income conditions prevailing in local markets, increases in
construction costs, taxes, utility costs and other operating
expenses, the managerial ability of project managers, changes in
laws and governmental regulations and economic trends generally in
the localities in which the projects are situated. Occupancy of
multi-family housing projects may also be adversely affected by
high rent levels and income limitations imposed
under Federal, state or local programs.
All single family mortgage revenue bonds and
certain multi-family housing revenue bonds are prepayable over the
life of the underlying mortgage or mortgage pool, and therefore the
average life of housing obligations cannot be determined. However,
the average life of these obligations
will ordinarily be less than their stated maturities. Single-family
issues are subject to mandatory redemption in whole or in part from
prepayments on underlying mortgage loans; mortgage loans are
frequently partially or completely
prepaid prior to their final stated maturities as a result of
events such as declining interest rates, sale of the mortgaged
premises, default, condemnation or casualty loss. Multi-family
issues are characterized by mandatory redemption
at par upon the occurrence of monetary defaults or breaches of
<PAGE>
covenants by the project operator. Additionally, housing
obligations are generally subject to
mandatory partial redemption at par to the extent that proceeds
from the sale of the obligations are not allocated within a stated
period (which may be within a
year of the date of issue). To the extent that these obligations
were valued at a premium when a Holder purchased Units, any
prepayment at par would result
in a loss of capital to the Holder and, in any event, reduce the
amount of income that would otherwise have been paid to Holders.
The tax exemption for certain housing revenue
bonds depends on qualification under Section 143 of the Internal
Revenue Code of 1986, as
amended (the "Code"), in the case of single family mortgage revenue
bonds or Section 142(a)(7) of the Code or other provisions of
Federal law in the case of certain multi-family housing revenue
bonds (including Section 8 assisted bonds).
These sections of the Code or other provisions of Federal law
contain certain ongoing requirements, including requirements
relating to the cost and location
of the residences financed with the proceeds of the single family
mortgage revenue bonds and the income levels of tenants of the
rental projects financed
with the proceeds of the multi-family housing revenue bonds. While
the issuers of the bonds and other parties, including the
originators and servicers of the
single-family mortgages and the owners of the rental projects
financed with the multi-family housing revenue bonds, generally
covenant to meet these ongoing
requirements and generally agree to institute procedures designed
to ensure that these requirements are met, there can be no
assurance that these ongoing
requirements will be consistently met. The failure to meet these
requirements could cause the interest on the bonds to become
taxable, possibly retroactively
to the date of issuance, thereby reducing the value of the bonds,
subjecting the Holders to unanticipated tax liabilities and
possibly requiring the Trustee to sell
the bonds at reduced values. Furthermore, any failure to meet these
ongoing requirements might not constitute an event of default under
the applicable mortgage or permit the holder to accelerate payment
of the bond or require the issuer to redeem the bond. In any event,
where the mortgage is insured by the
Federal Housing Administration, its consent may be required before
insurance proceeds would become payable to redeem the mortgage
bonds.
Power Facility Bonds. The ability of utilities to
meet their obligations with respect to revenue bonds issued on
their behalf is dependent on various factors,
including the rates they may charge their customers, the demand for
a utility's services and the cost of providing those services.
<PAGE>
Utilities, in particular investor-owned utilities, are subject to
extensive regulations relating to the rates
which they may charge customers. Utilities can experience
regulatory, political and consumer resistance to rate increases.
Utilities engaged in long-term capital
projects are especially sensitive to regulatory lags in granting
rate increases. Any difficulty in obtaining timely and adequate
rate increases could adversely affect a utility's results of
operations.
The demand for a utility's services is influenced
by, amoung other factors, competition, weather conditions and
economic conditions. Electric utilities, for
example, have experienced increased competition as a result of the
availability of other energy sources, the effects of conservation
on the use of electricity, self-generation by industrial customers
and the generation of electricity by
co-generators and other independent power producers. Also,
increased competition will result if federal regulators determine
that utilities must open their transmission lines to competitors.
Utilities which distribute natural gas also are subject to
competition from alternative fuels, including fuel oil, propane and
coal.
The utility industry is an increasing cost
business making the cost of generating electricity more expensive
and heightening its sensitivity to
regulation. A utility's costs are influenced by the utility's cost
of capital, the availability and cost of fuel and other factors. In
addition, natural gas pipeline and distribution companies have
incurred increased costs as a result of long-term
natural gas purchase contracts containing "take or pay" provisions
which require that they pay for natural gas even if natural gas is
not taken by them. There can
be no assurance that a utility will be able to pass on these
increased costs to customers through increased rates. Utilities
incur substantial capital expenditures
for plant and equipment. In the future they will also incur
increasing capital and
operating expenses to comply with environmental legislation such as
the Clean Air Act of 1990, and other energy, licensing and other
laws and regulations relating to, among other things, air
emissions, the quality of drinking water,
waste water discharge, solid and hazardous substance handling and
disposal, and siting and licensing of facilities. Environmental
legislation and regulations are
changing rapidly and are the subject of current public policy
debate and legislative proposals. It is increasingly likely that
some or many utilities will be
subject to more stringent environmental standards in the future
that could result in significant capital expenditures. Future
legislation and regulation could include, among other things,
regulation of so-called electromagnetic fields
<PAGE>
associated with electric transmission and distribution lines as
well as emissions of carbon dioxide and other so-called greenhouse
gases associated with the
burning of fossil fuels. Compliance with these requirements may
limit a utility's operations or require substantial investments in
new equipment and, as a result, may adversely affect a utility's
results of operations.
The electric utility industry in general is
subject to various external factors including (a) the effects of
inflation upon the costs of operation
and construction, (b) substantially increased capital outlays and
longer construction periods for larger and more complex new
generating units, (c) uncertainties in predicting future load
requirements, (d) increased financing requirements coupled with
limited availability of capital, (e)
exposure to cancellation and penalty charges on new generating
units under construction, (f) problems of cost and availability of
fuel, (g) compliance with rapidly changing and complex
environmental, safety and licensing requirements,
(h) litigation and proposed legislation designed to delay or
prevent construction
of generating and other facilities, (i) the uncertain effects of
conservation on the use of electric energy, (j) uncertainties
associated with the development of a
national energy policy, (k) regulatory, political and consumer
resistance to rate increases and (l) increased competition as a
result of the availability of other
energy sources. These factors may delay the construction and
increase the cost of new facilities, limit the use of, or
necessitate costly modifications to, existing
facilities, impair the access of electric utilities to credit
markets, or substantially increase the cost of credit for electric
generating facilities. The Sponsor cannot predict at this time the
ultimate effect of such factors on the ability of any issuers to
meet their obligations with respect to Bonds.
The National Energy Policy Act ("NEPA"), which
became law in October, 1992, makes it mandatory for a utility to
permit non-utility generators of electricity access to its
transmission system for wholesale
customers, thereby increasing competition for electric utilities.
NEPA also mandated demand-side management policies to be considered
by utilities. NEPA prohibits the Federal Energy Regulatory
Commission from mandating electric
utilities to engage in retail wheeling, which is competition among
suppliers of electric generation to provide electricity to retail
customers (particularly industrial retail customers) of a utility.
However, under NEPA, a state can mandate retail wheeling under
certain conditions.
<PAGE>
There is concern by the public, the scientific
community, and the U.S. Congress regarding environmental damage
resulting from the use of
fossil fuels. Congressional support for the increased regulation of
air, water, and soil contaminants is building and there are a
number of pending or recently
enacted legislative proposals which may affect the electric utility
industry. In particular, on November 15, 1990, legislation was
signed into law that
substantially revises the Clean Air Act (the "1990 Amendments").
The 1990 Amendments seek to improve the ambient air quality
throughout the United States by the year 2000. A main feature of
the 1990 Amendments is the reduction of sulphur dioxide and
nitrogen oxide emissions caused by electric
utility power plants, particularly those fueled by coal. Under the
1990 Amendments the U.S. Environmental Protection Agency ("EPA")
must develop limits for nitrogen oxide emissions by 1993. The
sulphur dioxide reduction will
be achieved in two phases. Phase I addresses specific generating
units named in the 1990 Amendments. In Phase II the total U.S.
emissions will be capped at
8.9 million tons by the year 2000. The 1990 Amendments contain
provisions for allocating allowances to power plants based on
historical or calculated levels. An allowance is defined as the
authorization to emit one ton of sulphur dioxide.
The 1990 Amendments also provide for possible
further regulation of toxic air emissions from electric generating
units pending the results of several federal government studies to
be conducted over the next three
to four years with respect to anticipated hazards to public
health, available corrective technologies, and mercury toxicity.
Electric utilities which own or operate nuclear
power plants are exposed to risks inherent in the nuclear industry.
These risks include exposure
to new requirements resulting from extensive federal and state
regulatory oversight, public controversy, decomissioning costs, and
spent fuel and radioactive waste disposal issues. While nuclear
power construction risks are no
longer of paramount concern, the emerging issue is radioactive
waste disposal. In addition, nuclear plants typically require
substantial capital additions and
modifications throughout their operating lives to meet safety,
environmental, operational and regulatory requirements and to
replace and upgrade various plant
systems. The high degree of regulatory monitoring and controls
imposed on nuclear plants could cause a plant to be out of service
or on limited service for long periods. When a nuclear facility
owned by an investor-owned utility or a state or local municipality
is out of service or operating on a limited service
basis, the utility operator or its owners may be liable for the
recovery of replacement power costs. Risks of substantial liability
<PAGE>
also arise from the operation of nuclear facilities and from the
use, handling, and possible
radioactive emissions associated with nuclear fuel. Insurance may
not cover all types or amounts of loss which may be experienced in
connection with the ownership and operation of a nuclear plant and
severe financial consequences
could result from a significant accident or occurrence. The Nuclear
Regulatory Commission has promulgated regulations mandating the
establishment of funded
reserves to assure financial capability for the eventual
decommissioning of licensed nuclear facilities. These funds are to
be accrued from revenues in amounts currently estimated to be
sufficient to pay for decommissioning costs.
The ability of state and local joint action power
agencies to make payments on bonds they have issued is dependent in
large part on payments made to them pursuant to power supply or
similar agreements. Courts
in Washington, Oregon and Idaho have held that certain agreements
between the Washington Public Power Supply System ("WPPSS") and the
WPPSS participants are unenforceable because the participants did
not have the authority to enter into the agreements. While these
decisions are not specifically applicable to agreements entered
into by public entities in other states, they may cause a
reexamination of the legal structure and economic viability of
certain projects financed by joint power agencies, which might
exacerbate some of the problems
referred to above and possibly lead to legal proceedings
questioning the enforceability of agreements upon which payment of
these bonds may depend.
Water and Sewer Revenue Bonds. Water and sewer
bonds are generally payable from user fees. The ability of state
and local water and sewer
authorities to meet their obligations may be affected by failure of
municipalities to utilize fully the facilities constructed by these
authorities, economic or
population decline and resulting decline in revenue from user
charges, rising construction and maintenance costs and delays in
construction of facilities,
impact of environmental requirements, failure or inability to raise
user charges in response to increased costs, the difficulty of
obtaining or discovering new supplies of fresh water, the effect of
conservation programs and the impact of "no growth" zoning
ordinances. In some cases this ability may be affected by the
continued availability of Federal and state financial assistance
and of municipal bond insurance for future bond issues.
University and College Bonds. The ability of
universities and colleges to meet their obligations is dependent
upon various factors, including
the size and diversity of their sources of revenues, enrollment,
reputation, management expertise, the availability and restrictions
<PAGE>
on the use of endowments and other funds, the quality and
maintenance costs of campus facilities, and, in
the case of public institutions, the financial condition of the
relevant state or other governmental entity and its policies with
respect to education. The institution's ability to maintain
enrollment levels will depend on such factors as
tuition costs, demographic trends, geographic location, geographic
diversity and quality of the student body, quality of the faculty
and the diversity of program offerings.
Legislative or regulatory action in the future at
the Federal, state or local level may directly or indirectly affect
eligibility standards or reduce or
eliminate the availability of funds for certain types of student
loans or grant programs, including student aid, research grants and
work-study programs, and may affect indirect assistance for
education.
Lease Rental Bonds. Lease rental bonds are issued
for the most part by governmental authorities that have no taxing
power or other means of
directly raising revenues. Rather, the authorities are financing
vehicles created solely for the construction of buildings
(administrative offices, convention
centers and prisons, for example) or the purchase of equipment
(police cars and computer systems, for example) that will be used
by a state or local government (the "lessee"). Thus, the bonds are
subject to the ability and willingness of the lessee government to
meet its lease rental payments which include debt service on the
bonds. Willingness to pay may be subject to changes in the views of
citizens and government officials as to the essential nature of the
finance project. Lease rental bonds are subject, in almost all
cases, to the annual appropriation
risk, i.e., the lessee government is not legally obligated to
budget and appropriate for the rental payments beyond the current
fiscal year. These bonds are also subject to the risk of abatement
in many states-rental bonds cease in the
event that damage, destruction or condemnation of the project
prevents its use by the lessee. (In these cases, insurance
provisions and reserve funds designed
to alleviate this risk become important credit factors). In the
event of default by the lessee government, there may be significant
legal and/or practical difficulties
involved in the reletting or sale of the project. Some of these
issues, particularly those for equipment purchase, contain the
so-called "substitution safeguard",
which bars the lessee government, in the event it defaults on its
rental payments, from the purchase or use of similar equipment for
a certain period of time. This
safeguard is designed to insure that the lessee government will
appropriate the necessary funds even though it is not legally
obligated to do so, but its legality
remains untested in most, if not all, states.
<PAGE>
Capital Improvement Facility Bonds. The Portfolio
of a State Trust may contain Bonds which are in the capital
improvement facilities category. Capital improvement bonds are
bonds issued to provide funds to assist
political subdivisions or agencies of a state through acquisition
of the underlying debt of a state or local political subdivision or
agency which bonds are secured by the proceeds of the sale of the
bonds, proceeds from investments and the indebtedness of a local
political subdivision or agency. The risks of an investment in such
bonds include the risk of possible prepayment or failure of payment
of proceeds on and default of the underlying debt.
Solid Waste Disposal Bonds. Bonds issued for solid
waste disposal facilities are generally payable from tipping fees
and from revenues that may be earned by the facility on the sale of
electrical energy generated in the
combustion of waste products. The ability of solid waste disposal
facilities to meet their obligations depends upon the continued use
of the facility, the successful and efficient operation of the
facility and, in the case of
waste-to-energy facilities, the continued ability of the facility
to generate electricity on a commercial basis. All of these factors
may be affected by a failure of municipalities to fully utilize the
facilities, an insufficient supply of
waste for disposal due to economic or population decline, rising
construction and maintenance costs, any delays in construction of
facilities, lower-cost alternative
modes of waste processing and changes in environmental regulations.
Because of the relatively short history of this type of financing,
there may be technological risks involved in the satisfactory
construction or operation of the
projects exceeding those associated with most municipal enterprise
projects. Increasing environmental regulation on the federal, state
and local level has a
significant impact on waste disposal facilities. While regulation
requires more waste producers to use waste disposal facilities, it
also imposes significant costs
on the facilities. These costs include compliance with frequently
changing and complex regulatory requirements, the cost of obtaining
construction and operating permits, the cost of conforming to
prescribed and changing equipment
standards and required methods of operation and, for incinerators
or waste-to-energy facilities, the cost of disposing of the waste
residue that
remains after the disposal process in an environmentally safe
manner. In addition, waste disposal facilities frequently face
substantial opposition by
environmental groups and officials to their location and operation,
to the possible adverse effects upon the public health and the
environment that may be caused
by wastes disposed of at the facilities and to alleged improper
operating procedures. Waste disposal facilities benefit from laws
which require waste to be disposed of in a certain manner but any
relaxation of these laws could cause
a decline in demand for the facilities' services. Finally,
waste-to-energy facilities are concerned with many of the same
issues facing utilities insofar as they derive
revenues from the sale of energy to local power utilities (see
Power Facility Bonds above).
Moral Obligation Bonds. The State Trust may also
include "moral obligation" bonds. If an issuer of moral obligation
bonds is unable to meet its obligations, the repayment of the bonds
becomes a moral commitment but not a legal obligation of the state
or municipality in question. Even though the state may be called on
to restore any deficits in capital reserve funds of the
agencies or authorities which issued the bonds, any restoration
generally requires appropriation by the state legislature and
accordingly does not constitute a legally enforceable obligation or
debt of the state. The agencies or authorities generally have no
taxing power.
Refunded Bonds. Refunded Bonds are typically
secured by direct obligations of the U.S. Government, or in some
cases obligations
guaranteed by the U.S. Government, placed in an escrow account
maintained by an independent trustee until maturity or a
predetermined redemption date. These
obligations are generally noncallable prior to maturity or the
predetermined redemption date. In a few isolated instances to date,
however, bonds which were thought to be escrowed to maturity have
been called for redemption prior to maturity.
Airport, Port and Highway Revenue Bonds. Certain
facility revenue bonds are payable from and secured by the revenues
from the ownership and operation of particular facilities, such as
airports (including airport terminals and maintenance facilities),
bridges, marine terminals,
turnpikes and port authorities. For example, the major portion of
gross airport operating income is generally derived from fees
received from signatory airlines
pursuant to use agreements which consist of annual payments for
airport use, occupancy of certain terminal space, facilities,
service fees, concessions and
leases. Airport operating income may therefore be affected by the
ability of the airlines to meet their obligations under the use
agreements. The air transport
industry is experiencing significant variations in earnings and
traffic, due to increased competition, excess capacity, increased
aviation fuel costs, deregulation, traffic constraints, the recent
recession and other factors. As a
result, several airlines are experiencing severe financial
difficulties. Several airlines including America West Airlines have
sought protection from their
creditors under Chapter 11 of the Bankruptcy Code. In addition,
other airlines such as Midway Airlines, Inc., Eastern Airlines,
Inc. and Pan American Corporation have been liquidated. However,
<PAGE>
within the past few months Northwest Airlines, Continental Airlines
and Trans World Airlines have emerged from bankruptcy. The Sponsor
cannot predict what effect these industry conditions may have on
airport revenues which are dependent for payment on the financial
condition of the airlines and their usage of the particular airport
facility.
Similarly, payment on bonds related to other
facilities is dependent on revenues from the projects, such as use
fees from ports, tolls on turnpikes and bridges and rents from
buildings. Therefore, payment may be adversely affected by
reduction in revenues due to such factors and increased cost of
maintenance or decreased use of a facility, lower cost of
alternative modes of transportation or scarcity of fuel and
reduction or loss of rents.
Special Tax Bonds. Special tax bonds are payable
from and secured by the revenues derived by a municipality from a
particular tax such as a tax on the rental of a hotel room, on the
purchase of food and beverages,
on the rental of automobiles or on the consumption of liquor.
Special tax bonds are not secured by the general tax revenues of
the municipality, and they do not
represent general obligations of the municipality. Therefore,
payment on special tax bonds may be adversely affected by a
reduction in revenues realized from
the underlying special tax due to a general decline in the local
economy or population or due to a decline in the consumption, use
or cost of the goods and services that are subject to taxation.
Also, should spending on the particular goods or services that are
subject to the special tax decline, the municipality may be under
no obligation to increase the rate of the special tax to ensure
that sufficient revenues are raised from the shrinking taxable
base.
Tax Allocation Bonds. Tax allocation bonds are
typically secured by incremental tax revenues collected on property
within the areas where redevelopment projects, financed by bond
proceeds are located ("project
areas"). Such payments are expected to be made from projected
increases in tax revenues derived from higher assessed values of
property resulting from
development in the particular project area and not from an increase
in tax rates. Special risk considerations include: reduction of, or
a less than anticipated
increase in, taxable values of property in the project area, caused
either by economic factors beyond the Issuer's control (such as a
relocation out of the project area by one or more major property
owners) or by destruction of property due to natural or other
disasters; successful appeals by property owners of assessed
valuations; substantial delinquencies in the payment of property
taxes; or imposition of any constitutional or legislative property
tax rate decrease.
<PAGE>
Transit Authority Bonds. Mass transit is generally
not self-supporting from fare revenues. Therefore, additional
financial resources must be made available to ensure operation of
mass transit systems as well as the timely payment of debt service.
Often such financial resources include Federal and state subsidies,
lease rentals paid by funds of the state or local government or a
pledge of a special tax such as a sales tax or a property tax. If
fare revenues or the additional financial resources do not increase
appropriately to pay for rising operating expenses, the ability of
the issuer to adequately service the debt may be adversely
affected.
Convention Facility Bonds. The Portfolio of a
State Trust may contain Bonds of issuers in the convention
facilities category. Bonds in the
convention facilities category include special limited obligation
securities issued to finance convention and sports facilities
payable from rental payments and annual governmental
appropriations. The governmental agency is not obligated to make
payments in any year in which the monies have not been appropriated
to make such payments. In addition, these facilities are limited
use facilities that may not be used for purposes other than as
convention centers or sports facilities.
Puerto Rico. The Portfolio may contain bonds of
issuers which will be affected by general economic conditions in
Puerto Rico. Puerto Rico's unemployment rate remains significantly
higher than the U.S. unemployment rate. Furthermore, the economy is
largely dependent for its development upon U.S. policies and
programs that are being reviewed and may be eliminated.
The Puerto Rican economy is affected by a number
of Commonwealth and Federal investment incentive programs. For
example, Section 936 of the Internal Revenue Code (the "Code")
provides for a credit against Federal income taxes for U.S.
companies operating on the island if
certain requirements are met. The Omnibus Budget Reconciliation Act
of 1993 imposes limits on such credit, effective for tax years
beginning after 1993. In addition, from time to time proposals are
introduced in Congress which, if
enacted into law, would eliminate some or all of the benefits of
Section 936. Although no assessment can be made at this time of the
precise effect of such limitation, it is expected that the
limitation of Section 936 credits would have a
negative impact on Puerto Rico's economy.
Aid for Puerto Rico's economy has traditionally
depended heavily on Federal programs, and current Federal budgetary
policies suggest that an expansion of aid to Puerto Rico is
unlikely. An adverse effect on the Puerto
Rican economy could result from other U.S. policies, including a
reduction of tax benefits for distilled products, further reduction
in transfer payment programs such as food stamps, curtailment of
<PAGE>
military spending and policies which could lead to a stronger
dollar.
In a plebiscite held in November, 1993, the Puerto
Rican electorate chose to continue Puerto Rico's Commonwealth
status. Previously proposed legislation, which was not enacted,
would have preserved the federal
tax exempt status of the outstanding debts of Puerto Rico and its
public corporations regardless of the outcome of the referendum, to
the extent that similar obligations issued by states are so treated
and subject to the provisions
of the Code currently in effect. There can be no assurance that any
pending or future legislation finally enacted will include the same
or similar protection
against loss of tax exemption. The November 1993 plebiscite can be
expected to have both direct and indirect consequences on such
matters as the basic
characteristics of future Puerto Rico debt obligations, the markets
for these obligations, and the types, levels and quality of revenue
sources pledged for the
payment of existing and future debt obligations. Such possible
consequences include, without limitation, legislative proposals
seeking restoration of the status of Section 936 benefits otherwise
subject to the limitations discussed above.
However, no assessment can be made at this time of the economic and
other effects of a change in federal laws affecting Puerto Rico as
a result of the November 1993 plebiscite.
Litigation and Legislation. To the best knowledge
of the Sponsor, there is no litigation pending as of the Initial
Date in respect of any Bonds which might reasonably be expected to
have a material adverse effect upon the State Trust. At any time
after the Initial Date of Deposit, litigation may be initiated on
a variety of grounds, or legislation may be enacted, with respect
to Bonds in the Trust. Litigation, for example, challenging the
issuance of pollution control revenue bonds under environmental
protection statutes may affect the validity of
Bonds or the tax-free nature of their interest. While the outcome
of litigation of this nature can never be entirely predicted,
opinions of bond counsel are delivered on the date of issuance of
each Bond to the effect that the Bond has been validly issued and
that the interest thereon is exempt from Federal income tax. In
addition, other factors may arise from time to time which
potentially may impair the ability of issuers to make payments due
on the Bonds.
Under the Federal Bankruptcy Act, a political
subdivision or public agency or instrumentality of any state,
including municipalities, may proceed to restructure or otherwise
alter the terms of its obligations, including
those of the type comprising the State Trust's Portfolio. The
Sponsor is unable to predict what effect, if any, this legislation
might have on the State Trust.
<PAGE>
From time to time Congress considers proposals to
tax the interest on state and local obligations, such as the Bonds.
The Supreme Court clarified in South Carolina v. Baker (decided
April 20, 1988) that the U.S. Constitution does not prohibit
Congress from passing a nondiscriminatory tax on interest on state
and local obligations. This type of legislation, if enacted into
law, could adversely affect an investment in Units. Holders are
urged to consult their own tax advisers.
Tax Exemption. In the opinion of bond counsel
rendered on the date of issuance of each Bond, the interest on each
Bond is excludable from
gross income under existing law for regular Federal income tax
purposes (except in certain circumstances depending on the Holder)
but may be subject to state
and local taxes. As discussed under Taxes below, interest on some
or all of the Bonds may become subject to regular Federal income
tax, perhaps retroactively to their date of issuance, as a result
of changes in Federal law or as a result of
the failure of issuers (or other users of the proceeds of the
Bonds) to comply with certain ongoing requirements.
Moreover, the Internal Revenue Service announced
on June 14, 1993 that it will be expanding its examination program
with respect to tax-exempt bonds. The expanded examination program
will consist of, among other measures, increased enforcement
against abusive transactions, broader audit coverage (including the
expected issuance of audit guidelines) and expanded compliance
achieved by means of expected revisions to the tax-exempt bond
information return forms. At this time, it is uncertain whether the
tax exempt status of any of the Bonds would be affected by such
proceedings, or whether such effect, if any, would be retroactive.
In certain cases, a Bond may provide that if the
interest on the Bond should ultimately be determined to be taxable,
the Bond would become due and payable by its issuer, and, in
addition, may provide that any related letter of credit or other
security could be called upon if the issuer failed to satisfy all
or part of its obligation. In other cases, however, a Bond may not
provide for the acceleration or redemption of the Bond or a call
upon the related letter of credit or other security upon a
determination of taxability. In those cases in which a Bond does
not provide for acceleration or redemption or in which both the
issuer and the bank or other entity issuing the letter of credit or
other security are unable to meet their obligations to pay the
amounts due on the Bond as a result of a determination of
taxability, the Trustee would be obligated to sell the Bond and,
since it would be sold as a taxable security, it is expected that
it would have to be sold at a substantial discount from current
market price. In addition, as mentioned above, under certain
circumstances Holders could be
required to pay income tax on interest received prior to the date
on which the interest is determined to be taxable.
<PAGE>
Potential purchasers of the Units of a State Trust
should consider the fact that the Trust's Portfolio consists
primarily of Bonds issued by
the state for which such State Trust is named or its municipalities
or authorities and realize the substantial risks associated with an
investment in such Bonds. Moreover, each State Trust is subject to
certain additional state risk factors. The
Sponsor believes the discussions of risk factors summarized below
describe some of the more significant aspects of the State Trusts.
The sources of such
information are the official statements of issuers as well as other
publicly available documents. While the Sponsor has not
independently verified this
information, it has no reason to believe that such information is
not correct in all material respects. Investments in a State Trust
or State Trusts should be made
with an understanding that the value of the underlying Portfolio
may decline with increases in interest rates.
California Trust
California's economy is the largest among the 50
states. The State's January 1, 1992 population of 31 million
represented approximately 12.0% of the total United States
population. Total employment was about 14 million, the majority of
which was in the service, trade and manufacturing sectors.
Since the start of the 1990-91 fiscal year, the
State has faced the worst economic, fiscal and budget conditions
since the 1930s. Construction,
manufacturing (especially aerospace), and financial services, among
others, have all been severely affected. Job losses have been the
worst of any post-war recession and have continued through the end
of 1993. Employment levels are
expected to stabilize before net employment starts to increase and
pre-recession job levels are not expected to be reached for several
more years. Unemployment is expected to remain above 9% through
1994.
The recession has seriously affected State tax
revenues, which basically mirror economic conditions. It has also
caused increased expenditures
for health and welfare programs. The State is also facing a
structural imbalance in its budget with the largest programs
supported by the General Fund--K-14
education (kindergarten through community college), health, welfare
and corrections--growing at rates significantly higher than the
growth rates for the
principal revenue sources of the General Fund. As a result, the
State entered a period of chronic budget imbalance, with
expenditures exceeding revenues for
four of the last five fiscal years. Revenues declined in 1990-91
over 1989-90, the first time since the 1930s. By June 30, 1993,
<PAGE>
the State's General Fund had
an accumulated deficit, on a budget basis, of approximately $2.8
billion. (Special Funds account for revenues obtained from
specific revenue sources, and
which are legally restricted to expenditures for specific
purposes.) The 1993-94
Budget Act incorporated a Deficit Reduction Plan to repay this
deficit over two years. The original budget for 1993-94
reflected revenues which exceeded expenditures by a approximately
$2.8 billion. As a result of continuing recession, the excess of
revenues over expenditures for the fiscal year is now
expected to be only about $500 million. Thus, the accumulated
budget deficit at June 30, 1994 is now estimated by the Department
of Finance to be approximately $2 billion, and the deficit will not
be retired by June 30, 1995 as
planned. The accumulated budget deficits over the past several
years, together with expenditures for school funding which have not
been reflected in the budget, and the reduction of available
internal borrowable funds, have combined
to significantly depleted the State's cash resources to pay as
ongoing expenses. In order to meet its cash needs, the State has
had to rely for several years on a
series of external borrowings, including borrowings past the end of
a fiscal year.
The State's tax revenue clearly reflects sharp
declines in employment, income and retail sales on a scale not seen
in over 50 years. The May 1994 revision to the 1994-95 Governor's
Budget (the "May Revision"), released May 20, 1994, assumes that
the State will start recovery from recessionary conditions in 1994,
with a modest upturn beginning in 1994 and continuing into 1995, a
year later than predicted in the May 1993 Department of Finance
economic projection. Pre-recession job levels are not expected to
be reached until 1997.
However, there is growing evidence that California
is showing signs of an economic turnaround, and the May Revision is
revised upward from the Governor's January Budget forecast. Since
the Governor's January Budget
forecast, 1993 non-farm employment has been revised upward by
31,000 jobs. Employment in the early months of 1994 has shown
encouraging signs of growth, several months sooner than was
contemplated in the January Budget forecast. Between December 1993
and April 1994, payrolls are up by 50,000 jobs.
On January 17, 1994 the Northridge earthquake,
measuring an estimated 6.8 on the Richter Scale, struck Los
Angeles. Significant property
damage to private and public facilities occurred in a four-county
area including northern Los Angeles County, Ventura County, and
parts of Orange and San Bernadino Counties, which were declared as
State and federal disaster areas by January 18. Current estimates
<PAGE>
of total property damage (private and public) are
in the range of $20 billion or more, but these estimates are still
subject to change.
Despite such damage, on the whole, the vast
majority of structures in the areas, including large manufacturing
and commercial buildings
and all modern high-rise offices, survived the earthquake with
minimal or no damage, validating the cumulative effect of strict
building codes and thorough preparation for such emergency by the
State and local agencies.
Damage to State-owned facilities included
transportation corridors and facilities such as Interstate Highways
5 and 10 and State Highways
14, 118 and 210. Most of the major highways (Interstates 5 and 10)
have now been reopened. The campus at California State University
Northridge (very near the epicenter) suffered an estimated $350
million damage, resulting in the
temporary closure of the campus. lt reopened using borrowed
facilities elsewhere and many temporary structures. There was also
some damage to the University of California at Los Angeles and to
the Van Nuys State Office
Building (now open after a temporary closure). Overall, except for
the temporary road and bridge closures, and CSU-Northridge, the
earthquake did not and is not expected to significantly affect
State government operations.
The State in conjunction with the federal
government is committed to providing assistance to local
governments, individuals and
businesses suffering damage as a result of the earthquake, as well
as to provide for the repair and replacement of State owned
facilities. The federal government
has provided substantial earthquake assistance. The President
immediately allocated some available disaster funds, and Congress
has approved additional
funds for a total of $9.5 billion of federal funds for earthquake
relief, including assistance to homeowners and small businesses,
and costs for repair of damaged
public facilities. lt is now estimated that the overall effect of
the earthquake on the regional and State economy will not be
serious. The earthquake may have
dampened economic activity briefly during late January and
February, but the rebuilding efforts are now adding a small measure
of stimulus.
Sectors which are now contributing to California's
recovery include construction and related manufacturing, wholesale
and retail trade, transportation and several service industries
such as amusements and recreation,
business services and management consulting. Electronics is showing
modest growth and the rate of decline in aerospace manufacturing is
<PAGE>
slowly diminishing. These trends are expected to continue, and by
next year, most of the restructuring in the finance and utilities
industries should be nearly completed.
As a result of these factors, average 1994 non-farm employment is
now forecast to maintain 1993 levels compared to a projected 0.6%
decline in the Governor's
January Budget forecast. 1995 employment is expected to be up 1.6%
compared to 0.7% in the January Budget forecast.
The Northridge earthquake resulted in a downward
revision of this year's personal income growth from 4% in the
Governor's January Budget
forecast to 3.6%. However, this decline is more than explained by
the $5.5 billion charge against rental and proprietor's
income---equal to 0.8% of total
income reflecting uninsured damage from the quake. Next year,
without the quake's effects, income is projected to grow 6.1%
compared to 5% projected in the January Budget forecast. Without
the quake's effects, income was little changed in the May Revision
compared to the January Budget forecast.
The housing forecast remains essentially unchanged
from the January Budget forecast. Although existing sales have
strengthened and subdivision surveys indicated increased new home
sales, building permits are up only slightly from recession lows.
Gains are expected in the months ahead, but
higher mortgage interest rates will dampen the upturn. Essentially,
the Northridge earthquake adds a few thousand housing units to the
forecast, but this effect is offset by higher interest rates.
Interest rates represent one of several downside
risks to the forecast. The rise in interest rates has occurred more
rapidly than contemplated
in the Governor's January Budget forecast. In addition to affecting
housing, higher rates may also dampen consumer spending, given the
high percentage of California homeowners with adjustable-rate
mortgages. The May Revision
forecast includes a further rise in the Federal Funds rate to
nearly 5% by the beginning of 1995. Should rates rise more steeply,
housing and consumer spending would be adversely affected.
The unemployment upturn is still tenuous. The
Employment Development Department revised down February's
employment gain and March was revised to a small decline.
Unemployment rates in California have been
volatile since January, ranging from 10.1% to a low of 8.6%, with
July's figure at 9%. The small sample size coupled with changes
made to the survey instrument in January contributed to this
volatility.
1993-94 Budget
The Governor's Budget, introduced on January 8,
<PAGE>
1993, proposed General Fund expenditures of $37.3 billion, with
projected revenues
of $39.9 billion. To balance the budget 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 May Revision of the Governor's budget,
released on May 20,1993, projected the State would have an
accumulated deficit of about $2.75
billion by June 30,1993, essentially unchanged from the prior year.
The Governor proposed to eliminate this deficit over an 18-month
period. Unlike previous years, the Govenor's 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.
The 1993-94 Budget Act was signed by the Governor
on June 30, 1993, along with implementing legislation. The Governor
vetoed about $71 million in spending. With enactment of the Budget
Act, the State carried out its regular cash flow borrowing program
for the fiscal year with the issuance of $2 billion of revenue
anticipation notes maturing June 28, 1994.
The 1993-94 Budget Act was predicated on revenue
and transfer estimates of $40.6 billion, $400 million below 1992-93
(and the second consecutive year of actual decline). The principal
reasons for declining revenue were the continued weak economy and
the expiration (or repeal) of three fiscal steps taken in 1991 a
half cent temporary sales tax, a deferral -of operating loss
carryforwards, and repeal by initiative of a sales tax on candy and
snack foods.
The 1993-94 Budget Act also assumed Special Fund
revenues of $11.9 billion, an increase of 2.9% over 1992-93. The
1993-94 Budget Act
included General Fund expenditures of $38.5 billion (a 6.3%
reduction from projected 1992-93 expenditures of $41.1 billion), in
order to keep a balanced budget within the available revenues. The
Budget also included Special Fund expenditures of $12.1 billion, a
4.2% increase. The Budget Act reflected the following major
adjustments:
1. Changes in local government
financing to shift about $2.6 billion in property taxes from
cities, counties, special districts and
redevelopment agencies to school and community college districts.
The property tax losses for cities and counties were offset in part
by additional sales tax revenues and relief from some state
mandated programs. Litigation by local
governments challenging this shift has so far been unsuccessful. In
November 1993 the voters approved the permanent extension of the
0.5% sales tax for local public safety purposes.
<PAGE> 2. The Budget projected K-12
Proposition 98 funding on a cash basis at the same per-pupil level
as 1992-93 by-providing schools a $609 million loan payable from
future years' Proposition 98 funds.
3. The Budget assumed receipt of $692
million in aid to the State from the federal government to offset
health and welfare costs associated with foreign immigrants living
in the State. About $411 million of this amount was one-time
funding. Congress ultimately appropriated only $450
million.
4. Reductions of $600 million in
health and welfare programs.
5. A 2-year suspension of the renters'
tax credit ($390 million expenditure reduction in 1993-94).
6. Miscellaneous one-time items, including
deferral of payment to the Public Employees Retirement Fund ($339
million) and a change in accounting for debt service from accrual
to cash basis, saving $107 million.
Administration reports during the course of the
1993-94 fiscal year have indicated that, although economic recovery
appears to have started in
the second half of the fiscal year, recessionary conditions
continued longer than
had been anticipated when the 1993-94 Budget Act was adopted.
Overall, revenues for the 1993-94 fiscal year were about $800
million lower than original projections, and expenditures were
about $780 million higher, primarily because
of higher health and welfare caseloads, lower property taxes, which
require greater State support for K-14 education to make up the
shortfall, and lower than anticipated federal government payments
for immigration-related costs. The
most recent reports, however, in May and June 1994, indicated that
revenues in the second half of the 1993-94 fiscal year have been
very close to the projections made in the Governor's Budget of
January 10, 1994, which is consistent with a slow turnaround in the
economy.
During the 1993-94 fiscal year, the State
implemented the Deficit Reduction Plan, which was a part of the
1993-94 Budget Act, by issuing
$1.2 billion of revenue anticipation warrants in February 1994,
maturing December 21, 1994. This borrowing reduced the cash deficit
at the end of the 1993-94 fiscal year. Nevertheless, because of the
$1.5 billion variance from the
original Budget Act assumption, the General Fund ended the fiscal
year at June 30, 1994 carrying forward an accumulated deficit of
approximately $2 billion.
Because of the revenue shortfall and the State's reduced internal
borrowing cash resources, in addition to the $1-2 billion of
<PAGE>
revenue anticipation warrants issued
as part of the Deficit Reduction Plan, the State issued an
additional $2 billion of revenue anticipation warrants, maturing
July 26,1994. which were needed to fund the State's obligations and
expenses through the end of the 1993-94 fiscal year.
1994-95 Budget
The 1994-95 fiscal year represents the fourth
consecutive year the Governor and Legislature were 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 Governor's May
Revision to his Budget proposal recognized that the accumulated
deficit could not be repaid in one year, and proposed a two-year
solution. The May Revision sets forth revenue and expenditure
forecasts and revenue and expenditure proposals which result in
operating surpluses for the budget for both 1994-95 and 1995-96,
and lead to the elimination of the accumulated deficit, estimated
at about $2 billion at June 30, 1994 by June 30, 1996.
The 1994-95 Budget Act, signed by the Governor on
July 8, 1994, projects revenues and transfers of $41.9 billion,
about $2.1 billion higher than revenues in 1993-94. This reflects
the Administration's forecast of an
improved economy. Also included in this figure is the projected
receipt of about $360 million from the Federal Government to
reimburse the State for the cost
of incarcerating undocumented immigrants. The State will not know
how much the Federal Government will actually provide until the
Federal fiscal year 1995 Budget is completed, which is expected to
be by October 1994. The Legislature
took no action on a proposal in the Governor s January Budget to
undertake expansion of the transfer of certain programs to
counties, which would also have
transferred to counties 0.5% of the State current sales tax. The
Budget Act projects Special Fund revenues of $12.1 billion, a
decrease of 2.4% from 1993-94 estimated levels.
The 1994-95 Budget Act projects General Fund
expenditures of $40.9 billion, an increase of $1.6 billion over
1993-94. The Budget Act also projects Special Fund expenditures of
$13.7 billion, a 5.4% increase over 1993-94 estimated expenditures.
The principal features of the Budget Act were
the following:
1. Receipt of additional federal aid
in 1994-95 of about $400 million for costs of refugee assistance
and medical care for undocumented aliens, thereby offsetting a
similar General Fund cost. The State
will not know how much of these funds it will receive until the
Federal fiscal year 1994 Budget is passed.
<PAGE> 2. Reductions of approximately
$l.l billion in health and welfare programs.
3. A General Fund increase of
approximately $38 million in support for the University of
California and $65 million for the
California State University. It is anticipated that student fees
for the U.C. and the C.S.U will increase up to 10%.
4. Proposition 98 funding for K-14
schools is increased by $526 million from the 1993-94 levels,
representing an increase for enrollment growth and inflation.
Consistent with previous budget agreements,
Proposition 98 funding provides approximately $4,217 per student
for K-12 schools, equal to the level in the past three years.
5. Legislation enacted with the Budget
Act clarifies laws passed in 1992 and 1993 requiring counties and
other local agencies to transfer funds to local school districts,
thereby reducing State aid. Some counties
had implemented programs providing less moneys to schools if there
were redevelopment agencies projects. The legislation bans this
method of transfers.
6. The Budget Act provides funding for
anticipated growth in the State's prison inmate population,
including provisions for
implementing recent legislation (the so-called "Three Strikes" law)
which requires mandatory life sentences for certain third-time
felony offenders.
7. Additional miscellaneous cuts ($500
million) and fund transfers ($255 million) totalling in the
aggregate approximately $755 million.
The 1994-95 Budget Act contains no tax increases.
Under legislation enacted for the 1993-94 Budget, the renters' tax
credit was suspended for 1993 and 1994. A ballot proposition to
permanently restore the renters'
credit after this year failed at the June 1994 election. The
Legislature enacted a further one-year suspension of the renters'
tax credit, saving about $390
million in the 1995-96 fiscal year. The 1994-95 Budget assumes that
the State will use a cash flow borrowing program in 1994-95 which
combines one-year notes and warrants. Issuance of the warrants
allows the State to defer repayment of approximately $1 billion of
its accumulated budget deficit into the 1995-96
fiscal year.
THE FOREGOING DISCUSSION OF THE 1993-94 AND
1994-1995 FISCAL YEAR BUDGETS IS BASED IN LARGE PART ON
STATEMENTS MADE IN A RECENT "PRELIMINARY OFFICIAL
STATEMENT" DISTRIBUTED BY THE STATE OF CALIFORNIA. IN
THAT DOCUMENT, THE STATE INDICATED THAT ITS DISCUSSION
<PAGE>
OF THE 1994-95 FISCAL YEAR BUDGET WAS BASED ON ESTIMATES
AND PROJECTIONS OF REVENUES AND EXPENDITURES FOR THE
CURRENT FISCAL YEAR AND MUST NOT BE CONSTRUED AS
STATEMENTS OF FACT. THE STATE NOTED FURTHER THAT THE
ESTIMATES AND PROJECTIONS ARE BASED UPON VARIOUS
ASSUMPTIONS WHICH MAY BE AFFECTED BY NUMEROUS
FACTORS, INCLUDING FUTURE ECONOMIC CONDITIONS IN THE
STATE AND THE NATION, AND THAT THERE CAN BE NO
ASSURANCE THAT THE ESTIMATES WILL BE ACHIEVED.
The State is subject to an annual appropriations
limit imposed by Article XIII B of the State Constitution (the
"Appropriations Limit"), and is
prohibited from spending "appropriations subject to limitation" in
excess of the Appropriations Limit. Article XIIIB, originally
adopted in 1979, was modified
substantially by Propositions 98 and 111 in 1988 and 1990,
respectively. "Appropriations subject to limitation" are
authorizations to spend "proceeds of
taxes", which consist of tax revenues and certain other funds,
including proceeds from regulatory licenses, user charges or other
fees to the extent that such
proceeds exceed the reasonable cost of providing the regulation,
product or service. The Appropriations Limit is based on the limit
for the prior year, adjusted annually for certain changes, and is
tested over consecutive two-year
periods. Any excess of the aggregate proceeds of taxes received
over such two-year period above the combined Appropriation Limits
for those two years is divided equally between transfers to K-14
districts and refunds to taxpayers.
Exempted from the Appropriations Limit are debt
service costs of certain bonds, court or federally mandated costs,
and, pursuant to Proposition 111, qualified capital outlay projects
and appropriations or revenues derived
from any increase in gasoline taxes and motor vehicle weight fees
above January 1, 1990 levels. Some recent initiatives were
structured to create new tax revenues dedicated to specific uses
and expressly exempted from the Article
XIIIB limits. The Appropriations Limit may also be exceeded in
cases of emergency arising from civil disturbance or natural
disaster declared by the Governor and approved by two-thirds of the
Legislature. If not so declared and approved, the Appropriations
Limit for the next three years must be reduced by the amount of the
excess.
Article XIIIB, as amended by Proposition 98 on
November 8, 1988, also establishes a minimum level of state funding
for school and community college districts and requires that excess
revenues up to a certain limit be transferred to schools and
community college districts instead of
returned to the taxpayers. Determination of the minimum level of
funding is based on several tests set forth in Proposition 98.
<PAGE>
During fiscal year 1991-92
revenues were smaller than expected, thus reducing the payment owed
to schools in 1991-92 under alternate "test" provisions. In
response to the changing
revenue situation, and to fully fund the Proposition 98 guarantee
in the 1991-92 and 1992-93 fiscal years without exceeding it, the
Legislature enacted legislation
to reduce 1991-92 appropriations. The amount budgeted to schools
but which exceeded the reduced appropriation was treated as a
non-Proposition 98 short-term loan in 1991-92. As part of the
1992-93 Budget, $1.1 billion of the
amount budgeted to K-14 schools was designated to "repay" the prior
year loan, thereby reducing cash outlays in 1992-93 by that amount.
To maintain per-average daily attendance ("ADA") funding, the
1992-93 Budget included loans of $732 million to K-12 schools and
$241 million to community colleges, to be
repaid from future Proposition 98 entitlements. The 1993-94 Budget
also provided new loans of $609 million to K-12 schools and $178
million to community colleges to maintain ADA funding. These loans
have been combined with the 1992-93 fiscal year loans into one loan
of $1.760 billion, to be repaid
from future years' Proposition 98 entitlements, and conditioned
upon maintaining current funding levels per pupil at K-12 schools.
A Sacramento County Superior Court in California Teachers'
Association, et al. v. Gould, et
al., has ruled that the 1992-93 loans to K-12 schools and
community colleges violate Proposition 98. The impact of the
court's ruling on the State budget and
funding for schools is unclear and will remain unclear until the
Court's written ruling, which is currently being prepared, is
issued.
The 1994-95 Budget Act has appropriated $14.4
billion of Proposition 98 funds for K-14 schools, exceeding the
minimum Proposition 98
guaranty by $8 million to maintain K-12 funds per pupil at $4,217.
Based upon State revenues, growth rates and inflation factors, the
1994-95 Budget Act appropriations an additional $286 million within
Proposition 908 for the 1993-94
fiscal year to reflect a need in appropriations for school district
and county officers of education, as well as an anticipated
deficiency in special education funding.
Because of the complexities of Article XIIIB, the
ambiguities and possible inconsistencies in its terms, the
applicability of its exceptions and
exemptions and the impossibility of predicting future
appropriations, the Sponsor cannot predict the impact of this or
related legislation on the Bonds in the
California Trust Portfolio. Other Constitutional amendments
affecting state and local taxes and appropriations have been
proposed from time to time. If any
<PAGE>
such initiatives are adopted, the State could be pressured to
provide additional financial assistance to local governments or
appropriate revenues as mandated
by such initiatives. Propositions such as Proposition 98 and
others that may be adopted in the future, may place increasing
pressure on the State's budget over
future years, potentially reducing resources available for other
State programs, especially to the extent the Article XIIIB spending
limit would restrain the
State's ability to fund such other programs by raising taxes.
As of July 1, 1994, the State had over $18.34
billion aggregate amount of its general obligation bonds
outstanding. General obligation bond
authorizations in the aggregate amount of approximately $5.16
billion remained unissued as of July 1, 1994. The State also builds
and acquires capital facilities
through the use of lease purchase borrowing. As of June 30, 1994,
the State had approximately $5.09 billion of outstanding
Lease-Purchase Debt.
In addition to the general obligation bonds, State
agencies and authorities had approximately $21.87 billion aggregate
principal amount of
revenue bonds and notes outstanding as of March 31, 1993. Revenue
bonds represent both obligations payable from State
revenue-producing enterprises and
projects, which are not payable from the General Fund, and conduit
obligations payable only from revenues paid by private users of
facilities financed by such
revenue bonds. Such enterprises and projects include
transportation projects, various public works and exposition
projects, education facilities (including the
California State University and University of California systems),
housing health facilities and pollution control facilities.
The State is a party to numerous legal
proceedings, many of which normally occur in governmental
operations. In addition, the State is
involved in certain other legal proceedings that, if decided
against the State, might require the State to make significant
future expenditures or impair future
revenue sources. Examples of such cases include challenges to the
State's method of taxation of certain businesses, challenges to
certain vehicle license fees, and challenges to the State's use of
Public Employee Retirement System
funds to offset future State and local pension contributions.
Other cases which could significantly impact revenue or
expenditures involve reimbursement to
school districts for voluntary school desegregation and state
mandated costs, challenges to Medi-Cal eligibility, recovery for
flood damages, and liability for
toxic waste cleanup. Because of the prospective nature of these
<PAGE>
proceedings, it is not presently possible to predict the outcome of
such litigation or estimate the
potential impact on the ability of the State to pay debt service on
its obligations.
On June 20, 1994, the United States Supreme
Court, in two companion cases, upheld the validity of California's
prior method of taxing multinational corporations under a
"unitary" method of accounting for their
worldwide earnings, thus avoiding tax refunds of approximately
$1.55 billion by the State, and enabling the State to collect $620
million in previous assessments. Barclays Bank PLC v. Franchise
Tax Board concerning foreign corporations, and Colgate-Palmmolive
v. Franchise Tax Board concerned domestic corporations.
Ratings
On July 15, 1994, Standard Poor's Corporation
("Standard & Poor's"), Moody's Investors Service, Inc.
("Moody's"),and Fitch Investors Service, Inc. ("Fitch") all
downgraded their ratings of California's general
obligation bonds. These bonds are usually sold in 20- to 30-year
increments and used to finance the construction of schools,
prisons, water systems and other projects. The ratings were
reduced by Standard & Poor's from "A+" to
"A", by Moody's from "Aa" to "A1", and by Fitch from "AA" to "A".
Since 1991, when it had a "AAA" rating, the State's rating has
been downgraded three times by all three ratings agencies. All
three agencies cite the 1994-95 Budget Act's dependence on a
"questionable" federal bailout to pay for the cost
of illegal immigrants, the Propositions 98 guaranty of a minimum
portion of State revenues for kindergarten through community
college, and the persistent
deficit requiring more borrowing as reasons for the reduced
rating. Another concern was the State's reliance on a standby
mechanism which could trigger
across-the-board reductions in all State programs, and which could
disrupt State operations, particularly in fiscal year 1995-96.
However, a Standard & Poor's spokesman stated that, although the
lowered ratings means California is aa
riskier borrower, Standard & Poor's anticipates that the State will
pay off its debts and not default. There can be no assurance that
such ratings will continue for any given period of time or that
they will not in the future be further revised.
The Sponsor believes the information summarized
about described some of the more significant aspects relating to
the California Trust.
The sources of such information are Preliminary Official Statements
and Official Statements relating to the State's general
obligation bonds and the State's revenue anticipation notes, or
obligations of other issuers located in the
State of California, or other publicly available documents.
<PAGE>
Although the Sponsor has not independently verified this
information, it has no reason to believe that such information is
not correct in all material respects.
As a result of Orange County's Chapter 9
bankruptcy filing on December 6, 1994, Moody's has suspended the
County's bond ratings, and
Standard & Poor's has cut its rating of all Orange County debt from
"AA-" to "CCC", a level below investment grade and an indication of
high risk and uncertainty. Fitch does not rate Orange County bonds.
It is anticipated that as
Orange County's credit and bond ratings fall, it will have
difficulty in getting loans or selling its bonds to raise money.
Additionally, the County's bankruptcy filing could affect about 180
municipalities, school districts and other municipal entities which
entrusted billions of dollars to Orange County to invest. Standard
& Poor's has informed such entities that they have been placed on
negative credit watch, the usual step prior to a downgrade of
credit rating.
The Sponsor believes the information summarized
above describes some of the more significant aspects relating to
the California Trust. The sources of such information are
Preliminary Official Statements and Official Statements relating to
the State's general obligation bonds and the State's revenue
anticipation notes, or obligations of other issuers located in the
State of California, or other publicly available documents.
Although the Sponsor has not independently verified this
information, it has no reason to believe that such information is
not correct in all material respects.
Massachusetts Trust
Risk Factors.The Commonwealth of Massachusetts and
certain of its cities and towns have at certain times in the recent
past undergone serious financial difficulties which have adversely
affected and, to some degree, continue to adversely affect their
credit standing. These financial difficulties could adversely
affect the market values and marketability of, or result in default
in payment on, outstanding bonds issued by the Commonwealth or its
public authorities or municipalities, including the Bonds deposited
in the Trust. The following description highlights some of the
more significant financial problems of the Commonwealth and the
steps taken to strengthen its financial condition.
The effect of the factors discussed below upon the
ability of Massachusetts issuers to pay interest and principal on
their obligations remains
unclear and in any event may depend on whether the obligation is a
general or revenue obligation bond (revenue obligation bonds being
payable from specific sources and therefore generally less affected
by such factors) and on what type of security is provided for the
bond. In order to constrain future debt service
<PAGE>
costs, the Executive Office for Administration and Finance
established in November, 1988 an annual fiscal year limit on
capital spending of $925 million,
effective fiscal 1990. In January, 1990, legislation was enacted
to impose a limit on debt service in Commonwealth budgets beginning
in fiscal 1991. The law provides that no more than 10% of the
total appropriations in any fiscal year may be expended for payment
of interest and principal on general obligation
debt of the Commonwealth (excluding the Fiscal Recovery Bonds
discussed below). It should also be noted that Chapter 62F of the
Massachusetts General Laws establishes a state tax revenue growth
limit and does not exclude principal
and interest due on Massachusetts debt obligations from the scope
of the limit. It is possible that other measures affecting the
taxing or spending authority of
Massachusetts or its political subdivisions may be approved or
enacted in the future.
The Commonwealth has waived its sovereign immunity
and consented to be sued under contractual obligations including
bonds and notes issued by it. However, the property of the
Commonwealth is not subject to attachment or levy to pay a
judgment, and the satisfaction of any judgment
generally requires legislative appropriation. Enforcement of a
claim for payment of principal of or interest on bonds and notes of
the Commonwealth may also
be subject to provisions of federal or Commonwealth statutes, if
any, hereafter enacted extending the time for payment or imposing
other constraints upon
enforcement, insofar as the same may be constitutionally applied.
The United States Bankruptcy Code is not applicable to states.
Cities and Towns. During recent years limitations
were placed on the taxing authority of certain Massachusetts
governmental entities that may
impair the ability of the issuers of some of the Bonds in the
Massachusetts Trust to maintain debt service on their obligations.
Proposition 2.5, passed by the
voters in 1980, led to large reductions in property taxes, the
major source of income for cities and towns. As a result, between
fiscal 1981 and fiscal 1989, the aggregate property tax levy
declined in real terms by 15.6%.
Since Proposition 2.5 did not provide for any new
state or local taxes to replace the lost revenues, in lieu of
substantial cuts in local services, the
Commonwealth began to increase local aid expenditures. In 1981
constant dollars, total direct local aid expenditures increased by
58.5% between fiscal years 1981 and 1989, or 5.9% per year. During
the same period, the total of
all other local revenue sources declined by 5.87% or 0.75% per
year. Despite the substantial increases in local aid from fiscal
1981 to fiscal 1989, local spending increased at an average rate of
<PAGE>
1% per year in real terms. Direct local
aid for fiscal 1987, 1988, and 1989 was $2.601 billion, $2.769
billion, and $2.961 billion, respectively. Direct local aid
declined in the three subsequent
years to $2.937 billion in fiscal 1990, $2.608 billion in 1991 and
$2.328 billion in 1992 and increased to $2.547 billion in 1993. It
is estimated that fiscal 1994
expenditures for direct local aid will be $2.737 billion, which is
an increase of approximately 7.5% above the fiscal 1993 level. The
additional amount of
indirect local aid provided over and above the direct local aid is
estimated to have been $1.313 billion in fiscal 1991, $1.265
billion in fiscal 1992 and $1.717 billion in fiscal 1993 and is
estimated to be approximately $1.717 billion in fiscal 1994.
Many communities have responded to the limitations
imposed by Proposition 2.5 through statutorily permitted overrides
and exclusions. Override activity peaked in fiscal 1991, when 182
communities attempted votes
on one of the three types of referenda questions (override of levy
limit, exclusion of debt service, or exclusion of capital
expenditures) and 100 passed
at least one question, adding $58.5 million of their levy limits.
In fiscal 1992, 67 of 143 communities had successful votes
totalling $31.0 million. In fiscal
1993, 83 communities attempted a vote; two-thirds of them (56)
passed questions aggregating $16.4 million.
A statewide voter initiative petition which would
effectively mandate that, commencing with fiscal 1992, no less than
40% of receipts from personal income taxes, sales and use taxes,
corporate excise taxes and lottery fund proceeds be distributed to
certain cities and towns in local aid was approved in the general
election held November 6, 1990. Pursuant to this petition, the
local aid distribution to each city or town was to equal no less
than 100% of the total local aid received for fiscal 1989.
Distributions in excess of fiscal 1989 levels were to be based on
new formulas that would replace the current local aide distribution
formulas. If implemented in accordance with its
terms (including appropriation of the necessary funds), the
petition as approved would shift several hundred million dollars to
direct local aid. However, local aid payments explicitly remain
subject to annual appropriation, and fiscal 1992 and fiscal 1993
appropriations for local aid did not meet, and fiscal 1994
appropriations for local aid do not meet, the levels set forth in
the initiative law.
Pension Liabilities. The Commonwealth had funded
its two pension systems on essentially a pay-as-you-go basis. The
funding schedule is based on actuarial valuations of the two
pension systems as of January 1. 1990,
at which time the unfunded accrued liability for such systems
operated by the Commonwealth (and including provision for Boston
<PAGE>
teachers) totalled $8.865 billion. The unfunded liability for the
Commonwealth related to cost of living
increases for local retirement systems was estimated to be an
additional $2.004 billion as of January 1, 1990. An actuarial
valuation as of January 1, 1992 shows that, as of such date, the
total unfunded actuarial liability for such systems, including
cost-of-living allowances, was approximately $8.485 billion
representing a reduction of approximately $2.383 billion from
January 1, 1990.
The amount in the Commonwealth's pension reserve,
established to address the unfunded liabilities of the two state
systems, has increased significantly in recent years due to
substantial appropriations and changes in law
relating to investment of retirement system assets. Total
appropriations and transfers to the reserve in fiscal years 1985,
1986, 1987 and 1988 amounted to
approximately $680 million. Comprehensive pension legislation
approved in January 1988 committed the Commonwealth, beginning in
fiscal 1989, to normal cost funding of its pension obligations and
to a 40-year amortization schedule for
its unfunded pension liabilities. Total pension costs increased
from $659.7 million in fiscal 1989 to $868.2 million in fiscal
1993. Pension funding is estimated to be $951.0 million in fiscal
year 1994. As of June 30, 1993, the Commonwealth's pension
reserves had grown to approximately $3.877 billion.
State Budget and Revenues. The Commonwealth's
Constitution requires, in effect, that its budget be balanced each
year. The Commonwealth's
fiscal year ends June 30. The General Fund is the Commonwealth's
primary operating fund; it also functions as a residuary fund to
receive otherwise unallocated revenues and to provide monies for
transfers to other funds as
required. The condition of the General Fund is generally regarded
as the principal indication of whether the Commonwealth's operating
revenues and expenses are in balance; the other principal operating
funds (the Local Aid Fund and the Highway Fund) are customarily
funded to at least a zero balance.
Limitations on Commonwealth tax revenues have been
established by enacted legislation and by public approval of an
initiative petition which has become law. The two measures are
inconsistent in several respects,
including the methods of calculating the limits and the exclusions
from the limits. The initiative petition does not exclude debt
service on the Commonwealth's notes and bonds from the limits.
State tax revenues in fiscal 1988 through fiscal 1993 were lower
than the limits. The Executive Office for
Administration and Finance currently estimates that state tax
revenues will not reach the limit imposed by either the initiative
petition or the legislative enactment in fiscal 1994.
<PAGE>
Budgeted expenditures for fiscal 1989 totalled
approximately $12.643 billion. Budgeted revenues totalled
approximately $11.970 billion, approximately $672.5 million less
than total expenditures. Under the budgetary
basis of accounting, after taking account of certain fund balances,
fiscal 1989 ended with a deficit of $319.3 million. Under the GAAP
basis of accounting, excluding fiduciary accounts and enterprise
funds, the Commonwealth ended
fiscal 1989 with a deficit of $946.2 million. This deficit
reflected an operating gain in the capital projects funds due to
the additional borrowing to reduce prior
year deficits. If the capital project funds are excluded, the
Comptroller calculated a GAAP deficit of $1.002 billion in fiscal
1989.
Fiscal 1989 tax revenues were adversely affected
by the economic slowdown that began in mid-1988. In June, 1988,
the fiscal 1989 tax revenue estimate was for 10.9% growth over
fiscal 1988. Fiscal 1989 ended with actual tax revenue growth of
6.5%.
The fiscal 1989 budgetary deficit caused a cash
deficit in the Commonwealth operating accounts on June 30, 1989 in
the amount of approximately $450 million. The State Treasurer was
forced to defer until early July certain fiscal 1989 expenditures
including the payment of approximately $305 million in local aid
due June 30, and with legislative authorization, issued temporary
notes in July in the amount of $1.1 billion to pay fiscal 1989 and
fiscal 1990 costs.
Fiscal year 1990 resulted in total expenditures of
approximately $13.260 billion. Budgeted revenues and other
services for fiscal 1990 were
approximately $12.008 billion. Tax revenues for fiscal 1990 were
approximately $8.517 billion, a decrease of approximately $314
million or 3.6% from fiscal 1989. The Commonwealth suffered an
operating loss of approximately $1.25 billion and ended fiscal 1990
with a budgetary deficit of $1.104 billion. The Commonwealth had
a cash surplus of $99.2 million on June
30, 1990 as a result of deferring until fiscal 1991 the payment of
approximately $1.26 billion of local aid due June 30, 1990.
On July 28, 1990, the legislature enacted Chapter
151 which provides, among other matters, for the Commonwealth
Fiscal Recovery Loan Act of 1990 and grants authorization for the
Commonwealth to issue bonds in an aggregate amount up to $1.42
billion for purposes of funding the Commonwealth's fiscal 1990
deficit and certain prior year Medicaid reimbursement payments.
Chapter 151 also provides for the establishment of the Commonwealth
Fiscal Recovery Fund, deposits for which are derived from
a portion of the Commonwealth's personal income tax receipts, are
dedicated for this purpose and are to be deposited in trust and
pledged to pay the debt service on these bonds. Under Chapter 151,
<PAGE>
the Commonwealth issued $1.363 billion of Dedicated Income Tax
Bonds to cover the anticipated fiscal 1990 deficit.
Total expenditures for fiscal 1991 are estimated
to have been $13.659 billion. Total revenues for fiscal 1991 are
estimated to have been $13.634 billion, resulting in an estimated
$21.2 million operating loss.
Application of the adjusted fiscal 1990 fund balances of $258.3
million resulted in a final fiscal 1991 budgetary surplus of $237.1
million. State finance law required that approximately $59.2
million of the fiscal year surplus be placed in
the Stabilization Fund described above. Amounts credited to the
Stabilization Fund are not generally available to defray current
year expenses without subsequent specific legislative
authorization.
After payment in full of the local aid
distribution of $1.018 billion due on June 28, 1991, retirement of
all of the Commonwealth's outstanding commercial paper and
repayment of certain other short-term
borrowing, as of the period of fiscal 1991, the Commonwealth had a
cash balance of $182.3 million. The fiscal 1991 year-end cash
position compared favorably to the Commonwealth's cash position at
the end of the prior fiscal
year, June 30, 1990, when the Commonwealth's cash shortfall would
have exceeded $1.1 billion had payment of local aid not been
postponed.
Upon taking office in January 1991, the new
Governor undertook a comprehensive review of the Commonwealth's
budget. Based on projected spending of $14.105 billion, it was
then estimated that $850 million
in budget balancing measures would be needed prior to the close of
fiscal 1991. At that time, estimated tax revenues were revised to
$8.845 billion, $903 million less than was estimated at the time
the fiscal 1991 budget was adopted. The
Governor proposed a series of legislative and administrative
actions, designed to eliminate the projected deficit. The
legislature adopted a number of the
Governor's recommendations and the Governor took certain other
administrative actions, not requiring legislative approval,
including $65 million in savings from
the adoption of a state employee furlough program. It is estimated
that spending reductions achieved through savings incentives and
withholding of allotments totalled $484.3 million in the aggregate
for fiscal 1991.
In addition to recommending spending reductions to
close the projected budget deficit, the administration, in May
1991, filed an amendment to its Medicaid state plan that enabled it
to claim 50% Federal reimbursement on uncompensated care payments
provided to certain hospitals in the Commonwealth.
<PAGE>
In fiscal 1992, Medicaid accounted for more than
half of the Commonwealth's appropriations for health care. It is
the largest item in the Commonwealth's budget. It has also been
one of the fastest growing budget
items. During fiscal years 1989, 1990 and 1991, Medicaid
expenditures were $1.83 billion, $2.12 billion and $2.77 billion,
respectively. A substantial
amount of expenditures in recent years was provided through
supplemental appropriations, repeating the experience that Medicaid
expenditures have exceeded initial appropriation amounts. These
annual amounts, however, do not
take account of the practice of retroactive settlement of many
provider payments after audit review and certification by the Rate
Setting Commission. In fiscal
1990, payments of approximately $488 million were made to hospitals
and nursing homes for rate settlements dating back as far as 1980,
through the Medical Assistance Liability Fund established to fund
certain Medicaid liabilities incurred, but not certified for
payment, in prior years. This amount is not
factored into the annual totals for Medicaid expenditures listed
above. Including retroactive provider settlements, Medicaid
expenditures for fiscal 1992 were
$2.818 billion and for fiscal 1993 were $3.151 billion. The
Executive Office for Administration and Finance estimates that
fiscal 1994 Medicaid expenditures
will be approximately $3.252 billion, an increase of 3.9% over
fiscal 1993 expenditures. For fiscal 1994, no supplemental
Medicaid appropriations are
currently expected to be necessary. The Governor had proposed a
managed care program to be implemented commencing in January, 1992
in order to address the considerable annual cost increases in the
Medicaid program. Medicaid is presently 50% funded by federal
reimbursements.
In fiscal 1992, total revenues and other sources
of the budgeted operating funds totalled $13.728 billion, an
increase over fiscal 1991 revenues
of .7%. (Actual fiscal 1992 tax revenues exceeded original
estimates and totalled $9.484 billion, an increase over fiscal 1991
collections of 5.4%). Fiscal 1992 expenditures and other uses of
budgeted operating funds totalled approximately $13.420 billion, a
decrease from fiscal 1991 expenditures by
1.7%. Fiscal year 1992 revenues and expenditures resulted in an
operating gain of $312.3 million. Through the use of the prior
year ending fund balances of
$312.3 million, fiscal 1992 budgetary fund balances totalled $549.4
million. Total fiscal 1992 spending authority continued into fiscal
1993 is $231.0 million.
After payment in full of the quarterly local aid
distribution of $514 million due on June 30, 1992, retirement of
the Commonwealth's outstanding commercial paper (except for
approximately $50 million of bond anticipation notes) and certain
<PAGE>
other short-term borrowings, as of June 30, 1992,
the Commonwealth showed a year-end cash position of approximately
$731 million for fiscal year 1992. The ending balance compares
favorably with the cash balance of $182.3 million at the end of
fiscal 1991. As of June 1993, the
Commonwealth showed a year-end cash position of $622.2 million for
fiscal year 1993. As of January 19, 1994, the Commonwealth
estimates a 1994 year-end cash position of approximately $725.4
million.
The budgeted operating funds of the Commonwealth
ended fiscal 1993 with a surplus of revenues and other sources over
expenditures and other
uses of $13.1 million and aggregate ending fund balances in the
budgeted operating funds of the Commonwealth of approximately
$562.5 million. Budgeted revenues and other sources for fiscal 1993
totalled approximately
$14.710 billion, including tax revenues of $9.930 billion. Total
revenues and other sources increased by approximately 6.9% from
fiscal 1992 to fiscal 1993,
while tax revenues increased by 4.7% for the same period. In July
1992, tax revenues had been estimated to be approximately $9.685
billion for fiscal 1993. This amount was subsequently revised
during fiscal 1993 to $9.940 billion.
Commonwealth budgeted expenditures and other used
in fiscal 1993 totalled approximately $14.696 billion, which is
$1.280 billion or approximately 9.6% higher than fiscal 1992
expenditures and other uses. Fiscal 1993 budgeted expenditures
were $23 million lower than the initial July 1992 estimates of
fiscal 1993 budget expenditures.
On July 19, 1993, the Governor signed into law the
budget for fiscal 1994, totalling $15.463 billion. This
represented a $694 million increase
over the then estimated budgeted expenditures of $14.976 billion
for fiscal 1993. On January 14, 1994, the Governor signed into law
supplemental appropriations
totalling approximately $157.9 million. Including an additional
$8.1 million in fiscal 1994 supplemental appropriation
recommendations that the Governor plans
to file, and an approximate $100 million contingency reserve in
fiscal 1994 for possible additional spending, fiscal 1994 budgeted
expenditures are currently
estimated to be approximately $15.716 billion. Budgeted revenues
and other sources to be collected in fiscal 1994 are estimated to
be approximately $15.535
billion, which includes tax revenues of approximately $10.694
billion (as compared to $9.930 billion in fiscal 1993). This
budget includes $175 million
as part of an education reform bill passed by the legislature. The
fiscal 1994 budget is based on numerous spending and revenue
estimates, the achievement of which cannot be assured. As of
<PAGE>
January 10, 1994, the Legislature had
overridden $21.0 million of the Governor's vetoes relating to the
fiscal 1994 budget. Commonwealth expenditures and other uses in
fiscal 1994 are currently estimated to be approximately $15.500
billion, which is $788 million or
approximately 5.36% higher than those of fiscal 1993. Based on
currently estimated revenues and expenditures, the Executive Office
for Administration and Finance projects a fiscal 1994 ending
balance of approximately $382.0 million, of which approximately
$315.5 million will be in the Stabilization Fund.
On July 19, 1993, a 60-day hiring freeze on all
executive branch agencies was instituted to help ensure that agency
expenditures remain within their fiscal 1994 budget authorizations.
On August 16, 1993, the Commonwealth announced that approximately
1,280 state employees would be laid off in the near future, in
addition to approximately 350 employees already laid off in fiscal
1994.
On January 21, 1994, the Governor presented his
Budget Submission for fiscal year 1995 providing for expenditures
of $16.14 billion, a $424 million, or 2.7%, increase over current
fiscal year 1994 projections. These proposed expenditures for
fiscal year 1995 include direct local aid of
$2.997 billion. This budget is based on total anticipated revenues
of $16.144 billion, which represents a $609 million, or 3.9%,
increase over fiscal year 1994
estimates. The Governor's budget recommendation is based on a tax
revenue estimate of $11.226 billion, an increase of approximately
5.0%, as compared to currently estimated fiscal 1994 tax revenues
of $10.694 billion.
The liabilities of the Commonwealth with respect
to outstanding bonds and notes payable as of January 1, 1994
totalled $12.555 billion. These
liabilities consisted of $8.430 billion of general obligation debt,
$1.036 billion of dedicated income tax debt (the Fiscal Recovery
Bonds), $104 million of
special obligation debt, $2.742 billion of supported debt, and $243
million of guaranteed debt.
Capital spending by the Commonwealth was
approximately $595 million in fiscal 1987, $632 million in fiscal
1988 and $971 million in fiscal
1989. In November 1988, the Executive Office for Administration
and Finance established an administrative limit on state financed
capital spending in the Capital Projects Funds of $925.0 million
per fiscal year. Capital expenditures
decreased to $936 million, $847 million, $694.1 million and $575.9
million in fiscal 1990, 1991, 1992 and 1993, respectively. Capital
expenditures are projected to increase to $886.0 million in fiscal
1994. The growth in capital spending accounts for a significant
rise in debt service during the period.
<PAGE>
Payments for the debt service on Commonwealth general obligation
bonds and notes have risen at an average annual rate of 20.4% from
$649.8 million in fiscal 1989 to $942.3 million in fiscal 1991.
Debt Service payments in fiscal
1992 were $898.3 million, representing a 4.7% decrease from fiscal
1991. This decrease resulted from a $261 million one-time
reduction achieved through the
issuance of refunding bonds in September and October of 1991. Debt
service expenditures were $1.139 billion for fiscal 1993 and are
projected to be $1.220 billion for fiscal 1994. These amounts
represent debt service payments on direct
Commonwealth debt and do not include debt service on notes issued
to finance the fiscal 1989 deficit and certain Medicaid-related
liabilities, which were paid in full from non-budgeted funds. Also
excluded are debt service contract
assistance to certain state agencies and the municipal school
building assistance program projected to total of $359.7 million in
the aggregate in fiscal 1994.
In addition to debt service on bonds issued for capital purposes,
the Commonwealth is obligated to pay the principal of and interest
on the Fiscal Recovery Bonds described above. The estimated debt
service on such bonds currently outstanding (a portion of which
were issued as variable rate bonds)
ranges from approximately $279 million (interest only) in fiscal
1994 through fiscal 1997 and approximately $130 million in fiscal
1998, at which time the entire amount of the Fiscal Recovery Bonds
will be retired.
In January 1990 legislation was enacted to impose
a limit on debt service in Commonwealth budgets beginning in fiscal
1991. The law provides that no more than 10% of the total
appropriations in any fiscal year
may be expended for payment of interest and principal on general
obligation debt (excluding the Fiscal Recovery Bonds) of the
Commonwealth. This law may be amended or appealed by the
legislature or may be superseded in the
General Appropriation Act for any year. From fiscal year 1987
through fiscal year 1994 estimated this percentage has been
substantially below the limited established by this law.
Legislation enacted in December 1989 imposes a
limit on the amount of outstanding direct bonds of the
Commonwealth. The limit for fiscal
1994 is $7.872 billion. The law provides that the limit for each
subsequent fiscal year shall be 105% of the previous fiscal year's
limit. The Fiscal Recovery Bonds will not be included in computing
the amount of bonds subject to this limit.
In August 1991, the Governor announced a five-year
capital spending plan. The plan, which represents the
Commonwealth's first centralized
multi-year capital plan, sets forth, by agency, specific projects
to receive capital spending allocations over the next five fiscal
<PAGE>
years and annual capital spending
limits. Capital spending by the Commonwealth, which exceeded $900
million annually in fiscal 1989, 1990 and 1991, declined to $694.1
million in fiscal 1992 and $575.9 in fiscal 1993. For fiscal 1994
through 1998, the plan forecasts
annual capital spending for the Commonwealth of between $813
million and $886 million per year, exclusive of spending by the
Massachusetts Bay Transit
Authority. Total expenditures are forecast at $4.25 billion, an
amount less than the total amount of agency capital spending
requests for the same period. Planned spending is also
significantly below legislatively authorized spending
levels.
Unemployment. From 1980 to 1989, the
Massachusetts unemployment rate was significantly lower than the
national average. The
Massachusetts unemployment rate averaged 9.0%, 8.5% and 6.9% in
calendar 1991, 1992 and 1993, respectively. The Massachusetts
unemployment rate in December, 1993 was 6.3% as compared to 6.6%
for November, 1993 and 8.6% for December of 1992, although the rate
has been volatile throughout this period. The Massachusetts
unemployment rate in January and February, 1994 was 7.2% and 6.4%,
respectively; these rates are not comparable to prior rates due to
a new rate computation which became effective in 1994.
The balance in the Massachusetts Unemployment
Compensation Trust Fund had been exhausted as of September 1991 due
to the continued high levels of unemployment. As of December 31,
1992, the Massachusetts Unemployment Compensation Trust Fund
balance was in deficit by $377
million. As of November 30, 1993, the Fund was in deficit by $163
million. The deficit is now expected to be approximately $120
million by the end of
calendar 1993. Benefit payments in excess of contributions are
being financed
by use of repayable advances from the federal unemployment loan
account. Legislation enacted in May 1992 increased employer
contributions in order to reduce advances from the federal loan
account. The additional increases in contributions provided by the
new legislation should result in a positive balance in the
Unemployment Compensation Trust Fund by the end of December 1994
and rebuild reserves in the system to over $1 billion by the end of
1996.
Litigation. The Attorney General of the
Commonwealth is not aware of any cases involving the Commonwealth
which in his opinion would
affect materially its financial condition. However, certain cases
exist containing substantial claims, among which are the following:
The United States has brought an action on behalf
of the U.S. Environmental Protection Agency alleging violations of
<PAGE>
the Clean Water Act and seeking to enforce the clean-up of Boston
Harbor. The Massachusetts Water
Resources Authority (the "MWRA") has assumed primary responsibility
for developing and implementing a court approved plan and time
table for the construction of the treatment facilities necessary to
achieve compliance with the federal requirements. The MWRA
currently projects that total cost of
construction of the waste water facilities required under the
court's order as approximately $3.5 billion in current dollars.
Under the Clean Water Act, the
Commonwealth may be liable for any costs of complying with any
judgment in this case to the extent that the MWRA or a municipality
is prevented by state law from raising revenues necessary to comply
with such a judgment.
In a recent suit filed against the Department of
Public Welfare, plaintiffs allege that the Department has
unlawfully denied personal care
attendant services to severely disabled Medicaid recipients. The
Court has denied plaintiffs' motion for a preliminary injunction
and has not yet acted on plaintiffs' motion for reconsideration of
that decision. If plaintiffs prevail on
their claims, the suit could cost the Commonwealth as much as $200
million.
In a suit filed against the Commissioner of
Revenue, plaintiffs challenge the inclusion of income from tax
exempt obligations in the measure
of the bank excise tax. The Appellate Tax Board issued a finding
of fact and report in favor of the Commissioner of Revenue on
September 30, 1993. An appeal has been filed. Approximately $400
million is at issue.
There are also several tax matters in litigation
which may result in an aggregate liability in excess of $195
million.
Ratings. Beginning on May 17, 1989, Standard &
Poor's downgraded its ratings on Massachusetts general obligation
bonds and certain agency issues from AA+ to AA. The ratings were
downgraded three additional
times to a low of BBB on December 31, 1989. On July 14, 1989,
Standard & Poor's also downgraded its rating on temporary general
obligation notes and various agency notes from SP-1 + to SP-1 and
on general obligation short-term notes and on short-term agency
debt from SP-1 to SP-2. Bonds rated BBB may
have speculative characteristics. The rating remained at BBB until
September 9, 1992 when Standard & Poor's raised its rating to A.
At this same time, such bonds were removed from CreditWatch. On
October 14, 1993, Standard & Poor's raised its rating from A to A+.
On June 21, 1989, Moody's Investors Service
downgraded its rating on Massachusetts general obligation bonds Aa
<PAGE>
to A. The ratings were further reduced on two occasions to a low
on March 19, 1990 of Baa where it remained until September 10, 1992
when Moody's increased its rating to A.
Fitch Investors Service, Inc. lowered its rating
on the Commonwealth's bonds from AA to A on September 29, 1989. As
of December 5, 1991, its qualification of the bonds changed from
Uncertain Trends to Stabilizing Credit Trend. On October 13, 1993,
Fitch Investors raised its rating from A to A+.
Ratings may be changed at any time and no
assurance can be given that they will be not be revised or
withdrawn by the rating agencies, if in
their respective judgments, circumstances should warrant such
action. Any downward revision or withdrawal of a rating could have
an adverse effect on market prices of the bonds.
The Sponsor is unable to predict what effect, if
any, such factors may have on the Bonds in the Massachusetts Trust.
Nevertheless, investors should be aware that if there should be a
financial crisis relating to Massachusetts, its public bodies or
municipalities (including the city of Boston), the market value and
marketability of all outstanding bonds issued by the
Commonwealth and its public authorities or municipalities,
including the Bonds in the Massachusetts Trust, could be adversely
affected.
New York Trust
New York State
The State's current fiscal year commenced on April
1, 1994, and ends in March 31, 1995, and is referred to herein as
the State's 1994-95 fiscal year. The State's budget for the
1994-95 fiscal year was enacted by the
Legislature on June 7, 1994, more than two months after the start
of the fiscal year. Prior to adoption of the budget, the
Legislature enacted appropriations for
disbursements considered to be necessary for State operations and
other purposes, including all necessary appropriations for debt
service. The State Financial Plan for the 1994-95 fiscal year was
formulated on June 16, 1994 and is based on the State's budget as
enacted by the Legislature and signed into law by the Governor.
The economic and financial condition of the State
may be affected by various financial, social, economic and
political factors. Those factors can be very complex, may vary
from fiscal year to fiscal year, and are
frequently the result of actions taken not only by the State and
its agencies and instrumentalities, but also by entities, such as
the Federal government, that are not under the control of the
State.
<PAGE>
The State Financial Plan is based upon forecasts
of national and State economic activity. Economic forecasts have
frequently failed to predict
accurately the timing and magnitude of changes in the national and
the State economies. Many uncertainties exist in forecasts of both
the national and State
economies, including consumer attitudes toward spending, Federal
financial and monetary policies, the availability of credit, and
the condition of the world
economy, which could have an adverse effect on the State. There
can be no assurance that the State economy will not experience
results in the current fiscal
year that are worse than predicted, with corresponding material and
adverse effects on the State's projections of receipts and
disbursements.
The State Division of the Budget ("DOB") believes
that its projections of receipts and disbursements relating to the
current State Financial
Plan, and the assumptions on which they are based, are reasonable.
Actual results, however, could differ materially and adversely from
the projections set forth below, and those projections may be
changed materially and adversely from time to time.
As noted above, the financial condition of the
State is affected by several factors, including the strength of the
State and regional economy and
actions of the Federal government, as well as State actions
affecting the level of receipts and disbursements. Owing to these
and other factors, the State may,
in future years, face substantial potential budget gaps resulting
from a significant disparity between tax revenues projected from a
lower recurring receipts base
and the future costs of maintaining State programs at current
levels. Any such recurring imbalance would be exacerbated if the
State were to use a significant
amount of nonrecurring resources to balance the budget in a
particular fiscal year. To address a potential imbalance for a
given fiscal year, the State would
be required to take actions to increase receipts and/or reduce
disbursements as it enacts the budget for that year, and under the
State Constitution the Governor
is required to propose a balanced budget each year. To correct
recurring budgetary imbalances, the State would need to take
significant actions to align
recurring receipts and disbursements in future fiscal years. There
can be no assurance, however, that the State's actions will be
sufficient to preserve budgetary balance in a given fiscal year or
to align recurring receipts and disbursements in future fiscal
years.
The 1994-95 State Financial Plan contains actions
that provide nonrecurring resources or savings, as well as actions
<PAGE>
that impose nonrecurring losses of receipts or costs. It is
believed that the net positive effect of
nonrecurring actions represents considerably less than one-half of
one percent of the State's General Fund, an amount significantly
lower than the amount
included in the State Financial Plans in recent years; it is
believed that those actions do not materially affect the financial
condition of the State. In addition to those nonrecurring actions,
the 1994-95 State Financial Plan reflects the use of $1.026 billion
in the positive cash margin carried over from the prior fiscal
year, resources that are not expected to be available in the
State's 1995-96 fiscal
year.
The General Fund is the general operating fund of
the State and is used to account for all financial transactions,
except those required to be accounted for in another fund. It is
the State's largest fund and receives almost
all State taxes and other resources not dedicated to particular
purposes. In the State's 1994-95 fiscal year, the General Fund is
expected to account for
approximately 52 percent of total governmental-fund receipts and 51
percent of total governmental-fund disbursements. General Fund
moneys are also transferred to other funds, primarily to support
certain capital projects and debt
service payments in other fund types.
New York State's financial operations have
improved during recent fiscal years. During the period 1989-90
through 1991-92, the State incurred General Fund operating deficits
that were closed with receipts from the
issuance of tax and revenue anticipation notes ("TRANs"). First,
the national recession, and then the lingering economic slowdown in
the New York and regional economy, resulted in repeated shortfalls
in receipts and three budget deficits. For its 1992-93 and 1993-94
fiscal years, the State recorded balanced budgets on a cash basis,
with substantial fund balances in each year as described
below.
The State ended its 1993-94 fiscal year with a
balance of $1.140
billion in the tax refund reserve account, $265 million in its
Contingency Reserve Fund ("CRF") and $134 million in its Tax
Stabilization Reserve Fund.
These fund balances were primarily the result of an improving
national economy, State employment growth, tax collections that
exceeded earlier projections and disbursements that were below
expectations. Deposits to the
personal income tax refund reserve have the effect of reducing
reported personal income tax receipts in the fiscal year when made
and withdrawals from such
reserve increase receipts in the fiscal year when made. The
balance in the tax refund service account will be used to pay
<PAGE>
taxpayer refunds, rather than drawing from 1994-95 receipts.
Of the $1.140 billion deposited in the tax refund
reserve account, $1.026 billion was available for budgetary
planning purposes in the 1994-95 fiscal year. The remaining $114
million will be redeposited in the tax
refund reserve account at the end of the State's 1994-95 fiscal
year to continue the process of restructuring the State's cash flow
as part of the Local Government Assistance Corporation ("LGAC")
program. The balance in the CRF will be used to meet the cost of
litigation facing the State. The Tax
Stabilization Reserve Fund may be used only in the event of an
unanticipated General Fund cash-basis deficit during the 1994-95
fiscal year.
Before the deposit of $1.140 billion in the tax
refund service account, General Fund receipts in 1993-94 exceeded
those originally projected
when the State Financial Plan for that year was formulated on April
16, 1993 by $1.002 billion. Greater-than-expected receipts in the
personal income tax, the bank tax, the corporation franchise tax
and the estate tax accounted for most
of this variance, and more than offset weaker-than-projected
collections from the sales and use tax and miscellaneous receipts.
Collections from individual
taxes were affected by various factors including changes in Federal
business laws, sustained profitability of banks, strong performance
of securities firms, and higher-than-expected consumption of
tobacco products following price cuts.
Disbursements and transfers from the General Fund
were $303 million below the level projected in April 1993, an
amount that would have been $423 million had the State not
accelerated the payment of Medicaid billings,
which in the April 1993 State Financial Plan were planned to be
deferred into the 1994-95 fiscal year. Compared to the estimates
included in the State
Financial Plan formulated in April 1993, lower disbursements
resulted from lower spending for Medicaid, capital projects, and
debt service (due to
refundings) and $114 million used to restructure the State's cash
flow as part of the LGAC program. Disbursements were
higher-than-expected for general
support for public schools, the State share of income maintenance,
overtime for prison guards, and highway snow and ice removal.
In certain prior fiscal years, the State has
failed to enact a budget prior to the beginning of the State's
fiscal year. A delay in the adoption
of the State's budget beyond the statutory April 1 deadline and the
resultant delay in the State's Spring borrowing has in certain
prior years delayed the projected receipt by the City of State aid,
and there can be no assurance that
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State budgets in the future fiscal years will be adopted by the
April 1 statutory deadline.
The State has noted that its forecasts of tax
receipts have been subject to variance in recent fiscal years. As
a result of these uncertainties and
other factors, actual results could differ materially and adversely
from the State's current projections and the State's projections
could be materially and
adversely changed from time to time. There can be no assurance that
the State will not face substantial potential budget gaps in future
years resulting from a
significant disparity between tax revenues projected from a lower
recurring receipts base and the spending required to maintain State
programs at current levels. To address any potential budgetary
imbalance, the State may need to take significant actions to align
recurring receipts and disbursements in future fiscal
years.
Ratings on general obligation bonds of the State
of New York were lowered by Standard & Poor's Corporation and
Moody's Investors Service
during 1990 from AA- to A and Aa to A, respectively. On January 6,
1992, Moody's Investors Service lowered its rating on certain
appropriations-backed
debt of New York State to Baa1 from A. The agency cited the
failure of Governor Mario M. Cuomo and New York State lawmakers to
close New York's current year budget gap. Moody's Investors
Services also placed the
general obligation, State guaranteed and New York local Municipal
Assistance Corporation Bonds under review for possible downgrade in
coming months. In addition, on January 13, 1992, Standard & Poor's
Corporation lowered its rating
on general obligation debt and guaranteed debt to A- from A.
Standard & Poor's Corporation also downgraded its rating on
variously rated debt, State moral obligations, contractual
obligations, lease purchase obligations and other
State guarantees. Additional reductions in ratings could result in
a loss to Unit holders.
As of March 31, 1994, the State had approximately
$5.370 billion in general obligation bonds, excluding refunding
bonds and $294 million in bond anticipation notes outstanding. On
May 24, 1993, the State issued $850
million in tax and revenue anticipation notes, all of which matured
on December 31, 1993. Principal and interest due on general
obligation bonds and interest due on bond anticipation notes and on
tax and revenue anticipation notes were
$782.5 million for the 1993-94 fiscal year, and are estimated to be
$786.3 million for the 1994-95 fiscal year. These figures do not
include interest on refunding bonds issued in July 1992, to the
extent that such interest is to be paid from escrowed funds.
<PAGE>
State Authorities
The fiscal stability of the State is related to
the fiscal stability of its authorities, which generally have
responsibility for financing, constructing,
and operating revenue-producing benefit facilities. Certain
authorities of the State, including the State Housing Finance
Agency ("HFA"), the Urban Development Corporation ("UDC") and the
Metropolitan Transportation
Authority ("MTA") have faced and continue to experience substantial
financial difficulties which could adversely affect the ability of
such authorities to make payments of interest on, and principal
amounts of, their respective bonds. Should any of its authorities
default on their respective obligations, the State's
access to public credit markets could be impaired. The
difficulties have in certain instances caused the State (under its
so-called "moral obligation") to
appropriate funds on behalf of the authorities. Moreover, it is
expected that the problems faced by these authorities will continue
and will require increasing
amounts of State assistance in future years. Failure of the State
to appropriate necessary amounts or to take other action to permit
those authorities having
financial difficulties to meet their obligations (including HFA,
UDC and MTA) could result in a default by one or more of the
authorities. Such default, if it
were to occur, would be likely to have a significant adverse effect
on investor confidence in, and therefore the market price of,
obligations of the defaulting
authority. In addition, any default in payment of any general
obligation of any authority whose bonds contain a moral obligation
provision could constitute a
failure of certain conditions that must be satisfied in connection
with Federal guarantees of City and MAC obligations and could thus
jeopardize the City's long-term financing plans.
The fiscal stability of the State is related to
the fiscal stability of its authorities, which generally have
responsibility for financing, constructing
and operating revenue-producing public benefit facilities. The
authorities are not subject to the constitutional restrictions on
the incurrence of debt which apply
to the State itself and may issue bonds and notes within the
amounts of, and as otherwise restricted by, their legislative
authorization. As of September 30,
1992, there were 18 authorities that had outstanding debt of $100
million or more. The aggregate outstanding debt, including bonds,
of these 18 authorities
was 63.5 billion as of September 30, 1993. As of March 31, 1994,
aggregate public authority debt outstanding as State supported debt
was $21.1 billion as State-related debt was $29.4 billion.
<PAGE>
The authorities are generally supported by
revenues generated by the projects financed or operated, such as
fares, user fees on bridges,
highway tolls and rentals for dormitory rooms and housing. In
recent years, however, the State has provided financial assistance
through appropriations, in some cases of a recurring nature, to
certain of the 18 authorities for operating
and other expenses and, in fulfillment of its commitments on moral
obligation indebtedness or otherwise for debt service. This
assistance is expected to continue to be required in future years.
The MTA oversees the operation of New York City's
subway and bus lines by its affiliates, the New York City Transit
Authority and the Manhattan and Bronx Surface Transit operating
(collectively, the "Transit Authority" or the "TA"). Through MTA's
subsidiaries, the Long Island
Railroad Company, the Metro-North Commuter Railroad Company and the
Metropolitan Suburban Bus Authority, the MTA operates certain
commuter rail and bus lines in the New York metropolitan area. In
addition, the Staten Island Rapid Transit Operating Authority, an
MTA subsidiary, operates a rapid transit
line on Staten Island. Through its affiliated agency, the
Triborough Bridge and Tunnel Authority (the "TBTA"), the MTA
operates certain intrastate toll bridges
and tunnels. Because fare revenues are not sufficient to finance
the mass transit portion of these operations, the MTA has depended
and will continue to depend for operating support upon a system of
Federal, State, local government and
TBTA support, including loans, grants and operating subsidies.
Over the past several years, the State has enacted several taxes,
including a surcharge on the profits of banks, insurance
corporations and general business corporations doing
business in the 12-county region served by the MTA
(the"Metropolitan Transportation Region") and a special one-quarter
of 1% regional sales and use tax, that provide additional revenues
for mass transit purposes including
assistance to the MTA, the surcharge, which expires in November
1995, yielded $507 million in calendar year 1992, of which the MTA
was entitled to receive approximately 90 percent, or approximately
$456 million. For the 1994-95 State fiscal year, total State
assistance to the MTA is estimated at approximately
$1.3 billion.
In 1993, State legislation authorized the
refunding of a five-year $9.56 billion MTA capital plan for the
five-year period, 1992 through 1996 (the
"1992-96 Capital Program"). The MTA has received approval of the
1992-96 Capital Program based on this legislation from the 1992-96
Capital Program Review Board, as State law requires. This is the
third five-year plan since the Legislature authorized procedures
for the adoption, approval and amendment of a five-year plan in
1981 for a capital program designed to upgrade the
performance of the MTA's transportation systems and to supplement,
<PAGE>
replace and rehabilitate facilities and equipment. The MTA, the
TBTA and the TA are collectively authorized to issue an aggregate
of $3.1 billion of bonds (net of
certain statutory exclusions) to finance a portion of the 1992-96
Capital Program. The 1992-96 Capital Program is expected to be
financed in significant part through the dedication of State
petroleum business taxes.
There can be no assurance that all the necessary
governmental actions for the Capital Program will be taken, that
funding sources currently
identified will not be decreased or eliminated, or that the 1992-96
Capital Program, or parts thereof, will not be delayed or reduced.
Furthermore, the power of the MTA to issue certain bonds expected
to be supported by the appropriation of State petroleum business
taxes is currently the subject of a court
challenge. If the Capital Program is delayed or reduced, ridership
and fare revenues may decline, which could, among other things,
impair the MTA's ability to meet its operating expenses without
additional State assistance.
The State's experience has been that if an
Authority suffers serious financial difficulties, both the ability
of the State and the Authorities to
obtain financing in the public credit markets and the market price
of the State's outstanding bonds and notes may be adversely
affected. The Housing Finance
Agency ("HFA") and the Urban Development Corporation ("UDC") have
in the past required substantial amounts of assistance from the
State to meet debt service costs or to pay operating expenses.
Further assistance, possibly in
increasing amounts, may be required for these, or other,
Authorities in the
future. In addition, certain statutory arrangements provide for
State local assistance payments otherwise payable to localities
whose local assistance payments otherwise payable to localities to
be made under certain circumstances to certain Authorities. The
State has no obligation to provide additional
assistance to localities whose local assistance payments have been
paid to Authorities under these arrangements. However, in the
event that such local assistance payments are so diverted, the
affected localities could seek additional State funds.
New York City and Other Localities
The City, with a population of approximately 7.3
million, is an international center of business and culture. Its
non-manufacturing economy is
broadly based, with the banking and securities, life insurance,
communications, publishing, fashion design, retailing and
construction industries accounting for
a significant portion of the City's total employment earnings.
Additionally, the City is the nation's leading tourist destination.
<PAGE>
The City's manufacturing activity is conducted primarily in apparel
and publishing.
The national economic recession which began in
July 1990 has adversely impacted the City harder than almost any
other political jurisdiction
in the nation. As a result, the City, with approximately 3 percent
of national employment, has lost approximately 20 percent of all
U.S. jobs during the
recent economic downturn and, consequently, has suffered erosion of
its local tax base. In total, the City private sector employment
has plummeted by approximately 360,000 jobs since 1987. But, after
nearly five years of decline, the City appears to be on the verge
of a broad-based recovery which will lift
many sectors of the local economy. Most of the nascent local
recovery can be attributed to the continued improvement in the U.S.
economy, but a great deal
of the strength expected in the City economy will be due to local
factors, such as the heavy concentration of the securities and
banking industries in the City. The current forecast calls for
modest employment growth of about 20,000 a year (0.6 percent) on
average through 1998 with some slowing but still positive growth in
employment in 1995-96 as U.S. growth slows (local job gains slow
from 25,000 to around 10,000 per year).
During the most recent economic downturn, the City
has faced recurring extraordinary budget gaps that have been
addressed by undertaking one-time, one-shot budgetary initiatives
to close then projected gaps in order to
achieve a balanced budget as required by the laws of the State.
For example, in order to achieve a balanced budget for the 1992
fiscal year, the City increased
taxes and reduced services during the 1991 fiscal year to close a
then projected gap of $3.3 billion in the 1992 fiscal year which
resulted from, among other things, lower than expected tax revenue
of approximately $1.4 billion, reduced State aid for the City of
approximately $564 million and greater than projected
increases in legally mandated expenditures of approximately $400
million, including public assistance and Medicare expenditures.
The gap-closing measures for fiscal year 1992 included receipt of
$605 million from tax increases, approximately $1.5 billion of
proposed service reductions and proposed productivity savings of
$545 million.
Notwithstanding its recurring projected budget
gaps, for fiscal years 1981 through 1993 the City achieved balanced
operating results (the City's
General Fund revenues and transfers reduced by expenditures and
transfers), as reported in accordance with Generally Accepted
Accounting Principles ("GAAP"), and the City's 1994 fiscal year
results are projected to be balanced in accordance with GAAP.
<PAGE>
The City's ability to maintain balanced budgets in
the future is subject to numerous contingencies; therefore, even
though the City has managed
to close substantial budget gaps in recent years in order to
maintain balanced operating results, there can be no assurance that
the City will continue to maintain a balanced budget as required by
State law without additional tax or other revenue increases or
reduction in City services, which could adversely affect the City's
economic base.
Pursuant to the laws of the State, the City
prepares an annual four-year financial plan, which is reviewed and
revised on a quarterly basis and
which includes the City's capital, revenue and expense projections.
The City is required to submit its financial plans to review
bodies, including the New
York State Financial Control Board ("Control Board"). If the City
were to experience certain adverse financial circumstances,
including the occurrence or
the substantial likelihood and imminence of the occurrence of an
annual operating deficit of more than $100 million or the loss of
access to the public credit markets to satisfy the City's capital
and seasonal financing requirements, the Control Board would be
required by State law to exercise powers, among
others, of prior approval of City financial plans, proposed
borrowings and certain contracts.
1995-1998 Financial Plan. On July 8, 1994, the
City submitted to the Control Board the Financial Plan for the
1995-1998 fiscal years (the "1995-1998 Financial Plan or "Financial
Plan"), which relates to the City, the
Board of Education ("BOE") and the City Universiuty of New York
("CUNY"). The Financial Plan is based on the City's expense and
capital budgets for the City's 1995 fiscal year, which were adopted
on June 23, 1994.
The 1995-1998 Financial Plan projects revenues and
expenditures for the 1995 fiscal year balanced in accordance with
GAAP. The projections for the 1995 fiscal year reflect proposed
actions to close a previously projected gap of approximately $2.3
billion for the 1995 fiscal year, which include City actions
aggregating $1.9 billion, a $288 million increase in State
actions over the 1994 and 1995 fiscal years, and a $200 million
increase in Federal assistance. The City actions include proposed
agency actions aggregating $1.1 billion, including productivity
savings; tax and fee enforcement initiatives;
service reductions; and savings from the restucturing of City
services. City actions also include savings of $45 million
resulting from proposed tort reform,
the projected transfer to the 1995 fiscal year of $171 million of
the projected 1994 fiscal year surplus, savings of $200 million for
employee health care costs, $51 million in reduced pension costs,
savings of $225 million from refinancing
<PAGE>
City bonds and $65 million from the proposed sale of certain City
assets. The proposed savings for employee health care ocsts are
subject to collective bargaining negotiation with the City's
unions; the proposed savings from tort
reform will require the approval of the State Legislature; and the
$200 million increase in Federal assistance is subject to approval
by Congress and the President.
The Financial Plan also set forth projections for
the 1996 through 1998 fiscal years and outlines a proposed
gap-closing program to close projected gaps of $1.5 billion, $2.0
billion and a $2.4 billion for the 1996 through 1998 fiscal years,
respectively, after successful implementation of the $2.3 billion
gap-closing program for the 1995 fiscal year.
The projections for the 1996 through 1998 fiscal
years assume the extension by the State Legislature of the 14%
personal income tax surcharge beyond calendar year 1995 and
extension of the 12.5% personal income tax
surcharge beyond calendar year 1996, resulting in combined revenues
of $159 million, $633 million and $920 million in the 1996, 1997
and 1998 fiscal years,
respectively. However, as part of the tax reduction program
refected in the Financial Plan, the City is proposing the
elimination of the 12.5% personal
income tax surcharge when it expires at a cost of $184 million in
fiscal year 1997 and $455 million in fiscal year 1998. The proposed
gap-closing actions include City actions aggregating $1.2 billion,
$1.5 billion and $1.7 billion in the
1996 through 1998 fiscal years, respectively; $275 million, $375
million and $525 million in proposed additional State actions in
the 1996 through 1998 fiscal
years, repectively, primarily from the proposed State assumption of
certain Medicaid costs; and $100 million and $200 million in
proposed additional Federal assistance in the 1997 and 1998 fiscal
years, respectively. The proposed
additional City actions, a substantial number of which are
unspecified, include additional spending reductions, the reduction
of City personnel through attrition,
government efficiency initiatives, procurement initiatives, labor
productivity initiatives, and the proposed privatization of City
sewage treatment plants.
Certain of these initiatives may be subject to negotiation with the
City's municipal unions. Various actions proposed in the Financial
Plan for the 1996-1998 fiscal years, including the proposed state
actions, are subject to approval by Congress and the President. The
State Legislature has in previous legislative
sessions failed to approve certain of the City's proposals for the
State assumption of certain Medicaid costs and mandate relief,
thereby increasing the uncertainty as to the receipt of the State
assistance included in the Financial Plan. In addition, the
Financial Plan assumes the continuation of the current
assumption with respect to wages for City employees and the assumed
<PAGE>
9% earnings on pension fund assets for the 1994 fiscal year are
expected to be substantially below the 9% assumed rate, which will
increase the City's future
pension contributions. In addition, a review of the pension fund
earnings assumptions is currently being conducted which could
firther increase the City's
future pension contributions. In addition, a review of the pension
fund earnings assumptions is currently being conducted which could
further increase the City's future pension contributions by a
substantial amount.
The City expects that tax revenue for the 1994
fiscal year will be approximaately $65 million less than forecast
in the 1994 Modification,
primarily due to shortfalls in the personal income tax and sales
tax,and that expenditures will be approximately $25 million greater
than forecast. Accordingly, the $171 million of the projected
surplus for the 1994 fiscal year,
which is currently projected in the 1994 Modification and the
Financial Plan to be transferred to the 1995 fiscal year will
decrease to 81 million. As a result,
the City will reduce expenditures for the 1995 fiscal year to
offset this decrease,
which is expected to be reflected in the first quarter modification
to the Financial Plan. In addition, the Financial Plan assumes that
a special session of the State
Legislature, which may take place in the near future, will enact,
and the Governor will sign, State legislation relating to the
proposed tort reform, which
would save the City $45 million in payments for tort liability in
fiscal year 1995, and certain anticipated improvements in fine and
fee collections forecast to earn
$25 million in City revenue in fiscal year 1995, and that the State
Legislature will not enact proposed legislation mandataing
additional pension benefits for City retirees costing the City
approximately $200 million annually. To address
these and other possible contingencies, on July 11, 1994, the Mayor
stated that he will reserve $100 million from authorized spending
by City agencies in fiscal year 1995 in addition to the existing
general reserrves of $150 million. In addition, the City has
identified a $360 million contingency program for the
1995 fiscal year, primarily consisting of layoffs and service
reductions.
Actions to Closse the Gaps. The 1995-1998
Financial Plan reflects a program of proposed actions by the City,
State and Federal governments to close the gaps between projected
revenues and expenditures of $1.5 billion, $2.0 billion and $2.4
billion for the 1996, 1997 and 1998 fiscal years, respectively.
City gap-closing actions total $1.2 billion in the
1996 fiscal year, $1.5 billion in the 1997 fiscal year and $1.7
billion in the 1998 fiscal year. These actions, a substantial
<PAGE>
number of which are unspecified, include additional
spending reductions, aggregate $501 million, $598 million and $532
million in the 1996 through 1998 fiscal years, respectively;
government efficiency
initiatives aggregating $50 million, $100 million and $150 million
in the 1996 through 1998 fiscal years, respectively; labor
productivity initiatives,
aggregating $250 million in each of the 1996 through 1998 fiscal
years; and a proposed privatiztion of City seewage treatment plants
which would result in revenues of $200 million in each of the 1996
through 1998 fiscal years. Certain of these initiatives may
besubject to negotiation with the City's municipal unions.
State actions proposed in the gap-closing program
total $275 million, $375 million and $525 million in each of the
1996, 1997 and 1998 fiscal years, respectively. These actions
include savings primarily from the
proposed State assumption of certain Medicaid costs.
The Federal actions proposed in the gap-closing
program are $100 million and $200 million in increased Federal
assistance in fiscal years 1997 and 1998, respectively.
Various actions proposed in the Financial Plan,
including the proposed increse in State aid, are subject to
approval by the Governor and the State Legislature, and the
proposed increase in Federal aid is subject to approval
by Congress and the President. State and Federal actions are
uncertain and no assurance can be given that such actions will in
fact be taken or that the savings
that the City projects will ersult from these actions will be
realized. The State Legislature failed to approve a substantial
portion of the proposed State assumption of Medicaid costs in the
last session. The Financial Plan assumes that these proposals will
be approved by the State Legislature during the 1995 fiscal year
and that the Federal government will increase its share of funding
for the Medicaid program. If these measures cannot be implemented,
the City will be required to take other actions to decrease
expenditures or increase revenues to maintain a balanced financial
plan.
Although the City has maintained balanced budgets
in each of its last thirteen years, and is projected to achieve
balanced operating results for
the 1993 fiscal year, there can be no assurance that the
gap-closing actions proposed in the Financial Plan can be
successfully implemented or that the City
will maintain a balanced budget in future years without additional
State aid, revenue increases or expenditure reductions. Additional
tax increases and reductions in essential City services could
adversely affect the City's economic base.
<PAGE>
Assumptions. The 1995-1998 Financial Plan is based
on numerous assumptions, including the continuing improvement in
the City's and the region's economy and a modest employment recvery
during calendar year 1994 and the concomitant receipt of
economically sensitive tax revenues in the
amounts projected. The 1995-1998 Financial Plan is subject to
various other uncertainties and contingencies relating to, among
other factors, the extent, if
any, to which wage increses for City employees exceed the annual
increases assumed for the 1995 through 1998 fiscal years;
continuation of the 9% interest
earnings assumptions for pension fund assets and current
assumptions with respect to wages for City employees affecting the
City's required pension fund
contributions; the willingness and ability of the State, in the
context, of the State's current financial condition, to provide the
aid contemplated by the Financial Plan and to take various other
actions to assist the City, including the
proposed State takeover of certain Mdeicaid costs and State mandate
relief; the ability of HHC, BOE and other such agencies to maintain
balanced budgets; the willingness of the Federal government to
provide Federal aid; approval of the
proposed continuation of the personal income tax surcharge;
adoption of the City's budgets by the City Council in substantially
the forms submitted by the
Mayor; the ability of the City to implement proposed reductions in
City personnel and other cost reduction initiatives, which may
require in certain cases
the cooperation of the City's municipal unions, and teh success
with which the City controls expenditures; savings for health care
costs for City employees in
the amounts projected in the Financial Plan; additional
expenditures that may be
incurred due to the requirements of certain legislation requiring
minimum levels of funding for education; the impact on real estate
tax revenues of the current
weakness in the real estate market; the City's ability to market
its securities successfully in the public credit markets; the level
of funding required to comply
with the Americans with Disabilities Act od 1990; and additional
expenditures that may be incurred as a result of deterioration in
the condition of the City's infrastructure.
The projections and assumptions contained in the
1995-1998 Financial Plan are subject to revision which may involve
substantial change, and no assurance can be given that these
estimates and projections, which include
actions which the City expects will be taken but which are not
within the City's control, will be realized.
Certain Reports. From time to time, the Control
Board staff, the City Comptroller and others issue reports and make
public statements regarding the City's financial condition,
<PAGE>
commenting on, among other matters, the City's
financial plans, projected revenues and expenditures and actions by
the City to eliminate projected operating deficits. Some of these
reports and statements have
warned that the City may have underestimated certain expenditures
and overestimated certain revenues and have suggested that the City
may not have adequately provided for future contingencies. Certain
of these reports have
analyzed the City's Future economic and social conditions and have
questioned whether the City has the capacity to generate sufficient
revenues in the future to meet the costs of its expenditure
increases and to provide necessary services.
On March 1, 1994, the City Comptroller issued a
report on the state of the City's economy. The report concluded
that, while the City's long recession is over, moderate growth is
the best the City can expect, with the local
economy being held back by continuing weakness in important
international economies.
On July 11, 1994, the City Comptroller issued a
report on the City's adopted budget for the 1995 fiscal year. The
City Comptroller stated that
if none of the uncertain proposals are implemented, the total risk
could be as much as $763 million to $1.02 billion. risks which were
identified as substantial
risks include a possible $208 million to $268 million increase in
overtime costs; approval by the State Legislature of a tort reform
program to limit damage
claims against the City, which would result in savings of $45
million; the $65 million proceeds from a proposed asset sale;
additional expenditures at Health
and Hospitals Corporation totaling $60 million; and $60 million of
increased pension contributions resulting from lower than assumed
pension fund earnings. Additional possible risks include obtaining
the agreement of municipal unions
to the proposed reduction in City expenditures for health care
costs by $200 million; uncertainties concerning the assumed
improvement in the collection of
taxes, fines and fees totaling $75 million; and uncertainty
concerning the receipt of the $200 million of increased Federal aid
projected for the 1995 fiscal year.
The City Comptroller noted that there are a number of additional
issues, including possible larger than projected expenditures for
foster care and public
assistance and the receipt of $100 million from assumed FICA
refunds. The City Comptroller has also stated in a report issued on
June 8, 1994 that certain of the
reductions in personnel and services proposed in the City's
financial plan submitted to the Control Board on May 10, 1994 (the
"May Financial Plan") will have long-term and, in some cases,
severe consequences for City residents.
<PAGE>
In addition, on July 11, 1994, the private members
of the Control Board, Robert R. Kiley, Heather L. Ruth and Stanley
S. Shuman, issued a statement which concluded that the 1995 fiscal
year is not reasonalbly
balanced and that further budget cuts are unavoidable in the next
six months. In addition, the private members stated that the
Financial Plan does not set forth
a path to structural balance. The private members stated that, in
order ot achieve this goal, City managers must be given fiscal
targets they can be expected to
meet; solid new proposals must be developed that back up the
savings the City has committed to achieve to balance future
budgets; and the deferral of expenses
to future years, through actions such as the sale of property tax
receivables, stretching out pension contributions and delaying debt
service payments through
refundings, must stop. On July 11, 1994, the Control Board staff
stated that the City faces risks of greater than $1 billion and $2
billion for the 1995 and 1996
fiscal years, respectively, and risks of approximately $3 billion
for each of the 1997 and 1998 fiscal years.
Substantially all of the City's full-time
employees are members of labor unions. The Financial Emergency Act
requires that all collective
bargaining agreements entered into by the City and the Covered
Organizations be consistent with the City's current financial plan,
except under certain circumstances, such as awards arrived at
through impasse procedures.
On January 11, 1993, the City announced a
settlement with a coalition of municipal unions, including Local
237 of the International
Brotherhood of Teamsters ("Local 237"), District 37 of the American
Federation of State, County and Municipal Employees ("District
Council 37") and other
unions covering approximately 44% of the City's workforce. The
settlement, which has been ratified by the unions, includes a total
net expenditure increase
of 8.25% over a 39-month period, ending March 31, 1995 for most of
these employees. On April 9, 1993 the City announced an agreement
with the Uniformed Fire Officers Association (the"UFOA") which is
consistent with the coalition agreement. The agreement has been
ratified. The Financial Plan
reflects the costs associated with these settlements and provides
for similar increases for all other City-funded employees.
The Financial Plan provides no additional wage
increases for City employees after their contracts expire in the
1995 and 1996 fiscal years. Each 1% wage increase for all employees
commencing in the 1995 and 1996
fiscal years would cost the City an additional $130 million for the
1995 fiscal year and $140 million for the 1996 fiscal year and $150
<PAGE>
million each year thereafter above the amounts provided for in the
Financial Plan.
The terms of eventual wage settlements could be
determined through the impasse procedure in the New York City
Collective Bargaining Law, which can impose a binding settlement.
New York City Indebtedness. Outstanding
indebtedness having an initial maturity greater than one year from
the date of issuance of the City as of March 31, 1994 was
$21,290,000 compared to $19,624,000 as of March 31, 1993.
A substantial portion of the capital improvement
in the City are financed by indebtedness issued by the Municipal
Assistance Corporation of the
City of New York ("MAC"). MAC was organized in 1975 to provide
financing assistance for the City and also to exercise certain
review functions with respect
to the City's finances. MAC bonds are payable out of certain State
sales and compensating use taxes imposed within the City, State
stock transfer taxes and per capita State aid to the City. Any
balance from these sources after meeting
MAC debt service and reserve fund requirements and paying MAC's
operating expenses is remitted to the City or, in the case of stock
transfer taxes, rebated
to the taxpayers. The State is not, however, obligated to continue
the imposition of such taxes or to continue appropriation of the
revenues therefrom to MAC,
nor is the State obligated to continue to appropriate the State per
capita aid to the City which would be required to pay the debt
service on certain MAC
obligations. MAC has not taxing power and MAC bonds do not create
an enforceable obligation of either the State or the City. As of
March 31, 1994, MAC had outstanding an aggregate of approximately
$4.071 billion of its bonds compared to $4.470 billion as of March
31, 1993.
On February 11, 1991, Moody's Investors Service
lowered its rating on the City's general obligation bonds from A to
Baa1. On July 2, 1993,
Standard & Poor's reconfirmed its A- rating of City bonds,
continued its negative rating outlook assessment and stated that
maintenance of such ratings depended upon the City's making further
progress towards reducing budget gaps
in the outlying years. In January 1995, Standard & Poor's
reconfirmed its negative outlook and placed it on CreditWatch
because of the City's accounting methods.
Litigation
The State is the subject of numerous legal
proceedings relating to State finances, State programs and
miscellaneous tort, real property and contract claims in which the
<PAGE>
State is a defendant and where monetary damages
sought are substantial. These proceedings could adversely affect
the financial condition of the State in the 1994-95 fiscal years or
thereafter.
In addition to the proceedings noted below, the
State is party to other claims and litigation which its legal
counsel has advised are not probable
of adverse court decisions. Although the amounts of potential
losses, if any are not presently determinable, it is the State's
opinion that its ultimate liability in
htese cases is not expected to have a material adverse effect on
the State's financial position in the 1994-95 fiscal year or
thereafter.
Among the more significant of these litigations,
which are at various procedural stages, are those that challenge:
(i) the validity of agreements
and treaties by which various Indian tribes transferred title to
the State of certain land in central New York; (ii) certain aspects
of the State's Medicaid rates and
regulations, including reimbursements to providers of mandatory and
optional Medicaid services; (iii) contamination in the Love Canal
area of Niagara Falls; (iv) an action against State and New York
City officials alleging that the present
level of shelter allowance for public assistance recipients is
inadequate under statutory standards to maintain proper housing;
(v) challenges to the practice of
reimbursing certain Office of Mental Health patient care expenses
from the client's Social Security benefits; (vi) a challenge to the
methods by which the
State reimburses localities for the administrative costs of food
stamp programs; (vii) a challenge to the State's possession of
certain funds taken pursuant to the
State's Abandoned Property Law; (viii) alleged responsibility of
State officials to assist in remedying racial segregation in the
City of Yonkers; (ix) an action
in which the State is a third party defendant, for injunctive or
other appropriate relief concerning liability for the maintenance
of stone groins constructed along
certain areas of Long Island's shoreline; (x) actions challenging
the constitutionality of legislation enacted during the 1990
legislative session which
changed the actuarial funding methods for determining contributions
to State employee retirement systems; (xi) challenges to the
constitutionality of financial
programs of the Thruway Authority authorized by Chapters 166 and
410 of the Laws of 1991, and to the sufficiency of the fiscal year
1991-92 judiciary budget;
(xii) challenges to the delay by the State Department of Social
Services in making two one-week Medicaid payments to the service
providers; (xiii) challenges to provisions of Section 2808-C of the
Public Health Law, which imposes a 13% surcharge on inpatient
<PAGE>
hospital bills paid by commercial insurers
and employee welfare benefit plans and to portions of Chapter 55 of
the laws of 1992 requiring hospitals to impose and remit to the
State an 11% surcharge on hospital bills paid by commercial
insurers; (xiv) challenges promulgated by the
State Department of Social Services of a home assessment resource
review instrument used to determine eligibility for and nature of
home care services for Medicaid recipients; and (xv) challenges to
programs implemented under Section 62 of Chapter 41 of the Laws of
1992 to reduce Medicaid benefits to certain home-relief Medicaid
recipients.
Economy
A national recession commenced in mid-1990. The
State has suffered a more severe economic downturn. The national
recession has been exacerbated in the State by a significant
retrenchment in the financial services
industry, cutbacks in defense spending, and an overbuilt real
estate market.
Over the long term, serious potential economic
problems may continue to aggravate State and local financial
conditions. For decades, the State economy has grown more slowly
than the nation as a whole, resulting in the
gradual erosion of the State's relative economic affluence and tax
base, and the relocation of certain manufacturing operations and
executive offices outside the
State. The causes of this relative decline are varied and complex,
in many cases involving national and international developments
beyond the State's control.
Part of the reason for the long-term relative decline in the State
economy has been attributed to the combined state and local tax
burden, which is among the highest in the nation. The existence of
this tax burden limits the State's ability
to impose higher taxes in the event of future financial
difficulties.
If during the existence of the New York Trust, the
City of New York, the State, or any of its agencies or
municipalities, because of its
or their own financial difficulties, become unable to meet regular
commitments or if there should be a default, moratorium or other
interruption of payments of interest or principal on any obligation
issued by New York City, the State, or a municipality or other
authority in the State, the market value and marketability of Bonds
in the New York Trust, the asset value of Units of the New York
Trust, and the interest income to the New York Trust, could be
adversely affected.
<PAGE>
Pennsylvania Trust
Potential purchasers of Units of the Trust should
consider the fact that the Trust's portfolio consists primarily of
securities issued by the Commonwealth of Pennsylvania (the
"Commonwealth"), its municipalities and
authorities and should realize the substantial risks associated
with an investment in such securities. Although the General Fund
of the Commonwealth (the principal operating fund of the
Commonwealth) experienced deficits in fiscal 1990 and 1991, tax
increases and spending decreases helped return the General
Fund balance to a surplus at June 30, 1992 of $87.5 million and at
June 30, 1993 of $698.9. The deficit in the Commonwealth's
unreserved/undesignated funds of prior years also was reversed to
a surplus of $64.4 million as of June 30, 1993.
Pennsylvania's economy historically has been
dependent upon heavy industry, but has diversified recently into
various services, particularly
into medical and health services, education and financial services.
Agricultural industries continue to be an important part of the
economy, including not only
the production of diversified food and livestock products, but
substantial economic activity in agribusiness and food-related
industries. Service industries
currently employ the greatest share of non-agricultural workers,
followed by the categories of trade and manufacturing. Future
economic difficulties in any of
these industries could have an adverse impact on the finances of
the Commonwealth or its municipalities, and could adversely affect
the market value of the Bonds in the Pennsylvania Trust or the
ability of the respective obligors
to make payments of interest and principal due on such Bonds.
Certain litigation is pending against the
Commonwealth that could adversely affect the ability of the
Commonwealth to pay debt service on
its obligations, including suits relating to the following matters:
(i) the ACLU has filed suit in federal court demanding additional
funding for child welfare
services; the Commonwealth settled a similar suit in the
Commonwealth Court of Pennsylvania and is seeking the dismissal of
the federal suit, inter alia, because of that settlement. The
district court has denied class certification to the
ACLU, and the parties have stipulated to a judgment against the
plaintiffs to allow plaintiffs to appeal teh denial of a class
certification to the Third Circuit;
(ii) in 1987, the Supreme Court of Pennsylvania held that the
statutory scheme for county funding of the judicial system to be in
conflict with the Constitution
of the Commonwealth but stayed judgment pending enactment by the
legislature of funding consistent with the opinion and the
legislature has yet to consider
<PAGE>
legislation implementing the judgment; (iii) several banks have
filed suit against the Commonwealth contesting the
constitutionality of a law enacted in 1989 imposing a bank shares
tax; in July 1994, the Commonwealth Court en banc
upheld the constitutionality of the 1989 bank shares tax law but
struck down a companion law to provide credits againsst the bank
shares tax for new banks;
cross appeals from that decision to the Pennsylvania Supreme Court
have been filed; (iv) litigation has been filed in both state and
federal court by an association of rural and small schools and
several individual school districts and
parents challenging the constitutionality of the Commonwealth's
system for funding local school districts--the federal case has
been stayed pending resolution
of the state case and the state case is in the pre-trial state (no
available estimate
of potential liability); (v) the ACLU has brought a class action on
behalf of inmates challenging the conditions of confinement in
thirteen of the Commonwealth's correctional institutions; a
proposed settlement agreement has
been submitted to the court and members of the class, but the court
has not yet set a date for hearing on the terms of the agreement
(no available estimate of
potential cost of complying with the injunction sought but capital
and personnel costs might cost millions of dollars) and (vi) a
consortium of public interest law
firms has filed a class action suit alleging that the Commonwealth
has not complied with a federal mandate to provide screening,
diagnostic and treatment
services for all Medicaid-eligible children under 21; the district
court denied class certification and has scheduled the case for
trial (potentially liability
estimated at between $9 million and $55 million); and (vii)
litigation has been filed in federal court by the Pennsylvania
Medical Society seeking payment of
the full co-pay and deductible in excess of the maximum fees set
under the Commonwealth's medical assistance program for outpatient
services provided to medical assistance patients who were also
eligible for Medicare; the
Commonwealth received a favorable decision in the federal district
court, but the Pennsylvania Medical Society won a reversal in the
federal circuit court (potential liability estimated at $50 million
per year).
The Commonwealth's general obligation bonds have
been rated AA- by Standard & Poor's and A1 by Moody's for more than
the last five years.
The City of Philadelphia (the "City") has been
experiencing severe financial difficulties which has impaired its
access to public credit markets and a long-term solution to the
City's financial crisis is still being sought. The City
experienced a series of General Fund deficits for fiscal years
<PAGE>
1988 through 1992.
The City has no legal authority to issue deficit
reduction bonds on its own behalf, but state legislation has been
enacted to create an Intergovernmental Cooperation Authority to
provide fiscal oversight for Pennsylvania cities (primarily
Philadelphia) suffering recurring financial difficulties. The
Authority is broadly empowered to assist cities in avoiding
defaults and eliminating deficits by encouraging the adoption of
sound budgetary practices and issuing bonds. In order for the
Authority to issue bonds on behalf
of the City, the City and the Authority entered into an
intergovernmental cooperative agreement providing the Authority
with certain oversight powers
with respect to the fiscal affairs of the City, and the Authority
approved a five-year financial plan prepared by the City. On June
16, 1992, the Authority issued a $474,555,000 bond issue on behalf
of the City. The Authority approved
the latest update of the five-year financial plan on May 2, 1994.
The City has reported a surplus of approximately $15 million for
fiscal year ending June 30,
1994. In July 1993, the Authority issued $643,430,000 of bonds to
refund certain general obligation bonds of the City and to fund
additional capital
projects. In September 1993, the Authority issued $178,675,000 of
bonds to advance refund certain of the bonds of the City and to
fund additional capital projects.
The Units
On the date of this Prospectus, each Unit in a
Trust represented a fractional undivided interest in the principal
and net income of the Trust as set
forth in the "Summary of Essential Information" in Part A. If any
Units are redeemed by the Trustee, the principal amount of the
Bonds in the affected Trust
will be reduced by an amount allocable to redeemed Units and the
fractional undivided interest in the affected Trust represented by
each unredeemed Unit
will be increased. Units will remain outstanding until redeemed
upon tender to the Trustee by any Unit holder, which may include
the Sponsor, or until the
termination of the Trust Agreement. (See "Amendment and
Termination of the Trust Agreement-Termination".) References in
this Prospectus to "Units" are
to Units which represented the fractional undivided interest
indicated in the "Summary of Essential Information" of Part A.
Estimated Current Return and Estimated Long-Term Return
Under accepted bond practice, tax-exempt bonds are
<PAGE>
customarily offered to investors on a "yield price" basis (as
contrasted to a "dollar price"
basis) at the lesser of the yield as computed to maturity of the
bonds or to an earlier redemption date and which takes into account
not only the interest
payable on the bonds but also the amortization or accretion to a
specified date of any premium over or discount from the par
(maturity) value in the bond's
purchase price. Since Units of the Trust are offered on a dollar
price basis, the rate of return on an investment in Units of the
Trust is stated in terms of
"Estimated Current Return", computed by dividing the Net Annual
Income per Unit by the Public Offering Price per Unit. Any change
in either the Net
Annual Income per Unit or the Public Offering Price per Unit will
result in a change in the Estimated Current Return. The Net Annual
Income per Unit of
a Trust is determined by dividing the total annual interest income
of such Trust, less estimated annual fees and expenses of the
Trustee, the Sponsor and the
Evaluator, by the number of Units of such Trust outstanding. The
Net Annual Income per Unit of a Trust will change as the income or
expenses of such Trust
changes and as Bonds are redeemed, paid, sold or exchanged. For a
statement of the Net Annual Income per Unit and the Estimated
Current Return Based on Public Offering Price, see Part A, "Summary
of Essential Information".
The Estimated Long-Term Return for a Trust is a
measure of the return to the investor over the estimated life of a
Trust. The Estimated
Long-Term Return represents an average of the yields to maturity
(or call) of the Bonds in a Trust's portfolio calculated in
accordance with accepted bond
practice and adjusted to reflect expenses and sales charges. In
calculating Estimated Long-Term Return, the average yield for a
Trust's portfolio is derived
by weighing each Bond's yield by the market value of the Bond and
by the amount of time remaining to the date to which the Bond is
priced. Once the
average portfolio yield is computed, this figure is then reduced to
reflect estimated expenses and the effect of the maximum sales
charge paid by investors. The Estimated Long-Term Return
calculation does not take into
account the difference in the timing of payments to Unitholders who
choose the quarterly or semi-annual plan of distribution which will
reduce the economic return compared to those who choose the monthly
plan of distribution.
A Trust may experience expenses and portfolio
charges different from those assumed in the calculation of
Estimated Long-Term Return. There thus can be no assurance that
the Estimated Current Returns or Estimated Long-
<PAGE>
Term Returns quoted for a Trust will be realized in the future.
Since both Estimated Current Return and Estimated Long-Term Return
quoted on a given business day are based on the market value of the
underlying Bonds on that day,
subsequent calculations of these performance measures will reflect
the then-current market value of the underlying Bonds and may be
higher or lower.
Taxes
The following discussion addresses only the tax
consequences of Units held as capital assets and does not address
the tax consequences of Units held by dealers, financial
institutions or insurance companies.
In the opinion of Davis Polk & Wardwell, special
counsel for the Sponsor, under existing law:
The Trust is not an association taxable as a
corporation for Federal income tax purposes, and income received by
the Trust will be treated
as the income of the Unit holders ("Holders") in the manner set
forth below.
Each Holder will be considered the owner of a pro
rata portion of each Bond in the State Trust under the grantor
trust rules of Sections 671-679
of the Internal Revenue Code of 1986, as amended (the "Code"). In
order to determine the face amount of a Holder's pro rata portion
of each Bond on the
Date of Deposit, see "Aggregate Principal" under "Portfolio of
Securities". The total cost to a Holder of his Units, including
sales charges, is allocated to his pro rata portion of each Bond,
in proportion to the fair market values thereof on the date the
Holder purchases his Units, in order to determine his tax basis for
his pro rata portion of each Bond. In order for a Holder who
purchases his Units on the Date of Deposit to determine the fair
market value of his pro rata portion of each Bond on such date, see
"Cost of Securities to Trust" under "Portfolio of Securities".
Each Holder will be considered to have received
the interest on his pro rata portion of each Bond when interest on
the Bond is received by the State Trust. In the opinion of bond
counsel (delivered on the date of issuance of each Bond), such
interest will be excludable from gross income for regular Federal
income tax purposes (except in certain limited circumstances
referred to below). Amounts received by the State Trust pursuant to
a bank letter of credit, guarantee or insurance policy with respect
to payments of principal, premium or interest on a Bond in the
State Trust will be treated for Federal income tax purposes in the
same manner as if such amounts were paid by the
issuer of the Bond.
<PAGE>
The State Trust may contain Bonds which were
originally issued at a discount ("original issue discount"). The
following principles will apply to
each Holder's pro rata portion of any Bond originally issued at a
discount. In general, original issue discount is defined as the
difference between the price at
which a debt obligation was issued and its stated redemption price
at maturity. Original issue discount on a tax-exempt obligation
issued after September 3, 1982, is deemed to accrue as tax-exempt
interest over the life of the obligation
under a formula based on the compounding of interest. Original
issue discount on a tax-exempt obligation issued before July 2,
1982 is deemed to accrue as
tax-exempt interest ratably over the life of the obligation.
Original issue discount
on any tax-exempt obligation issued during the period beginning
July 2, 1982 and ending September 3, 1982 is also deemed to accrue
as tax-exempt interest
over the life of the obligation, although it is not clear whether
such accrual is ratable or is determined under a formula based on
the compounding of interest.
If a Holder's tax basis for his pro rata portion of a Bond issued
with original issue discount is greater than its "adjusted issue
price" but less than its stated
redemption price at maturity (as may be adjusted for certain
payments), the Holder will be considered to have purchased his pro
rata portion of the Bond at an "acquisition premium." A Holder's
adjusted tax basis for his pro rata portion
of a Bond issued with original issue discount will include original
issue discount accrued during the period such Holder held his
Units. Such increases to the
Holder's tax basis in his pro rata portion of the Bond resulting
from the accrual of original issue discount, however, will be
reduced by the amortization of any such acquisition premium.
If a Holder's tax basis for his pro rata portion
of a Bond exceeds the redemption price at maturity thereof (subject
to certain adjustments), the Holder will be considered to have
purchased his pro rata portion of the Bond
with "amortizable bond premium". The Holder is required to amortize
such bond premium over the term of the Bond. Such amortization is
only a reduction of basis for his pro rata portion of the Bond and
does not result in any deduction
against the Holder's income. Therefore, under some circumstances,
a Holder may recognize taxable gain when his pro rata portion of a
Bond is disposed of for an amount equal to or less than his
original tax basis therefor.
A Holder will recognize taxable gain or loss when
all or part of his pro rata portion of a Bond is disposed of by the
State Trust for an amount greater or less than his adjusted tax
basis. Any such taxable gain or loss will be
capital gain or loss, except that any gain from the disposition of
<PAGE>
a Holder's pro rata portion of a Bond acquired by the Holder at a
"market discount" (i.e.,
where the Holder's original tax basis for his pro rata portion of
the Bond (plus any original issue discount which will accrue
thereon until its maturity) is less
than its stated redemption price at maturity) would be treated as
ordinary income to the extent the gain does not exceed the accrued
market discount. Capital gains
are generally taxed at the same rate as ordinary income. However,
the excess of net long-term capital gains over net short-term
capital losses may be taxed at
a lower rate than ordinary income for certain noncorporate
taxpayers. A capital gain or loss is long-term if the asset is held
for more than one year and short-term if held for one year or less.
The deduction of capital losses is subject to limitations. A Holder
will also be considered to have disposed of all or part of his pro
rata portion of each Bond when he sells or redeems all or some of
his Units.
Under Section 265 of the Code, a Holder (except a
corporate Holder) is not entitled to a deduction for his pro rata
share of fees and expenses of the State Trust because the fees and
expenses are incurred in connection with
the production of tax-exempt income. Further, if borrowed funds are
used by a Holder to purchase or carry Units of the State Trust,
interest on such indebtedness will not be deductible for Federal
income tax purposes. In addition, under rules used by the Internal
Revenue Service, the purchase of Units may be considered to have
been made with borrowed funds even though the borrowed funds are
not directly traceable to the purchase of Units. Similar rules may
be applicable for state tax purposes.
From time to time proposals are introduced in
Congress and state legislatures which, if enacted into law, could
have an adverse impact on the
tax-exempt status of the Bonds. It is impossible to predict whether
any legislation in respect of the tax status of interest on such
obligations may be proposed and eventually enacted at the Federal
or state level.
The foregoing discussion relates only to Federal
and certain aspects of New York State and City income taxes.
Depending on their state of residence, Holders may be subject to
state and local taxation and should consult
their own tax advisers in this regard.
* * * * *
Interest on certain tax-exempt bonds issued after
August 7, 1986 will be a preference item for purposes of the
alternative minimum tax ("AMT").
The Sponsor believes that interest (including any original issue
discount) on the Bonds should not be subject to the AMT for
<PAGE>
individuals or corporations under
this rule. A corporate Holder should be aware, however, that the
accrual or receipt of tax-exempt interest not subject to the AMT
may give rise to an alternative minimum tax liability (or increase
an existing liability) because the
interest income will be included in the corporation's "adjusted
current earnings" for purposes of the adjustment to alternative
minimum taxable income required
by Section 56(g) of the Code and will be taken into account for
purposes of the environmental tax on corporations under Section 59A
of the Code, which is based on an alternative minimum taxable
income.
In addition, interest on the Bonds must be taken
into consideration in computing the portion, if any, of social
security benefits that will be included in an individual's gross
income and subject to Federal income
tax. Holders are urged to consult their own tax advisers concerning
an investment in Units.
At the time of issuance of each Bond, an opinion
relating to the validity of the Bond and to the exemption of
interest thereon from regular
Federal income taxes was or will be rendered by bond counsel.
Neither the Sponsor nor Davis Polk & Wardwell nor any of the
special counsel for state tax
matters have made or will make any review of the proceedings
relating to the issuance of the Bonds or the basis for these
opinions. The tax exemption is
dependent upon the issuer's (and other users') compliance with
certain ongoing requirements, and the opinion of bond counsel
assumes that these requirements
will be complied with. However, there can be no assurance that the
issuer (and other users) will comply with these requirements, in
which event the interest on the Bond could be determined to be
taxable retroactively to the date of issuance.
In the case of certain of the Bonds, the opinions
of bond counsel indicate that interest on such Bonds received by
a "substantial user" of the
facilities being financed with the proceeds of such Bonds, or
persons related thereto, for periods while such Bonds are held by
such a user or related person,
will not be exempt from regular Federal income taxes, although
interest on such Bonds received by others would be exempt from
regular Federal income taxes.
"Substantial user" is defined under U.S. Treasury Regulations to
include only a person whose gross revenue derived with respect to
the facilities financed by the issuance of bonds is more than 5% of
the total revenue derived by all users
of such facilities, or who occupies more than 5% of the usable area
of such facilities or for whom such facilities or a part thereof
were specifically constructed, reconstructed or acquired. "Related
<PAGE>
persons" are defined to include certain related natural persons,
affiliated corporations, partners and partnerships.
Similar rules may be applicable for state tax purposes.
After the end of each calendar year, the Trustee
will furnish to each Holder an annual statement containing
information relating to the interest received by the State Trust on
the Bonds, the gross proceeds received by the
Trust from the disposition of any Bond (resulting from redemption
or payment at maturity of any Bond or the sale by the State Trust
of any Bond), and the fees
and expenses paid by the State Trust. The Trustee will also furnish
annual information returns to each Holder and to the Internal
Revenue Service. Holders are required to report to the Internal
Revenue Service the amount of tax-exempt interest received during
the year.
The description of Federal tax consequences
applies separately for each State Trust. Below, arranged
alphabetically by state, is a description of
certain state and local tax consequences for residents of the state
and locality for which such State Trust is named.
California Trust
Messrs. Morgan, Lewis & Bockius acted as special
California counsel to Insured Trust 9 and all prior Insured Trusts.
Messrs. Adams, Duque and Hazeltine, special California counsel to
Insured Trust 21 and New York 14.
At the time of the Closing for each Insured Trust, the respective
counsel to the Trusts rendered an opinion under the existing law
substantially to the effect that:
The Insured California Trust is not an association taxable as
a corporation under the income tax laws of the State of California;
The income, deductions and credits against tax of the Insured
California Trust will be treated as the income, deductions and
credits against tax of the
holders of Units in the Insured California Trust under the income
tax laws of the State of California;
Interest on the bonds held by the Insured California Trust,
and any interest income received by the Insured California Trust
from its investments in units of
previously formed California trusts included within a Multistate
Series of Tax Exempt Securities Trust (the "Previously Formed
Trusts"), to the extent that
such interest is exempt from taxation under California law will not
lose its character as tax-exempt income merely because that income
is passed through to the holders of Units; however, a corporation
subject to the California franchise tax is required to include that
interest income in its gross income for
<PAGE>
purposes of determining its franchise tax liability;
Each holder of a Unit in the Insured California Trust will
have a taxable event when the Insured California Trust disposes of
a bond (whether by sale, exchange, redemption, or payment at
maturity) or when the Unit holder redeems or sells his Units. The
total tax cost of each Unit to a holder of a Unit in the
Insured California Trust is allocated among each of the bond issues
held in the Insured California Trust (in accordance with the
proportion of the Insured California Trust comprised by each bond
issue) in order to determine the holder's per Unit tax cost for
each bond issue, and the tax cost reduction requirements relating
to amortization of bond premium will apply separately to the per
Unit tax cost of each bond issue. Therefore, under some
circumstances, a holder of a Unit may realize a taxable gain when
the Insured California Trust
which issued such Unit disposes of a bond or the holder's Units are
sold or redeemed for an amount equal to or less than his original
cost of the bond or
Unit. Similarly, each Unit holder will have a taxable event (i)
when a Previously Formed Trust disposes of a bond, and (ii) when
the Insured California Trust disposes of any of its ownership
interests in a Previously Formed Trust;
Each holder of a Unit in the Insured California Trust is
deemed to be the owner of a pro rata portion of the Insured
California Trust under the personal property tax laws of the State
of California; and
The pro rata ownership of the bonds held by the Insured
California Trust, as well as the interest income therefrom, are
exempt from California personal property taxes.
Massachusetts Trust
At the time of the closing for each Massachusetts
Trust, Messrs. Palmer & Dodge, special Massachusetts counsel on
Massachusetts tax matters,
rendered an opinion under then existing Massachusetts law
substantially to the effect that:
Tax-exempt interest for federal income tax
purposes (including insurance payments to the extent they are
treated as tax-exempt interest for
federal income tax purposes) received by or through the
Massachusetts Trust, or by or through a Previous Trust in which the
Massachusetts Trusts owns an
interest, on obligations issued by Massachusetts its counties,
municipalities, authorities, political subdivisions, or
instrumentalities, by the government of
Puerto Rico or by its authority or by the government of Guam or by
its authority, will not result in a Massachusetts income tax
liability for the Massachusetts Trust or for Unitholders who are
<PAGE>
subject to Massachusetts income
taxation under Massachusetts General Laws, Chapter 62.
Capital gain and capital loss realized by the
Massachusetts Trust and included in the Federal gross income of
Unitholders who are subject to
Massachusetts income taxation under General Laws, Chapter 62 will
be included as capital gains and losses in the Unit holder's
Massachusetts gross income,
except where capital gain is specifically exempted from income
taxation under the Massachusetts statute authorizing issuance of
the obligations held by the
Massachusetts Trust or held by the Previous Trusts in which the
Massachusetts Trust owns an interest, and will not result in a
Massachusetts income tax liability for the Massachusetts Trust.
Gains and losses realized upon sale or redemption
of Units by Unitholders who are subject to Massachusetts income
taxation under Massachusetts General Law, Chapter 62 will be
includible in their Massachusetts gross income.
Pennsylvania Trust
At the time of the closing for each Pennsylvania
Trust, Messrs. Drinker Biddle & Reath, special Pennsylvania counsel
on Pennsylvania tax matters, rendered an opinion under then
existing Pennsylvania law substantially to the effect that:
Units evidencing fractional undivided interests in
the Pennsylvania Trust are not subject to any of the personal
property taxes presently in effect in Pennsylvania to the extent
that the Trust is comprised of
bonds issued by the Commonwealth of Pennsylvania, any public
authority, commission, board or other agency created by the
Commonwealth of Pennsylvania, any political subdivision of the
Commonwealth of Pennsylvania
or any public authority created by any such political subdivision
("Pennsylvania Bonds"). The taxes referred to include the County
Personal Property Tax imposed on residents of Pennsylvania by the
Act of June 17, 1913, P.L. 507,
as amended, and the additional personal property taxes imposed on
Pittsburgh residents by the School District of Pittsburgh under the
Act of June 20, 1947, P.L. 733, as amended, and by the City of
Pittsburgh under Ordinance No. 599
of December 28, 1967. The portion, if any, representing
Pennsylvania Bonds held by Units in a Prior Trust are also not
subject to such taxes. The portion,
if any, of such Units representing bonds or other obligations
issued by the Government of Guam or by its authority and bonds
issued by the Government of Puerto Rico or by its authority and
bonds issued by the Government of the
<PAGE>
Virgin Islands or by a municipality thereof (collectively,
"Possession Bonds") is not expressly exempt from taxation under the
foregoing Acts, but because
such bonds are expressly relieved from state taxation by United
States statutes, the Commonwealth of Pennsylvania and its political
subdivisions are precluded from imposing any direct tax on
Possession Bonds, and, therefore, such bonds are not subject to
Personal Property Tax.
Pennsylvania Trust Units may be subject to tax in
the estate of a resident decedent under the Pennsylvania
inheritance and estate tax.
Income received by a Unit holder attributable to
interest realized by the Pennsylvania Trust from Pennsylvania
Bonds, Possession Bonds and Prior
Trust Units or attributable to insurance proceeds on account of
such interest, is not taxable to individuals, estates or trusts
under the Personal Income Tax
imposed by Article III of the Tax Reform Code of 1971. Neither is
such income taxable to corporations under the Corporate Net Income
Tax imposed by Article IV of the Tax Reform Code of 1971 (in the
case of insurance proceeds
to the extent that they are exempt for Federal Income Tax
purposes); nor to individuals under the Pennsylvania School
District Net Income Tax ("School
District Tax") imposed on Philadelphia resident individuals under
authority of the Act of August 9, 1963, P.L. 640.
Income received by a Unit Holder attributable to
gain on the sale or other disposition by the Pennsylvania Trust of
Pennsylvania Bonds,
Possession Bonds and Prior Trust Units is not taxable to
individuals, estates or trusts under the Personal Income Tax. Such
gain is also not taxable under the
Corporate Net Income Tax or under the School District Tax, except
that gain on the sale or other disposition of Possession Bonds and
that portion of Prior Trust Units attributable to such bonds held
for six months or less may be taxable under the School District
Tax.
To the extent that gain on the disposition of a
Unit represents gain realized on Pennsylvania or Possession Bonds
held by the Pennsylvania Trust or held by Prior Trust Units, such
gain may be subject to the Personal
Income Tax and Corporate Net Income Tax. Such gain may also be
subject to the School District Tax, except the gain realized with
respect to a Unit held for more than six months is not subject to
the School District Tax.
No opinion is expressed regarding the extent, if
any, to which Units, or interest and gain thereon, is subject to,
or included in the measure of, the special taxes imposed by the
<PAGE>
Commonwealth of Pennsylvania on banks and
other financial institutions or any privilege, excise, franchise or
other tax imposed on business entities not discussed herein
(including the Corporate Capital Stock/Foreign Franchise Tax).
Insurance on the Bonds in the Portfolio of a Trust
Insurance guaranteeing the scheduled payment to
maturity of all principal and interest ("Insurance to Maturity")
has been obtained for some or all of the Bonds in each Trust at the
cost of the issuer of the Bond, a previous holder or the Sponsor as
of the first business day after the Date of Deposit. Insurance to
Maturity was obtained from the Municipal Bond Insurance
Association ("MBIA"), as of the Date of Deposit, for all the Bonds
in the Portfolios of Insured Series 1-4, Insurance to Maturity was
obtained for all the Bonds in the Portfolios of Insured Series 5-9
from one or more of the following
insurers; MBIA, AMBAC Indemnity Corporation ("AMBAC"), Municipal
Bond Investors Assurance Corporation ("MBIAC"), Capital Guaranty
Insurance Company ("CGIC"), Financial Guaranty Insurance Company
("Financial Guaranty"), Asset Guaranty Reinsurance Company ("Asset
Guaranty"), Capital
Markets Insurance Company ("CAPMAC"), Connie Lee Insurance Company
("Connie Lee") or FInancial Security Assurance Inc. ("FSA").
(collectively, the "Insurance Companies".) For Insured Series 5
and subsequent Insured Series, the description of the Bonds under
"Portfolio of Securities" in Part A indicates
which Insurance Company has issued Insurance to Maturity with
respect to each Bond.
The insurance policies are non-cancellable and
will continue in force so long as Bonds are outstanding and the
insurers remain in business. The
respective insurance policies guarantee the scheduled payment of
principal and interest on but do not guarantee the market value of
the Bonds covered by each
policy or the value of the Units. In the event the issuer of an
insured Bond defaults in payment of interest or principal the
insurance company insuring the Bond will be required to pay to the
trustee any interest or principal payments
due. Payment under each of the insurance policies is to be made in
respect of principal of and interest on Bonds covered thereby which
becomes due for payment but is unpaid. Each such policy provides
for payment of the defaulted
principal or interest due to a trustee or paying agent. 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
rights to receive such payment.
As a result of the insurance on the Bonds of each
Trust, the Units thereof received a rating of AAA by Standard &
Poor's Corporation as of the Date of Deposit for each such Trust.
There can be no assurance that Units of a Trust will retain this
<PAGE>
AAA rating. Insurance is not a substitute for the basic
credit of an issuer, but supplements the issuer's existing credit
and provides additional security therefor. No representation is
made as to the Insurance Companies' abilities to meet their
commitments.
A description of each of the insurers follows:
AMBAC Indemnity Corporation
AMBAC is a Wisconsin-domiciled stock insurance
company, regulated by the Insurance Department of the State of
Wisconsin, and licensed to do business in various states, with
admitted assets of approximately $2,060,000,000 and policyholders'
surplus of approximately $1,178,000,000 as of June 30, 1994. AMBAC
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.
CGIC
CGIC, a monoline bond insurer headquartered in San
Francisco, California, was established in November 1986 to assume
the financial guaranty business of United States Fidelity and
Guaranty Company ("USF&G'). It is a wholly-owned subsidiary of
Capital Guaranty Corporation ("CGC") whose stock is owned by:
Constellation Investments, Inc., an affiliate of Baltimore Gas &
Electric, Fleet/Norstar Financial Group, Inc., Safeco Corporation,
Sibag Finance Corporation, an affiliate of Siemens AG, and USF&G,
the 8th largest property/casualty company in the U.S. as measured
by net premiums written, and CGC management. As of June 30, 1994,
CGIC had total admitted assets of approximately $286,825,253
(unaudited) and total statutory policyholders' surplus of
approximately $168,000,000 (unaudited).
Financial Guaranty
Financial Guaranty is a wholly-owned subsidiary of
FGIC Corporation (the "Corporation"), a Delaware holding company.
Financial Guaranty, domiciled in the State of New York and located
at 175 Water Street, New York, New York, 10038, commenced its
business of providing insurance and financial guaranties for a
variety of investment instruments in January, 1984. The
Corporation is a wholly-owned subsidiary of General Electric
Capital Corporation. The Corporation and General Electric Capital
Corporation are not obligated to pay the debts of Financial
Guaranty or the claims against Financial
Guaranty. Neither the National Insured Trust nor the Units nor the
portfolio is insured directly or indirectly by the Corporation.
Financial Guaranty, in addition to providing
insurance for the payment of interest and principal of municipal
bonds and notes held in unit investment trust portfolios, provides
<PAGE>
insurance for all or a portion of new issues
of municipal bonds and notes and for municipal bonds and notes held
by mutual funds. Financial Guaranty expects to provide other forms
of financial guaranties
in the future. It is also authorized to write fire, property
damage liability, workman's compensation and employers' liability
and fidelity and surety insurance. As of June 30, 1994, its total
admitted assets were approximately
$1,947,000,000 and its policyholders' surplus was approximately
$850,000,000. Although the Sponsor has not undertaken an
independent investigation of
Financial Guaranty, the Sponsor is not aware that the information
herein is inaccurate or incomplete. Standard & Poor's Corporation
and Moody's Investors Service have rated the claims-paying ability
of Financial Guaranty "AAA" and "Aaa", respectively.
Financial Guaranty is currently licensed to
provide insurance in all 50 states and the District of Columbia,
files reports with state insurance
regulatory agencies and is subject to audit and review by such
authorities. Financial Guaranty is also subject to regulation by
the State of New York
Insurance Department. Such regulation, however, is no guarantee
that Financial Guaranty will be able to perform on its contracts of
insurance in the event a claim should be made thereunder.
The information relating to Financial Guaranty
contained above has been furnished by Financial Guaranty. The
financial information contained
herein with respect to Financial Guaranty is unaudited but appears
in reports filed with state insurance regulatory authorities and is
subject to audit and review by such authorities. 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.
MBIA
The insurance companies comprising MBIA and their
respective percentage liabilities are as follows: The Aetna
Casualty and Surety Company, thirty-three percent (33%); The Fund
American Companies, Inc., thirty percent
(30%); The Travelers Indemnity Company, fifteen percent (15%);
Cigna Property and Casualty Company, twelve percent (12%); and The
Continental Insurance Company, ten percent (10%). Each insurance
company comprising
MBIA is licensed to do business in various states. Such state
regulation, however, is no guarantee that any of the insurance
companies comprising MBIA will be able to perform on its contract
of insurance in the event a claim should
be made thereunder. All policies are individual obligations of the
<PAGE>
participating insurance companies and their obligations thereunder
cannot be increased beyond
their percentage commitment; therefore, each company will not be
obligated to pay any unpaid obligation of any other member of MBIA.
However, each insurance company is a multiline insurer involved in
several lines of insurance
other than municipal bond insurance, and the assets of each
insurance company also secure all of its other insurance policy and
surety bond obligations. The
MBIA companies listed above or their parent organizations have been
in the insurance business from seventy to well over a hundred
years. Standard & Poor's Corporation rates all new issues insured
by MBIA, "AAA" and Moody's Investors Service rates all bond issues
insured by MBIA, "Aaa".
MBIAC
MBIAC is the principal operating subsidiary of
MBIA, Inc. The principal shareholders of MBIA, Inc. are The Aetna
Casualty and Surety Company, The Fund American Companies, Inc.,
subsidiaries of CIGNA Corporation and Credit Local de France, CAECL
S.A., and they own approximately 35% of the outstanding common
stock of MBIA Inc. Neither MBIA, Inc. nor its shareholders are
obligated to pay the debts of or claims
against MBIAC. MBIAC, 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. As of March 31. 1994, MBIAC
had admitted assets of approximately $3.2 billion(unaudited) and
policyholders' surplus of
approximately $998,000,000. Standard & Poor's Corporation rates
all new issues insured by MBIAC and Moody's Investors Service rates
all bond issues insured by MBIAC, "AAA" and "Aaa", respectively.
Asset Guaranty
Asset Guaranty is a New York State insurance
company licensed to write financial guarantee, credit, residual
value and surety insurance. Asset
Guaranty commenced operations in mid-1988 by providing reinsurance
to several major monoline insurers. Asset Guaranty also issued
limited amounts of primary financial guaranty insurance, but not in
direct competition with the
primary mono-line companies for which it acts as a reinsurer. The
parent holding company of Asset Guaranty, Asset Guarantee Inc.
(AGI), merged with Enhance Financial Services (EFS) in June, 1990
to form Enhance Financial Services Group Inc. (EFSG). The two main,
100%-owned subsidiaries of
EFSG, Asset Guaranty and Enhance Reinsurance Company (ERC), share
common management and physical resources. After an initial public
offering completed in February 1992 and the sale by Merrill Lynch
& Co. of its stake, EFSG is 49.8%-owned by the public, 29.9% by US
<PAGE>
West Financial Services, 14.1% by Manufacturers Life Insurance Co.
and 6.2% by senior management.
Both ERC and Asset Guaranty are rated "AAA" for claims paying
ability by Duff & Phelps. ERC is rated triple-A for claims-paying
ability by both S&P and
Moody's. Asset Guaranty received a "AA" claims-paying-ability
rating from S&P during August 1993, but remains unrated by Moody's.
As of December 31, 1993 Asset Guaranty had admitted assets of
approximately $138,000,000 and policyholders' surplus of
approximately $73,000,000.
CAPMAC
CAPMAC commenced operations in December 1987, as
the second mono-line financial guaranty insurance company (after
FSA) organized solely to insure non-municipal obligations. CAPMAC,
a New York corporation,
is a wholly-owned subsidiary of CAPMAC Holdings, Inc. (CHI), which
was sold in 1992 by Citibank (New York State) to a group of 12
investors led by the
following: Dillon Read's Saratoga Partners Il; L.P. (Saratoga), an
acquisition fund; Caprock Management, Inc., representing
Rockefeller family interests;
Citigrowth Fund, a Citicorp venture capital group; and CAPMAC
senior management and staff. These groups control approximately 70%
of the stock of CHI. CAPMAC had traditionally specialized in
guaranteeing consumer loan and
trade receivable asset-backed securities. Under the new ownership
group CAPMAC intends to become involved in the municipal bond
insurance business, as well as their traditional non-municipal
business. As of December 31, 1993 CAPMAC's admitted assets were
approximately $182,000,000 and its
policyholders' surplus was approximately $146,000,000.
Connie Lee
Connie Lee is a wholly owned subsidiary of College
Construction Loan Insurance Association ("CCLIA"), a
government-sponsored enterprise established by Congress to provide
American academic institutions
with greater access to low-cost capital through enhancement. Connie
Lee, the operating insurance company, was incorporated in 1987 and
began business as
a reinsurer of tax-exempt bonds of colleges, universities, and
teaching hospitals with a concentration on the hospital sector.
During the fourth quarter of 1991
Connie Lee began underwriting primary bond insurance which will
focus largely on the college and university sector. CCLIA's
founding shareholders are the
U.S. Department of Education, which owns 36% of CCLIA, and the
Student Loan Marketing Association ("Sallie Mae"), which owns 14%.
The other principal owners are: Pennsylvania Public School
Employees' Retirement System, Metropolitan Life Insurance Company,
Kemper Financial Services, Johnson family funds and trusts,
Northwestern University, Rockefeller & Co.,
Inc. administered trusts and funds, and Stanford University. Connie
Lee is domiciled in the state of Wisconsin and has licenses to do
business in 47 states and the District of Columbia. As of June 30,
1994, its total admitted assets were approximately $13,006,058 and
policyholders' surplus was approximately $105,009,992 (unaudited).
FSA
FSA is a monoline property and casualty insurance
company incorporated in New York in 1984. It is a wholly-owned
subsidiary of Financial Security Assurance Holdings Ltd., a New
York Stock Exchange listed company
which is in turn approximately 60.5% owned by U.S. West Capital
Corportion (U.S. West) 7.6% by Fund American Enterprises Holdings
Inc. and 7.4% by the Tokio Marine and Fire Insurance Co. Ltd. FSA
is licensed directly or indirectly through its subsidiaries to
engage in the special guaranty insurance business in all 50 states,
the District of Columbia, Puerto Rico and the United Kingdom.
U.S. West is a subsidiary of U.S. West, Inc.,
which operates businesses involved in communications, data
solutions, marketing services and
capital assets, including the provision of telephone services in 14
states in the western and midwestern United States.
Pursuant to an intercompany agreement, liabilities
on financial guaranty insurance written by FSA or either of its
subsidiaries proportional to their respective capital surplus and
reserves, subject to applicalbe statutory risk
limitations. In addition, FSA reinsures a portion of its
liabilities under certain of its financial guaranty insurance
policies with other reinsureres under various
quota-share treaties and on a transaction-by-transaction basis.
Such reinsurance is utilized by FSA as a risk management device and
to comply with certain
statutory and rating agency requirements; it does not alter or
limit FSA's obligations under any financial guaranty insurance
policy. As of June 30, 1994
total shaoreholder equity of FSA and its wholly-owned subsidiaries
was (unaudited) $530,024,000 and total unearned premium reserves
was (unaudited) $206,026,000.
Insurance companies are subject to regulation and
supervision in the jurisdictions in which they do business under
statutes which delegate
regulatory, supervisory and administrative powers to state
insurance commissioners. This regulation, supervision and
administration relate, among
other things, to: the standards of solvency which must be met and
maintained; the licensing of insurers and their agents; the nature
of and limitations on investments; deposits of securities for the
benefit of policyholders;
<PAGE>
approval of policy forms and premium rates; periodic examinations
of the affairs of insurance companies; annual and other reports
required to be filed on the financial condition of insurers or for
other purposes; and requirements regarding
reserves for unearned premiums, losses and other matters.
Regulatory agencies require that premium rates not be excessive,
inadequate or unfairly discriminatory. Insurance regulation in many
states also includes "assigned risk"
plans, reinsurance facilities, and joint underwriting associations,
under which all insurers writing particular lines of insurance
within the jurisdiction must accept,
for one or more of those lines, risks unable to secure coverage in
voluntary markets. A significant portion of the assets of insurance
companies is required by law to be held in reserve against
potential claims on policies and is not available to general
creditors.
Although the Federal government does not regulate
the business of insurance, Federal initiatives can significantly
impact the insurance business.
Current and proposed Federal measures which may significantly
affect the insurance business include pension regulation (ERISA),
controls on medical care
costs, minimum standards for no-fault automobile insurance,
national health insurance, personal privacy protection, tax law
changes affecting life insurance
companies or the relative desirability of various personal
investment vehicles and repeal of the current antitrust exemption
for the insurance business. (If this
exemption is eliminated, it will substantially affect the way
premium rates are set by all property-liability insurers.) In
addition, the Federal government operates in some cases as a
co-insurer with the private sector insurance companies.
Insurance companies are also affected by a variety
of state and Federal regulatory measures and judicial decisions
that define and extend the risks and benefits for which insurance
is sought and provided. These include
judicial redefinitions of risk exposure in areas such as products
liability and state and Federal extension and protection of
employee benefits, including pension,
workers' compensation, and disability benefits. These developments
may result in short-term adverse effects on the profitability of
various lines of insurance. Longer-term adverse effects can often
be minimized through prompt repricing
of coverages and revision of policy terms. In some instances, these
developments may create new opportunities for business growth. All
insurance companies write policies-and set premiums based on
actuarial assumptions about mortality, injury, the occurrence of
accidents and other insured events. These
assumptions, while well supported by past experience, necessarily
do not take account of future events. The occurrence in the future
of unforeseen circumstances could affect the financial condition of
<PAGE>
one or more insurance companies. The insurance business is highly
competitive and with the deregulation of financial service
businesses, it should become more competitive. In addition,
insurance companies may expand into non-traditional lines of
business which may involve different types of risks.
The financial information relating to AMBAC, CGIC,
MBIA, MBIAC, Asset Guaranty, CAPMAC, Connie Lee and FSA has been
obtained from publicly available sources. 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.
Insurance Premiums
The cost of the insurance (the "Insurance
Premiums") for Insurance to Maturity has been paid by the issuers
at the time of issuance, by
a previous holder of a Bond or by the Sponsor on the first business
day after the Date of Deposit. The Insurance Premiums paid by the
Sponsor were paid from the acquisition profit of the Sponsor (see
"Public Offering--Sponsor's and
Underwriters' Profits"), and, if such profit was not sufficient to
cover the cost of said Insurance Premiums, from the sales charge
imposed on the purchasers
of Units or from other general funds of the Sponsor.
Expenses and Charges
At no cost to the Trusts, the Sponsor has borne
all the expenses of creating and establishing the Trusts, including
the cost of the initial preparation and execution of the Trust
Agreements, initial preparation and
printing of the certificates for Units, the fees of the Evaluator,
legal expenses, advertising and selling expenses and other
out-of-pocket expenses. The cost of
maintaining the secondary market, such as printing, legal and
accounting, will be borne by the Sponsor except as otherwise
provided in the Trust Agreements.
Trustee's, Sponsor's and Evaluator's Fees -- The
Trustee will receive for its ordinary recurring services to the
Trusts an annual fee in the
amount set forth in Part A -- "Summary of Essential Information".
For a discussion of the services performed by the Trustee pursuant
to its obligation under the Trust Agreements, see "Rights of Unit
Holders". The Trustee will
receive the benefit of any reasonable cash balances in the Interest
and Principal Accounts.
<PAGE>
The Portfolio supervision fee (the "Supervision
Fee"), which is earned for Portfolio supervisory services is based
upon the greatest face amount
of Bonds in the Trust at any time during the calendar year with
respect to which the fee is being computed. The Supervision Fee
has been incurred by Portfolios
which have come into existence after August 14, 1991, beginning
with Series 345 initially, and each series, in existence,
thereafter.
The Supervision Fee, which is not to exceed the
amount set forth in Part A--"Summary of Essential Information," may
exceed the actual costs of providing Portfolio supervisory services
for such Trust, but at no time
will the total amount the Sponsor receives for Portfolio
supervisory services rendered to all series of Tax Exempt
Securities Trust in any calendar year
exceed the aggregate cost to them of supplying such services in
such year. In addition, the Sponsor may also be reimbursed for
bookkeeping and other
administrative services provided to the Trust in amounts not
exceeding their costs of providing these services.
The Evaluator determines the aggregate bid price
of the underlying securities in the Trusts on a daily basis at a
fee in the amount set forth under Part A, "Summary of Essential
Information", for each evaluation of
the Bonds in a Trust. For a discussion of the services performed
by the Evaluator pursuant to its obligations under the Trust
Agreements, see "Evaluator--Responsibility" and "Public
Offering--Offering Price".
Any of such fees may be increased without approval
of the Unit holders by amounts not exceeding proportionate
increases in consumer prices for
services as measured by the United States Department of Labor's
Consumer Price Index entitled "All Services Less Rent" or, if such
Index in no longer published, in a similar Index to be determined
by the Trustee and the Sponsor. In addition, at the time of any
such increase, the Trustee shall also be entitled
to charge thereafter an additional fee at a rate or amount to be
determined by the Trustee and the Sponsor based upon the face
amount of Deposited Units in a
Trust, for the Trustee's services in maintaining such Deposited
Units. The approval of Unit holders shall not be required for
charging of such additional fee.
Other Charges -- The following additional charges
are or may be incurred by a Trust: all expenses (including counsel
fees and expenses of counsel and auditors) of the Trustee incurred
in connection with its activities under the Trust Agreements,
including reports and communications to Unit
holders; the expenses and costs of any action undertaken by the
<PAGE>
Trustee to protect the Trusts and the rights and interests of the
Unit holders; fees of the
Trustee for any extraordinary services performed under the Trust
Agreements, indemnification of a Trustee for any loss or liability
accruing to it without gross
negligence, bad faith or willful misconduct on its part, arising
out of or in connection with its acceptance or administration of a
Trust; in the case of certain
Trusts, to the extent lawful, expenses (including legal, accounting
and printing expenses) of maintaining registration or qualification
of the Units and/or the Trust under Federal or state securities
laws subsequent to initial registration so
long as the Sponsor are maintaining a market for the Units; and all
taxes and other governmental charges imposed upon the Securities or
any part of the Trusts (no such taxes or charges are being levied
or made or, to the knowledge
of the Sponsor, contemplated). The above expenses, including the
Trustee's fee, when paid by or owing to the Trustee, are secured by
a lien on the Trust. In addition, the Trustee is empowered to sell
Bonds in order to make funds available to pay all expenses.
PUBLIC OFFERING
Offering Price
The Public Offering Price of the Units of the
Trusts is determined by adding to the Evaluator's determination of
the aggregate bid price
of the Bonds per Unit a sales charge equal to the percentage of the
Public Offering Price indicated for the Trust in Part A, "Summary
of Essential Information". The aggregate bid price of the
underlying Bonds may be expected
to be less than the aggregate offering price of the Bonds. (See
"Method of Evaluation".) A proportionate share of accrued and
undistributed interest on the Bonds in a Trust at the date of
delivery of the Units of such Trust to the
purchaser is also added to the Public Offering Price.
Pursuant to employee benefit plans, Units of the
Trusts are available to employees of the Sponsor, at a Public
Offering Price equal to the
Evaluator's determination of the aggregate bid price of Bonds of a
Trust per Unit plus a sales charge of 1.25% of the Public Offering
Price and after the Initial Public Offering period, at a Public
Offering Price equal to the Evaluator's
determination of the aggregate bid price of the Bonds of a Trust
per Unit plus a sales charge of 1.25% of the Public Offering Price.
Sales through such plans to employees of the Sponsor result in less
selling effort and selling expenses than sales to the general
public.
<PAGE>
Method of Evaluation
The aggregate bid price of the Bonds (which is
used to calculate the price at which the Sponsor repurchase and
sell Units in the secondary market
and the Redemption Price at which Units may be redeemed) will be
determined by the Evaluator (1) on the basis of the current bid
prices for the Bonds, (2) if
bid prices are not available for any bonds, on the basis of current
bid prices of comparable securities, (3) by appraisal, or (4) by
any combination of the above.
Such determinations will be made each business day as of the
Evaluation Time set forth in the "Summary of Essential Information"
in Part A, effective for all
sales made subsequent to the last preceding determination. The
term "business day" as used herein shall exclude Saturdays, Sundays
and any other day on which the New York Stock Exchange is closed.
The difference between the bid
and offering prices of the Bonds may be expected to average
approximately 1.5% of principal amount. In the case of actively
traded securities, the difference may be as little as 0.5 of 1%,
and in the case of inactively traded
securities such difference will usually not exceed 3%. The price
at which Units may be repurchased by the Sponsor in the secondary
market could be less than
the price paid by the Unit holder. For information relating to the
calculation of the Redemption Price per Unit, which is also based
upon the aggregate bid price
of the underlying Bonds and which may be expected to be less than
the Public Offering Price per Unit, see "Rights of Unit
Holders--Redemption of Units".
In determining the bid prices of Bonds covered by
Insurance of Maturity, the evaluator took into account the
insurance issued in respect of those
Bonds and the AAA rating assigned to certain of those Bonds as a
result of the insurance. In making its evaluation, the Evaluator
first determined the quality
of the insurance issued by the Insurance Companies and then
compared the Bonds to other securities which had comparable
insurance and which were of
comparable quality. In addition, the Evaluator, in accordance
with its practice, obtained from dealers and brokers two sets of
bid prices for the Bonds: one
based on actual bid prices for such Bonds (without insurance) and
the other based on said dealer's or broker's estimation of such bid
prices as if such Bonds were insured.
Distribution of Units
Units acquired in the secondary market (see
"Public Offering--Market for Units") may be offered by this
Prospectus at the Public Offering
<PAGE>
Price determined in the manner provided above (see "Public
Offering--Offering Price"). The Sponsor will allow a discount on
Units sold to members of the
National Association of Securities Dealers, Inc. Such discount is
subject to change from time to time.
Sales will be made only with respect to whole
Units, and the Sponsor reserves the right to reject, in whole or in
part, any order for the
purchase of Units. A purchaser does not become a Unit holder
(Certificate holder) or become entitled to exercise the rights of
a Unit holder (including the
right to redeem his Units) until he has paid for his Units.
Generally, such payment must be made within five business days
after an order for the purchase
of Units has been placed. The price paid by a Unit holder is the
Public Offering Price in effect at the time his order is received,
plus accrued interest (see "Public Offering-Method of Evaluation").
This price may be different from the Public Offering price in
effect on any other day, including the day on which the Unit holder
made payment for the Units.
Market for Units
Although not obligated to do so, the Sponsor
presently intends to maintain a market for the Units of the
respective Trusts and to continuously
offer to purchase such Units at prices based upon the aggregate bid
price of the underlying Bonds which may be less than the price paid
by the Unit holder. For information relating to the method and
frequency of the Evaluator's determination of the aggregate bid
price of the underlying Bonds. (See "Public Offering-Method of
Evaluation".) The costs of maintaining the
secondary market, such as printing, legal and accounting, will be
borne by the Sponsor except as otherwise provided in the Trust
Agreements. The Sponsor may cease to maintain such a market at any
time and from time to time, without
notice if the supply of Units of any of the respective Trusts
exceeds demand, or for any other reason. In this event the Sponsor
may nonetheless purchase Units, as a service to Unit holders, at
prices based on the current Redemption Price of
those Units. In the event that a market is not maintained for the
Units of any of the Trusts, a Unit holder of such a Trust desiring
to dispose of his Units may be able to do so only by tendering such
Units to the Trustee for redemption at
the Redemption Price, which is also based upon the aggregate bid
price of the underlying Bonds. (See "Rights of Unit
Holders--Redemption of Units".)
Exchange Option
Unit holders may elect to exchange any or all of
<PAGE>
their Units in this series of a Trust for units of one or more of
any series of Tax Exempt
Securities Trust (the "Exchange Trust") available for sale in the
state in which the Unit holder resides at a Public Offering Price
for the units of the Exchange
Trust to be acquired based on a fixed sales charge of $25 per unit.
The Sponsor reserves the right to modify, suspend or terminate this
plan at any time without
further notice to Unit holders. Therefore, there is no assurance
that a market for units will in fact exist on any given date on
which a Unit holder wishes to sell
his Units of this series and thus there is no assurance that the
Exchange Option will be available to a Unit holder. Exchanges will
be effected in whole units
only. Any excess proceeds from Unit holders' Units being
surrendered will be returned and Unit holders will not be permitted
to advance any new money in order to complete an exchange.
An exchange of Units pursuant to the Exchange
Option for units of an Exchange Trust will generally constitute a
"taxable event" under the Code
i.e. a Unit holder will recognize gain or loss at the time of
exchange. However, an exchange of Units of this Trust for units of
any other similar series of the
Tax Exempt Securities Trust which are grantor trusts for U.S.
Federal income tax purposes will not constitute a taxable event to
the extent that the underlying securities in each trust do not
differ materially either in kind or in extent. Unit
holders are urged to consult their own tax advisors as to the tax
consequences to them of exchanging Units in particular cases.
Units of the Exchange Trust will be sold under the
Exchange Option at the bid prices of the underlying securities in
the particular portfolio
involved per unit plus a fixed charge of $25 per unit. As an
example, assume that a Unit holder, who has three units of a trust
with a current price of $1,020
per unit based on the bid prices of the underlying securities,
desires to exchange his units for units of a series of an Exchange
Trust with a current price of $880
per unit based on the bid prices of the underlying securities. In
this example, the proceeds from the Unit holder's units will
aggregate $3,060. Since only whole units of an Exchange Trust may
be purchased under the Exchange Option,
the Unit holder would be able to acquire three units in the
Exchange Trust for a total cost of $2,715 ($2,640 for the units and
$75 for the sales charge). The remaining $345 would be returned to
the Unit holder in cash.
Reinvestment Programs
Distributions of interest and principal, if any,
are made to Unit holders monthly. The Unit holder will have the
<PAGE>
option of either receiving his
monthly income check from the Trustee or participating in one of
the reinvestment programs offered by certain of the Sponsor
provided such Unit holder meets the minimum qualifications of the
reinvestment program and such program lawfully qualifies for sale
in the jurisdiction in which the Unit holder
resides. Upon enrollment in a reinvestment program, the Trustee
will direct monthly interest distributions and principal
distributions, if any, to the
reinvestment program selected by the Unit holder. Since each
Sponsor has arranged for different reinvestment alternatives, Unit
holders should contact the
Sponsor for more complete information, including charges and
expenses. The appropriate prospectus will be sent to the Unit
holder. The unit holder should
read the prospectus for a reinvestment program carefully before
deciding to participate. Participation in the reinvestment program
will apply to all Units of a Trust owned by the Unit holder and may
be terminated at any time by the Unit
holder, or the program may be modified or terminated by the Trustee
or the program's Sponsor.
Sponsor's Profits
For their services, the Sponsor receives a gross
commission equal to a percentage of the Public Offering Price of
the Units. In maintaining a market for the Units of the respective
Trusts (see "Public Offering--Market for
Units"), the Sponsor also realizes profits or sustain losses in the
amount of any difference between the price at which they buy such
Units and the price at which they resell or redeem such Units (see
"Public Offering--Offering Price").
RIGHTS OF UNIT HOLDERS
Certificates
Ownership of Units of the respective Trusts is
evidenced by registered certificates executed by the Trustee and
the Sponsor. Certificates are
transferable by presentation and surrender to the Trustee of the
certificate properly endorsed or accompanied by a written
instrument or instruments of transfer.
Certificates may be issued in denominations of one
Unit or any multiple thereof. A Unit holder may be required to pay
$2.00 per certificate
reissued or transferred, and to pay any governmental charge that
may be imposed in connection with each such transfer or
interchange. For new certificates issued to replace destroyed,
stolen or lost certificates, the Unit holder
must furnish indemnity satisfactory to the Trustee and must pay
<PAGE>
such expenses as the Trustee may incur. Mutilated certificates
must be surrendered to the Trustee for replacement.
Distribution of Interest and Principal
Interest and principal received by each Trust will
be distributed on each monthly Distribution Date on a pro rata
basis to Unit holders in such
Trust of record as of the preceding Record Date. All distributions
will be net of applicable expenses and funds required for the
redemption of Units and, if
applicable, reimbursements to the Trustee for interest payments
advanced to Unit holders on previous Monthly Distribution Dates.
(See Part A, "Summary of
Essential Information" and "Tax Exempt Securities Trust--Expenses
and Charges" and "Rights of Unit Holders--Redemption of Units" in
this section.)
The Trustee will credit to the Interest Account of
each respective Trust all interest received by such Trust,
including that part of the
proceeds of any disposition of Bonds of such Trust which represents
accrued interest and including all moneys paid pursuant to any
insurance contract representing interest on any Bond in the Trusts.
Other receipts will be credited
to the Principal Account of the affected Trust. The pro rata share
of the Interest Account and the pro rata share of cash in the
Principal Account represented by
each Unit of a Trust will be computed by the Trustee each month as
of the Record Date. (See Part A, "Summary of Essential
Information".) Proceeds received from the disposition of any of
the Bonds subsequent to a Record Date
and prior to the next succeeding Distribution Date will be held in
the Principal Account and will not be distributed until the
following Distribution Date. The
distribution to the Unit holders as of each Record Date will be
made on the following Distribution Date or shortly thereafter and
shall consist of an amount
substantially equal to one-twelfth of such holder's pro rata share
of the estimated annual income to the Interest Account after
deducting estimated expenses (the
"Monthly Interest Distribution") plus such holder's pro rata share
of the cash balance in the Principal Account computed as of the
close of business on the
preceding Record Date. Persons who purchase Units between a Record
Date and a Distribution Date will receive their first distribution
on the second Distribution Date following their purchase of Units.
No distribution need be
made from the Principal Account if the balance therein is less than
an amount sufficient to distribute $1.00 per Unit. The Monthly
Interest Distribution per Unit as of the date of this Prospectus is
shown in the "Summary of Essential
<PAGE>
Information" in Part A for the particular Trust and will change as
the income and expenses of the respective Trusts change and as
Bonds are exchanged, redeemed, paid or sold.
Normally, interest on the Bonds in the Portfolio
of each Trust is paid on a semi-annual basis. Because Bond
interest is not received by the
Trusts at a constant rate throughout the year, any Monthly Interest
Distribution may be more or less than the amount credited to the
Interest Account as of the Record Date. In order to eliminate
fluctuations in Monthly Interest Distributions
resulting from such variances, the Trustee is required by the Trust
Agreement to advance such amounts as may be necessary to provide
Monthly Interest Distributions of approximately equal amounts. The
Trustee will be reimbursed, without interest, for any such advances
from funds available from the Interest
Account on the next ensuing Record Date or Record Dates, as the
case may be. If all or a portion of the Bonds for which advances
have been made subsequently
fail to pay interest when due and if one or more of the insurers of
such Bonds fails to meet its obligation under its policy of
insurance, the Trustee may recoup advances made by it in
anticipation of receipt of interest payments on such
Bonds by reducing the amount distributed per Unit in one or more
Monthly Interest Distributions. If units are redeemed subsequent
to such advances by the Trustee, but prior to receipt by the
Trustee of actual notice of the failure of the
issuer to pay the interest due on the underlying Bond and the
concurrent failure of the respective insurance company to meet its
obligation under its insurance
policy, each remaining Unit holder will be subject to a greater pro
rata reduction in his Monthly Interest Distribution than would have
occurred absent such
redemptions. Funds which are available for future distributions,
payments of expenses and redemptions are in accounts which are
non-interest bearing to Unit
holders and are available for use by United States Trust Company of
New York, pursuant to normal banking procedures. The Trustee is
entitled to the benefit of holding any reasonable cash balances in
the Interest and Principal Accounts.
The Trustee anticipates that the average cash balance in the
Interest Account will be approximately 2% in excess of the amounts
anticipated to be required for
Monthly Distributions to Unit holders. In addition, because of the
varying interest payment dates of the Bonds comprising each Trust
Portfolio, accrued interest at any point in time will be greater
than the amount of interest actually
received by a particular Trust and distributed to Unit holders.
Therefore, there will always remain an item of accrued interest
that is added to the value of the
Units. This excess accrued but undistributed interest amount is
known as the accrued interest carryover. If a Unit holder sells
all or redeems a portion of his Units, a portion of his sale
<PAGE>
proceeds will be allocable to his proportionate share
of the accrued interest carryover. Similarly, if a Unit holder
sells or redeems all or a portion of his Units, the Redemption
Price per Unit which he is entitled
to receive from the Trustee will include accrued interest carryover
on the Bonds. (See "Rights of Unit Holders --Redemption of
Units--Computation of Redemption Price per Unit".)
As of the first day of each month the Trustee will
deduct from the Interest Account of each Trust and, to the extent
funds are not sufficient
therein, from the Principal Account of such Trust, amounts
necessary to pay the
expenses of such Trust. (See "Tax Exempt Securities
Trust--Expenses and
Charges".) The Trustee also may withdraw from said account such
amounts, if any, as it deems necessary to establish a reserve for
any governmental charges
payable out of the Trust. Amounts so withdrawn shall not be
considered a part of the Trust's assets until such time as the
Trustee shall return all or any part
of such amounts to the appropriate account. In addition, the
Trustee may withdraw from the Interest Account and the Principal
Account such amounts as
may be necessary to cover redemption of Units by the Trustee. (See
"Rights of Unit Holders--Redemption of Units".) The Trustee is
also entitled to withdraw
from the Interest Account, and, to the extent funds are not
sufficient therein, from the Principal Account, on one or more
Record Dates as may be appropriate, amounts sufficient to recoup
advances which it has made in anticipation of the receipt by a
Trust of interest in respect of Bonds which subsequently fail to
pay interest when due.
Reports and Records
The Trustee shall furnish Unit holders in
connection with each distribution a statement of the amount of
interest, if any, and the amount of
other receipts, if any, which are being distributed, expressed in
each case as a dollar amount per Unit. In the event that the
issuer of any of the Bonds fails to
make payment when due of any interest or principal and such failure
results in a change in the amount that would otherwise be
distributed as a monthly
distribution, the Trustee will, with the first such distribution
following such failure, set forth in an accompanying statement, the
issuer and the Bonds, the
amount of the reduction in the distribution per Unit resulting from
such failure, the percentage of the aggregate principal amount of
Bonds which such Bond
represents and, to the extent then determined, information
<PAGE>
regarding any disposition or legal action with respect to such
Bond. Within a reasonable time
after the end of each calendar year, the Trustee will furnish to
each person who
at any time during the calendar year was a Unit holder of record,
a statement (1) as to the Interest Account: interest received
(including amounts representing
interest received upon any disposition of Bonds), deductions for
payment of applicable taxes and for fees and expenses of the Trust,
redemption of Units and
the balance remaining after such distributions and deductions,
expressed both as
a total dollar amount and as a dollar amount representing the pro
rata share of each Unit outstanding on the last business day of
such calendar year; (2) as to
the Principal Account: the dates of disposition of any Bonds and
the net proceeds received therefrom (excluding any portion
representing interest), deductions for payments of applicable
taxes and for fees and expenses of the
Trust, redemptions of Units, and the balance remaining after such
distributions and deductions, expressed both as a total dollar
amount and as a dollar amount
representing the pro rata share of each Unit outstanding on the
last business day of such calendar year; (3) a list of Bonds held
and the number of Units
outstanding on the last business day of such calendar year; (4) the
Redemption Price per Unit based upon the last computation thereof
made during such calendar year; and (5) amounts actually
distributed during such calendar year
from the Interest Account and from the Principal Account,
separately stated, expressed both as total dollar amounts and as
dollar amounts representing the
pro rata share of each Unit outstanding. The accounts of Trusts
will be audited not less frequently than annually by independent
auditors designated by the
Sponsor, and the report of such auditors shall be furnished by the
Trustee to Unit holders of such Trusts upon request.
The Trustee shall keep available for inspection by
Unit holders at all reasonable times during the usual business
hours, books of record and
account of its transactions as Trustee including records of the
names and addresses of Unit holders, certificates issued or held,
a current list of Bonds in the Portfolio and a copy of the Trust
Agreement.
Redemption of Units
Units may be tendered to the Trustee for
redemption at its unit investment trust office at 770 Broadway, New
York, New York 10003, upon payment of any relevant tax. At the
present time there are no specific taxes related to the redemption
of the Units. No redemption fee will be charged by
<PAGE>
the Sponsor or the Trustee. Units redeemed by the Trustee will be
cancelled.
Certificates for Units to be redeemed must be
properly endorsed or accompanied by a written instrument of
transfer. Unit holders must sign
exactly as their name appears on the face of the certificate with
the signature guaranteed by an officer of a national bank or trust
company or by a member
of either the New York, Midwest or Pacific Stock Exchange. In
certain instances the Trustee may require additional documents such
as, but not limited to, trust instruments, certificates of death,
appointments as executor or administrator or certificates of
corporate authority.
Within seven calendar days following such tender,
the Unit holder will be entitled to receive in cash an amount for
each Unit tendered equal to the Redemption Price per Unit computed
as of the Evaluation Time set forth
in the "Summary of Essential Information" of Part A on the date of
tender. (See "Redemption of Units--Computation of Redemption Price
per Unit".) The "date of tender" is deemed to be the date on which
Units are received by the
Trustee, except as regards Units received after the close of
trading on the New York Stock Exchange, the date of tender is the
next day on which such
Exchange is open for trading, and such Units will be deemed to have
been tendered to the Trustee on such day for redemption at the
Redemption Price computed on that day. For information relating to
the purchase by the Sponsor
of Units tendered to the Trustee for redemption at prices which
may, in certain circumstances, be in excess of the Redemption
Price, see "Redemption of Units--Purchase by the Sponsor of Units
Tendered for Redemption."
Accrued interest paid on redemption shall be
withdrawn from the Interest Account, or, if the balance therein is
insufficient, from the Principal
Account. All other amounts paid on redemption shall be withdrawn
from the Principal Account. The Trustee is empowered to sell Bonds
in order to make funds available for redemption. Such sales, if
required, could result in a sale
of Bonds by the Trustee at a loss. To the extent Bonds are sold,
the size and diversity of each Trust will be reduced.
The Trustee reserves the right to suspend the
right of redemption and to postpone the date of payment of the
Redemption Price per Unit for any period during which the New York
Stock Exchange is closed, other
than weekend and holiday closings, or trading on that Exchange is
restricted or during which (as determined by the Securities and
Exchange Commission) an emergency exists as a result of which
disposal or evaluation of the underlying
<PAGE>
Bonds is not reasonably practicable, or for such other periods as
the Securities and Exchange Commission has by order permitted.
Computation of Redemption Price per Unit - The
Redemption Price per Unit of a Trust is determined by the Trustee
on the basis of the bid
prices of the Bonds in such Trust as of the Evaluation Time on the
date any such determination is made. The Redemption Price per Unit
of a Trust is each Unit's
pro rata share, determined by the Trustee, of: (1) the aggregate
value of the Bonds in such Trust on the bid side of the market
(determined by the Evaluator as set forth under "Public Offering
Prices--Method of Evaluation"), (2) cash on
hand in such Trust, and accrued and unpaid interest on the Bonds as
of the date of computation, less (a) amounts representing taxes or
governmental charges
payable out of such Trust, (b) the accrued expenses of such Trust,
and (c) cash held for distribution to Unit holders of such Trust of
record as of a date prior to the evaluation.
Purchase by the Sponsor of Units Tendered for
Redemption--The Trust Agreement requires that the Trustee notify
the Sponsor of any tender of Units for redemption. So long as the
Sponsor is maintaining a bid in the secondary market, the Sponsor,
prior to the close of business on the second
succeeding business day, will purchase any Units tendered to the
Trustee for redemption at the price so bid by making payment
therefore to the Unit holder
in an amount not less than the Redemption Price not later than the
day on which the Units would otherwise have been redeemed by the
Trustee. (See "Public Offering--Market for Units".) Units held by
the Sponsor may be tendered to the
Trustee for redemption as any other Units, provided that the
Sponsor shall not receive for Units purchased as set forth above a
higher price than it paid, plus accrued interest.
The offering price of any Units resold by the
Sponsor will be the Public Offering Price determined in the manner
provided in this Prospectus.
(See "Public Offering--Offering Price".) Any profit resulting from
the resale of such Units will belong to the Sponsor which likewise
will bear any loss resulting from a lower offering or redemption
price subsequent to their acquisition of such Units. (See "Public
Offering--Sponsor's Profits".)
SPONSOR
Smith Barney Inc., 388 Greenwich Street, New York,
New York 10013 ("Smith Barney"), was incorporated in Delaware in
1960 and traces its history through predecessor partnerships to
1873. Smith Barney, an investment banking and securities
broker-dealer firm, is a member of the New
York Stock Exchange, Inc. and other major securities and
<PAGE>
commodities exchanges, the National Association of Securities
Dealers, Inc. and the
Securities Industry Association. Smith Barney is an indirect,
wholly-owned subsidiary of The Travelers Inc. (formerly, Primerica
Corporation).
Smith Barney sponsors numerous open-end investment
companies and closed-end investment companies. Smith Barney also
sponsors all Series of Corporate Securities Trust, Government
Securities Trust and Harris, Upham Tax-Exempt Fund and acts as
co-sponsor of certain trusts of The
Equity Income Fund, Concept Series. The Sponsor has acted
previously as managing underwriter of other investment companies.
In addition to participating as a member of various underwriting
and selling groups or as agent of other investment companies, the
Sponsor also executes orders for the purchase and sale of
securities of investment companies and sell securities to
such companies in its capacities as broker or dealer in securities.
Limitations on Liability
The Sponsor is liable for the performance of its
obligations arising from their responsibilities under the Trust
Agreement, but will be under
no liability to Unit holders for taking any action of refraining
from any action in good faith or for errors in judgment or
responsible in any way for depreciation or loss incurred by reason
of the sale of any Bonds, except in cases
of willful misfeasance, bad faith, gross negligence or reckless
disregard of its obligations and duties. (See "Tax Exempt
Securities Trust--Portfolio" and "Sponsor -- Responsibility".)
Responsibility
The Sponsor is empowered to direct the Trustee to
dispose of Bonds or deposited Units of other Trusts when certain
events occur that
adversely affect the value of the Bonds, if the Sponsor determine
that any insurance that may be applicable to the Bonds cannot be
relied upon to maintain the interests of the Trusts to at least as
great an extent as such disposition,
including default in payment of interest or principal, default in
payment of interest or principal on other obligations of the same
issuer, institution of legal
proceedings, default under other documents adversely affecting debt
service, decline in price or the occurrence of other market or
credit factors, or decline
in projected income pledged for debt service on revenue Bonds and
advanced refunding that, in the opinion of the Sponsor, may be
detrimental to the interests of the Unit Holders.
<PAGE>
The Sponsor intends to provide portfolio services
for each Trust in order to determine whether the Trustee should be
directed to dispose of any such Bonds.
It is the responsibility of the Sponsor to
instruct the Trustee to reject any offer made by an issuer of any
of the Bonds to issue new obligations
in exchange and substitution for any Bonds pursuant to a refunding
or refinancing plan, except that the Sponsor may instruct the
Trustee to accept such
an offer or to take any other action with respect thereto as the
Sponsor may deem proper if the issuer is in default with respect to
such Bonds or in the
judgment of the Sponsor the issuer will probably default in respect
to such Bonds in the foreseeable future. Any obligations so
received in exchange or
substitution will be held by the Trustee subject to the terms and
conditions of the Trust Agreement to the same extent as Bonds
originally deposited thereunder.
Within five days after the deposit of obligations in exchange or
substitution for underlying Bonds, the Trustee is required to give
notice thereof to each Unit
holder, identifying the Bonds eliminated and the Bonds substituted
therefor. Except as stated in this paragraph, the acquisition by
the Trust of any securities other than the Bonds initially
deposited in each respective Trust is prohibited.
Resignation
If the Sponsor resigns or otherwise fails or
becomes unable to perform its duties under the Trust Agreement, and
no express provision is made for action by the Trustee in such
event, the Trustee may appoint a successor sponsor or terminate the
Trust Agreement and liquidate the affected Trusts.
TRUSTEE
The Trustee is the United States Trust Company of
New York, with its principal place of business at 114 West 47th
Street, New York, New York 10036. United States Trust Company of
New York has, since its establishment in 1853, engaged primarily in
the management of trust and agency accounts for individuals and
corporations. The Trustee is a member of the New York Clearing
House Association and is the 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. In connection with the storage and
handling of certain Bonds deposited in the Trust, the Trustee may
use the services of The Depository Trust Company. These services
may include safekeeping of the
Bonds and coupon-clipping, computer book-entry transfer and
<PAGE>
institutional delivery services. The Depository Trust Company is
a limited purpose trust company organized under the Banking Law of
the State of New York, a member of the Federal Reserve System and
a clearing agency registered under the Securities Exchange Act of
1934.
Limitations on Liability
The Trustee shall not be liable or responsible in
any way for depreciation or loss incurred by reason of the
disposition of any moneys, securities or certificates or in respect
of any evaluation or for any action taken
in good faith reliance on prima facie properly executed documents
except in cases of willful misfeasance, bad faith, gross negligence
or reckless disregard for its obligations and duties. In addition,
the Trustee shall not be personally
liable for any taxes or other governmental charges imposed upon or
in respect of a Trust which the Trustee may be required to pay
under current or future law
of the United States or any other taxing authority having
jurisdiction. (See "Tax Exempt Securities Trust -- Portfolio".)
For information relating to the responsibilities and
indemnification of the Trustee under the Trust Agreement,
reference is made to the material set forth under "Rights of Unit
Holders", "Sponsor -- Resignation" and "Other Charges".
Resignation
By executing an instrument in writing and filing
the same with the Sponsor, the Trustee and any successor may
resign. In such an event the
Sponsor is obligated to appoint a successor trustee as soon as
possible. If the Trustee becomes incapable of acting or becomes
bankrupt or its affairs are taken
over by public authorities, the Sponsor may remove the Trustee and
appoint a successor as provided in the Trust Agreement. Such
resignation or removal
shall become effective upon the acceptance of appointment by the
successor trustee. If no successor has accepted the appointment
within thirty days after
notice of resignation, the retiring trustee may apply to a court of
competent jurisdiction for the appointment of a successor. The
resignation or removal of
a trustee becomes effective only when the successor trustee accepts
its appointment as such or when a court of competent jurisdiction
appoints a successor trustee.
EVALUATOR
The Evaluator is Kenny Information, Systems, Inc.,
a division of J.J. Kenny Co., Inc. with main offices located at 65
Broadway, New York, New York 10006.
Limitations on Liability
The Trustee, Sponsor and Unit holders may rely on
any evaluation furnished by the Evaluator and shall have no
responsibility for the accuracy thereof. Determinations by the
Evaluator under the Trust Agreement
shall be made in good faith upon the basis of the best information
available to it; provided, however, that the Evaluator shall be
under no liability to the
Trustee, the Sponsor, or Unit holders for errors in judgment. But
this provision shall not protect the Evaluator in cases of willful
misfeasance, bad faith, gross negligence or reckless disregard of
its obligations and duties.
Responsibility
The Trust Agreement requires the Evaluator to
evaluate the Bonds of a Trust on the basis of their bid prices on
the last business day of June
and December in each year, on the day on which any Unit of such
Trust is tendered for redemption and on any other day such
evaluation is desired by the Trustee or is requested by the
Sponsor. For information relating to the responsibility of the
Evaluator to evaluate the Bonds on the basis of their bid prices
see "Public Offering -- Offering Price".
Resignation
The Evaluator may resign or may be removed by the
joint action of the Sponsor and the Trustee, and in such event, the
Sponsor and the Trustee are to use their best efforts to appoint a
satisfactory successor. Such
resignation or removal shall become effective upon the acceptance
of appointment by a successor evaluator. If upon resignation of
the Evaluator no successor has accepted appointment within thirty
days after notice of resignation, the Evaluator may apply to a
court of competent jurisdiction for the appointment
of a successor.
AMENDMENT AND TERMINATION OF THE TRUST AGREEMENT
Amendment
The Sponsor and the Trustees have the power to
amend the Trust Agreement without the consent of any of the Unit
holders when such an
amendment is (1) to cure any ambiguity or to correct or supplement
any provision of the Trust Agreement which may be defective or
inconsistent with any other provision contained therein, or (2) to
make such other provisions as
<PAGE>
shall not adversely affect the interests of the Unit holders;
provided, that the Trust Agreement is not amended to increase the
number of Units issuable
thereunder or to permit the deposit or acquisition of securities
either in addition to or in substitution for any of the Bonds
initially deposited in the respective
Trusts, except for the substitution of certain refunding securities
for such Bonds or to permit the Trustee to engage in business or in
investment activities not specifically authorized in the Trust
Agreement as originally adopted. In the
event of any amendment, the Trustee is obligated to notify promptly
all Unit holders of the substance of such amendment.
Termination
The Trust Agreement provides that if the principal
amount of Bonds is less than 50% of the principal amount of the
Bonds originally deposited
in such Trust, the Trustee may in its discretion and will, when
directed by the
Sponsor, terminate such Trust. Each Trust may be terminated at any
time by 100% of the Unit holders. See Part A for additional
mandatory and optional termination provisions. However, in no
event may any trust continue beyond
the Mandatory Termination Date set forth in Part A of this
Prospectus under "Summary of Essential Information". In the event
of termination, written notice
thereof will be sent by the Trustee to all Unit holders. Within a
reasonable period after termination, the Trustee will sell any
Bonds remaining in the
affected Trust, and, after paying all expenses and charges incurred
by such Trust, will distribute to each Unit holder, upon surrender
for cancellation of his certificate for Units, his pro rata share
of the balances remaining in the Interest
Account and Principal Account of such Trust.
LEGAL OPINIONS
Certain legal matters in connection with the Units
offered hereby have been passed upon by Messrs. Davis Polk &
Wardwell, 450 Lexington Avenue, New York, New York 10017, as
special counsel for the Sponsor. Messrs. Carter, Ledyard &
Milburn, 2 Wall Street, New York, New York 10005, act as counsel
for the Trustee.
AUDITORS
The Statements of Financial Condition and
Portfolio of Securities of each Trust included in this Prospectus
have been audited by KPMG Peat Marwick LLP, independent auditors,
as indicated in their report with respect thereto, and are included
<PAGE>
herein in reliance upon the authority of said
firm as experts in accounting and auditing.
RATINGS
Standard & Poor's
A Standard & Poor's corporate or municipal bond
rating is a current assessment of the creditworthiness of an
obligor with respect to a
specific debt obligation. This assessment of creditworthiness may
take into consideration obligors such as guarantors, insurers, or
lessees.
The bond rating is not a recommendation to
purchase or sell a
security, inasmuch as it does not comment as to market price or
suitability for a particular investor.
The ratings are based on current information
furnished to Standard & Poor's by the issuer and obtained by
Standard & Poor's from other
sources it considers reliable. Standard & Poor's does not perform
any audit in
connection with any rating and may, on occasion, rely on unaudited
financial information. The ratings may be changed, suspended or
withdrawn as a result
of changes in, or unavailability of, such information.
The ratings are based, in varying degrees, on the
following considerations:
I. Likelihood of default-capacity and
willingness of the obligor as to the timely payment of interest and
repayment of principal in accordance with the terms of
the obligation;
II. Nature of and provisions of the
obligation; and
III. Protection afforded by, and relative
position of, the
obligation in the event of bankruptcy, reorganization or
other arrangement under the laws of bankruptcy and
other laws affecting creditors' rights.
A summary of the meaning of the applicable rating
symbols as published by Standard & Poor's follows:
AAA--Debt rated AAA has the highest rating
assigned by Standard & Poor's. Capacity to pay interest and repay
principal is extremely strong.
<PAGE>
AA--Debt rated AA has a very strong capacity to
pay interestand repay principal and differs from the higher rated
issues only in small degree.
A--Debt rated A has a strong capacity to pay
interest and repay principal although it is somewhat more
susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in
higher rated categories.
BBB--Bonds rated BBB are regarded as having an
adequate capacity to pay interest and repay principal. Whereas
they normally exhibit
adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to weakened capacity
to pay interest and repay principal for bonds in this category than
for bonds in higher-rated categories.
BB,B,CCC,CC,C--Debt rated BB,B,CCC,CC and C is
regarded, on balance, as predominantly speculative with respect to
capacity to pay interest and repay principal in accordance with the
terms of the obligation.
BB indicates the lowest degree of speculation and C the highest
degree of speculation. While such debt will likely have some
quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions.
D--Debt rated D is in default, and payment of
interest and/or repayment of principal is in arrears.
Plus (+) or Minus (-): To provide more detailed
indications of credit quality, the ratings from "AA" to "CCC" 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 that the rating is provisional. A provisional
rating assumes the successful
completion of the project being financed by the debt being rated
and indicates that payment of debt service requirements is largely
or entirely dependent upon
the successful and timely completion of the project. This rating,
however, while addressing credit quality subsequent to completion
of the project, makes no
comment on the likelihood of, or the risk of, default upon failure
of such completion. Accordingly, the investor should exercise his
own judgment with respect to such likelihood and risk.
Conditional rating(s), indicated by "Con" are
given to bonds for which the continuance of the security rating is
contingent upon Standard &
Poor's receipt of an executed copy or closing documentation
confirming investments and cash flows and/or the security rating is
<PAGE>
conditional upon the
issuance of insurance by the respective insurance company.
Moody's Investors Service
A summary of the meaning of the applicable Moody's Investors
Service'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 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
a high quality by all standards. Together with the Aaa group they
comprise what are generally
known as high grade bonds. Aa bonds are rated lower than the best
bonds because margins of protection may not be as large as in Aaa
securities or fluctuations of protective elements may be of greater
amplitude or there may be
other elements present which make the long-term risks appear
somewhat larger than in Aaa securities.
A--Bonds which are rated A possess many favorable
investment attributes and are to be considered as upper medium
grade obligations. Factors
giving security to principal and interest are considered adequate,
but elements may be present which suggest a susceptibility to
impairment sometime in the future.
Baa--Bonds which are rated Baa are considered s
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.
Ba--Bonds which are rated Ba are judged to have
speculative elements; their future cannot be considered as well
assured. Often the protection
of interest and principal payments may be very moderate and thereby
not well safeguarded during both good and bad times over the
future. Uncertainty of position characterizes bonds in this class.
<PAGE>
B--Bonds which are rated B generally lack the
characteristics of the desirable investment. Assurance of interest
and principal payments or of maintenance of other terms of the
contract over any long period of time may be small.
Caa--Bonds which are rated Caa are of poor
standing. Such issues may be in default or there may be present
elements of danger with respect to principal or interest.
Ca--Bonds which are rated Ca represent obligations
which are speculative in a high degree. Such issues are often in
default or have other marked shortcomings.
C--Bonds which are rated C are the lowest rated
class of bonds and issues so rated can be regarded as having
extremely poor prospects of ever attaining any real investment
standing.
Note: Those municipal bonds in the Aa, A, Baa,
Ba and B groups which Moody's believes possess the strongest
investment attributes are
designated by the symbols Aa1, A1, Baa1, Ba1 and B1, respectively.
In addition, Moody's applies numerical modifiers, 1, 2, and 3 in
each generic rating classification from Aa through B in its
corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of
its generic rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates that the issue ranks in the
lower end of its generic rating category.
Although Industrial Revenue Bonds and Environmental Control Revenue
Bonds are tax-exempt issues, they are included in the corporate
bond rating system.
Conditional ratings, indicated by "Con" are given
to bonds for which the security depends upon the completion of some
act or 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.
Note: NR indicates, among other things, that no
rating has been requested, that there is insufficient information
on which to base a rating,
or that Standard & Poor's Corporation and Moody's Investors Service
do not rate a particular type of obligation as a matter of policy.
Subsequent to the Date
of Deposit the credit characteristics of the Issuers of Securities
may have changed. Currently, certain of the Securities in the
portfolio of a Trust may be
unrated and have credit characteristics comparable to securities
<PAGE>
rated below the
minimum requirements of such Trust for acquisition of a Security.
See Part A-"Portfolio of Securities" herein to ascertain the
ratings on the Securities, if any,on the date of the Portfolio of
Securities.
Fitch Investors Service, Inc.
A brief description of the applicable Fitch
Investors Service, Inc. rating symbols and their meanings is as
follows:
AAA--Bonds which are considered to be investment
grade and of the highest credit quality. The obligor has an
exceptionally strong ability to
pay interest and repay principal, which is unlikely to be affected
by reasonably foreseeable events.
AA--Bonds which are considered to be investment
grade and of very high credit quality. The obligor's ability to
pay interest and repay principal is very strong although not quite
as strong as bonds rated AAA.
A--Bonds which are considered to be investment
grade and of high credit quality. The obligor's ability to pay
interest and repay principal is
considered to be strong, but may be more vulnerable to adverse
changes in economic conditions and circumstances than bonds with
higher ratings.
BBB-Bonds which are considered to be investment
grade and of satisfactory credit quality. The obligor's ability to
pay interest and repay principal is considered to be adequate.
Adverse changes in economic conditions
and circumstances, however, are more likely to have adverse impact
on these bonds, and therefore impair timely payment. The
likelihood that these bonds
will fall below investment grade is higher than for bonds with
higher ratings.
Plus (+) Minus (-)--Plus and minus signs are used
with a rating symbol to indicate the relative position of a credit
within the rating category.
Plus and minus signs, however, are not used in the 'AAA', 'DDD',
'DD' or 'D' categories.
Conditional--A conditional rating is promised on
the successful completion of a project of the occurrence of a
specific event.
Duff & Phelps Credit Rating Co.
A brief description of the applicable Duff & Phelps Credit Rating
<PAGE>
Co. rating symbols and their meanings is as follows:
AAA-Highest credit quality. The risk factors are
negligible, being only slightly more than for risk-free U.S.
Treasury debt.
AA-High credit quality. Protection factors are
strong. Risk is modest but may vary slightly from time to time
because of economic conditions.
A-Protection factors are average but adequate.
However, risk factors are more variable and greater in periods of
economic stress.
BBB-Below average protection factors but still
considered sufficient for prudent investment. Considerable
variability in risk during economic cycles.
NR-Not rated (credit characteristics comparable to
A or better on the Date of Deposit).
<PAGE>
Prospectus
This Prospectus contains information concerning the Trust and
the Sponsors, but does not contain all the information set forth
in the registration statements and exhibits relating thereto, which
the Trust has filed with the Securities and Exchange Commission,
Washington, D.C. under the Securities Act of 1933 and the
Investment Company Act of 1940, and to which reference is
hereby made.
<TABLE>
<S>
<C>
Index:
Page
Summary of Essential Information. . . . . . . . . . . . . . . . . . . . . . . . . . . A-
2
Insured Series 13
Financial and Statistical Information . . . . . . . . . . . . . . . . . . . . . . . . A-
3
Report of Independent Auditors. . . . . . . . . . . . . . . . . . . . . . . . . . . . A-3
Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-
4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Portfolios of Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-6
8,262 Units
Tax Exempt Securities Trust - Insured Series. . . . . . . . . . . . . . . . . . . . . 1
The Trusts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Objectives. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Estimated Current Return and Estimated Long-Term Return . . . . . . . . . . . . . . 37
PROSPECTUS
Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Dated February 20 1995
Insurance on the Bonds in the Portfolio of a Trust. . . . . . . . . . . . . . . . . 43
Expenses and Charges. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Public Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Offering Price. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Method of Evaluation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Sponsor
Distribution of Units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Market for Units. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
SMITH BARNEY INC.
Exchange Option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Reinvestment Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Sponsors' Profits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Rights of Unit Holders. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Certificates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
1345 Avenue of the Americas
Distribution of Interest and Principal. . . . . . . . . . . . . . . . . . . . . . . 51
New York, New York 10105
Reports and Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
(800) 298-UNIT
Redemption of Units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Sponsors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Limitations on Liability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Responsibility. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Resignation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Limitations on Liability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Resignation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Evaluator . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Limitations on Liability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Responsibility. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Resignation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Amendment and Termination of the Trust Agreement. . . . . . . . . . . . . . . . . . . 57
Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Legal Opinions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Auditors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Ratings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
</TABLE>
This Prospectus does not constitute an offer to sell, or a
solicitation of an offer to buy, securities in any state to any
person to whom it is not lawful to make such offer in such state.
<PAGE> PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
CONTENTS OF REGISTRATION STATEMENT
This Post-Effective Amendment to the Registration Statement
on Form S-6 comprises the following papers and documents:
The facing Sheet on Form S-6.
The cross-reference sheet.
The Prospectus consisting of pages A-1 - A- , and 1- , back cover.
Signatures.
Written consents of the following persons:
KPMG Peat Marwick
Kenny S&P Evaluation Services,
a division of Kenny Information Systems, Inc.
(included in Exhibit 4.6A)
The following exhibits:
*4.6A - Consent of Kenny S&P Evaluation Services, a division
of Kenny Information Systems, Inc. as Evaluator.
* Filed herewith.
II-1
<PAGE>
KENNY S&P EVALUATION SERVICES
A Division of Kenny Information Systems, Inc.
65 Broadway
New York, New York, 10006-2511
Telephone 212/770-4000
Smith Barney Incorporated
1345 Avenue of the Americas
New York, NY 10105
RE:Tax Exempt Securities Trust
Insured Series 13
Gentlemen:
We have examined the post-effective Amendment to the
Registration Statement File No. 33-2743 for the above-captioned
trust. We hereby acknowledge that Kenny S&P Evaluation Services,
a division of Kenny Information Systems, Inc. is currently acting
as the evaluator for the trust. We hereby consent to the use in
the Amendment of the reference to Kenny S&P Evaluation Services,
a division of Kenny Information Systems, 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,
John R. Fitzgerald
Vice President
tru:l-31
<PAGE>
CONSENT OF COUNSEL
The consent of counsel to
the use of their name in the Prospectus included in this Post-
Effective Amendment to the Registration Statement ("Post-
Effective Amendment") is contained in their opinion filed as
Exhibit 3.1 to the Registration Statement.
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of
our report dated January 9, 1995 included herein and to the
reference to our firm under the heading "AUDITORS" in the
prospectus.
KPMG PEAT MARWICK
New York, New York
January 10, 1995
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933,
the registrant, Tax Exempt Securities Trust, Insured Series 13,
certifies that it meets all the requirements for
effectiveness of this Post-Effective Amendment pursuant to Rule
485(b) under the Securities Act of 1933 and has duly caused this
Post-Effective Amendment to be signed on its behalf by the
undersigned thereunto duly authorized, in the City of New York,
and State of New York on the 10th day of January, 1995.
Signatures appear on pages II-3 and II-4.
A majority of the members of the Board of Directors of Smith
Barney Incorporated have signed this Post-Effective Amendment
pursuant to Powers of Attorney authorizing the person signing
this Post-Effective Amendment to do so on behalf of such members.
These Powers of Attorney were filed with the Securities
and Exchange Commission under the Securities Act of 1933 with the
Registration Statement of Tax Exempt Securities Trust,
Appreciation Series 7, Registration No. 2-78499 and with the
Registration Statement of Tax Exempt Securities Trust, Series
110, Intermediate Term Series 15 and Short-Intermediate Term
Series 13, Registration Nos. 2-97179, 2-95591 and 2-96184,
respectively, with the Registration Statement of Tax Exempt
Securities Trust, Series 284, Amendment No. 2, Registration No.
33-22777, with the Registration Statement of Tax Exempt
Securities Trust, Series 295, Amendment No. 1, Registration No.
33-26376, and with the Registration Statement of Tax Exempt
Securities Trust, Series 335, Amendment No. 1, Registration No.
33-37952.
<PAGE>
TAX EXEMPT SECURITIES TRUST
BY SMITH BARNEY INC.
By
(George S. Michinard, Jr.)
By the following persons,* who constitute a majority of
the directors of Smith Barney Inc. :
Steven D. Black
James S. Boshart III
Robert A. Case
James Dimon
Robert Druskin
Robert F. Greenhill
Jeffrey B. Lane
Robert H. Lessin
John F. Lyness
Jack L. Rivkin
By
(George S. Michinard, Jr.
Attorney-in-Fact)
* Pursuant to Powers of Attorney previously filed.
II-3
