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File No. 33-06973
CIK #796365
Securities and Exchange Commission
Washington, D. C. 20549
Post-Effective
Amendment No. 8
to
Form S-6
For Registration under the Securities Act of 1933
of Securities of Unit Investment Trusts Registered
on Form N-8B-2
KEMPER TAX-EXEMPT INSURED INCOME TRUST, SERIES A-44, KEMPER
TAX-EXEMPT INCOME TRUST, MULTI-STATE SERIES 28
NAME AND EXECUTIVE OFFICE ADDRESS OF DEPOSITOR:
KEMPER UNIT INVESTMENT TRUSTS
(a service of Kemper Securities, Inc.)
77 West Wacker - 5th Floor
Chicago, Illinois 60601
Name and complete address of agent for service:
C. PERRY MOORE
77 West Wacker - 5th Floor
Chicago, Illinois 60601
X(X) Check box if it is proposed that this filing will become effective
immediately upon pursuant to paragraph (b) of Rule 485.
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KEMPER TAX-EXEMPT INSURED INCOME TRUST
NATIONAL SERIES
PART ONE
The date of this Part One is that date
which is set forth in Part Two of the Prospectus
Kemper Tax-Exempt Insured Income Trust (the "Trust") was formed for
the purpose of gaining interest income free from Federal income taxes while
conserving capital and diversifying risks by investing in an insured, fixed
portfolio consisting of obligations issued by or on behalf of states of the
United States or counties, municipalities, authorities or political
subdivisions thereof.
Insurance guaranteeing the scheduled payment of principal and
interest on all of the Municipal Bonds in the portfolio listed in Part Two has
been obtained from an independent company by either the Trust, the Sponsor or
the issuer of the Municipal Bonds involved. Insurance obtained by a Municipal
Bond issuer is effective so long as such Bonds are outstanding. The insurance,
in any case, does not relate to the Units offered hereby or to their market
value. As a result of such insurance, the Units of the Trust received on the
original date of deposit a rating of "AAA" by Standard & Poor's Corporation.
See "Insurance on the Portfolios" and "Description of Securities Ratings." No
representation is made as to any insurer's ability to meet its commitments.
This Prospectus is in two parts. Read and retain both parts for
future reference.
SPONSOR: KEMPER UNIT INVESTMENT TRUSTS
a service of Kemper Securities, Inc.
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.
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TABLE OF CONTENTS
<TABLE>
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SUMMARY . . . . . . . . . . . . . . . . . 3
The Trust . . . . . . . . . . . . . . 3
Insurance . . . . . . . . . . . . . . 3
Public Offering Price . . . . . . . . 4
Interest and Principal
Distributions . . . . . . . . . . . . 4
Reinvestment . . . . . . . . . . . . . 4
Estimated Long-Term Return and
Estimated Current Return . . . . . . 4
Market for Units . . . . . . . . . . . 5
THE TRUST . . . . . . . . . . . . . . . . 5
PORTFOLIOS . . . . . . . . . . . . . . . 6
Portfolio Risk Information . . . . . . 7
INSURANCE ON THE PORTFOLIOS . . . . . . . 12
Financial Guaranty Insurance
Company . . . . . . . . . . . . . . . 14
AMBAC Indemnity Corporation . . . . . 14
Municipal Bond Investors
Assurance Corporation . . . . . . . 14
Financial Security Assurance . . . . . 15
Capital Guaranty Insurance
Company . . . . . . . . . . . . . . . 16
DISTRIBUTION REINVESTMENT . . . . . . . . 17
The Program Agent is Investors
Fiduciary Trust Company . . . . . . . 18
INTEREST AND ESTIMATED LONG-TERM
AND CURRENT RETURNS . . . . . . . . . . . 18
TAX STATUS OF THE TRUST . . . . . . . . . 18
PUBLIC OFFERING OF UNITS . . . . . . . . 22
Public Offering Price . . . . . . . . 22
Public Distribution of Units . . . . . 24
Profits of Sponsor . . . . . . . . . . 25
MARKET FOR UNITS . . . . . . . . . . . . 26
REDEMPTION . . . . . . . . . . . . . . . 25
Computation of Redemption Price . . . 26
UNITHOLDERS . . . . . . . . . . . . . . . 27
Ownership of Units . . . . . . . . . . 27
Distributions to Unitholders . . . . . 27
Statement to Unitholders . . . . . . . 28
Rights of Unitholders . . . . . . . . 30
INVESTMENT SUPERVISION . . . . . . . . . 30
ADMINISTRATION OF THE TRUST . . . . . . . 31
The Trustee . . . . . . . . . . . . . 31
The Evaluator . . . . . . . . . . . . 32
Amendment and Termination . . . . . . 33
Limitations on Liability . . . . . . . 33
The Trustee . . . . . . . . . . . . . 34
The Evaluator: . . . . . . . . . . . . 34
EXPENSES OF THE TRUST . . . . . . . . . . 34
THE SPONSOR . . . . . . . . . . . . . . . 35
LEGAL OPINIONS . . . . . . . . . . . . . 36
INDEPENDENT AUDITORS . . . . . . . . . . 36
DESCRIPTION OF MUNICIPAL BOND
RATINGS . . . . . . . . . . . . . . . . 36
Essential Information*
Report of Independent Auditors*
Statement of Assets and Liabilities*
Statement of Operations*
Statement of Changes in Net Assets*
Schedule of Investments*
Notes to Schedules of Investments*
Notes to Financial Statements*
*INFORMATION ON THESE ITEMS APPEARS IN PART TWO
</TABLE>
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KEMPER TAX-EXEMPT INSURED INCOME TRUST
SUMMARY
THE TRUST. Kemper Tax-Exempt Insured Income Trust (the "Trust") is a
unit investment trust consisting of a number of diversified portfolios (the
"Series"), each portfolio consisting of obligations ("Municipal Bonds",
"Securities" or "Bonds") issued by or on behalf of states of the United States
or counties, municipalities, authorities or political subdivisions thereof.
The objective of each Series of the Trust is tax-exempt income and
conservation of capital with diversification of risk through investment in an
insured, fixed portfolio of long-term Municipal Bonds. Interest on certain
Municipal Bonds in certain of the National Series will be a preference item for
purposes of the alternative minimum tax. Accordingly, such National Series may
be appropriate only for investors who are not subject to the alternative
minimum tax. There is, of course, no guarantee that the Trust's objective will
be achieved.
All of the Municipal Bonds in a Series of the Trust were rated in the
category "BBB" or better by Standard & Poor's Corporation ("Standard & Poor's")
or "Baa" by Moody's Investors Service, Inc. ("Moody's") on the date such Series
was established (the "Date of Deposit"). Ratings of the Municipal Bonds may
have changed since the Date of Deposit. See "Description of Securities
Ratings" herein and the "Schedule of Investments" in Part Two.
The Units, each of which represents a pro rata undivided fractional
interest in the Municipal Bonds deposited in the appropriate Series of the
Trust, are issued and outstanding Units which have been reacquired by the
Sponsor either by purchase of Units tendered to the Trustee for redemption or
by purchase in the open market. No offering is being made on behalf of
the Trust and any profit or loss realized on the sale of Units will accrue to
the Sponsor and/or the firm reselling such Units.
INSURANCE. Insurance guaranteeing the scheduled payment of principal
and interest on all of the Municipal Bonds in the portfolio of each Series of
the Trust has been obtained by the Trust, the Sponsor or directly by the issuer
from an independent insurance company. Series A through A-24 are insured by
AMBAC Indemnity Corporation ("AMBAC Indemnity") and Series A-25 and subsequent
Series are insured by Financial Guaranty Insurance Company ("Financial
Guaranty") or other insurers. Insurance obtained directly by the issuer may be
from such companies or other insurers. See "Insurance on the Portfolio"
herein and "Schedule of Investments" in Part Two. Insurance obtained by the
Trust remains in effect only while the insured Municipal Bonds are retained in
the Trust, while insurance obtained by a Municipal Bond issuer is effective so
long as such Bonds are outstanding. Pursuant to an irrevocable commitment of
Financial Guaranty, in the event of a sale of any Bond from Series A-25 or
subsequent series covered under the Trust's insurance policy, the Trustee has
the right to obtain permanent insurance for such Municipal Bond upon the
payment of a single predetermined insurance premium from the proceeds of the
sale of such Municipal Bond. The insurance, in either case, does not relate to
the Units offered hereby or to their market value. As a result of such
insurance,
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the Units of each Series of the Trust received on the original Date of Deposit
a rating of "AAA" from Standard & Poor's. See "Insurance on the Portfolio."
No representation is made as to AMBAC Indemnity's, Financial Guaranty's or any
other insurer's ability to meet its commitments.
PUBLIC OFFERING PRICE. The Public Offering Price per Unit of a Series
of the Trust is equal to a pro rata share of the aggregate bid prices of the
Municipal Bonds in such Series (plus or minus a pro rata share of cash, if any,
in the Principal Account, held or owed by the Series) plus a sales charge shown
under "Public Offering of Units." In addition, there will be added to each
transaction an amount equal to the accrued interest from the last Record Date
of such Series to the date of settlement (five business days after order). The
sales charge is reduced on a graduated scale as indicated under "Public
Offering of Units - Public Offering Price."
INTEREST AND PRINCIPAL DISTRIBUTIONS. Distributions of the estimated
annual interest income to be received by a Series of the Trust, after deduction
of estimated expenses, will be made monthly unless the Unitholder elects to
receive such distributions quarterly or semi-annually. Distributions will be
paid on the Distribution Dates to holders of record of such Series on the
Record Dates set forth for the applicable option. See "Essential Information"
in Part Two.
The distribution of funds, if any, in the Principal Account of each
Series, will be made semi-annually to Unitholders of Record on the appropriate
dates. See "Essential Information" in Part Two.
REINVESTMENT. Distributions of interest and principal, including
capital gains, if any, made by a Series of the Trust will be paid in cash
unless a Unitholder elects to reinvest such distributions. See "Distribution
Reinvestment."
ESTIMATED CURRENT RETURN AND ESTIMATED LONG-TERM RETURN. The Estimated
Current Return is calculated by dividing the estimated net annual interest
income per Unit by the Public Offering Price of such Trust. The estimated net
annual interest income per Unit will vary with changes in fees and expenses of
such Trust and with the principal prepayment, redemption, maturity, exchange or
sale of Securities while the Public Offering Price will vary with changes in
the bid price of the underlying Securities; therefore, there is no assurance
that the present Estimated Current Returns will be realized in the future.
Estimated Long-Term Return is calculated using a formula which (1) takes into
consideration, and determines and factors in the relative weightings of, the
market values, yields (which takes into account the amortization of premiums
and the accretion of discounts) and estimated retirements of all of the
Securities in the Trust and (2) takes into account the expenses and sales
charge associated with each Trust Unit. Since the market values and estimated
retirements of the Securities and the expenses of the Trust will change, there
is no assurance that the present Estimated Long-Term Return will be realized in
the future. Estimated Current Return and Estimated Long-Term Return are
expected to differ because the calculation of Estimated Long-Term Return
reflects the estimated date and amount of principal returned while Estimated
Current Return calculations include only net annual interest income and Public
Offering Price.
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MARKET FOR UNITS. While under no obligation to do so, the Sponsor
intends, subject to change at any time, to maintain a market for the Units of
each Series of the Trust and to continuously offer to repurchase such Units at
prices which are based on the aggregate bid side evaluation of the Municipal
Bonds in such Series of the Trust. If such a market is not maintained and no
other over-the-counter market is available, Unitholders will still be able to
dispose of their Units through redemption by the Trustee at prices based upon
the aggregate bid price of the Municipal Bonds in such Series of the Trust.
See "Redemption."
THE TRUST
Each Series of the Trust is one of a series of unit investment trusts
created by the Sponsor under the name Kemper Tax-Exempt Insured Income Trust,
all of which are similar, and each of which was created under the laws of the
State of Missouri pursuant to a Trust Agreement* (the "Agreement"). Kemper
Unit Investment Trusts, a service of Kemper Securities, Inc., acts as Sponsor
and Evaluator and Investors Fiduciary Trust Company acts as Trustee. For
information regarding the relationship of Kemper Unit Investment Trusts and
Investors Fiduciary Trust Company, see "The Sponsor."
The objectives of the Trust are tax-exempt income and conservation of
capital with diversification of risk through investment in an insured, fixed
portfolio of long-term Municipal Bonds. Interest on certain Municipal Bonds
in the National Series will be a preference item for purposes of the
alternative minimum tax. Accordingly, such National Series may be appropriate
only for the investors who are not subject to the alternative minimum tax.
There is, of course, no guarantee that the Trust's objectives will be achieved.
A Series of the Trust may be an appropriate investment vehicle for
investors who desire to participate in a portfolio of insured, tax-exempt,
fixed income securities with greater diversification than they might be able to
acquire individually. In addition, Municipal Bonds of the type deposited in
the Trust are often not available in small amounts.1
Each Series of the Trust consists of an insured portfolio of interest
bearing obligations issued by or on behalf of states of the United States or
counties, municipalities, authorities or political subdivisions thereof the
interest on which is, in the opinion of bond counsel to the issuing
authorities, exempt from all Federal income taxes under existing law, but may
be subject to state and local taxes. Proceeds from the maturity, redemption or
sale of the Municipal Bonds in a Series of the Trust, unless used to pay for
Units tendered for redemption, will be distributed to Unitholders of such
Series and will not be utilized to purchase replacement or additional Municipal
Bonds for the Series.
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* Reference is hereby made to said Trust Agreement, and any statements
contained herein are qualified in their entirety by the provisions of said
Trust Agreements.
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The Units, each of which represents a pro rata undivided fractional
interest in the principal amount of Municipal Bonds deposited in a Series of
the Trust, are issued and outstanding Units which have been reacquired by the
Sponsor either by purchase of Units tendered to the Trustee for redemption or
by purchase in the open market. No offering is being made on behalf of the
Trust or any Series thereof and any profit or loss realized on the sale of
Units will accrue to the Sponsor and/or the firm reselling such Units. To the
extent that Units of a Series of the Trust are redeemed, the principal amount
of Municipal Bonds in such Series will be reduced and the undivided fractional
interest represented by each outstanding Unit of the Series will increase. See
"Redemption."
PORTFOLIOS
In selecting the Municipal Bonds which comprise the portfolio of a
Series of the Trust the following requirements, were deemed to be of primary
importance: (a) a minimum rating of "BBB" by Standard & Poor's Corporation or
"Baa" by Moody's Investors Service, Inc. (see "Description of Securities
Ratings"); (b) the price of the Municipal Bonds relative to other issues of
similar quality and maturity; (c) the diversification of the Municipal Bonds as
to purpose of issue; (d) the income to the Unitholders of the Series; and (e)
whether such Municipal Bonds were insured, or the availability and cost of
insurance for the prompt payment of principal and interest, when due, on the
Municipal Bonds; and (f) the dates of maturity of the Municipal Bonds.
Subsequent to the Date of Deposit, a Municipal Bond may cease to be
rated or its rating may be reduced below the minimum required as of the Date of
Deposit. Neither event requires the elimination of such investment from the
portfolio, but may be considered in the Sponsor's determination to direct the
Trustee to dispose of the investment. See "Investment Supervision" herein and
"Schedule of Investments" in Part Two.
The Sponsor may not alter the portfolio of a Series of the Trust,
except that certain of the Municipal Bonds may be sold upon the happening of
certain extraordinary circumstances. See "Investment Supervision."
Certain Series of the Trust contain Municipal Bonds which may be
subject to redemption prior to their stated maturity date pursuant to sinking
fund provisions, call provisions or extraordinary optional or mandatory
redemption provisions or otherwise. A sinking fund is a reserve fund
accumulated over a period of time for retirement of debt. A callable debt
obligation is one which is subject to redemption or refunding prior to maturity
at the option of the issuer. A refunding is a method by which a debt
obligation is redeemed at or before maturity, by the proceeds of a new debt
obligation. In general, call provisions are more likely to be exercised when
the offering side valuation is at a premium over par than when it is at a
discount from par. Accordingly, any such call, redemption, sale or maturity
will reduce the size and diversity of such Series, and the net annual interest
income of the Series and may reduce the Estimated Long-Term Returns and/or
Estimated Current Return. See "Interest and Estimated Long-Term and Current
Returns." Each Trust portfolio contains a listing of the sinking fund and call
provisions, if any, with respect to each of the debt obligations. Extraordinary
optional redemptions and mandatory redemptions result from the happening of
certain events. Generally, events that may permit the extraordinary optional
redemption of Municipal Bonds or may require the mandatory redemption of
Municipal Bonds include among others: a final determination that the interest
on the Municipal Bonds is taxable; the substantial damage or destruction by
fire or other casualty of the project for which the proceeds of the Municipal
Bonds were used; an exercise by a local, state or Federal governmental unit of
its power of eminent domain to take all or substantially all of the project for
which the proceeds of the Municipal Bonds were used; changes in the economic
availability of raw materials, operating supplies or facilities or
technological or other changes which render the operation of the project for
which the proceeds of the Municipal Bonds were used uneconomic; changes in law
or an administrative or judicial decree which
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renders the performance of the agreement under which the proceeds of the
Municipal Bonds were made available to finance the project impossible or which
creates unreasonable burdens or which imposes excessive liabilities, such as
taxes not imposed on the date the Municipal Bonds are issued on the issuer of
the Municipal Bonds or the user of the proceeds of the Municipal Bonds; an
administrative or judicial decree which requires the cessation of a substantial
part of the operations of the project financed with the proceeds of the
Municipal Bonds; an overestimate of the costs of the project to be financed
with proceeds of the Municipal Bonds resulting in excess proceeds of the
Municipal Bonds which may be applied to redeem Municipal Bonds; or an
underestimate of a source of funds securing the Municipal Bonds resulting in
excess funds which may be applied to redeem Municipal Bonds. The Sponsor is
unable to predict all of the circumstances which may result in such redemption
of an issue of Municipal Bonds.
The Sponsor and the Trustee shall not be liable in any way for any
default, failure or defect in any Municipal Bond.
PORTFOLIO RISK INFORMATION. An investment in Units of a Series of the
Trust should be made with an understanding of the risks which an investment in
fixed rate debt obligations may entail, including the risk that the value of
the portfolio and hence of the Units will decline with increases in interest
rates. The value of the underlying Municipal Bonds will fluctuate inversely
with changes in interest rates. The uncertain economic conditions of recent
years, together with the fiscal measures adopted to attempt to deal with them,
have resulted in wide fluctuations in interest rates and, thus, in the value of
fixed rate debt obligations generally and long term obligations in particular.
The Sponsor cannot predict whether such fluctuations will continue in the
future.
Certain Series of the Trust contain Municipal Bonds which are general
obligations of a governmental entity that are backed by the taxing power of
such entity. All other Municipal Bonds in the Series of the Trust are revenue
bonds payable from the income of a specific project or authority and are not
supported by the issuer's power to levy taxes. General obligation bonds are
secured by the issuer's pledge of its faith, credit and taxing power for the
payment of principal and interest. Revenue bonds, on the other hand, are
payable only from the revenues derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special excise or other
specific revenue source. There are, of course, variations in the security of
the different Municipal Bonds in the Series of the Trust, both within a
particular classification and between classifications, depending on numerous
factors.
Certain Series of the Trust contain Municipal Bonds which are
obligations of issuers whose revenues are derived from services provided by
hospitals and other health care facilities, including nursing homes. In view
of this an investment in such Series should be made with an understanding of
the characteristics of such issuers and the risks that such an investment may
entail. Ratings of bonds issued for health care facilities are often based on
feasibility studies that contain projections of occupancy levels, revenues and
expenses. A facility's gross receipts and net income available for debt
service will be affected by future events and conditions including, among other
things, demand for services and the ability of the facility to provide the
services required, physicians' confidence in the facility, management
capabilities, economic developments in the service area, competition, efforts
by insurers and governmental agencies to limit rates, legislation establishing
state rate-setting agencies, expenses, the cost and possible unavailability of
malpractice insurance, the funding of Medicare, Medicaid and other similar
third party payor programs, and government regulation. Federal legislation has
been enacted which implemented a system of prospective Medicare reimbursement
which may restrict the flow of revenues to hospitals and other facilities which
are reimbursed for services provided under the Medicare program. Future
legislation or changes in the areas noted above, among other things, would
affect all hospitals to varying degrees and, accordingly, any adverse changes
in these areas may adversely affect the ability of such issuers to make payment
of principal and interest on Municipal Bonds held
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in such Series. Such adverse changes also may adversely affect the ratings of
the Municipal Bonds held in such Series of the Trust. 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. 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 or in other circumstances. For example,
certain hospitals may have the right to call bonds at par if the hospital may
legally be required because of the bonds to perform procedures against
specified religious principles. Certain FHA- insured bonds may provide that
all or a portion of those 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 reduce severely its
collateral value.
Certain Series of the Trust contain Municipal Bonds which are single
family mortgage revenue bonds, which are issued for the purpose of acquiring
from originating financial institutions notes secured by mortgages on
residences located within the issuer's boundaries and owned by persons of low
or moderate income. Mortgage loans are generally partially or completely
prepaid prior to their final maturities as a result of events such as sale of
the mortgaged premises, default, condemnation or casualty loss. Because these
Municipal Bonds are subject to extraordinary mandatory redemption in whole or
in part from such prepayments of mortgage loans, a substantial portion of such
Municipal Bonds will probably be redeemed prior to their scheduled maturities
or even prior to their ordinary call dates. The redemption price of such
issues may be more or less than the offering price of such Municipal Bonds.
Extraordinary mandatory redemption without premium could also result from the
failure of the originating financial institutions to make mortgage loans in
sufficient amounts within a specified time period or, in some cases, from the
sale by the Municipal Bond issuer of the mortgage loans. Failure of the
originating financial institutions to make mortgage loans would be due
principally to the interest rates on mortgage loans funded from other sources
becoming competitive with the interest rates on the mortgage loans funded with
the proceeds of the single family mortgage revenue bonds. Additionally,
unusually high rates of default on the underlying mortgage loans may reduce
revenues available for the payment of principal of or interest on such mortgage
revenue bonds. Single family mortgage revenue bonds issued after December 31,
1980 were issued under Section 103A of the Internal Revenue Code, which Section
contains certain ongoing requirements relating to the use of the proceeds of
such Bonds in order for the interest on such Municipal Bonds to retain its
tax-exempt status. In each case, the issuer of the Municipal Bonds has
covenanted to comply with applicable ongoing requirements and bond counsel to
such issuer has issued an opinion that the interest on the Municipal Bonds is
exempt from Federal income tax under existing laws and regulations. There can
be no assurances that the ongoing requirements will be met. The failure to
meet these requirements could cause the interest on the Municipal Bonds to
become taxable, possibly retroactively from the date of issuance.
Certain Series of the Trust contain Municipal Bonds which are
obligations of issuers whose revenues are primarily derived from mortgage loans
to housing projects for low to moderate income families. The ability of such
issuers to make debt service payments will be affected by events and conditions
affecting financed projects, including, among other things, the achievement and
maintenance of sufficient occupancy levels and adequate rental income,
increases in taxes, employment and income conditions prevailing in local labor
markets, utility costs and other operating expenses, the managerial ability of
project managers, changes in laws and governmental regulations, the
appropriation of subsidies and social and economic trends affecting the
localities in which the projects are located. The occupancy of housing
projects may be adversely affected by high rent levels and income limitations
imposed under Federal and state programs. Like single family mortgage revenue
bonds, multi-family mortgage revenue bonds are subject to redemption and call
features,
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including extraordinary mandatory redemption features, upon prepayment, sale
or non-origination of mortgage loans as well as upon the occurrence of other
events. Certain issuers of single or multi-family housing bonds have
considered various ways to redeem bonds they have issued prior to the stated
first redemption dates for such bonds. In connection with the housing
Municipal Bonds held by the Trust, the Sponsor has not had any direct
communications with any of the issuers thereof, but at the initial Date of
Deposit it was not aware that any of the respective issuers of such Municipal
Bonds were actively considering the redemption of such Municipal Bonds prior to
their respective stated initial call dates. However, there can be no assurance
that an issuer of a Municipal Bond in the Trust will not attempt to so redeem a
Municipal Bond in the Trust.
Certain Series of the Trust contain Municipal Bonds which are
obligations of issuers whose revenues are derived from the sale of water and/or
sewerage services. Water and sewerage bonds are generally payable from user
fees. Problems faced by such issuers include the ability to obtain timely and
adequate rate increases, a decline in population resulting in decreased user
fees, the difficulty of financing large construction programs, the limitations
on operations and increased costs and delays attributable to environmental
considerations, the increasing difficulty of obtaining or discovering new
supplies of fresh water, the effect of conservation programs and the impact of
"no-growth" zoning ordinances. Issuers may have experienced these problems in
varying degrees. Because of the relatively short history of solid waste
disposal bond 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 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 disposal 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.
Certain Series of the Trust contain Municipal Bonds which are
obligations of issuers whose revenues are primarily derived from the sale of
electric energy or natural gas. Utilities are generally subject to extensive
regulation by state utility commissions which, among other things, establish
the rates which may be charged and the appropriate rate of return on an
approved asset base. The problems faced by such issuers include the difficulty
in obtaining approval for timely and adequate rate increases from the governing
public utility commission, the difficulty in financing large construction
programs, the limitations on operations and increased costs and delays
attributable to environmental considerations, increased competition, recent
reductions in estimates of future demand for electricity in certain areas of
the country, the difficulty of the capital market in absorbing utility debt,
the difficulty in obtaining fuel at reasonable prices and the effect of energy
conservation. Issuers may have experienced these problems in varying degrees.
In addition, Federal, state and municipal governmental authorities may from
time to time review existing and impose additional regulations governing the
licensing, construction and operation of nuclear power plants, which may
adversely affect the ability of the issuers of such Municipal Bonds to make
payments of principal and/or interest on such Municipal Bonds. 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 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
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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 action 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.
Certain Series of the Trust contain Municipal Bonds which are
industrial revenue bonds ("IRBs"), including pollution control revenue bonds,
which are tax-exempt securities issued by states, municipalities, public
authorities or similar entities to finance the cost of acquiring, constructing
or improving various industrial projects. These projects are usually operated
by corporate entities. Issuers are obligated only to pay amounts due on the
IRBs to the extent that funds are available from the unexpended proceeds of the
IRBs or receipts or revenues of the issuer under an arrangement between the
issuer and the corporate operator of a project. The arrangement 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 IRBs. Regardless of the
structure, payment of IRBs is solely dependent upon the creditworthiness of the
corporate operator of the project or corporate guarantor. Corporate operators
or guarantors may be affected by many factors which may have an adverse impact
on the credit quality of the particular company or industry. These include
cyclicality of revenues and earnings, regulatory and environmental
restrictions, litigation resulting from accidents or environmentally-caused
illnesses, extensive competition and financial deterioration resulting from
leveraged buy-outs or takeovers. The IRBs in the Series of the Trust may be
subject to special or extraordinary redemption provisions which may provide for
redemption at par or, with respect to original issue discount bonds, at issue
price plus the amount of original issue discount accreted to the redemption
date plus, if applicable, a premium. The Sponsor cannot predict the causes or
likelihood of the redemption of IRBs or other Municipal Bonds in the Series of
the Trust prior to the stated maturity of such Municipal Bonds.
Certain Series of the Trust contain Municipal Bonds which are
obligations which are payable from and secured by revenues derived from the
ownership and operation of facilities such as airports, bridges, turnpikes,
port authorities, convention centers and arenas. The major portion of an
airport's gross operating income is generally derived from fees received from
signatory airlines pursuant to use agreements which consist of annual payments
for leases, occupancy of certain terminal space and service fees. Airport
operating income may therefore be affected by the ability of the airlines to
meet their obligations under the use agreements. The air transport industry is
experiencing significant variations in earnings and traffic, due to increased
competition, excess capacity, increased costs, deregulation, traffic
constraints and other factors, and several airlines are experiencing severe
financial difficulties. The Sponsor cannot predict what effect these industry
conditions may have on airport revenues which are dependent for payment on the
financial condition of the airlines and their usage of the particular airport
facility. Similarly, payment on Municipal Bonds related to other facilities is
dependent on revenues from the projects, such as user fees from ports, tolls on
turnpikes and bridges and rents from buildings. Therefore, payment may be
adversely affected by reduction in revenues due to such factors as increased
cost of maintenance, decreased use of a facility, lower cost of alternative
modes of transportation, scarcity of fuel and reduction or loss of rents.
Certain Series of the Trusts contain Municipal Bonds which are
obligations of issuers which are, or which govern the operation of, schools,
colleges and universities and whose revenues are derived mainly from ad valorem
taxes, or for higher education systems, from tuition, dormitory revenues,
grants and endorsements. General problems relating to school bonds include
litigation contesting the state constitutionality of financing public education
in part from ad valorem taxes, thereby creating a disparity in educational
funds available to schools in wealthy areas and schools in poor areas.
Litigation or legislation on this issue may affect the sources of funds
available for the payment of school bonds in the Trusts. General problems
relating to college and university obligations would include the prospect of a
declining percentage of the population consisting
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of "college" age individuals, possible inability to raise tuition and fees
sufficiently to cover increased operating costs, the uncertainty of continued
receipt of Federal grants and state funding and new government legislation or
regulations which may adversely affect the revenues or costs of such issuers.
All of such issuers have been experiencing certain of these problems in varying
degrees. In addition, the ability of universities and colleges to meet their
obligations is dependent upon various factors, including the size and diversity
of their sources of revenues, enrollment, reputation, management expertise, the
availability and restrictions on the use of endowments and other funds, the
quality and maintenance costs of campus facilities, and, in the case of public
institutions, the financial condition of the relevant state or other
governmental entity and its policies with respect to education. The
institution's ability to maintain enrollment levels will depend on such factors
as tuition costs, geographic location, geographic diversity and quality of
student body, quality of the faculty and the diversity of program offerings.
Certain Series of the Trust contain Municipal Bonds which are Urban
Redevelopment Bonds ("URBs"). URBs have generally been issued under bond
resolutions pursuant to which the revenues and receipts payable under the
arrangements with the operator of a particular project have been assigned and
pledged to purchasers. In some cases, a mortgage on the underlying project may
have been granted as security for the URBs. Regardless of the structure,
payment of the URBs is solely dependent upon the creditworthiness of the
operator of the project.
Certain of the Municipal Bonds in the Trust may be lease revenue bonds
whose revenues are derived from lease payments made by a municipality or other
political subdivision which is leasing equipment or property for use in its
operation. The risks associated with owning Municipal Bonds of this nature
include the possibility that appropriation of funds for a particular project or
equipment may be discontinued. The Sponsor cannot predict the likelihood of
nonappropriation of funds for these types of lease revenue Municipal Bonds.
Lease revenue Municipal Bonds may also be subject to the risk of abatement in
many states -- rental obligations cease in the event that damage, destruction
or condemnation of the project prevents its use by the lessee. (In these
cases, insurance provisions 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 re-letting
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 its 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 even though it
is not legally obligated to do so, but its legality remains untested in most,
if not all, states.
Certain Series of the Trust contain "zero coupon" bonds, i.e., an
original issue discount bond that does not provide for the payment of current
interest. Zero coupon bonds are purchased at a deep discount because the buyer
receives only the right to receive a final payment at the maturity of the bond
and does not receive any periodic interest payments. The effect of owning deep
discount bonds which do not make current interest payments (such as the zero
coupon bonds) is that a fixed yield is earned not only on the original
investment but also, in effect, on all discount earned during the life of such
obligation. This implicit reinvestment of earnings at the same rate eliminates
the risk of being unable to reinvest the income on such obligation at a rate as
high as the implicit yield on the discount obligation, but at the same time
eliminates the holder's ability to reinvest at higher rates in the future. For
this reason, zero coupon bonds are subject to substantially greater price
fluctuations during periods of changing market interest rates than are
securities of comparable quality which pay interest currently. For the Federal
tax consequences of original issue discount bonds such as the zero coupon
bonds, see "Tax Status of the Trust."
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Investors should be aware that many of the Municipal Bonds in the
Series of the Trust are subject to continuing requirements such as the actual
use of Municipal Bond proceeds or manner of operation of the project financed
from Municipal Bond proceeds that may affect the exemption of interest on such
Municipal Bonds from Federal income taxation. Although at the time of issuance
of each of the Municipal Bonds in the Series of the Trust an opinion of bond
counsel was rendered as to the exemption of interest on such obligations from
Federal income taxation, there can be no assurance that the respective issuer
or other obligors on such obligations will fulfill the various continuing
requirements established upon issuance of the Municipal Bonds. A failure to
comply with such requirements may cause a determination that interest on such
obligations is subject to Federal income taxation, perhaps even retroactively
from the date of issuance of such Municipal Bonds, thereby reducing the value
of the Municipal Bonds and subjecting Unitholders to unanticipated tax
liabilities.
Federal bankruptcy statutes relating to the adjustment of debts of
political subdivisions and authorities of states of the United States provide
that, in certain circumstances, such subdivisions or authorities may be
authorized to initiate bankruptcy proceedings without prior notice to or
consent of creditors, which proceedings could result in material and adverse
modification or alteration of the rights of holders of obligations issued by
such subdivisions or authorities.
Certain issues of the Municipal Bonds in some Series of the Trust
represent "moral obligations" of a governmental entity other than the issuer.
In the event that the issuer of the Municipal Bond defaults in the repayment
thereof, such other governmental entity lawfully may, but is not obligated to,
discharge the obligation of the issuer to repay such Municipal Bond. If an
issuer of moral obligation bonds is unable to meet its obligations, the
repayment of such Municipal 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.
To the best of the Sponsor's knowledge, as of the date of this
Prospectus, there is no litigation pending with respect to any Municipal Bond
which might reasonably be expected to have a material adverse effect on the
Trust or any Series thereof. Although the Sponsor is unable to predict whether
any litigation may be instituted, or if instituted, whether such litigation
might have a material adverse effect on the Trust or any Series, the Trust
received copies of the opinions of bond counsel given to the issuing
authorities at the time of original delivery of each of the Municipal Bonds to
the effect that the Municipal Bonds had been validly issued and that the
interest thereon is exempt from Federal income taxes.
INSURANCE ON THE PORTFOLIOS
All Municipal Bonds in the portfolios of each Series of the Trust are
insured as to payment of interest and principal, when due, either by a policy
obtained by the Trust, the Sponsor or by the Bond issuer. Series A through A-24
are insured by AMBAC Indemnity and Series A-25 and subsequent Series are
insured by Financial Guaranty. The insurance policy obtained by the Trust for
a Series is non-cancelable and will continue in force so long as such Series of
the Trust is in existence, the insurer and/or the reinsures referred to below
remain in business and the Municipal Bonds described in the policy continue to
be held in such Series of the Trust. The premium for any insurance policy or
policies obtained by an issuer of Municipal Bonds has been paid in advance by
such issuer and any such policy or policies are non-cancelable and will remain
in force so long as the Municipal Bonds so insured are outstanding and the
insurer and/or insurers referred to below remain in business. In those
instances where Municipal Bond insurance is obtained by the Sponsor or
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the issuer directly from an insurer, no premiums for insurance are paid by the
Trust and such bonds are not covered by the Trust's policy. Non-payment of
premiums on the policy obtained by the Trust will not result in the
cancellation of such insurance but will force the insurer to take action
against the Trustee to recover premium payments due it. Premium rates for each
issue of Municipal Bonds protected by the policy obtained by the Trust are
fixed for the life of the appropriate Series of the Trust.
The aforementioned insurance guarantees the scheduled payment of
principal and interest on all of the Municipal Bonds as they fall due. It does
not guarantee the market value of the Municipal Bonds or the value of the Units
of a Series of the Trust. The insurance obtained by the Trust is only
effective as to Municipal Bonds owned by and held in a Series of the Trust and
the price which an individual pays on acquisition of Units, or receives on
redemption or resale of Units, does not, except as indicated below, include any
element of value for the insurance obtained by the Trust. Unitholders should
recognize that in order to receive any benefit from the portfolio insurance
obtained by the Trust they must be owners of the Units of a Series of the Trust
at the time the Trustee becomes entitled to receive any payment from the
insurer for such Series. Insurance obtained by the issuer of a Municipal Bond
is effective so long as the Municipal Bond is outstanding, whether or not held
by a Series of the Trust.
Pursuant to an irrevocable commitment of Financial Guaranty, the
Trustee, upon the sale of a Municipal Bond from Series A-25 (or any subsequent
Series) covered under the Trust's insurance policy, has the right to obtain
permanent insurance (the "Permanent Insurance") with respect to such Municipal
Bond (i.e., insurance to the maturity of the Municipal Bond regardless of the
identity of the holder thereof) upon the payment of a single predetermined
insurance premium from the proceeds of the sale of such Municipal Bond.
Accordingly, every Municipal Bond in Series A-25 (or subsequent Series) of the
Trust is eligible to be sold on an insured basis. It is expected that the
Trustee will exercise the right to obtain Permanent Insurance with respect to
Municipal Bonds in such Series only if upon such exercise the Trust would
receive net proceeds (i.e., the value of such Municipal Bond if sold as an
insured Municipal Bond less the insurance premium attributable to the Permanent
Insurance) from such sale in excess of the sale proceeds if such Municipal Bond
was sold on an uninsured basis. The insurance premium with respect to each
Municipal Bond is determined based upon the insurability of each Municipal Bond
as of the Date of Deposit and will not be increased or decreased for any change
in the creditworthiness of such Municipal Bond's issuer.
Insurance obtained by the Trust, under normal circumstances, has no
effect on the price or redemption value of Units. It is the present intention
of the Evaluator to attribute a value to such insurance for the purpose of
computing the price or redemption value of Units only in circumstances where
the credit quality of an underlying Municipal Bond has significantly
deteriorated. Insurance obtained by the issuer of a Municipal Bond is
effective so long as such Municipal Bond is outstanding. Therefore, any such
insurance may be considered to represent an element of market value in regard
to the Municipal Bonds thus insured, but the exact effect, if any, of this
insurance on such market value cannot be predicted.
The value to be added to such Municipal Bonds shall be an amount equal
to the excess, if any, by which the net proceeds realized from the sale of the
Municipal Bonds on an insured basis exceeds the sum of (i) the net proceeds
realizable from the sale of the Municipal Bonds on an uninsured basis plus (ii)
in the case of Series A-25 and later the premium attributable to the Permanent
Insurance. The portfolio insurance obtained by the Trust from AMBAC Indemnity
for Series A through A-24 is applicable only while the Municipal Bonds remain
in the Trust's portfolio. Consequently, the price received by the Trust upon
the disposition of any such Municipal Bond will reflect a value placed upon it
by the market as an uninsured obligation rather than a value resulting from the
insurance. Due to this fact, the Sponsor will not direct the Trustee to
dispose of Municipal Bonds in Series A through A-24 which are in default or
imminent danger of default but to retain such
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Municipal Bonds in the portfolio so that if a default in the payment of
interest or principal occurs the Trust may realize the benefits of the
insurance.
The Sponsor will instruct the Trustee not to sell Municipal Bonds from
Series A-25 or later to effect redemptions or for any reason but rather to
retain them in the portfolio unless value attributable to the Permanent
Insurance can be realized upon sale. See "Investment Supervision."
FINANCIAL GUARANTY INSURANCE COMPANY. Financial Guaranty is a
wholly-owned subsidiary of FGIC Corporation (the "Corporation"), a Delaware
holding company. The Corporation is a wholly-owned subsidiary is General
Electric Capital Corporation ("GECC"). Neither the Corporation nor GECC is
obligated to pay the debt of or the claims against Financial Guaranty.
Financial Guaranty is domiciled in the State of New York and is subject to
regulation by the State of New York Insurance Department. As of December 31,
1992, the total capital and surplus of Financial Guaranty was approximately
$621,000,000. Copies of Financial Guaranty's financial statements, prepared on
the basis of statutory accounting principles, and the Corporation's financial
statements, prepared on the basis of generally accepted accounting principles,
may be obtained by writing to Financial Guaranty at 115 Broadway, New York, New
York 10006, Attention: Communications Department. Financial Guaranty's
telephone number is (212) 312- 3000.
In addition, Financial Guaranty Insurance Company is currently
authorized to write insurance in 49 states and the District of Columbia.
The information relating to Financial Guaranty contained above has been
furnished by such corporation. The financial information contained herein with
respect to such corporation is unaudited but appears in reports or other
materials 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 date thereof but the
Sponsor is not aware that the information herein is inaccurate or incomplete.
AMBAC INDEMNITY CORPORATION. AMBAC Indemnity Corporation ("AMBAC") is
a Wisconsin-domiciled stock insurance company, regulated by the office of
Commissioner of Insurance of Wisconsin, and licensed to do business in 50
states, the District of Columbia and the Commonwealth of Puerto Rico, with
admitted assets (unaudited) of approximately $1,503,000,000 and statutory
capital (unaudited) of approximately $862,000,000 as of September 30, 1992.
Statutory capital consists of statutory contingency reserve and policyholders'
surplus. AMBAC Indemnity is a wholly-owned subsidiary of AMBAC Inc., a 100%
publicly held company. Moody's Investors Service, Inc. and Standard & Poor's
Corporation have both assigned a AAA claims-paying ability rating to AMBAC.
Copies of AMBAC's financial statements prepared in accordance with statutory
accounting standards are available from AMBAC. The address of AMBAC's
administrative offices and its telephone number are One State Street Plaza, 17
Floor, New York, New York 10004 and (212) 668-0340. AMBAC has entered into
quota share reinsurance agreements under which a percentage of the insurance
underwritten pursuant to certain municipal bank insurance programs of AMBAC
Indemnity has been and will be assumed by a number of foreign and domestic
unaffiliated reinsures.
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION. Municipal Bond
Investors Assurance Corporation ("MBIA Corporation") is the principal operating
subsidiary of MBIA, Inc., a New York Stock Exchange listed Company. MBIA, Inc.
is obligated to pay the debts of or claims against MBIA Corporation. MBIA
Corporation, which commenced municipal bond insurance operations on January 5,
1987, is a limited liability
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<PAGE> 15
corporation rather than a several liability association. MBIA Corporation 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 December 31, 1991 MBIA Corporation had admitted assets of $2.0
billion (audited), total liabilities of $1.4 billion (audited), and total
capital and surplus of $647 million (audited) prepared in accordance with
statutory accounting practices prescribed or permitted by insurance regulatory
authorities. As of September 30, 1992, MBIA Corporation had admitted assets of
$2.3 billion (unaudited), total liabilities of $1.6 billion (unaudited), and
total policyholder's surplus of $758 million (unaudited), prepared in
accordance with statutory accounting practices prescribed or permitted by
insurance regulatory authorities. Standard & Poor's Corporation has rated the
claims-paying ability of MBIA "AAA". Copies of MBIA Corporation's financial
statements prepared in accordance with statutory accounting practices are
available from MBIA Corporation. The address of MBIA Corporation is 113 King
Street, Armonk, New York 10504.
Effective December 31, 1993, MBIA Inc. acquired Bond Investors Group,
Inc. On January 5, 1990, the Insurer acquired all of the outstanding stock of
Bond Investors Group, Inc., the parent of BIG, now known as MBIA Insurance
Corp. of Illinois. Through a reinsurance agreement, BIG has ceded all of its
net insured risks, as well as its unearned premium and contingency reserves, to
the Insurer and the Insurer has reinsured BIG's net outstanding exposure.
Moody's Investors Service rates all bonds issues insured by MBIA "Aaa"
and short-term loans "MIG1," both designated to be of the highest quality.
Standard & Poor's Corporation rates all new issues insured by MBIA "AAA."
FINANCIAL SECURITY ASSURANCE. Financial Security Assurance ("Financial
Security" or "FSA") is a monoline insurance company incorporated on March 16,
1984 under the laws of the State of New York. The operations of Financial
Security commenced on July 25, 1985, and Financial Security received its New
York State insurance license on September 23, 1985. Financial Security and its
two wholly owned subsidiaries are licensed to engage in financial guaranty
insurance business in 47 states, the District of Columbia and Puerto Rico.
Financial Security and its subsidiaries are engaged exclusively in the
business of writing financial guaranty insurance, principally in respect of
asset-backed and other collateralized securities offered in domestic and
foreign markets. Financial Security and its subsidiaries also write financial
guaranty insurance in respect of municipal and other obligations and reinsure
financial guaranty insurance policies written by other leading insurance
companies. In general, financial guaranty insurance consists of the issuance
of a guaranty of scheduled payments of an issuer's securities, thereby
enhancing the credit rating of these securities, in consideration for payment
of a premium to the insurer.
Financial Security is 91.6% owned by U S West, Inc., and 8.4% owned by
Tokio Marine and Fire Insurance Co., Ltd. ("Tokio Marine"). U S West, Inc.
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. Tokio Marine is the
largest property and casualty insurance company in Japan. No shareholder of
Financial Security is obligated to pay any debt of Financial Security or any
claim under any insurance policy issued by Financial Security or to make any
additional contribution to the capital of Financial Security.
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<PAGE> 16
As of September 30, 1992 the total policyholders' surplus and
contingency reserves and the total unearned premium reserve, respectively, of
Financial Security and its consolidated subsidiaries were, in accordance with
statutory accounting principles, approximately $456,840,000 (unaudited) and
$231,686,000 (unaudited), and the total shareholders' equity and the unearned
premium reserve, respectively of Financial Security and its consolidated
subsidiaries were, in accordance with generally accepted accounting principles,
approximately $615,376,000 (unaudited) and $213,838,000 (unaudited).
Copies of Financial Security's financial statements may be obtained by
writing of Financial Security at 350 Park Avenue, New York, New York 10022,
attention Communications Department. Financial Security's and its telephone
number is (212) 826-0100.
Pursuant to an intercompany agreement, liabilities on financial
guaranty insurance written by Financial Security or either of its subsidiaries
are reinsured among such companies at an agreed-upon percentage substantially
proportional to their respective capital, surplus and reserves, subject to
applicable statutory risk limitations. In addition, Financial Security
reinsures a portion of its liabilities under certain of its financial guaranty
insurance policies with unaffiliated reinsures under various quota share
treaties and on a transaction-by-transaction basis. Such reinsurance is
utilized by Financial Security as a risk management device and to comply with
certain statutory and rating agency requirements; it does not alter or limit
Financial Security's obligations under any financial guaranty insurance policy.
Financial Security's claims-paying ability is rated "Aaa" by Moody's
Investors Service, Inc., and "AAA" by Standard & Poor's Corporation, Nippon
Investors Service Inc., Duff & Phelps Inc. and Australian Ratings Pty. Ltd.
Such ratings reflect only the views of the respective rating agencies, are not
recommendations to buy, sell or hold securities and are subject to revision or
withdrawal at any time by such rating agencies.
CAPITAL GUARANTY INSURANCE COMPANY. Capital Guaranty Insurance Company
("Capital Guaranty") was incorporated in Maryland on June 25, 1986, and is a
wholly owned subsidiary of Capital Guaranty Corporation, a Maryland insurance
holding company.
Capital Guaranty Corporation is owned by the following investors:
Constellation Investments, Inc., an affiliate of Baltimore Gas and Electric;
Fleet/Norstar Financial Group, Inc.; Safeco Corporation; Sibag Finance
Corporation, an affiliate of Siemens A.G. and United States Fidelity and
Guaranty Company and management.
Capital Guaranty, headquartered in San Francisco, is an monoline
financial guaranty insurer engaged in the underwriting and development of
financial guaranty insurance. Capital Guaranty insures general obligation, tax
supported and revenue bonds structured as tax-exempt and taxable securities as
well as selectively insures taxable corporate/asset backed securities. Standard
& Poor's rates the claims-paying ability of Capital Guaranty "AAA".
Capital Guaranty's insured portfolio currently includes over $9 billion
in total principal and interest insured. As of December 31, 1990, the total
policyholders' surplus of Capital Guaranty was $103,802,396 (audited), and the
total admitted assets were $180,118,227 (audited) as reported to the Insurance
Department of the State of Maryland. Financial statements for Capital Guaranty
Insurance Company, that have been prepared in accordance with statutory
insurance accounting standards, are available upon request. The address of
Capital Guaranty's headquarters is Steuart Tower, 22nd Floor, One Market Plaza,
San Francisco, CA 94105-
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<PAGE> 17
1413 and the telephone number is (415) 995-8000.
In order to be in a Series of the Trust, Municipal Bonds must be
insured by the issuer thereof or be eligible for the insurance obtained by the
Series of the Trust. In determining eligibility, the company insuring the
portfolio has applied its own standards which correspond generally to the
standards it normally uses in establishing the insurability of new issues of
municipal bonds and which are not necessarily the criteria used in regard to
the selection of Municipal Bonds by the Sponsor. To the extent the standards
of the insurer are more restrictive than those of the Sponsor, the previously
stated Trust investment criteria have been limited.
On the date shown under "Essential Information" in Part Two, the
Estimated Long-Term and Current Returns per Unit for the Trust, after payment
of the insurance premium were as indicated. The Estimated Long-Term and
Current Returns per Unit for a trust with an identical portfolio without the
insurance obtained by the Trust would have been higher on such date.
An objective of the portfolio insurance obtained by the Trust is to
obtain a higher yield on the portfolio of the Series of the Trust than would be
available if all the Municipal Bonds in such portfolio had Standard & Poor's
"AAA" rating and/or Moody's "Aaa" rating(s), while having the protection of
insurance of prompt payment of interest and principal, when due, on the
Municipal Bonds. There is, of course, no certainty that this result will be
achieved. Municipal Bonds in a Series of the Trust which have been insured by
the issuer (all of which are rated "AAA" by Standard & Poor's and/or "Aaa" by
Moody's) may or may not have a higher yield than uninsured bonds rated "AAA" by
Standard & Poor's or "Aaa" by Moody's. In selecting such Municipal Bonds for
the portfolio, the Sponsor has applied the criteria described above.
In the event of nonpayment of interest or principal, when due, in
respect of a Municipal Bond, the appropriate insurer shall make such payment
not later than 30 days after it has been notified that such nonpayment has
occurred or is threatened (but not earlier than the date such payment is due).
The insurer, as regards any payment it may make, will succeed to the rights of
the Trustee in respect thereof.
The Internal Revenue Service has issued a letter ruling which holds, in
effect, that inurance proceeds representing maturity interest on defaulted
municipal obligations paid to municipal bond funds substantially similar to the
Trust, under policy provisions substantially identical to the policies
described herein, will be excludable from Federal gross income under Section
103(a)(1) of the Internal Revenue Code. Holders of Units in the Trust should
discuss with their tax advisers the degree of reliance which they may place on
this letter ruling. Furthermore, Chapman and Cutler, Counsel for the Sponsor,
have given an opinion to the effect that such payment of proceeds would be
excludable from Federal gross income to the same extent that such interest
would have been so excludable if paid by the issuer of the defaulted
obligations. See "Tax Status of the Trust."
DISTRIBUTION REINVESTMENT
Each Unitholder of a Trust Fund may elect to have distributions of
principal (including capital gains, if any) or interest or both automatically
invested without charge in shares of any mutual fund underwritten or advised by
Kemper Financial Services, Inc., an affiliate of the sponsor, (the "Kemper
Funds") which is registered in the Unitholder's state of residence, other than
those Kemper Funds sold with a contingent deferred sales charge. Since the
portfolio securities and investment objectives of such Kemper Funds may differ
significantly from that of the Trust Funds, Unitholders should carefully
consider the consequences, including the fact that distributions from such
Kemper Funds may be taxable, before selecting such Kemper Funds for
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reinvestment. Detailed information with respect to the investment objectives
and the management of the Funds is contained in their respective prospectuses,
which can be obtained from and appropriate Trust Fund Underwriter upon request.
An investor should read the prospectus of the reinvestment fund selected prior
to making the election to reinvest. Unitholders who desire to have such
distributions automatically reinvested should inform their broker at the time
of purchase or should file with the Program Agent referred to below a written
notice of election.
Unitholders who are receiving distributions in cash may elect to
participate in distribution reinvestment by filing with the Program Agent an
election to have such distributions reinvested without charge. Such election
must be received by the Program Agent at least ten days prior to the Record
Date applicable to any distribution in order to be in effect for such Record
Date. Any such election shall remaining effect until a subsequent notice is
received by the Program Agent (See "Distributions to Unitholders").
THE PROGRAM AGENT IS INVESTORS FIDUCIARY TRUST COMPANY. All inquiries
concerning participation in distribution reinvestment should be directed to the
Program Agent at P.O. Box 419430, Kansas City, Missouri 64173-0216, telephone
(816) 474-8786.
INTEREST AND ESTIMATED LONG-TERM AND CURRENT RETURNS
As of the opening of business on the date indicated therein, the
Estimated Current Returns and the Estimated Long-Term Returns for the Trust
were as set forth under "Essential Information" in Part Two of this Prospectus.
Estimated Current Returns are calculated by dividing the estimated net annual
interest income per Unit by the Public Offering Price. The estimated net
annual interest income per Unit will vary with changes in fees and expenses of
the Trust and with the principal prepayment, redemption, maturity, exchange or
sale of Securities while the Public Offering Price will vary with changes in
the offering price of the underlying Securities; therefore, there is no
assurance that the present Estimated Current Returns will be realized in the
future. Estimated Long-Term Returns are calculated using a formula which (1)
takes into consideration, and determines and factors in the relative weightings
of, the market values, yields (which takes into account the amortization of
premiums and the accretion of discounts) and estimated retirements of all of
the Securities in the Trust and (2) takes into account the expenses and sales
charge associated with the Trust Unit. Since the market values and estimated
retirements of the Securities and the expenses of the Trust will change, there
is no assurance that the present Estimated Long-Term Returns will be realized
in the future. Estimated Current Returns and Estimated Long-Term Returns are
expected to differ because the calculation of Estimated Long-Term Returns
reflects the estimated date and amount of principal returned while Estimated
Current Returns calculations include only net annual interest income and Public
Offering Price.
TAX STATUS OF THE TRUST
All Municipal Bonds in the Trust were accompanied by copies of opinions
of bond counsel given to the issuers thereof at the time of original delivery
of the Municipal Bonds to the effect that the interest thereon is exempt from
all Federal income taxes. In connection with the offering of Units of the
Trust Funds, neither the Sponsor, the Trustee, the auditors nor their
respective counsel have made any review of the proceedings relating to the
issuance of the Municipal Bonds or the basis for such opinions. Gain realized
on the sale or redemption of the Municipal Bonds by the Trustee or of a Unit by
a Unitholder is, however, includable in gross income for Federal income tax
purposes. Such gain does not include any amounts received in respect of
accrued interest or earned original issue discount. It should be noted that
under recently enacted legislation described below that subjects accretion of
market discount on tax-exempt bonds to taxation as ordinary income, gain
realized on the sale or redemption of Municipal Bonds by the Trustee or of
Units by a Unitholder that
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<PAGE> 19
would have been treated as capital gain under prior law is treated as ordinary
income to the extent it is attributable to accretion of market discount.
Market discount can arise based on the price a Trust Fund pays for Municipal
Bonds or the price a Unitholder pays for his or her Units. In addition, bond
counsel to the issuing authorities rendered opinions as to the exemption of
interest on such Bonds, when held by residents of the state in which the
issuers of such bonds are located, from state income taxes and, where
applicable, local income taxes.
Neither the Sponsor, the Trustee, the Independent Auditors nor their
respective counsel, have made any review of the proceedings relating to the
issuance of the Municipal Bonds or the bases for such opinions. However, bond
counsel to the issuing authorities rendered opinions as to the exemption of
interest on such Bonds, when held by residents of the state in which the
issuers of such bonds are located, from state income taxes and, where
applicable, local income taxes.
At the time of closing for the Trusts, Chapman and Cutler, counsel for
the Sponsor, rendered an opinion under then existing law substantially to the
effect that:
Each series of the Trust is not an association taxable as a corporation for
federal income tax purposes and interest and accrued original issue
discount on Bonds which is excludable from gross income under the Internal
Revenue Code of 1986 (the "Code") will retain its status when distributed to
Unitholders, except to the extent such interest is subject to the
alternative minimum tax, an additional tax on branches of foreign
corporations and the environmental tax (the "Superfund Tax"), as noted
below.
Each Unitholder is considered to be the owner of a pro rata portion of each
asset of the respective Series of the Trust in the proportion that the
number of Units of such Trust held by him bears to the total number of
Units outstanding of such Trust under subpart E, subchapter J of chapter 1 of
the Code and will have a taxable event when such Trust
disposes of a Bond, or when the Unitholder redeems or sells his Units.
Unitholders must reduce the tax basis of their Units for their share of
accrued interest received by a Trust, if any, on Bonds delivered after the
Unitholders pay for their Units to the extent that such interest accrued on
such Bonds during the period from the Unitholder's settlement date to the
date such Bonds are delivered to a Trust and, consequently, such Unitholders
may have an increase in taxable gain or reduction in capital loss upon
the disposition of such Units. Gain or loss upon the sale or redemption of
Units is measured by comparing the proceeds of such sale or redemption with
the adjusted basis of the Units. If the Trustee disposes of Bonds (whether
by sale, payment on maturity, redemption or otherwise), gain or loss is
recognized to the Unitholder. The amount of any such gain or loss is
measured by comparing the Unitholder's pro rata share of the total proceeds
from such disposition with the Unitholder's basis for his or her fractional
interest in the asset disposed of. In the case of a Unitholder who
purchases Units, such basis (before adjustment for earned original issue
discount and amortized bond premium, if any) is determined by apportioning
the cost of the Units among each of the Trust's assets ratably according to
value as of the date of acquisition of the Units. The tax cost reduction
requirements of the Code relating to amortization of bond premium may, under
some circumstances, result in the Unitholder realizing a taxable gain when
his Units are sold or redeemed for an amount equal to his original cost.
Any proceeds paid under individual insurance policies obtained by issuers of
Bonds or under any insurance policies obtained by the Trust or the Sponsor
which represent maturing interest on defaulted obligations held by the
Trustee will be excludable from Federal gross income if, and to the same
extent as, such interest would have been so excludable if paid in the normal
course by the issuer of the defaulted obligations.
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<PAGE> 20
Sections 1288 and 1272 of the Internal Revenue Code of 1986 (the
"Code") provide a complex set of rules governing the accrual of original issue
discount. These rules provide that original issue discount accrues either on
the basis of a constant compound interest rate or ratably over the term of the
Municipal Bond, depending on the date the Municipal Bond was issued. In
addition, special rules apply if the purchase price of a Municipal Bond exceeds
the original issue price plus the amount of original issue discount which would
have previously accrued based upon its issue price (its "adjusted issue
price"). The application of these rules will also vary depending on the value
of the Municipal Bond on the date a Unitholder acquires his Units, and the
price the Unitholder pays for his Units. Investors with questions regarding
these Code sections should consult with their tax advisers.
"The Revenue Reconcilliation Act of 1993" (the "Tax Act") was recently
enacted. The Tax Act subjects tax- exempt bonds to the market discount rules
of the Code effective for bonds purchased after April 30, 1993. In general,
market discount is the amount (if any) by which the stated redemption price at
maturity exceeds an investor's purchase price (except to the extent that such
difference, if any, is attributable to original issue discount not yet
accrued). Under the Tax Act, accretion of market discount is taxable as
ordinary income; under prior law the accretion had been treated as capital
gain. Market discount that accretes while a Trust Fund holds a Municipal Bond
would be recognized as ordinary income by the Unitholders when principal
payments are received on the Municipal Bond, upon sale or at redemption
(including early redemption), or upon sale or redemption of his or her Units,
unless a Unitholder elects to include market discount in taxable income as it
accrues. The market discount rules are complex and Unitholders should consult
their tax advisers regarding these rules and their application.
In the case of all Unitholders (both individuals and corporations),
interest on all or certain Bonds held by certain Series of the Trusts may be
treated as an item of tax preference for purposes of computing the alternative
minimum tax. Accordingly, investments in Units may subject Unitholders to (or
result in increased liability under) the alternative minimum tax. Due to the
complexity of the alternative minimum tax, Unitholders are urged to consult
their tax advisers regarding the impact, if any, of the alternative minimum
tax.
In addition, in the case of certain corporations, the alternative
minimum tax and the Superfund Tax depend upon the corporation's alternative
minimum taxable income, which is the corporation's taxable income with certain
adjustments. One of the adjustment items used in computing the alternative
minimum taxable income and the Superfund Tax of a corporation (other than an S
Corporation, Regulated Investment Company, Real Estate Investment Trust, or
REMIC) is an amount equal to 75% of the excess of such corporation's "adjusted
current earnings" over an amount equal to its alternative minimum taxable
income (before such adjustment item and the alternative tax net operating loss
deduction). "Adjusted current earnings" includes all tax-exempt interest,
including interest on all of the Bonds in a Trust. Unitholders are urged to
consult their tax advisers with respect to the particular tax consequences to
them including the corporate alternative minimum tax, the Superfund Tax and the
branch profit tax imposed by Section 884 of the Code.
Counsel for the Sponsor has also advised that under Section 265 of the
Code, interest on indebtedness incurred or continued to purchase or carry Units
of a Trust is not deductible for Federal income tax purposes. The Internal
Revenue Service has taken the position that such indebtedness need not be
directly traceable to the purchase or carrying of Units (however, these rules
generally do not apply to interest paid on indebtedness incurred to purchase or
improve a personal residence). Also, under Section 265 of the Code, certain
financial institutions that acquire units would generally not be able to
deduct any of the interest expense attributable to ownership of such Units.
Investors with questions
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<PAGE> 21
regarding these issues should consult with their tax advisers.
In the case of certain Municipal Bonds in certain Series of the Trust,
the opinions of bond counsel indicate that interest on such securities received
by a "substantial user" of the facilities being financed with the proceeds of
these securities or persons related thereto, for periods while such securities
are held by such a user or related person, will not be excludable from Federal
gross income, although interest on such securities received by others would be
excludable from Federal gross income. "Substantial user" and "related person"
are defined under U.S. Treasury Regulations. Any person who believes that he
or she may be a "substantial user" or a "related person" as so defined should
contact his or her tax adviser.
Under existing law, the Trusts are not associations taxable as a
corporation and the income of the Trusts will be treated as the income of the
Unitholders under the income tax laws of the State of Missouri.
All statements of law in the Prospectus concerning exclusion from gross
income for Federal, state or other tax purposes are the opinions of counsel and
are to be so construed.
At the respective times of issuance of the Bonds, opinions relating to
the validity thereof and to the exclusion of interest thereon from Federal
gross income are rendered by bond counsel to the respective issuing
authorities. Neither the Sponsor nor Chapman and Cutler has made any special
review for the Trust Funds of the proceedings relating to the issuance of the
Bonds or of the basis for such opinions.
For taxpayers other than corporations, net capital gains are presently
subject to a maximum marginal stated tax rate of 28 percent. However, it should
be noted that legislative proposals are introduced from time to time that
affect tax rates and could affect relative differences at which ordinary income
and capital gains are taxed. Under the Code, taxpayers must disclose to the
Internal Revenue Service the amount of tax-exempt interest earned during the
year.
Section 86 of the Code, in general, provides that fifty percent of
Social Security benefits are includible in gross income to the extent that the
sum of "modified adjusted gross income" plus fifty percent of the Social
Security benefits received exceeds a "base amount." The base amount is $25,000
for unmarried taxpayers, $32,000 for married taxpayers filing a joint return
and zero for married taxpayers who do not live apart at all times during the
taxable year and who file separate returns. Modified adjusted gross income is
adjusted gross income determined without regard to certain otherwise allowable
deductions and exclusions from gross income and by including tax-exempt
interest. To the extent that Social Security benefits are includible in gross
income, they will be treated as any other item of gross income.
Although tax-exempt interest is included in modified adjusted gross
income solely for the purpose of determining what portion, if any, of Social
Security benefits will be included in gross income, no tax-exempt interest,
including that received from the Trust, will be subject to tax. A taxpayer
whose adjusted gross income already exceeds the base amount must include fifty
percent of his Social Security benefits in gross income whether or not he
receives any tax-exempt interest. A taxpayer whose modified adjusted gross
income (after inclusion of tax-exempt interest) does not exceed the base amount
need not include
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<PAGE> 22
any Social Security benefits in gross income.
In addition, under the Tax Act, for taxable years beginning after
December 31,1993, up to 85 percent of Social Security benefits are includible
in gross income to the extent that the sum of "modified adjusted gross income"
plus fifty percent of Social Security benefits received exceeds an "adjusted
base amount." The adjusted base amount is $34,000 for married taxpayers,
$44,000 for married taxpayers filing a joint return and zero for married
taxpayers who do not live apart at all times during the taxable year and who
file separate returns.
For a discussion of the state tax status of income earned on Units of a
state trust, see the discussion of tax status for the applicable trust. Except
as noted therein, the exemption of interest on state and local obligations for
Federal income tax purposes discussed above does not necessarily result in
exemption under the income or other tax laws of any state or city. The laws of
the several states vary with respect to the taxation of such obligations.
All statements in the Prospectus concerning exemption from Federal,
state or other taxes are the opinions of counsel and are to be construed.
PUBLIC OFFERING OF UNITS
PUBLIC OFFERING PRICE. Units of each Series of the Trust are offered
at the Public Offering Price, plus accrued interest to the expected settlement
date. The Public Offering Price per Unit of a Series is equal to the aggregate
bid side evaluation of the Municipal Bonds in the Series' portfolio (as
determined pursuant to the terms of a contract with the Evaluator, by Kenny
Information Services, Inc., a non-affiliated firm regularly engaged in the
business of evaluating, quoting or appraising comparable securities), plus or
minus cash, if any, in the Principal Account, held or owed by the Series,
divided by the number of outstanding Units of that Series of the Trust, plus
the sales charge applicable. The sales charge is based upon the dollar
weighted average maturity of the Trust and is determined in accordance with the
table set forth below. For purposes of this computation, Municipal Bonds will
be deemed to mature on their expressed maturity dates unless: (a) the
Municipal Bonds have been called for redemption or funds or securities have
been placed in escrow to redeem them on an earlier call date, in which case
such call date will be deemed to be the date upon which they mature; or (b)
such Municipal Bonds are subject to a "mandatory tender", in which case such
mandatory tender will be deemed to be the date upon which they mature. The
effect of this method of sales charge computation will be that different sales
charge rates will be applied to the Trust based upon the dollar weighted
average maturity of such Trust's portfolio, in accordance with the following
schedule:
<TABLE>
<CAPTION>
PERCENT OF PERCENT OF NET
DOLLAR WEIGHTED AVERAGE PUBLIC OFFERING AMOUNT
YEARS TO MATURITY PRICE INVESTED
- ----------------- ----- --------
<S> <C> <C>
0 to 3.99 years . . . . . . . . . . . . . . . . . . . . . . . 2.00% 2.041%
4 to 7.99 years . . . . . . . . . . . . . . . . . . . . . . . 3.50 3.627
8 to 14.99 years . . . . . . . . . . . . . . . . . . . . . . 4.50 4.712
15 or more years . . . . . . . . . . . . . . . . . . . . . . 5.50 5.820
</TABLE>
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<PAGE> 23
The sales charge per Unit will be reduced as set forth below:
DOLLAR WEIGHTED AVERAGE YEARS TO MATURITY*2
<TABLE>
<CAPTION>
4 TO 7.99 8 TO 14.99 15 OR MORE
------------------------------------------------------
AMOUNT OF INVESTMENT SALES CHARGE (% OF PUBLIC OFFERING PRICE)
- -------------------- -----------------------------------------
<S> <C> <C> <C>
$1 to $99,999 . . . . . . . . . . . . . . . . . . . . . . . . . 3.50% 4.50% 5.50%
$100,000 to $499,999 . . . . . . . . . . . . . . . . . . . . . 3.25 4.25 5.00
$500,000 to $999,999 . . . . . . . . . . . . . . . . . . . . . 3.00 4.00 4.50
$1,000,000 or more . . . . . . . . . . . . . . . . . . . . . . 2.75 3.75 4.00
</TABLE>
The reduced sales charge as shown on the preceding charts will apply to
all purchases of Units on any one day by the same purchases from the same
dealer, and for this purpose, purchases of Units of a Series of the Trust will
be aggregated with concurrent purchases of Units of any other unit investment
trust that may be offered by the Sponsor. Additionally, Units purchased in the
name of a spouse or child (under 21) of such purchaser will be deemed to be
additional purchases by such purchaser. The reduced sales charge will also be
applicable to a trust or other fiduciary purchasing for a single trust estate or
single fiduciary account.
The Sponsor intends to permit officers, directors and employees of the
Sponsor and Evaluator and, at the discretion of the Sponsor, registered
representatives of selling firms to purchase Units of the Trusts without a sales
charge, although a transaction processing fee may be imposed on such trades.
The Public Offering Price on the date shown on the cover page of Part
Two of the Prospectus or on any subsequent date will vary from the amounts
stated under "Essential Information" in Part Two in accordance with fluctuations
in the prices of the underlying Municipal Bonds. The aggregate bid side
evaluation of the Municipal Bonds shall be determined (a) on the basis of
current bid prices of the Municipal Bonds, (b) if bid prices are not available
for any particular Municipal Bond, on the basis of current bid prices for
comparable bonds, (c) by determining the value of the Municipal Bonds on the
bid side of the market by appraisal, or (d) by any combination of the above.
Except as described in "Insurance on the Portfolios" above, the Evaluator will
not attribute any value to the insurance obtained by the Trust. On the other
hand, the value of insurance obtained by an issuer of Municipal Bonds or by the
Sponsor is reflected and included in the market value of such Municipal Bonds.
In any case, the Evaluator will consider the ability of an insurer to
meet its commitments under the Trust's insurance policy (if any). For example,
if the Trust were to hold the Municipal Bonds of a municipality which had
significantly deteriorated in credit quality, the Evaluator would first consider
in its evaluation the market price of the Municipal Bonds at their lower credit
rating. The Evaluator would also attribute a value to the insurance feature of
the Municipal Bonds which would be equal to the difference between the market
value of such Municipal Bonds and the market value of bonds of a similar
- -----------------------------------------
* If the dollar weighted average maturity of a Trust is under 3.99 years,
the sales charge is 2% and 1.5% of the Public Offering Price for purchases
of $1 to $249,999 and $250,000 or more, respectively.
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<PAGE> 24
nature which were of investment grade rating. It is the position of the Sponsor
that this is a fair method of valuing insured Municipal Bonds and reflects a
proper valuation method in accordance with the provisions of the Investment
Company Act of 1940. For a description of the circumstances under which
a full or partial suspension of the right of Unitholders to redeem their Units
may occur, see "Redemption."
The foregoing evaluations and computations shall be made as of the
Evaluation Time stated under "Essential Information" in Part Two, on each
business day effective for all sales made during the preceding 24-hour period,
and for purposes of resales and repurchases of Units.
The interest on the Municipal Bonds in each Series of the Trust, less
the estimated fees and expenses, is estimated to accrue in the annual amounts
per Unit set forth under "Essential Information" in Part Two. The amount of net
interest income which accrues per Unit may change as Municipal Bonds mature or
are redeemed, exchanged or sold, or as the expenses of a Series of the Trust
change or as the number of outstanding Units of such Series changes.
Payment for Units must be made on or before the fifth business day
following purchase (the "settlement date"). A purchaser becomes the owner of
Units on the settlement date. If a Unitholder desires to have certificates
representing Units purchased, such certificates will be delivered as soon as
possible following his written request therefor. For information with respect
to redemption of Units purchased, but as to which certificates requested have
not been received, see "Redemption" below.
PUBLIC DISTRIBUTION OF UNITS. The Sponsor has qualified Units for sale
in all states. Units will be sold through dealers who are members of the
National Association of Securities Dealers, Inc. and through others. Sales may
be made to or through dealers at prices which represent discounts from the
Public Offering Price as set forth in the table below. Certain commercial banks
are making Units of the Trust available to their customers on an agency basis.
A portion of the sales charge paid by their customers is retained by or remitted
to the banks, in the amount shown in the table below. Under the Glass-Steagall
Act, banks are prohibited from underwriting Trust Units; however, the
Glass-Steagall Act does permit certain agency transactions and the banking
regulators have indicated that these particular agency transactions are
permitted under such Act. In addition, state securities laws on this issue may
differ from the interpretations of Federal law expressed herein and banks and
financial institutions may be required to register as dealers pursuant to state
law.
-24-
<PAGE> 25
DOLLAR WEIGHTED AVERAGE YEARS TO MATURITY*3
<TABLE>
<CAPTION>
4 TO 7.99 8 TO 14.99 15 OR MORE
-------------------------------------------------------------
DISCOUNT PER UNIT
AMOUNT OF INVESTMENT (% OF PUBLIC OFFERING PRICE)
- -------------------- ----------------------------
<S> <C> <C> <C>
$1 to $99,999 . . . . . . . . . . . . . . . . . . . . . 2.00% 3.00% 4.00%
$100,000 to $499,999 . . . . . . . . . . . . . . . . . 1.75 2.75 3.50
$500,000 to $999,999 . . . . . . . . . . . . . . . . . 1.50 2.50 3.00
$1,000,000 or more . . . . . . . . . . . . . . . . . . 1.25 2.25 2.50
</TABLE>
In addition to such discounts, the Sponsor may, from time to time, pay
or allow an additional discount, in the form of cash or other compensation, to
dealers employing registered representatives who sell, during a specified time
period, a minimum dollar amount of Units of the Trusts and other unit investment
trusts underwritten by the Sponsor.
The Sponsor reserves the right to change the levels of discounts at any
time. The difference between the discount and the sales charge will be retained
by the Sponsor.
The Sponsor reserves the right to reject, in whole or in part, any order
for the purchase of Units.
PROFITS OF SPONSOR. The Sponsor will retain a portion of the sales
charge on each Unit sold, representing the difference between the Public
Offering Price of the Units and the discounts allowed to firms selling such
Units. The Sponsor may realize additional profit or loss as a result of the
possible change in the daily evaluation of the Municipal Bonds in the Trust,
since the value of its inventory of Units may increase or decrease.
MARKET FOR UNITS
While not obligated to do so, the Sponsor intends to, subject to change
at any time, maintain a market for Units of each Series of the Trust offered
hereby and to offer to purchase said Units at prices, as determined by the
Evaluator, based on the aggregate bid prices of the underlying Municipal Bonds
of such Series, together with accrued interest to the expected date of
settlement. Accordingly, Unitholders who wish to dispose of their Units should
inquire of their broker or bank as to the current market price of the Units in
order to determine whether there is in existence any price in excess of the
Redemption Price and, if so, the amount thereof.
REDEMPTION
A Unitholder who does not dispose of Units in the secondary market
described above may cause
- --------------------------------
* If the dollar weighted average maturity of a Trust is under 3.99 years, the
concession or agency commission is 1.00% of the Public Offering Price.
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<PAGE> 26
their Units to be redeemed by the Trustee by making a written request to
the Trustee, Investors Fiduciary Trust Company, P.O. Box 419430, Kansas City,
Missouri 64173-0216 and, in the case of Units evidenced by a certificate, by
tendering such certificate to the Trustee, properly endorsed or accompanied by a
written instrument or instruments of transfer in form satisfactory to the
Trustee. Unitholders must sign the request, and such certificate or transfer
instrument, exactly as their names appear on the records of the Trustee and on
any certificate representing the Units to be redeemed. If the amount of the
redemption is $25,000 or less and the proceeds are payable to the Unitholder(s)
of record at the address of record, no signature guarantee is necessary for
redemptions by individual account owners (including joint owners). Additional
documentation may be requested, and a signature guarantee is always required,
from corporations, executors, administrators, trustees, guardians or
associations. The signatures must be guaranteed by a commercial bank or trust
company, savings and loan association or by a member firm of a national
securities exchange. A certificate should only be sent by registered or
certified mail for the protection of the Unitholder. Since tender of the
certificate is required for redemption when one has been issued, Units
represented by a certificate cannot be redeemed until the certificate
representing such Units has been received by the purchaser.
Redemption shall be made by the Trustee on the seventh calendar day
following the day on which a tender for redemption is received, or if the
seventh calendar day is not a business day, on the first business day prior
thereto (the "Redemption Date"), by payment of cash equivalent to the Redemption
Price for that Series of the Trust, determined as set forth below under
"Computation of Redemption Price," as of the Evaluation Time stated under
"Essential Information" in Part Two, next following such tender, multiplied by
the number of Units being redeemed. Any Units redeemed shall be cancelled and
any undivided fractional in the Trust Fund extinguished. The price received
upon redemption might be more or less than the amount paid by the Unitholder
depending on the value of the Municipal Bonds in the portfolio at the time of
redemption. Any Units redeemed shall be cancelled and any undivided fractional
in the Trust Fund extinguished. Any Units redeemed shall be cancelled and any
undivided fractional interest in that Series of the Trust will be extinguished.
Under regulations issued by the Internal Revenue Service, the Trustee is
required to withhold a specified percentage of the principal amount of a Unit
redemption if the Trustee has not been furnished the redeeming Unitholder's tax
identification number in the manner required by such regulations. Any amount so
withheld is transmitted to the Internal Revenue Service and may be recovered by
the Unitholder only when filing a tax return. Under normal circumstances the
Trustee obtains the Unitholder's tax identification number from the selling
broker. However, any time a Unitholder elects to tender Units for redemption,
such Unitholder should make sure that the Trustee has been provided a certified
tax identification number in order to avoid this possible "back-up
withholding." In the event the Trustee has not been previously provided such
number, one must be provided at the time redemption is requested.
Any amounts paid on redemption representing interest shall be withdrawn
from the Interest Account of such Series to the extent that funds are available
for such purpose. All other amounts paid on redemption shall be withdrawn from
the Principal Account of such Series. The Trustee is empowered to sell
Municipal Bonds from the portfolio of a Series in order to make funds available
for the redemption of Units of such Series. Such sale may be required when
Municipal Bonds would not otherwise be sold and might result in lower prices
than might otherwise be realized. To the extent Municipal Bonds are sold, the
size and diversity of that Series of the Trust will be reduced.
The Trustee is irrevocably authorized in its discretion, if the Sponsor
does not elect to purchase any Units tendered for redemption, in lieu of
redeeming such Units, to sell such Units in the over-the-
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<PAGE> 27
counter market for the account of tendering Unitholders at prices which will
return to such Unitholders amounts in cash, net after brokerage commissions,
transfer taxes and other charges, equal to or in excess of the Redemption Price
for such Units. In the event of any such sale, the Trustee shall pay the net
proceeds thereof to the Unitholders on the day they would otherwise be entitled
to receive payment of the Redemption Price.
The right of redemption may be suspended and payment postponed (1) for
any period during which the New York Stock Exchange is closed, other than
customary weekend and holiday closings, or during which (as determined by the
Securities and Exchange Commission) trading on the New York Stock Exchange is
restricted; (2) for any period during which an emergency exists as a result of
which disposal by the Trustee of Municipal Bonds is not reasonably practicable
or it is not reasonably practicable to fairly determine the value of the
underlying Municipal Bonds in accordance with the Agreement; or (3) for such
other period as the Securities and Exchange Commission may by order permit.
Because insurance obtained by Series A through A-24 of the Trust terminates as
to Bonds which are sold by the Trustee and because the insurance obtained by
such Series of the Trust does not have a realizable cash value which can be used
by the Trustee to meet redemptions of Units, under certain circumstances the
Sponsor may apply to the Securities and Exchange Commission for an order
permitting a full or partial suspension of the right of Unitholders to redeem
their Units if a significant portion of the Bonds in the portfolio is in default
in payment of principal or interest or in significant risk of such default. The
Trustee is not liable to any person or in any way for any loss or damage which
may result from any such suspension or postponement.
COMPUTATION OF REDEMPTION PRICE. The Redemption Price for Units of each
Series of the Trust is computed by the Evaluator as of the Evaluation Time
stated under "Essential Information" in Part Two next occurring after the
tendering of a Unit for redemption and on any other business day desired by it,
by
A. adding (1) the cash on hand in such Series of the Trust other than
cash depositier in the Trust Funds to purchase Municipal Bonds not applied to
the purchase of such Bonds; (2) the aggregate value of the Municipal Bonds held
in such Series of the Trust, as determined by the Evaluator on the basis of bid
prices therefor; (3) interest accrued and unpaid on the Municipal Bonds in that
Series of the Trust as of the date of computation; and
B. deducting therefrom (1) amounts representing any applicable taxes
or governmental charges payable out of that Series of the Trust and for which no
deductions have been previously made for the purpose of additions to the Reserve
Account described under "Expenses of the Trust"; (2) amounts representing
estimated accrued expenses of that Series of the Trust including, but not
limited to, fees and expenses of the Trustee (including legal and auditing fees
and insurance costs), the Evaluator, the Sponsor and bond counsel, if any; (3)
cash held for distribution to Unitholders of record as of the business day prior
to the evaluation being made; and (4) other liabilities incurred by such Series
of the Trust; and
C. finally, dividing the results of such computation by the number of
Units of such Series of the Trust outstanding as of the date thereof.
UNITHOLDERS
OWNERSHIP OF UNITS. Ownership of Units of a Trust will not be evidenced
by certificates unless a Unitholder, the Unitholder's registered broker/dealer
or the clearing agent makes a written request to
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the Trustee. Units are transferable by making a written request to the
Trustee and, in the case of Units evidenced by a certificate, by presenting and
surrendering such certificate to the Trustee properly endorsed or accompanied by
a written instrument or instruments of transfer which should be sent registered
or certified mail for the protection of the Unitholder. Unitholders must sign
such written request, and such certificate or transfer instrument, exactly as
their names appear on the records of the Trustee and on any certificate
representing the Units to be transferred. Such signatures must be guaranteed by
a commercial bank or trust company, savings and loan association or by a member
firm of a national securities exchange.
Units may be purchased and certificates, if requested, will be issued in
denominations of one Unit or any multiple thereof subject to any minimum
investment requirement established by the Sponsor from time to time. Any
Certificate issued will be numbered serially for identification, issued in fully
registered form and will be transferable only on the books of the Trustee. The
Trustee may require a Unitholder to pay a reasonable fee, to be determined in
the sole discretion of the Trustee, for each certificate re-issued or
transferred, and to pay any governmental charge that may be imposed in
connection with each such transfer or interchange. The Trustee at the present
time does not intend to charge for the normal transfer or interchange of
certificates. Destroyed, stolen, mutilated or lost certificates will be
replaced upon delivery to the Trustee of satisfactory indemnity (generally
amounting to 3% of the market value of the Units), affidavit of loss, evidence
of ownership and payment of expenses incurred.
DISTRIBUTIONS TO UNITHOLDERS. Interest received by a Series of the
Trust, including any portion of the proceeds from a disposition of Municipal
Bonds which represents accrued interest, is credited by the Trustee to the
Interest Account for such Series. All other receipts are credited by the
Trustee to a separate Principal Account for such Series. During each year the
distributions to the Unitholders of each Series of the Trust as of each Record
Date (see "Essential Information" in Part Two) will be made on the following
Distribution Date or shortly thereafter and shall consist of an amount
substantially equal to one-twelfth, one-fourth or one-half (depending on the
distribution option selected) of such holders' pro rata share of the estimated
net annual interest income to the Interest Account for such Series of the
Trust. In addition, the Trustee will distribute on each semiannual
Distribution Date or shortly thereafter, to each Unitholder of record on the
preceding Record Date, an amount substantially equal to such holders' pro rata
share of the cash balance, if any, in the Principal Account of such Series
computed as of the close of business on the preceding Record Date. However,
no distribution will be required if the balance in the Principal Account of
such Series is less than $1.00 per Unit; if such balance is between $5.00 and
$10.00 per Unit, distributions will be made on each quarterly Distribution
Date; and if such balance exceeds $10.00 per Unit, such amounts will be
distributed on the next monthly Distribution Date. Persons who purchase Units
of the Trust between a Record Date and a Distribution Date will receive their
first distribution on the second Distribution Date following their purchase of
Units. All distributions of principal and interest will be paid in cash
unless a Unitholder has elected to reinvest principal and/or interest payments
in shares of one of the reinvestment funds. See "Distribution Reinvestment."
Interest distributions per Unit for each Series will be in the amounts shown
under "Essential Information" in the applicable Part Two and may change as
underlying Municipal Bonds are redeemed, paid or sold, or as expenses of such
Series of the Trust change or the number of outstanding Units of such Series
of the Trust changes.
Since interest on Municipal Bonds in each Series of the Trust is payable
at varying intervals, usually in semiannual installments, and distributions of
income are made to Unitholders of a Series of the Trust at what may be different
intervals from receipt of interest, the interest accruing to such Series of the
Trust may not be equal to the amount of money received and available for
distribution from the
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Interest Account of such Series. Therefore, on each Distribution Date
the amount of interest actually on deposit in the Interest Account and available
for distribution may be slightly more or less than the interest distribution
made. In order to eliminate fluctuations in interest distributions resulting
from such variances, the Trustee is authorized by the Agreement to advance such
amounts as may be necessary to provide interest distributions of approximately
equal amounts. The Trustee will be reimbursed, without interest, for any such
advances from funds available in the Interest Account of such Series.
Because the interest to which Unitholders of a Series of the Trust are
entitled will at most times exceed the amount available for distribution, there
will almost always remain an item of accrued interest that is added to the daily
value of the Units of such Series. If Unitholders of a Series sell or redeem
all or a portion of their Units they will be paid their proportionate share of
the accrued interest of such Series to, but not including, the fifth business
day after the date of sale or to the date of tender in the case of a redemption.
Unitholders purchasing Units will initially receive distributions in
accordance with the election of the prior owner. Unitholders desiring to change
their distribution option may do so by sending written notice to the Trustee,
together with their certificate (if one was issued). Certificates should only be
sent by registered or certified mail to minimize the possibility of loss. If
written notice and any certificate are received by the Trustee not later than
January 1 of a year, the change will become effective on January 2 for
distributions commencing with February 15 of that year. If notice is not
received by the Trustee, the Unitholder will be deemed to have elected to
continue with the same option for the subsequent twelve months.
STATEMENT TO UNITHOLDERS. With each distribution, the Trustee will
furnish or cause to be furnished each Unitholder a statement of the amount of
interest and the amount of other receipts, if any, which are being distributed,
expressed in each case as a dollar amount per Unit.
The accounts of each Series of the Trust are required to be audited
annually, at the Series' expense, by independent auditors designated by the
Sponsor, unless the Trustee determines that such an audit would not be in the
best interest of the Unitholders of such Series of the Trust. The accountants'
report will be furnished by the Trustee to any Unitholder of such Series of the
Trust upon written request.
Within a reasonable period of time after the end of each calendar year,
the Trustee shall furnish to each person who at any time during the calendar
year was a Unitholder of a Series of the Trust a statement covering the calendar
year, setting forth:
A. As to the Interest Account:
1. The amount of interest received on the Municipal Bonds in such
Series and the percentage of such amount by states and territories in which the
issuers of such Municipal Bonds are located;
2. The amount paid from the Interest Account of such Series
representing accrued interest of any Units redeemed;
3. The deductions from the Interest Account of such Series for
applicable taxes, if any, fees and expenses (including insurance costs and
auditing fees) of the Trustee, the Evaluator, the Sponsor
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and bond counsel, if any;
4. Any amounts credited by the Trustee to a Reserve Account for such
Series described under "Expenses of the Trust"; and
5. The net amount remaining after such payments and deductions,
expressed both as a total dollar amount and a dollar amount per Unit outstanding
on the last business day of such calendar year.
B. As to the Principal Account:
1. The dates of the maturity, liquidation or redemption of any of the
Municipal Bonds in such Series and the net proceeds received therefrom excluding
any portion credited to the Interest Account;
2. The amount paid from the Principal Account of such Series
representing the principal of any Units redeemed;
3. The deductions from the Principal Account of such Series for
payment of applicable taxes, if any, fees and expenses (including insurance
costs and auditing expenses) of the Trustee, the Evaluator, the Sponsor and of
bond counsel, if any;
4. Any amounts credited by the Trustee to a Reserve Account for such
Series described under "Expenses of the Trust"; and
5. The net amount remaining after distributions of principal and
deductions, expressed both as a dollar amount and as a dollar amount per Unit
outstanding on the last business day of such calendar year.
C. The following information:
1. A list of the Municipal Bonds in such Series as of the last
business day of such calendar year;
2. The number of Units of such Series outstanding on the last business
day of such calendar year;
3. The Redemption Price of such Series based on the last Trust
Evaluation made during such calendar year;
4. The amount actually distributed during such calendar year from the
Interest and Principal Accounts of such Series separately stated, expressed both
as total dollar amounts and as dollar amounts per Unit of such Series
outstanding on the Record Date for each such distribution.
RIGHTS OF UNITHOLDERS. A Unitholder may at any time tender Units to the
Trustee for redemption. No Unitholder of a Series shall have the right to
control the operation and management of such Series or of the Trust in any
manner, except to vote with respect to amendment of the Agreement or termination
of such Series of the Trust. The death or incapacity of any Unitholder will not
operate to terminate the Series or the Trust nor entitle legal representatives
or heirs to claim an accounting or to bring any action or proceeding in any
court for partition or winding up of such Series or the Trust.
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INVESTMENT SUPERVISION
The Sponsor may not alter the portfolio of the Trust by the purchase,
sale or substitution of Municipal Bonds, except in the special circumstances
noted below. Thus, with the exception of the redemption or maturity of
Municipal Bonds in accordance with their terms, and/or the sale of Municipal
Bonds to meet redemption requests, the assets of the Trust will remain unchanged
under normal circumstances.
The Sponsor may direct the Trustee to dispose of Municipal Bonds the
value of which has been affected by certain adverse events, including
institution of certain legal proceedings, a decline in their price or the
occurrence of other market factors, including advance refunding, so that in the
opinion of the Sponsor the retention of such Municipal Bonds in a Series of the
Trust would be detrimental to the interest of the Unitholders of such Series.
The proceeds from any such sales, exclusive of any portion which represents
accrued interest, will be credited to the Principal Account for distribution to
the Unitholders.
The portfolio insurance obtained by the Trust from AMBAC Indemnity for
Series A through A-24 is applicable only while the Municipal Bonds remain in the
portfolio of a Series of the Trust. Consequently, the price received by such
Series of the Trust upon the disposition of any such Municipal Bond will reflect
a value placed upon it by the market as an uninsured obligation rather than a
value resulting from the insurance. Due to this fact, the Sponsor will not
direct the Trustee to dispose of Municipal Bonds in Series A through A-24 which
are in default or imminent danger of default but to retain such Municipal Bonds
in the portfolio so that if a default in the payment of interest or principal
occurs, the Trust may realize the benefits of the insurance.
Pursuant to an irrevocable commitment of Financial Guaranty, the
Trustee, at the time of the sale of a Municipal Bond covered under the Trust's
insurance policy with respect to Series A-25 and subsequent Series, has the
right to obtain permanent insurance with respect to such Municipal Bond (i.e.,
insurance to maturity of the Municipal Bond regardless of the identity of the
holder thereof) (the "Permanent Insurance") upon the payment of a single
predetermined insurance premium from the proceeds of the sale of such Municipal
Bond. Accordingly, every Municipal Bond in such Series of the Trust is eligible
to be sold on an insured basis. It is expected that the Trustee will exercise
the right to obtain Permanent Insurance for Municipal Bonds in Series A-25 and
subsequent Series only if upon such exercise a Series of the Trust would receive
net proceeds (i.e., the value of such Municipal Bond if sold as an insured bond
less the insurance premium attributable to the Permanent Insurance) from such
sale in excess of the sale proceeds if such Municipal Bond were sold on an
uninsured basis. The insurance premium with respect to each Municipal Bond in
such Series is determined based upon the insurability of each Municipal Bond as
of the initial Date of Deposit and will not be increased or decreased for any
change in the creditworthiness of such Municipal Bond's issuer.
The Trustee is permitted to utilize the option to obtain Permanent
Insurance available on Series A-25 and subsequent Series only in circumstances
where the value added to the Municipal Bonds exceeds the costs of acquiring
such Permanent Insurance. Unless such Permanent Insurance may be obtained at an
acceptable price, the Sponsor will not direct the Trustee to dispose of
Municipal Bonds which are in default or imminent danger of default but to retain
such Municipal Bonds in the portfolio so that the Trust may realize the benefits
of the insurance on the portfolio.
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The Sponsor is required to instruct the Trustee to reject any offer made
by an issuer of Municipal Bonds to issue new obligations in exchange or
substitution for any of such Municipal Bonds pursuant to a refunding financing
plan except that the Sponsor may instruct the Trustee to accept or reject such
an offer or to take any other action with respect thereto as the Sponsor may
deem proper if (1) the issuer is in default with respect to such Bonds or (2) in
the written opinion of the Sponsor the issuer will probably default with respect
to such Bonds in the reasonably foreseeable future. Any obligation so received
in exchange or substitution will be held by the Trustee subject to the terms and
conditions of the Trust Agreement to the same extent as Bonds originally
deposited thereunder. Within five days after the deposit of obligations in
exchange or substitution for underlying Bonds, the Trustee is required to give
notice thereof to each Unitholder, identifying the Bonds eliminated and the
Bonds substituted therefor.
The Trustee may sell Municipal Bonds designated by the Sponsor from a
Series of the Trust for the purpose of redeeming Units of such Series tendered
for redemption and the payment of expenses. See "Redemption".
ADMINISTRATION OF THE TRUST
THE TRUSTEE. The Trustee, Investors Fiduciary Trust Company, is a trust
company specializing in investment related services, organized and existing
under the laws of Missouri, having its trust office at 127 West 10th Street,
Kansas City, Missouri 64105. The Trustee is subject to supervision and
examination by the Division of Finance of the State of Missouri and the Federal
Deposit Insurance Corporation. Investors Fiduciary Trust Company is jointly
owned by DST Systems, Inc. and Kemper Financial Services, Inc., an affiliate of
the Sponsor. See "The Sponsor."
The Trustee, whose duties are ministerial in nature, has not
participated in selecting the portfolio of any Series of the Trust. For
information relating to the responsibilities of the Trustee under the Agreement,
reference is made to the material set forth under "Unitholders."
In accordance with the Agreement, the Trustee shall keep proper books of
record and account of all transactions at its office. Such records shall
include the name and address of, and the number of Units held by, every
Unitholder of each Series. The books and records with respect to a Series of
the Trust shall be open to inspection by any Unitholder of such Series at all
reasonable times during the usual business hours. The Trustee shall make such
annual or other reports as may from time to time be required under any
applicable state or Federal statute, rule or regulation. The Trustee shall keep
a certified copy or duplicate original of the Agreement on file in its office
available for inspection at all reasonable times during usual business hours by
any Unitholder, together with a current list of the Municipal Bonds held in each
Series of the Trust. Pursuant to the Agreement, the Trustee may employ one or
more agents for the purpose of custody and safeguarding of Municipal Bonds
comprising the portfolios.
Under the Agreement, the Trustee or any successor trustee may resign and
be discharged of its duties created by the Agreement by executing an instrument
in writing and filing the same with the Sponsor.
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The Trustee or successor trustee must mail a copy of the notice of
resignation to all Unitholders then of record, not less than sixty days before
the date specified in such notice when such resignation is to take effect. The
Sponsor upon receiving notice of such resignation is obligated to appoint a
successor trustee promptly. If, upon such resignation, no successor trustee has
been appointed and has accepted the appointment within thirty days after
notification, the retiring Trustee may apply to a court of competent
jurisdiction for the appointment of a successor. In case the Trustee becomes
incapable of acting or is adjudged a bankrupt or is taken over by public
authorities, the Sponsor may remove the Trustee and appoint a successor trustee
as provided in the Agreement. Notice of such removal and appointment shall be
mailed to each Unitholder by the Sponsor. Upon execution of a written
acceptance of such appointment by a successor trustee, all the rights, powers,
duties and obligations of the original Trustee shall vest in the successor. The
Trustee shall be a corporation organized under the laws of the United States or
any state thereof, which is authorized under such laws to exercise trust
powers. The Trustee shall have at all times an aggregate capital, surplus and
undivided profits of not less than $2,000,000.
THE EVALUATOR. Kemper Unit Investment Trusts, a service of Kemper
Securities, Inc., the Sponsor, also serves as Evaluator. The Evaluator may
resign or be removed by the Trustee, in which event the Trustee is to use its
best efforts to appoint a satisfactory successor. Such resignation or removal
shall become effective upon acceptance of appointment by the successor
evaluator. If, upon resignation of the Evaluator, no successor has accepted
appointment within thirty days after notice of resignation, the Evaluator may
apply to a court of competent jurisdiction for the appointment of a successor.
Notice of such resignation or removal and appointment shall be mailed by the
Trustee to each Unitholder. At the present time, pursuant to a contract with
the Evaluator, Kenny Information Services, Inc., a non-affiliated firm regularly
engaged in the business of evaluating, quoting or appraising comparable
securities, provides portfolio evaluations of the Municipal Bonds in the Trust
which are then reviewed by the Evaluator. In the event the Sponsor is unable to
obtain current evaluations from Kenny Information Systems, Inc., it may make its
own evaluations or it may utilize the services of any other non-affiliated
evaluator or evaluators it deems appropriate.
AMENDMENT AND TERMINATION. The Agreement may be amended by the Trustee
and the Sponsor without the consent of any of the Unitholders: (1) to cure any
ambiguity or to correct or supplement any provision which may be defective or
inconsistent; (2) to change any provision thereof as may be required by the
Securities and Exchange Commission or any successor governmental agency; or (3)
to make such provisions as shall not adversely affect the interests of the
Unitholders. The Agreement may also be amended in any respect by the Sponsor
and the Trustee, or any of the provisions thereof may be waived, with the
consent of the holders of Units representing 66 - 2/3% of the Units then
outstanding, provided that no such amendment or waiver will reduce the interest
in a Series of the Trust of any Unitholder without the consent of such
Unitholder or reduce the percentage of Units required to consent to any such
amendment or waiver without the consent of all Unitholders. In no event shall
the Agreement be amended to increase the number of Units issuable thereunder or
to permit, except in accordance with the provisions of the Agreement, the
acquisition of any Municipal Bonds in addition to or in substitution for those
in the Trust. The Trustee shall promptly notify Unitholders of the substance of
any such amendment.
The Agreements provide that a Series of the Trust shall terminate upon
the maturity, redemption or other disposition, of the last of the Municipal
Bonds held in such Series. If the value of a Series of the Trust shall be less
than the applicable minimum Trust value stated under "Essential Information" in
Part Two the Trustee may, in its discretion, and shall, when so directed by the
Sponsor, terminate such Series of the Trust. A Series of the Trust may be
terminated at any time by the holders of Units
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representing 66-2/3% of the Units of such Series then outstanding. In
the event of termination, written notice thereof will be sent by the Trustee to
all Unitholders of such Series. Within a reasonable period after termination,
the Trustee will sell any Municipal Bonds remaining in such Series of the Trust
and, after paying all expenses and charges incurred by such Series of the Trust,
will distribute to Unitholders of such Series (upon surrender for cancellation
of certificates for Units, if issued) their pro rata share of the balances
remaining in the Interest and Principal Accounts of such Series.
Notwithstanding the foregoing, in connection with final distributions to
Unitholders, it should be noted that because the portfolio insurance obtained by
Series A through A-24 of the Trust is applicable only while Bonds so insured are
held by such Series of the Trust, the price to be received by such Series of the
Trust upon the disposition of any such Bond which is in default by reason of
nonpayment of principal or interest, will not reflect any value based on such
insurance. Therefore, in connection with any liquidation of such Series it
shall not be necessary for the Trustee to, and the Trustee does not currently
intend to, dispose of any Bond or Bonds if retention of such Bond or Bonds,
until due, shall be deemed to be in the best interest of Unitholders, including,
but not limited to situations in which a Bond or Bonds so insured are in default
and situations in which a Bond or Bonds so insured have a deteriorated market
price resulting from a significant risk of default. All proceeds received, less
applicable expenses, from insurance on defaulted Bonds not disposed of at the
date of termination will ultimately be distributed to Unitholders of record as
of such date of termination as soon as practicable after the date such defaulted
Bond or Bonds become due and applicable insurance proceeds have been received by
the Trustee.
LIMITATIONS ON LIABILITY. The Sponsor: The Sponsor is liable for the
performance of its obligations arising from its responsibilities under the
Agreements, but will be under no liability to the Unitholders for taking any
action or refraining from any action in good faith pursuant to the Agreements or
for errors in judgment, except in cases of its own gross negligence, bad faith
or willful misconduct. The Sponsor shall not be liable or responsible in any
way for depreciation or loss incurred by reason of the sale of any Municipal
Bonds.
The Trustee: The Agreements provide that the Trustee shall be under no
liability for any action taken in good faith in reliance upon prima facie
properly executed documents or for the disposition of monies, Municipal Bonds,
or certificates except by reason of its own gross negligence, bad faith or
willful misconduct, nor shall the Trustee be liable or responsible in any way
for depreciation or loss incurred by reason of the sale by the Trustee of any
Municipal Bonds. In the event that the Sponsor shall fail to act, the Trustee
may act and shall not be liable for any such action taken by it in good faith.
The Trustee shall not be personally liable for any taxes or other governmental
charges imposed upon or in respect of the Municipal Bonds or upon the interest
thereon. In addition, the Agreements contain other customary provisions
limiting the liability of the Trustee.
The Evaluator: The Trustee and Unitholders may rely on any evaluation
furnished by the Evaluator and shall have no responsibility for the accuracy
thereof. The Agreement provides that the determinations made by the Evaluator
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 or Unitholders for errors in judgment, but shall be liable only for its
gross negligence, lack of good faith or willful misconduct.
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EXPENSES OF THE TRUST
Except with respect to those series indicated in the next sentence, the
Sponsor will not charge any Series of the Trust an advisory fee and will receive
no fee from the Trust for services performed as Sponsor. The Sponsor will charge
Kemper Tax-Exempt Income Trust, Multi-State Series 45 and subsequent series a
surveillance fee for services performed for such Trust Funds in an amount not to
exceed the amount shown under "Essential Information" in Part Two, but in no
event will such compensation when combined with all compensation received from
Kemper Tax-Exempt Insured Income Trust, Multi-State Series 23, 24, 32 and
subsequent series, Kemper Tax-Exempt Insured Income Trust, Series A-74 and
subsequent series and Kemper Tax-Exempt Income Trust, Multi-State Series 45 and
subsequent series exceed the aggregate cost to the Sponsor for providing such
services. Such fee shall be based on the total number of Units of such Trust
outstanding as of the January Record Date for any annual period. The Sponsor
paid all the expenses of creating and establishing the Trust, including the cost
of the initial preparation, printing and execution of the Prospectus, Agreement
and the certificates, legal and accounting expenses, advertising and selling
expenses, payment of closing fees, expenses of the Trustee, initial evaluation
fees and other out-of-pocket expenses.
The Trustee receives for its services a fee calculated on the basis of
the annual rate set forth under "Essential Information" in Part Two per $1,000
principal amount of Municipal Bonds in each Series of the Trust, based on the
largest aggregate principal amount of Municipal Bonds in such Series at any time
during the monthly, quarterly or semi-annual period, as appropriate. Funds that
are available for future distributions, redemptions and payment of expenses are
held in accounts which are non-interest bearing to Unitholders and are available
for use by the Trustee pursuant to normal banking procedures; however, the
Trustee is also authorized by the Trust Agreements to make from time to time
certain non-interest bearing advances to the Trust Funds. The Trustee also
receives indirect benefits to the extent that it holds funds on deposit in the
various non-interest bearing accounts created pursuant to the Agreement;
however, the Trustee is also authorized by the Agreement to make from time to
time certain non-interest bearing advances to the Trust. See
"Unitholders-Distributions to Unitholders."
For evaluation of Municipal Bonds in a Series of the Trust, the
Evaluator receives a fee, payable monthly, calculated on the basis of an annual
rate as set forth under "Essential Information" in Part Two, based upon the
largest aggregate principal amount of Municipal Bonds in such Series of the
Trust at any time during such monthly period.
The Trustee's, Sponsor's (if any) and Evaluator's fees are payable
monthly on or before each Distribution Date by deductions from the Interest
Account of each Series to the extent funds are available and then from the
Principal Account of such Series. Such fees may be increased without approval
of Unitholders by amounts not exceeding a proportionate increase in the Consumer
Price Index entitled "All Services Less Rent of Shelter", published by the
United States Department of Labor, or any equivalent index substituted therefor.
The following additional charges are or may be incurred by a Series of
the Trust: (a) fees for the Trustee's extraordinary services; (b) expenses of
the Trustee (including legal and auditing expenses and insurance costs, but not
including any fees and expenses charged by any agent for custody and
safeguarding of Municipal Bonds) and of bond counsel, if any; (c) various
governmental charges; (d) expenses and costs of any action taken by the Trustee
to protect the Trust or such Series, or the rights and interests of the
Unitholders; (e) indemnification of the Trustee for any loss, liability or
expense incurred by it in the administration of such Series of the Trust without
gross negligence, bad faith or
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willful misconduct on its part; (f) indemnification of the Sponsor for
any loss, liability or expense incurred in acting in that capacity without
gross negligence, bad faith or willful misconduct; and (g) expenditures
incurred in contacting Unitholders upon termination of the Series. The fees
and expenses set forth herein are payable out of such Series of the Trust and,
when owed to the Trustee, are secured by a lien on the assets of the Series of
the Trust. Fees or charges relating to the Trust shall be allocated to each
Trust Fund in the same ratio as the principal amount of such Trust Fund bears
to the total principal amount of all Trust Funds in the Trust. Fees or charges
relating solely to a particular Trust Fund shall be charged only to such Trust
Fund.
Fees and expenses of a Series of the Trust shall be deducted from the
Interest Account of such Series, or, to the extent funds are not available in
such Account, from the Principal Account of such Series. The Trustee may
withdraw from the Principal Account or the Interest Account of such Series such
amounts, if any, as it deems necessary to establish a reserve for any taxes or
other governmental charges or other extraordinary expenses payable out of that
Series of the Trust. Amounts so withdrawn shall be credited to a separate
account maintained for such Series known as the Reserve Account and shall not be
considered a part of such Series when determining the value of the Units of such
Series until such time as the Trustee shall return all or any part of such
amounts to the appropriate account.
THE SPONSOR
The Sponsor, Kemper Unit Investment Trusts, with an office at 77 West
Wacker Drive, 5th Floor, Chicago, Illinois 60601, (800) 621-5024, is a service
of Kemper Securities, Inc., which is a wholly-owned subsidiary of Kemper
Financial Companies, Inc., which, in turn, is a wholly-owned subsidiary of
Kemper Corporation. The Sponsor acts as underwriter of a number of other Kemper
unit investment trusts and will act as underwriter of any other unit investment
trust created by the Sponsor in the future. As of April 30, 1993, the total
stockholder's equity of Kemper Securities, Inc. was approximately $426,125,017
(unaudited).
If at any time the Sponsor shall of fail to perform any of its duties
under the Agreement or shall become incapable of acting or shall be adjudged a
bankrupt or insolvent or its affairs are taken over by public authorities, then
the Trustee may (a) appoint a successor sponsor at rates of compensation deemed
by the Trustee to be reasonable and not exceeding such reasonable amounts as may
be prescribed by the Securities and Exchange Commission, or (b) terminate the
Agreement and liquidate the Trust or any Series thereof as provided therein or
(c) continue to act as Trustee without terminating the Agreement.
The foregoing financial information with regard to the Sponsor relates
to the Sponsor only and not to this Trust or any Series. Such information is
included in this Prospectus only for the purposes of informing investors as to
the financial responsibility of the Sponsor and its ability to carry out its
contractual obligations with respect to the Series of the Trust. More
comprehensive financial information can be obtained upon request from the
Sponsor.
LEGAL OPINIONS
The legality of the Units offered hereby and certain matters relating to
Federal tax law were originally passed upon by Chapman and Cutler, 111 West
Monroe Street, Chicago, Illinois 60603, as counsel for the Sponsor.
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INDEPENDENT AUDITORS
The statement of net assets, including the schedule of investments,
appearing in Part Two of this Prospectus and Registration Statement, with
information pertaining to the specific Series of the Trust to which such
statement relates, has been audited by Ernst & Young, independent auditors, as
set forth in their report appearing in Part Two and is included in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing.
DESCRIPTION OF MUNICIPAL BOND RATINGS*4
STANDARD & POOR'S CORPORATION. - A brief description of the applicable
Standard & Poor's Corporation rating symbols and their meanings follows:
A Standard & Poor's corporate or municipal bond rating is a current
assessment of the creditworthiness of an obligor with respect to a specific debt
obligation. This assessment may take into consideration obligors such as
guarantors, insurers, or lessees.
The bond rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished by the issuer and
obtained by Standard & Poor's from other sources it considers reliable.
Standard & Poor's does not perform an audit in connection with any rating and
may, on occasion, rely on unaudited financial information. The ratings may be
changed, suspended, or withdrawn as a result of changes in, or unavailability
of, such information, or for other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
I. Likelihood of default - capacity and willingness of the
obligor as to the timely payment of interest and repayment of principal in
accordance with the terms of the obligation;
II. Nature of and provisions of the obligation;
III. Protection afforded by, and relative position of, the
obligation in the event of bankruptcy, reorganization or other arrangement,
under the laws of bankruptcy and other laws affecting creditors' rights.
AAA - Bonds rated AAA have the highest rating assigned by Standard &
Poor's to a debt obligation. Capacity to pay interest and repay principal is
extremely strong.
AA - Bonds rated AA have a very strong capacity to pay interest and
repay principal and differ from the highest rated issues only in small degree.
- ----------------------------------
* As published by the rating company itself.
-37-
<PAGE> 38
A - Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for bonds in this category than for bonds in higher rated categories.
Plus (+) or Minus (-): The ratings from "AA" to "A" may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
Provisional Ratings: The letter "p" indicates the rating is
provisional. A provisional rating assumes the successful completion of the
project being financed by the bonds being rated and indicates that payment of
debt service requirements is largely or entirely dependent upon the successful
and timely completion of the project. This rating, however, while addressing
credit quality subsequent to completion of the project, makes no comment on the
likelihood of, or the risk of default upon failure of, such completion. The
investor should exercise his own judgment with respect to such likelihood and
risk.
MOODY'S INVESTORS SERVICE, INC. -- A brief description of the applicable
Moody's Investors Service, Inc. rating symbols and their meanings follow:
Aaa - Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues. Their
safety is so absolute that with the occasional exception of oversupply in a few
specific instances, characteristically, their market value is affected solely by
money market fluctuations.
Aa - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or 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. Their market value is virtually immune to all but money market
influences, with the occasional exception of oversupply in a few specific
instances.
A - Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
The market value of A-rated bonds may be influenced to some degree by economic
performance during a substained period of depressed business conditions, but,
during periods of normalcy, A-rated bonds frequently move in parallel with Aaa
and Aa obligations, with the occasional
-38-
<PAGE> 39
exception of oversupply in a few specific instances.
A1 - Bonds which are rated A1 offer the maximum in security within their
quality group, can be bought for possible upgrading in quality, and
additionally, afford the investor an opportunity to gauge more precisely the
relative attractiveness of offerings in the market place.
Baa - Bonds which are rated Baa are considered as lower 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. The market value of Baa-rated bonds is more sensitive to changes in
economic circumstances and, aside from occasional speculative factors applying
to some bonds of this class, Baa market valuations move in parallel with Aaa, Aa
and A obligations during periods of economic normalcy, except in instances of
oversupply.
Conditional Ratings: Bonds rated "Con(-)" are ones 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 operation experience, (c)
rentals which begin when facilities are completed, or (d) payments to which some
other limiting condition attaches. Parenthetical rating denotes probable credit
stature upon completion of construction or elimination of basis of condition.
Note: Moody's applies numerical modifiers, 1, 2, and 3 in each generic
rating classification from Aa through B in certain areas of its 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.
-39-
<PAGE> 2
Kemper Tax-Exempt Insured Income Trust
Series A-44
Part Two
Dated January 28, 1994
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.
NOTE: Part Two of this Prospectus May Not Be Distributed unless Accompanied
by Part One.
<PAGE> 3
Kemper Tax-Exempt Insured Income Trust - Series A-44
Essential Information
As of January 3, 1994
Sponsor: Kemper Financial Services, Inc.
Evaluator: Kemper Unit Investment Trusts
Trustee: Investors Fiduciary Trust Company
<TABLE>
<S> <C>
GENERAL INFORMATION
Principal Amount of Municipal Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,130,000
Number of Units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,754
Fractional Undivided Interest in the Trust per Unit . . . . . . . . . . . . . . . . . . . . . 1/4,754
Principal Amount of Municipal Bonds per Unit . . . . . . . . . . . . . . . . . . . . . . . . $ 868.74
Public Offering Price:
Aggregate Bid Price of Municipal Bonds in the Portfolio . . . . . . . . . . . . . . . . . . . $ 4,306,829
Aggregate Bid Price of Municipal Bonds per Unit . . . . . . . . . . . . . . . . . . . . . . . $ 905.94
Cash per Unit (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (.03)
Sales Charge 3.627% (3.5% of Public Offering Price) . . . . . . . . . . . . . . . . . . . . . $ 32.86
Public Offering Price per Unit (exclusive of accrued interest) (2) . . . . . . . . . . . . . $ 938.77
Redemption Price per Unit (exclusive of accrued interest) . . . . . . . . . . . . . . . . . . $ 905.91
Excess of Public Offering Price per Unit Over Redemption Price per Unit . . . . . . . . . . . $ 32.86
Minimum Value of the Trust under which Trust Agreement may be terminated . . . . . . . . . . $ 1,000,000
Date of Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . November 6, 1986
Mandatory Termination Date . . . . . . . . . . . . . . . . . . . . . . . December 31, 2036
</TABLE>
Annual Evaluation Fee: $.30 per $1,000 principal amount of Municipal Bonds.
Evaluations for purpose of sale, purchase or redemption of Units are made as of
the close of business of the Sponsor next following receipt of an order for a
sale or purchase of Units or receipt by Investors Fiduciary Trust Company of
Units tendered for redemption.
SPECIAL INFORMATION BASED ON VARIOUS DISTRIBUTION OPTIONS
<TABLE>
<CAPTION>
MONTHLY QUARTERLY SEMIANNUAL
---------------------------------------------
<S> <C> <C> <C>
Calculation of Estimated Net Annual
Interest Income per Unit (3):
Estimated Annual Interest Income . . . . . . . . . . . $63.6766 $63.6766 $63.6766
Less: Estimated Annual Expense,
Excluding Insurance. . . . . . . . . . . . . . 1.8892 1.5718 1.3012
Annual Premium on Portfolio
Insurance. . . . . . . . . . . . . . . . . . . 1.7736 1.7736 1.7736
---------------------------------------------
Estimated Net Annual Interest Income . . . . . . . . . $60.0138 $60.3312 $60.6018
---------------------------------------------
---------------------------------------------
Calculation of Interest Distribution per Unit:
Estimated Net Annual Interest Income . . . . . . . . . . $60.0138 $60.3312 $60.6018
Divided by 12, 4 and 2, respectively . . . . . . . . . . $ 5.0012 $15.0828 $30.3009
Estimated Daily Rate of Net Interest
Accrual per Unit . . . . . . . . . . . . . . . . . . . . $ .1667 $ .1676 $ .1683
Estimated Current Return Based on Public
Offering Price (3) . . . . . . . . . . . . . . . . . . . 6.39% 6.43% 6.46%
Estimated Long-Term Return (3) . . . . . . . . . . . . . . 3.60% 3.64% 3.67%
</TABLE>
Trustee's Annual Fees and Expenses (including Evaluator's Fee): $1.8892,
$1.5718 and $1.3012 ($.7875, $.6905 and $.6843 of which represent expenses) per
Unit under the monthly, quarterly and semiannual distribution options,
respectively.
Record and Computation Dates: First day of the month, as follows: monthly -
each month; quarterly - January, April, July and October; semiannual - January
and July.
Distribution Dates: Fifteenth day of the month, as follows: monthly - each
month; quarterly - January, April, July and October; semiannual - January and
July.
i
<PAGE> 4
1. This amount, if any, represents principal cash or overdraft which is an
asset or liability of the Trust and is included in the Public Offering
Price.
2. Units are offered at the Public Offering Price plus accrued
interest to the date of settlement (five business days after purchase). On
January 3, 1994, there was added to the Public Offering Price of
$938.77, accrued interest to the settlement date of January 10, 1994 of
$9.97, $10.04 and $10.11 for a total price of $948.74, $948.81 and $948.88
for the monthly, quarterly and semiannual distribution options,
respectively.
3. The Estimated Long-Term Return and Estimated Current Return will vary. For
detailed explanation, see Part One of this prospectus.
ii
<PAGE> 5
Report of Independent Auditors
Unitholders
Kemper Tax-Exempt Insured Income Trust
Series A-44
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Kemper Tax-Exempt Insured Income Trust Series
A-44 as of September 30, 1993, and the related statements of operations and
changes in net assets for each of the three years in the period then ended.
These financial statements are the responsibility of the Trust's sponsor. 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 investments owned as of September 30, 1993,
by correspondence with the custodial bank. An audit also includes assessing
the accounting principles used and significant estimates made by the sponsor,
as well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Kemper Tax-Exempt Insured
Income Trust Series A-44 at September 30, 1993, and the results of its
operations and the changes in its net assets for each of the three years in the
period then ended in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG
ERNST & YOUNG
Kansas City, Missouri
January 14, 1994
1
<PAGE> 6
Kemper Tax-Exempt Insured Income Trust
Series A-44
Statement of Assets and Liabilities
September 30, 1993
<TABLE>
<S> <C> <C>
ASSETS
Municipal Bonds, at value (cost $4,141,090) (Note 1) $4,487,779
Accrued interest 80,840
Cash 15,471
----------
4,584,090
LIABILITIES AND NET ASSETS
Accrued liabilities 1,988
Net assets, applicable to 4,824 Units outstanding (Note 5):
Cost of Trust assets, exclusive of interest (Note 1) $4,141,090
Unrealized appreciation (Note 2) 346,689
Distributable funds 94,323
---------------------------
Net assets $4,582,102
----------
----------
</TABLE>
See accompanying notes to financial statements.
2
<PAGE> 7
Kemper Tax-Exempt Insured Income Trust
Series A-44
Statement of Operations
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
1993 1992 1991
------------------------------------------
<S> <C> <C> <C>
Investment income - interest $314,426 $340,460 $354,798
Expenses:
Trustee's fees and related expenses 6,506 6,958 6,879
Evaluator's fees 1,289 1,397 1,448
Insurance expense 8,621 9,502 9,881
------------------------------------------
Total expenses 16,416 17,857 18,208
------------------------------------------
Net investment income 298,010 322,603 336,590
Realized and unrealized gain (loss)
on investments:
Realized gain (loss) (2,656) 5,400 128
Unrealized appreciation during the year 113,562 103,629 232,773
------------------------------------------
Net gain on investments 110,906 109,029 232,901
------------------------------------------
Net increase in net assets resulting
from operations $408,916 $431,632 $569,491
------------------------------------------
------------------------------------------
</TABLE>
See accompanying notes to financial statements.
3
<PAGE> 8
Kemper Tax-Exempt Insured Income Trust
Series A-44
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
1993 1992 1991
-------------------------------------------
<S> <C> <C> <C>
Operations:
Net investment income $ 298,010 $ 322,603 $ 336,590
Realized gain (loss) on investments (2,656) 5,400 128
Unrealized appreciation on investments
during the year 113,562 103,629 232,773
-------------------------------------------
Net increase in net assets resulting
from operations 408,916 431,632 569,491
Distributions to Unitholders:
Net investment income (304,960) (328,854) (342,095)
Principal from investment transactions (150,654) (288,677) (17,736)
Capital transactions:
Redemption of Units - (104,011) (97,753)
-------------------------------------------
Total increase (decrease) in net assets (46,698) (289,910) 111,907
Net assets:
At the beginning of the year 4,628,800 4,918,710 4,806,803
-------------------------------------------
At the end of the year (including distributable
funds applicable to Trust Units of $94,323,
$101,278 and $108,710 at September 30,
1993, 1992 and 1991, respectively) $4,582,102 $4,628,800 $4,918,710
-------------------------------------------
-------------------------------------------
Trust Units outstanding at the end of the year 4,824 4,824 4,932
-------------------------------------------
-------------------------------------------
</TABLE>
See accompanying notes to financial statements.
4
<PAGE> 9
Kemper Tax-Exempt Insured Income Trust
Series A-44
Schedule of Investments
September 30, 1993
<TABLE>
<CAPTION>
REDEMPTION PRINCIPAL
NAME OF ISSUER AND TITLE OF BOND(6)(8) COUPON RATE MATURITY DATE PROVISIONS(2) RATING(1) AMOUNT(4) VALUE(3)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
+City of Chicago (Illinois) Wastewater 7.375% 1/01/2012 1996 @ 102 AAA $ 230,000 $ 252,968
Transmission Refunding and Improvement
Revenue Bonds, Series 1986. Insured by
Financial Guaranty Insurance Company. (5)
+Illinois Educational Facilities Authority, 0.00 7/01/2014 2008 @ 61.875 S.F. A+ 175,000 58,268
Revenue Refunding Bonds, Loyola
University of Chicago, Series 1984-A. (7)
_Illinois Educational Facilities Authority, 0.00 7/01/2014 2008 @ 61.875 S.F. A+ 95,000 30,380
Revenue Refunding Bonds, Loyola University Non-Callable
of Chicago, Series 1984-A. (7)
+Maine Health and Higher Educational 7.375 10/01/2013 1996 @ 102 A+ 395,000 444,533
Facilities Authority, Hospital Revenue
Refunding Bonds (Maine Medical Center
Issue), Series 1986.
Maine State Housing Authority, Mortgage 7.50 11/15/2016 1996 @ 102 AA- 275,000 289,481
Purchase Bonds, 1986 Series B.
+Nebraska Public Power District, Power 7.50 1/01/2020 1996 @ 102 AAA 200,000 220,504
Supply System Revenue Bonds, 1986 Series.
+North Carolina Municipal Power Agency #1, 8.50 1/01/2017 1996 @ 102 Aaa* 500,000 562,480
Catawba Electric Revenue Bonds, Series
1985-B.
+Cushing Municipal Authority, Oklahoma, 7.375 7/01/2011 1996 @ 102 AAA 425,000 474,687
Utility System Revenue Bonds, Series
1986. Insured by AMBAC Indemnity
Corporation. (5)
+Piedmont Municipal Power Agency, South 7.50 1/01/2016 1995 @ 100 AAA 485,000 509,410
Carolina, Electric Revenue Bonds,
Series 1985.
Brazos River Authority, Texas, Pollution 7.625 12/01/2009 1993 @ 101 BBB- 60,000 60,829
Control Revenue Bonds for Texas Power
and Light Co., Series 1979.
+Lower Colorado River Authority (Texas) 9.50 1/01/2013 1996 @ 102 AAA 500,000 572,540
Priority Revenue Bonds, Series 1985.
Red River Authority of Texas (Pollution 7.875 9/15/2014 2002 @ 100 S.F. A2* 475,000 533,867
Control Revenue Bonds) West Texas 1996 @ 103
Utilities, Public Service Company
of Oklahoma, Central Power and Light
Company, Oklaunion Project, Series 1984.
+Intermountain Power Agency (Utah) Power 7.00 7/01/2022 1995 @ 100 AA 450,000 477,832
Supply Revenue Refunding Bonds, 1985
Series H.
------------------------
$4,265,000 $4,487,779
------------------------
------------------------
</TABLE>
See accompanying notes to Schedule of Investments.
5
<PAGE> 10
Kemper Tax-Exempt Insured Income Trust
Series A-44
Notes to Schedule of Investments
1. All ratings are by Standard & Poor's Corporation, unless marked with the
symbol "*", in which case the rating is by Moody's Investors Service, Inc.
The symbol "NR" indicates Bonds for which no rating is available.
2. There is shown under this heading the year in which each issue of Bonds is
initially redeemable and the redemption price for that year or, if
currently redeemable, the redemption price currently in effect; unless
otherwise indicated, each issue continues to be redeemable at declining
prices thereafter, but not below par value. In addition, certain Bonds in
the Portfolio may be redeemed in whole or in part other than by operation
of the stated redemption or sinking fund provisions under certain unusual
or extraordinary circumstances specified in the instruments setting forth
the terms and provisions of such Bonds. "S.F." indicates a sinking fund is
established with respect to an issue of Bonds. Redemption pursuant to call
provisions generally will, and redemption pursuant to sinking fund
provisions may, occur at times when the redeemed Bonds have a valuation
which represents a premium over the call price or par.
To the extent that the Bonds were deposited in the Trust at a price higher
than the price at which they are redeemed, this will represent a loss of
capital when compared with the original Public Offering Price of the Units.
To the extent that the Bonds were acquired at a price lower than the
redemption price, this may represent an increase in capital when compared
with the original Public Offering Price of the Units. Distributions of net
income will generally be reduced by the amount of the income which would
otherwise have been paid with respect to redeemed Bonds and, unless
utilized to pay for Units tendered for redemption, there will be
distributed to Unitholders the principal amount and any premium received on
such redemption. In this event the estimated current return and estimated
long-term return may be affected by such redemptions.
3. See Note 1 to the accompanying financial statements for a description of
the method of determining cost and value.
6
<PAGE> 11
Kemper Tax-Exempt Insured Income Trust
Series A-44
Notes to Schedule of Investments (continued)
4. At September 30, 1993, the Portfolio of the Trust consists of 12
obligations issued by entities located in 8 states. All of the issues are
payable from the income of a specific project or authority and are not
supported by an issuer's power to levy taxes. The sources of payment for
the revenue bonds are divided as follows: Electric Systems, 8; Housing, 1;
Hospitals and Health Care, 1; University, 1; Sewer, 1. Approximately 67%
of the aggregate principal amount of Bonds in the Trust are obligations of
public utility issuers. Approximately 94% of the aggregate principal
amount of Bonds in the Trust are subject to call by the issuers within five
years after September 30, 1993.
5. Insurance on these Bonds was obtained by the issuers of such Bonds.
6. Those securities preceded by (+) are secured by, and payable from, escrowed
U.S. Government securities.
7. These Bonds have been purchased at a discount from the par value because
there is no stated interest income thereon. Such Bonds are normally
described as "zero coupon" Bonds. Over the lives of the Bonds the value
increases, so that upon maturity, the holders of the Bonds will receive
100% of the principal amount thereof.
8. The security preceded by (_) is of the same issue as another Bond in the
Trust.
See accompanying notes to financial statements.
7
<PAGE> 12
Kemper Tax-Exempt Insured Income Trust
Series A-44
Notes to Financial Statements
1. SIGNIFICANT ACCOUNTING POLICIES
VALUATION OF MUNICIPAL BONDS
Municipal Bonds (Bonds) are stated at bid prices as determined by Kemper Unit
Investment Trusts (A Service of Kemper Securities, Inc.), the "Evaluator" of
the Trust. The aggregate bid prices of the Bonds are determined by the
Evaluator based on (a) current bid prices of the Bonds, (b) current bid prices
for comparable bonds, (c) appraisal, or (d) any combination of the above. (See
Note 5 - Insurance.)
COST OF MUNICIPAL BONDS
Cost of the Trust's Bonds was based on the offering prices of the Bonds on
November 6, 1986 (Date of Deposit). The premium or discount (including any
original issue discount) existing at November 6, 1986, is not being amortized.
Realized gain (loss) from Bond transactions is reported on an identified cost
basis.
2. UNREALIZED APPRECIATION AND DEPRECIATION
Following is an analysis of net unrealized appreciation at September 30, 1993:
<TABLE>
<S> <C>
Gross unrealized depreciation $ -
Gross unrealized appreciation 346,689
--------
Net unrealized appreciation $346,689
--------
--------
</TABLE>
3. TRANSACTIONS WITH AFFILIATES
The Trustee, Investors Fiduciary Trust Company, is 50% owned by Kemper
Financial Services, Inc., the Trust's sponsor and an affiliate of Kemper Unit
Investment Trusts. Prior to July 1, 1991, the Trustee's fee (not including the
reimbursement of out-of-pocket expenses), calculated monthly, was at the annual
rate of $1.08, $.86 and $.60 under the monthly, quarterly and semiannual
distribution options, respectively, per $1,000 principal amount of Bonds in the
Trust, based on the largest aggregate principal amount of Bonds in the Trust at
any time during such monthly, quarterly or semiannual periods. Effective July
1, 1991, such fees were revised to $1.25, $1.00 and $.70 under the monthly,
quarterly and semiannual distribution options, respectively. The Evaluator
received a fee, payable monthly, at an annual rate of $.30 per $1,000 principal
amount of Bonds, based on the largest aggregate principal amount of Bonds in
the Trust at any time during such monthly period.
8
<PAGE> 13
Kemper Tax-Exempt Insured Income Trust
Series A-44
Notes to Financial Statements (continued)
4. FEDERAL INCOME TAXES
The Trust is not an association taxable as a corporation for federal income
tax purposes. Each Unitholder is considered to be the owner of a pro rata
portion of the Trust under Subpart E, Subchapter J of Chapter 1 of the
Internal Revenue Code of 1986, as amended. Accordingly, no provision has
been made for federal income taxes.
5. OTHER INFORMATION
COST TO INVESTORS
The cost to initial investors of Units of the Trust was based on the
aggregate offering price of the Bonds on the date of an investor's
purchase, plus a sales charge of 4.7% of the Public Offering Price
(equivalent to 4.932% of the net amount invested). The Public Offering
Price for secondary market transactions is based on the aggregate bid price
of the Bonds plus or minus a pro rata share of cash or overdraft in the
Principal Account, if any, on the date of an investor's purchase, plus a
sales charge of 3.5% of the Public Offering Price (equivalent to 3.627% of
the net amount invested).
INSURANCE
Insurance guaranteeing the payment of all principal and interest on the
Bonds in the portfolio has been obtained from independent companies by the
Trust or the respective issuers of such Bonds. All Bonds in the Trust's
portfolio are insured under the insurance policy obtained by the Trust from
Financial Guaranty Insurance Company except for two issues for which
insurance has been purchased by the issuer of such Bonds. Insurance
obtained by the Trust remains in effect only while the insured Bonds are
retained in the Trust, while insurance obtained by a Bond issuer is
effective as long as such Bonds are outstanding. At September 30, 1993,
the valuation of Bonds does not include any amount attributable to the
insurance acquired by the Trust. Pursuant to an irrevocable commitment
from an insurance company, in the event of a sale of a Bond covered under
the Trust's insurance policy, the Trustee has the right to obtain permanent
insurance for such Bond upon the payment of a single predetermined
insurance premium from the proceeds of the sale of such Bond. The
insurance, in either case, does not relate to the Units offered hereby or
to their market value. As a result of such insurance, the Units of the
Trust have received a rating of "AAA" by Standard & Poor's Corporation. No
representation is made as to any insurer's ability to meet its commitments.
9
<PAGE> 14
Kemper Tax-Exempt Insured Income Trust
Series A-44
Notes to Financial Statements (continued)
5. OTHER INFORMATION (CONTINUED)
DISTRIBUTIONS
Distributions of net investment income to Unitholders are declared and paid
in accordance with the option (monthly, quarterly or semiannual) selected
by the investor. Such income distributions, on a record date basis, are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------------------------------------------------------
SEPTEMBER 30, 1993 SEPTEMBER 30, 1992 SEPTEMBER 30, 1991
DISTRIBUTION -----------------------------------------------------------------------------------
PLAN PER UNIT TOTAL PER UNIT TOTAL PER UNIT TOTAL
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Monthly $62.70 $134,803 $66.15 $142,760 $68.03 $146,567
Quarterly 63.52 48,339 67.01 51,332 68.38 52,720
Semiannual 63.79 121,818 67.32 133,390 68.68 140,115
-------- -------- --------
$304,960 $327,482 $339,402
-------- -------- --------
-------- -------- --------
</TABLE>
In addition, the Trust redeemed Units with proceeds from the sale of Bonds
as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
1992 1991
<S> <C> <C>
---------------------
Principal portion $104,011 $ 97,753
Net interest accrued 1,372 2,693
---------------------
$105,383 $100,446
---------------------
---------------------
Units 108 103
---------------------
---------------------
</TABLE>
10
<PAGE> 15
Kemper Tax-Exempt Insured Income Trust
Series A-44
Notes to Financial Statements (continued)
5. OTHER INFORMATION (CONTINUED)
Selected data for a Unit of the Trust outstanding throughout each year -
<TABLE>
<CAPTION>
MONTHLY QUARTERLY SEMIANNUAL
YEAR ENDED SEPTEMBER 30 YEAR ENDED SEPTEMBER 30 YEAR ENDED SEPTEMBER 30
1993 1992 1991 1993 1992 1991 1993 1992 1991
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment income - interest $ 65.18 $ 69.68 $ 71.49 $ 65.18 $ 69.68 $ 71.49 $ 65.18 $ 69.68 $ 71.49
Expenses 3.68 3.95 3.98 3.37 3.61 3.66 3.10 3.32 3.35
----------------------------------------------------------------------------------------------------
Net investment income 61.50 65.73 67.51 61.81 66.07 67.83 62.08 66.36 68.14
Distributions to Unitholders:
Net investment income (62.70) (66.15) (68.03) (63.52) (67.01) (68.38) (63.79) (67.32) (68.68)
Principal from investment
transactions (31.23) (59.24) (3.56) (31.23) (59.24) (3.56) (31.23) (59.24) (3.56)
Net gain on investments 22.99 22.27 46.94 22.99 22.27 46.94 22.99 22.27 46.94
----------------------------------------------------------------------------------------------------
Change in net asset value (9.44) (37.39) 42.86 (9.95) (37.91) 42.83 (9.95) (37.93) 42.84
Net asset value:
Beginning of the year 953.42 990.81 947.95 964.37 1,002.28 959.45 964.53 1,002.46 959.62
----------------------------------------------------------------------------------------------------
End of the year, including
distributable funds $943.98 $953.42 $990.81 $954.42 $ 964.37 $1,002.28 $954.58 $ 964.53 $1,002.46
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE> 16
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Independent
Auditors" and to the use of our report dated January 14, 1994, in this
Post-Effective Amendment to the Registration Statement (Form S-6) and
related Prospectus of Kemper Tax-Exempt Insured Income Trust Series A-44
dated January 28, 1994.
/s/ ERNST & YOUNG
ERNST & YOUNG
Kansas City, Missouri
January 28, 1994
<PAGE> 1
KEMPER TAX-EXEMPT INCOME TRUST
MULTI-STATE SERIES
OHIO TAX-EXEMPT BOND TRUST
SERIES 1-10
PART ONE
THE DATE OF THIS PART ONE IS THAT DATE
WHICH IS SET FORTH IN PART TWO
OF THE PROSPECTUS
Each State Trust of the Kemper Tax-Exempt Income Trust Multi-State Series and
Series 1-10 of the Ohio Tax-Exempt Bond Trust were formed for the purpose of
gaining interest income free from Federal, State and, where applicable, local
income taxes and/or property taxes while conserving capital and diversifying
risks by investing in fixed portfolios of Municipal Bonds consisting of
obligations issued primarily by or on behalf of the State for which such Trust
is named or counties, municipalities, authorities or political subdivisions
thereof.
This Prospectus is in two parts. Read and retain both parts for future
reference.
SPONSOR: KEMPER UNIT INVESTMENT TRUSTS,
A SERVICE OF KEMPER SECURITIES, INC.
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.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO
-------
<S> <C>
SUMMARY . . . . . . . . . . . . . . . . . 4
The Trust . . . . . . . . . . . . . . . 4
Public Offering Price . . . . . . . . . 4
Interest and Principal Distributions . 5
Reinvestment . . . . . . . . . . . . . 5
Estimated Current Return and
Estimated Long-Term Return . . . . . 5
Market for Units . . . . . . . . . . . 5
THE TRUST . . . . . . . . . . . . . . . . 6
PORTFOLIOS . . . . . . . . . . . . . . . 7
Portfolio Risk Information . . . . . . 8
DISTRIBUTION REINVESTMENT . . . . . . . . 15
INTEREST AND ESTIMATED LONG-TERM
AND CURRENT RETURNS . . . . . . . . . . 15
FEDERAL TAX STATUS OF THE STATE . . . .
TRUSTS . . . . . . . . . . . . . . . . 16
DESCRIPTION AND STATE TAX STATUS OF
THE STATE TRUSTS . . . . . . . . . . . 19
Alabama Trusts . . . . . . . . . . . 24
Arizona Trusts . . . . . . . . . . . 26
California Trusts . . . . . . . . . . 31
Colorado Trusts . . . . . . . . . . . 39
Florida Trusts . . . . . . . . . . . 42
Louisiana Trusts . . . . . . . . . . 47
Massachusetts Trusts . . . . . . . . 50
Michigan Trusts . . . . . . . . . . . 52
Minnesota Trusts . . . . . . . . . . 55
Missouri Trusts . . . . . . . . . . . 57
New Jersey . . . . . . . . . . . . . 59
New York Trusts . . . . . . . . . . . 64
North Carolina Trusts . . . . . . . . 73
Ohio Trusts . . . . . . . . . . . . . 75
Pennsylvania Trusts . . . . . . . . . 79
Texas Trusts . . . . . . . . . . . . 84
PUBLIC OFFERING OF UNITS . . . . . . . . 82
Public Offering Price . . . . . . . . . 82
Public Distribution of Units . . . . . 84
Profits of Sponsor . . . . . . . . . . 85
MARKET FOR UNITS . . . . . . . . . . . . 85
REDEMPTION . . . . . . . . . . . . . . . 85
Computation of Redemption Price . . . . 86
UNITHOLDERS . . . . . . . . . . . . . . . 87
Ownership of Units . . . . . . . . . . 87
Distributions to Unitholders . . . . . 87
Statements to Unitholders . . . . . . . 89
Rights of Unitholders . . . . . . . . . 90
INVESTMENT SUPERVISION . . . . . . . . . 90
ADMINISTRATION OF THE TRUST . . . . . . . 91
The Trustee . . . . . . . . . . . . . . 91
The Evaluator . . . . . . . . . . . . . 92
Amendment and Termination . . . . . . . 92
Limitations on Liability . . . . . . . 93
EXPENSES OF THE TRUST . . . . . . . . . . 94
THE SPONSOR . . . . . . . . . . . . . . . 95
LEGAL OPINIONS . . . . . . . . . . . . . 95
INDEPENDENT AUDITORS . . . . . . . . . . 96
DESCRIPTION OF SECURITIES
RATINGS . . . . . . . . . . . . . . . . 96
---------------------------------------------
Essential Information*
Report of Independent Auditors*
Statement of Assets and Liabilities*
Statement of Operations*
Statement of Changes in Net Assets*
Schedule of Investments*
Notes to Schedule of Investments*
Notes to Financial Statements*
</TABLE>
* INFORMATION ON THESE ITEMS APPEARS IN PART TWO
FOR THE APPROPRIATE STATE TRUST
2
<PAGE> 3
KEMPER TAX-EXEMPT INCOME TRUST
MULTI-STATE SERIES
OHIO TAX-EXEMPT BOND TRUST
SERIES 1-10
SUMMARY
THE TRUST. Kemper Tax-Exempt Income Trust,
Multi-State Series and Ohio Tax-Exempt Bond Trust, Series 1-10 (collectively,
the "Trust") are each a unit investment trust consisting of a number of
diversified portfolios designated as the State Trusts. Each State Trust
consists of obligations ("Municipal Bonds", "Securities" or "Bonds") issued
primarily by or on behalf of the State for which such State Trust is named or
counties, municipalities, authorities or political subdivisions thereof.
Each State Trust's investment objective is interest
income which is exempt from Federal, state and, where applicable, local income
taxes and/or property taxes, while conserving capital and diversifying risks by
investing in fixed portfolios of Municipal Bonds consisting of obligations
issued primarily by or on behalf of the State for which such State Trust is
named or counties, municipalities, authorities or political subdivisions
thereof. There is, of course, no guarantee that the State Trusts' objective
will be achieved.
All of the Municipal Bonds in the State Trust
portfolios were rated in the category "BBB" or better by Standard & Poor's
Corporation ("Standard & Poor's") or "Baa" or better by Moody's Investors
Service, Inc. ("Moody's") on the Date of Deposit or were unrated. However, if
any Municipal Bonds were unrated on the Date of Deposit, they must have had, in
the opinion of the Sponsor, credit characteristics equivalent to Bonds rated at
least "BBB" or "Baa." Municipal Bonds which are rated "BBB" or "Baa" are
regarded as having an adequate capacity to pay interest and repay principal but
may lack outstanding credit characteristics and, in fact, have speculative
characteristics as well. Ratings of the Municipal Bonds may have changed since
the Date of Deposit. See "Description of Securities Ratings" herein and the
"Schedule of Investments" in Part Two.
The Units, each of which represents a pro rata
undivided fractional interest in the principal amount of Municipal Bonds
deposited in the appropriate Trust, are issued and outstanding Units which have
been reacquired by the Sponsor either by purchase of Units tendered to the
Trustee for redemption or by purchase in the open market. No offering is being
made on behalf of a State Trust and any profit or loss realized on the sale of
Units will accrue to the Sponsor and/or the firm reselling such Units.
PUBLIC OFFERING PRICE. The Public Offering Price per
Unit of each State Trust is equal to a pro rata share of the aggregate bid
prices of the Municipal Bonds in such State Trust (plus or minus a pro rata
share of cash, if any, in the Principal Account, held or owed by the State
Trust) plus a sales charge shown under
3
<PAGE> 4
"Public Offering of Units." In addition, there will be added to each
transaction in a State Trust an amount equal to the accrued interest from the
last Record Date of such State Trust to the date of settlement (five business
days after order). The sales charge is reduced on a graduated scale as
indicated under "Public Offering of Units-Public Offering Price."
INTEREST AND PRINCIPAL DISTRIBUTIONS. Distributions
of the estimated annual interest income to be received by each State Trust,
after deduction of estimated expenses, will be made monthly unless the
Unitholder elects to receive such distributions quarterly or semi-annually.
Distributions will be paid on the Distribution Dates to holders of record of
such State Trust on the Record Dates set forth for the applicable option. See
"Essential Information" in Part Two.
The distribution of funds, if any, in the Principal
Account of each State Trust, will be made semi-annually to Unitholders of
Record of such State Trust on the appropriate dates. See "Essential
Information" in Part Two.
REINVESTMENT. Each Unitholder of a Trust Fund
offered herein may elect to have distributions of principal or interest or both
automatically invested without charge in shares of certain mutual funds
sponsored by Kemper Financial Services, Inc. See "Distribution Reinvestment."
ESTIMATED CURRENT RETURN AND ESTIMATED LONG-TERM
RETURN. The Estimated Current Return is calculated by dividing the estimated
net annual interest income per Unit by the Public Offering Price of such State
Trust. The estimated net annual interest income per Unit will vary with
changes in fees and expenses of such State Trust and with the principal
prepayment, redemption, maturity, exchange or sale of Securities while the
Public Offering Price will vary with changes in the bid price of the underlying
Securities; therefore, there is no assurance that the present Estimated Current
Returns will be realized in the future. Estimated Long-Term Return is
calculated using a formula which (1) takes into consideration, and determines
and factors in the relative weightings of, the market values, yields (which
takes into account the amortization of premiums and the accretion of discounts)
and estimated retirements of all of the Securities in the State Trust and (2)
takes into account the expenses and sales charge associated with each State
Trust Unit. Since the market values and estimated retirements of the
Securities and the expenses of the State Trust will change, there is no
assurance that the present Estimated Long-Term Return will be realized in the
future. Estimated Current Return and Estimated Long-Term Return are expected
to differ because the calculation of Estimated Long-Term Return reflects the
estimated date and amount of principal returned while Estimated Current Return
calculations include only net annual interest income and Public Offering Price.
MARKET FOR UNITS. While under no obligation to do
so, the Sponsor intends, subject to change at any time, to maintain a market
for the Units of each State Trust and to continuously offer to repurchase such
Units at prices which are based on the aggregate bid side evaluation of the
Municipal Bonds in each State Trust. If such a market is not maintained and no
other over-the-counter market is available, Unitholders will
4
<PAGE> 5
still be able to dispose of their Units through redemption by the Trustee at
prices based upon the aggregate bid price of the Municipal Bonds in such State
Trust. See "Redemption."
5
<PAGE> 6
KEMPER TAX-EXEMPT INCOME TRUST
MULTI-STATE SERIES
OHIO TAX-EXEMPT BOND TRUST
SERIES 1-10
THE TRUST
Each State Trust Fund is one of a series of unit
investment trusts created by the Sponsor under the name Ohio Tax-Exempt Bond
Trust or under the name Kemper Tax-Exempt Income Trust, Multi-State Series, all
of which are similar, and each of which was created under the laws of the State
of Missouri pursuant to a Trust Agreement*1 (the "Agreement") such "State
Trusts" being collectively referred to herein as the ("Trust"). Kemper Unit
Investment Trusts, a service of Kemper Securities, Inc., acts as Sponsor and
Evaluator and Investors Fiduciary Trust Company acts as Trustee. For
information regarding the relationship of Kemper Unit Investment Trusts and
Investors Fiduciary Trust Company, see "The Sponsor."
The State Trusts may be an appropriate investment
vehicle for investors who desire to participate in a portfolio of tax-exempt,
fixed income securities with greater diversification than they might be able to
acquire individually. In addition, Municipal Bonds of the type deposited in
the State Trusts are often not available in small amounts.
Each State Trust's investment objective is interest
income which is exempt from Federal, State and, where applicable, local income
taxes, while conserving capital and diversifying risks by investing in fixed
portfolios of Municipal Bonds consisting of obligations issued primarily by or
on behalf of the State for which such State Trust is named or counties,
municipalities, authorities or political subdivisions thereof. There is, of
course, no guarantee that the State Trusts' objective will be achieved.
All of the Municipal Bonds in the State Trust
portfolios were rated in the category "BBB" or better by either Standard &
Poor's Corporation ("Standard & Poor's") or "Baa" or better by Moody's
Investors Service, Inc. ("Moody's") on the Date of Deposit or were unrated.
However, if any Municipal Bonds were unrated on the Date of Deposit, they must
have had, in the opinion of the Sponsor, credit characteristics equivalent to
Municipal Bonds rated at least "BBB" or "Baa". Municipal Bonds which are rated
"BBB" or "Baa" are regarded as having an adequate capacity to pay interest and
repay principal but may lack outstanding credit characteristics and, in fact,
have speculative characteristics as well. Ratings of the Municipal Bonds may
have changed since the Date of Deposit. See "Description of Securities
Ratings" herein and the "Schedule of Investments" in Part Two.
* Reference is hereby made to said Trust Agreement, and any statements
contained herein are qualified in their entirety by the provisions of said
Trust Agreement.
6
<PAGE> 7
Proceeds of the maturity, redemption or sale of the
Municipal Bonds in a State Trust, unless used to pay for Units tendered for
redemption, will be distributed to Unitholders thereof and will not be utilized
to purchase additional Municipal Bonds.
The Units, each of which represents a pro rata
undivided fractional interest in the principal amount of Municipal Bonds
deposited in the appropriate State Trust, are issued and outstanding Units
which have been reacquired by the Sponsor either by purchase of Units tendered
to the Trustee for redemption or by purchase in the open market. No offering
is being made on behalf of the State Trusts and any profit or loss realized on
the sale of Units will accrue to the Sponsor and/or the firm reselling such
Units. To the extent that Units of any State Trust are redeemed, the principal
amount of Municipal Bonds in such State Trust will be reduced and the undivided
fractional interest represented by each outstanding Unit of such State Trust
will increase. See "Redemption."
PORTFOLIOS
The selection of Municipal Bonds for each State Trust
was based largely upon the experience and judgment of the Sponsor. In making
such selections the Sponsor deemed the following requirements, among others, to
be of primary importance: (a) a minimum rating in the category "BBB" by
Standard & Poor's or "Baa" by Moody's except that the Sponsor may, from time to
time, in specifically designated State Trusts, have deemed it to be acceptable
to acquire unrated Municipal Bonds which had, in the opinion of the Sponsor,
credit characteristics at least equal to Municipal Bonds so rated; (b) the
price of the Municipal Bonds relative to other issues of similar quality and
maturity; (c) the diversification of the Municipal Bonds as to purpose of
issue; (d) the income to the Unitholders of the State Trust; and (e) the dates
of maturity of the Bonds. Subsequent to the Date of Deposit, a Municipal Bond
may have ceased to be rated or its rating may have been reduced below the
minimum required as of the Date of Deposit. Neither event requires the
elimination of such investment from a State Trust, but may be considered in the
Sponsor's determination to direct the Trustee to dispose of such investment.
See "Investment Supervision" herein and the "Schedule of Investments" in Part
Two.
The Sponsor may not alter the portfolio of a State
Trust except that certain of the Municipal Bonds may be sold upon the happening
of certain extraordinary circumstances described under "Investment
Supervision". Certain of the Municipal Bonds in the State Trusts are subject
to redemption prior to their stated maturity date call or redemption pursuant
to sinking fund provisions, call provisions or extraordinary optional or
mandatory redemption provisions or otherwise. A sinking fund is a reserve fund
accumulated over a period of time for retirement of debt. A callable debt
obligation is one which is subject to redemption or refunding prior to maturity
at the option of the issuer. A refunding is a method by which a debt
obligation is redeemed, at or before maturity, by the proceeds of a new debt
obligation. In general, call provisions are more likely to be exercised when
the offering side valuation is at a premium over par than when it is at a
discount from par. Accordingly, any such call, redemption, sale or maturity
will reduce the size and diversity of such Series, and the net annual interest
income of the Series and may reduce the Estimated Long-Term
7
<PAGE> 8
Return and/or Estimated Current Return. See "Interest and Estimated
Long-Term and Current Returns." Each Trust portfolio contains a listing of the
sinking fund and call provisions, if any, with respect to each of the debt
obligations. Extraordinary optional redemptions and mandatory redemptions
result from the happening of certain events. Generally, events that may permit
the extraordinary optional redemption of Municipal Bonds or may require the
mandatory redemption of Municipal Bonds include, among others: a final
determination that the interest on the Municipal Bonds is taxable; the
substantial damage or destruction by fire or other casualty of the project for
which the proceeds of the Municipal Bonds were used; an exercise by a local,
State or Federal governmental unit of its power of eminent domain to take all
or substantially all of the project for which the proceeds of the Municipal
Bonds were used; changes in the economic availability of raw materials,
operating supplies or facilities or technological or other changes which render
the operation of the project for which the proceeds of the Municipal Bonds were
used uneconomic; changes in law or an administrative or judicial decree which
renders the performance of the agreement under which the proceeds of the
Municipal Bonds were made available to finance the project impossible or which
creates unreasonable burdens or which imposes excessive liabilities, such as
taxes, not imposed on the date the Municipal Bonds are issued on the issuer of
the Municipal Bonds or the user of the proceeds of the Municipal Bonds; an
administrative or judicial decree which requires the cessation of a substantial
part of the operations of the project financed with the proceeds of the
Municipal Bonds; an overestimate of the costs of the project to be financed
with the proceeds of the Municipal Bonds resulting in excess proceeds of the
Municipal Bonds which may be applied to redeem Municipal Bonds; or an
underestimate of a source of funds securing the Municipal Bonds resulting in
excess funds which may be applied to redeem Municipal Bonds. The Sponsor is
unable to predict all of the circumstances which may result in such redemption
of an issue of Municipal Bonds.
The Sponsor and the Trustee shall not be liable in
any way for any default, failure or defect in any Municipal Bond.
PORTFOLIO RISK INFORMATION. An investment in Units
of a Series of the State Trusts should be made with an understanding of the
risks which an investment in fixed rate debt obligations may entail, including
the risk that the value of the portfolio and hence of the Units will decline
with increases in interest rates. The value of the underlying Municipal Bonds
will fluctuate inversely with changes in interest rates. The uncertain
economic conditions of recent years, together with the fiscal measures adopted
to attempt to deal with them, have resulted in wide fluctuations in interest
rates and, thus, in the value of fixed rate debt obligations generally and
long-term obligations in particular. The Sponsor cannot predict whether such
fluctuations will continue in the future.
Certain of the Municipal Bonds in the State Trusts
may be general obligations of a governmental entity that are backed by the
taxing power of such entity. All other Municipal Bonds in the State Trusts are
revenue bonds payable from the income of a specific project or authority and
are not supported by the issuer's power to levy taxes. General obligation
bonds are secured by the issuer's pledge of its faith, credit and taxing power
for the payment of principal and interest. Revenue bonds, on the other hand,
are payable only from the revenues derived from a particular facility or class
of facilities or, in some cases, from the
8
<PAGE> 9
proceeds of a special excise or other specific revenue source. There are, of
course, variations in the security of the different Municipal Bonds in the
State Trusts, both within a particular classification and between
classifications, depending on numerous factors.
Certain Series of the State Trusts contain Municipal
Bonds which are obligations of issuers whose revenues are derived from services
provided by hospitals and other health care facilities, including nursing
homes. In view of this an investment in such Series should be made with an
understanding of the characteristics of such issuers and the risks that such an
investment may entail. Ratings of bonds issued for health care facilities are
often based on feasibility studies that contain projections of occupancy
levels, revenues and expenses. A facility's gross receipts and net income
available for debt service will be affected by future events and conditions
including, among other things, demand for services and the ability of the
facility to provide the services required, physicians' confidence in the
facility, management capabilities, economic developments in the service area,
competition, efforts by insurers and governmental agencies to limit rates,
legislation establishing state rate-setting agencies, expenses, the cost and
possible unavailability of malpractice insurance, the funding of Medicare,
Medicaid and other similar third party payor programs, and government
regulation. Federal legislation has been enacted which implemented a system of
prospective Medicare reimbursement which may restrict the flow of revenues to
hospitals and other facilities which are reimbursed for services provided under
the Medicare program. Future legislation or changes in the areas noted above,
among other things, would affect all hospitals to varying degrees and,
accordingly, any adverse changes in these areas may adversely affect the
ability of such issuers to make payment of principal and interest on Municipal
Bonds held in such Series. Such adverse changes also may adversely affect the
ratings of the Municipal Bonds held in such State Trusts. 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. 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 or in other circumstances. For example,
certain hospitals may have the right to call bonds at par if the hospital may
legally be required because of the bonds to perform procedures against
specified religious principles. Certain FHA-insured bonds may provide that all
or a portion of those 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 reduce severely its collateral value.
Certain of the Municipal Bonds in the State Trusts
may be single family mortgage revenue bonds, which are issued for the purpose
of acquiring from originating financial institutions notes secured by mortgages
on residences located within the issuer's boundaries and owned by persons of
low or moderate income. Mortgage loans are generally partially or completely
prepaid prior to their final maturities as a result of events such as sale of
the mortgaged premises, default, condemnation or casualty loss. Because these
Municipal Bonds are subject to extraordinary mandatory redemption in whole or
in part from such
9
<PAGE> 10
prepayments of mortgage loans, a substantial portion of such
Municipal Bonds will probably be redeemed prior to their scheduled maturities
or even prior to their ordinary call dates. The redemption price of such
issues may be more or less than the offering price of such Municipal Bonds.
Extraordinary mandatory redemption without premium could also result from the
failure of the originating financial institutions to make mortgage loans in
sufficient amounts within a specified time period or, in some cases, from the
sale by the Municipal Bond issuer of the mortgage loans. Failure of the
originating financial institutions to make mortgage loans would be due
principally to the interest rates on mortgage loans funded from other sources
becoming competitive with the interest rates on the mortgage loans funded with
the proceeds of the single family mortgage revenue bonds. Additionally,
unusually high rates of default on the underlying mortgage loans may reduce
revenues available for the payment of principal of or interest on such mortgage
revenue bonds. Single family mortgage revenue bonds issued after December 31,
1980 were issued under Section 103A of the Internal Revenue Code, which Section
contains certain ongoing requirements relating to the use of the proceeds of
such Municipal Bonds in order for the interest on such Municipal Bonds to
retain its tax-exempt status. In each case, the issuer of the Municipal Bonds
has covenanted to comply with applicable ongoing requirements and bond counsel
to such issuer has issued an opinion that the interest on the Municipal Bonds
is exempt from Federal income tax under existing laws and regulations. There
can be no assurances that the ongoing requirements will be met. The failure to
meet these requirements could cause the interest on the Municipal Bonds to
become taxable, possibly retroactively from the date of issuance.
Certain of the Municipal Bonds in the State Trusts
may be obligations of issuers whose revenues are primarily derived from
mortgage loans to housing projects for low to moderate income families. The
ability of such issuers to make debt service payments will be affected by
events and conditions affecting financed projects, including, among other
things, the achievement and maintenance of sufficient occupancy levels and
adequate rental income, increases in taxes, employment and income conditions
prevailing in local labor markets, utility costs and other operating expenses,
the managerial ability of project managers, changes in laws and governmental
regulations, the appropriation of subsidies and social economic trends
affecting the localities in which the projects are located. The occupancy of
housing projects may be adversely affected by high rent levels and income
limitations imposed under Federal and state programs. Like single family
mortgage revenue bonds, multi-family mortgage revenue bonds are subject to
redemption and call features, including extraordinary mandatory redemption
features, upon prepayment, sale or non-origination of mortgage loans as well as
upon the occurrence of other events. Certain issuers of single or multi-family
housing bonds have considered various ways to redeem bonds they have issued
prior to the stated first redemption dates for such bonds. In connection with
the housing Municipal Bonds held by the State Trusts, the Sponsor has not had
any direct communications with any of the issuers thereof, but at the initial
Date of Deposit it was not aware that any of the respective issuers of such
Municipal Bonds were actively considering the redemption of such Municipal
Bonds prior to their respective stated initial call dates. However, there can
be no assurance that an issuer of a Municipal Bond in the State Trusts will not
attempt to so redeem a Municipal Bond in the State Trusts.
Certain of the Municipal Bonds in the State Trusts
may be obligations of issuers whose revenues are derived from the sale of water
and/or sewerage services. Water and sewerage bonds are generally payable from
user fees. Problems faced by such issuers include the ability to obtain timely
and adequate rate
10
<PAGE> 11
increases, a decline in population resulting in decreased user fees,
the difficulty of financing large construction programs, the limitations on
operations and increased costs and delays attributable to environmental
considerations, the increasing difficulty of obtaining or discovering new
supplies of fresh water, the effect of conservation programs and the impact of
"no-growth" zoning ordinances. Issuers may have experienced these problems in
varying degrees. Because of the relatively short history of solid waste
disposal bond 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 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 disposal 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.
Certain of the Municipal Bonds in the State Trusts
may be obligations of issuers whose revenues are primarily derived from the
sale of electric energy or natural gas. Utilities are generally subject to
extensive regulation by state utility commissions which, among other things,
establish the rates which may be charged and the appropriate rate of return on
an approved asset base. The problems faced by such issuers include the
difficulty in obtaining approval for timely and adequate rate increases from
the governing public utility commission, the difficulty in financing large
construction programs, the limitations on operations and increased costs and
delays attributable to environmental considerations, increased competition,
recent reductions in estimates of future demand for electricity in certain
areas of the country, the difficulty of the capital market in absorbing utility
debt, the difficulty in obtaining fuel at reasonable prices and the effect of
energy conservation. Issuers may have experienced these problems in varying
degrees. In addition, Federal, State and municipal governmental authorities
may from time to time review existing and impose additional regulations
governing the licensing, construction and operation of nuclear power plants,
which may adversely affect the ability of the issuers of such Municipal Bonds
to make payments of principal and/or interest on such Municipal Bonds. 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 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
action power agencies, which might exacerbate some of the problems referred to
above and possibly lead to legal proceedings questioning the enforceability of
agreements upon which payment of these bonds may depend.
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Certain of the Municipal Bonds in the State Trusts may be industrial
revenue bonds ("IRBs"), including pollution control revenue bonds, which are
tax-exempt securities issued by states, municipalities, public authorities or
similar entities to finance the cost of acquiring, constructing or improving
various industrial projects. These projects are usually operated by corporate
entities. Issuers are obligated only to pay amounts due on the IRBs to the
extent that funds are available from the unexpended proceeds of the IRBs or
receipts or revenues of the issuer under an arrangement between the issuer and
the corporate operator of a project. The arrangement 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 IRBs. Regardless of the
structure, payment of IRBs is solely dependent upon the creditworthiness of the
corporate operator of the project or corporate guarantor. Corporate operators
or guarantors may be affected by many factors which may have an adverse impact
on the credit quality of the particular company or industry. These include
cyclicality of revenues and earnings, regulatory and environmental
restrictions, litigation resulting from accidents or environmentally-caused
illnesses, extensive competition and financial deterioration resulting from
leveraged buy-outs or takeovers. The IRBs in the State Trusts may be subject
to special or extraordinary redemption provisions which may provide for
redemption at par or, with respect to original issue discount bonds, at issue
price plus the amount of original issue discount accreted to the redemption
date plus, if applicable, a premium. The Sponsor cannot predict the causes or
likelihood of the redemption of IRBs or other Municipal Bonds in the State
Trusts prior to the stated maturity of such Municipal Bonds.
Certain of the Municipal Bonds in the State Trusts
may be obligations which are payable from and secured by revenues derived from
the ownership and operation of facilities such as airports, bridges, turnpikes,
port authorities, convention centers and arenas. The major portion of an
airport's gross operating income is generally derived from fees received from
signatory airlines pursuant to use agreements which consist of annual payments
for leases, occupancy of certain terminal space and service fees. Airport
operating income may therefore be affected by the ability of the airlines to
meet their obligations under the use agreements. The air transport industry
is experiencing significant variations in earnings and traffic, due to
increased competition, excess capacity, increased costs, deregulation, traffic
constraints and other factors, and several airlines are experiencing severe
financial difficulties. The Sponsor cannot predict what effect these industry
conditions may have on airport revenues which are dependent for payment on the
financial condition of the airlines and their usage of the particular airport
facility. Similarly, payment on Municipal Bonds related to other facilities is
dependent on revenues from the projects, such as user fees from ports, tolls on
turnpikes and bridges and rents from buildings. Therefore, payment may be
adversely affected by reduction in revenues due to such factors as increased
cost of maintenance, decreased use of a facility, lower cost of alternative
modes of transportation, scarcity of fuel and reduction or loss of rents.
Certain of the Municipal Bonds in the State Trusts
may be obligations of issuers which are, or which govern the operation of,
schools, colleges and universities and whose revenues are derived mainly from
ad valorem taxes, or for higher education systems, from tuition, dormitory
revenues, grants and endowments. General problems relating to school bonds
include litigation contesting the state constitutionality of financing public
education in part from ad valorem taxes, thereby creating a disparity in
educational funds available
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to schools in wealthy areas and schools in poor areas. Litigation or
legislation on this issue may affect the sources of funds available for the
payment of school bonds in the Trusts. General problems relating to college
and university obligations would include the prospect of a declining percentage
of the population consisting of "college" age individuals, possible inability
to raise tuition and fees sufficiently to cover increased operating costs, the
uncertainty of continued receipt of Federal grants and state funding and new
government legislation or regulations which may adversely affect the revenues
or costs of such issuers. All of such issuers have been experiencing certain
of these problems in varying degrees. In addition, the ability of universities
and colleges to meet their obligations is dependent upon various factors,
including the size and diversity of their sources of revenues, enrollment,
reputation, management expertise, the availability and restrictions on the use
of endowments and other funds, the quality and maintenance costs of campus
facilities, and, in the case of public institutions, the financial condition of
the relevant state or other governmental entity and its policies with respect
to education. The institution's ability to maintain enrollment levels will
depend on such factors as tuition costs, geographic location, geographic
diversity and quality of student body, quality of the faculty and the
diversity of program offerings.
Certain of the Municipal Bonds in the State Trusts
may be Urban Redevelopment Bonds ("URBs"). URBs have generally been issued
under bond resolutions pursuant to which the revenues and receipts payable
under the arrangements with the operator of a particular project have been
assigned and pledged to purchasers. In some cases, a mortgage on the
underlying project may have been granted as security for the URBs. Regardless
of the structure, payment of the URBs is solely dependent upon the
creditworthiness of the operator of the project.
Certain of the Municipal Bonds in the State Trusts
may be lease revenue bonds whose revenues are derived from lease payments made
by a municipality or other political subdivision which is leasing equipment or
property for use in its operation. The risks associated with owning Municipal
Bonds of this nature include the possibility that appropriation of funds for a
particular project or equipment may be discontinued. The Sponsor cannot
predict the likelihood of nonappropriation of funds for these types of lease
revenue Municipal Bonds. Lease revenue Municipal Bonds may also be subject to
the risk of abatement in many states -- rental obligations cease in the event
that damage, destruction or condemnation of the project prevents its use by the
lessee. (In these cases, insurance provisions 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 re-letting 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 its 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 even though it is not legally obligated to do so,
but its legality remains untested in most, if not all, states.
Certain of the Municipal Bonds in the State Trusts
may be "zero coupon" bonds, i.e., an original issue discount bond that does not
provide for the payment of current interest. Zero coupon bonds are purchased
at a deep discount because the buyer receives only the right to receive a final
payment at the maturity of the bond and does not receive any periodic interest
payments. The effect of owning deep
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discount bonds which do not make current interest payments (such as the
zero coupon bonds) is that a fixed yield is earned not only on the original
investment but also, in effect, on all discount earned during the life of such
obligation. This implicit reinvestment of earning at the same rate eliminates
the risk of being unable to reinvest the income on such obligation at a rate as
high as the implicit yield on the discount obligation, but at the same time
eliminates the holder's ability to reinvest at higher rates in the future. For
this reason, zero coupon bonds are subject to substantially greater price
fluctuations during periods of changing market interest rates than are
securities of comparable quality which pay interest currently. For the Federal
tax consequences of original issue discount bonds such as the zero coupon
bonds, see "Federal Tax Status of the State Trusts."
Investors should be aware that many of the Municipal
Bonds in the State Trusts are subject to continuing requirements such as the
actual use of Municipal Bond proceeds or manner of operation of the project
financed from Municipal Bond proceeds that may affect the exemption of interest
on such Municipal Bonds from Federal income taxation. Although at the time of
issuance of each of the Municipal Bonds in the State Trusts an opinion of
bond counsel was rendered as to the exemption of interest on such obligations
from Federal income taxation, there can be no assurance that the respective
issuers or other obligors on such obligations will fulfill the various
continuing requirements established upon issuance of the Municipal Bonds. A
failure to comply with such requirements may cause a determination that
interest on such obligations is subject to Federal income taxation, perhaps
even retroactively from the date of issuance of such Municipal Bonds, thereby
reducing the value of the Municipal Bonds and subjecting Unitholders to
unanticipated tax liabilities.
Federal bankruptcy statutes relating to the
adjustment of debts of political subdivisions and authorities of states of the
United States provide that, in certain circumstances, such subdivisions or
authorities may be authorized to initiate bankruptcy proceedings without prior
notice to or consent of creditors, which proceedings could result in material
and adverse modification or alteration of the rights of holders of obligations
issued by such subdivision or authorities.
Certain issues of the Municipal Bonds in the State
Trusts represent "moral obligations" of a governmental entity. In the event
that the issuer of the Municipal Bond defaults in the repayment thereof, the
governmental entity lawfully may, but is not obligated to, discharge the
obligation of the issuer to repay such Municipal Bond. If an issuer of moral
obligation bonds is unable to meet its obligations, the repayment of such
Municipal 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.
To the best of the Sponsor's knowledge, as of the
date of this Prospectus, there is no litigation pending with respect to any
Municipal Bond which might reasonably be expected to have a material adverse
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effect on the Trust or any State Trust. Although the Sponsor is unable to
predict whether any other litigation may be instituted, or if instituted,
whether such litigation might have a material adverse effect on the Trust, the
Trust received copies of the opinions of bond counsel given to the issuing
authorities at the time of original delivery of each of the Municipal Bonds to
the effect that the Municipal Bonds had been validly issued and that the
interest thereon is exempt from Federal income taxes.
DISTRIBUTION REINVESTMENT
Kemper Financial Services, Inc., ("KFS"), an
affiliate of the Sponsor, is the Investment Manager and Principal Underwriter
of Kemper Municipal Bond Fund ("KMBF") and Tax-Exempt Portfolio of Cash
Equivalent Fund ("TEPCE"). Each of these funds invests in obligations issued
by or on behalf of states, territories and possessions of the United States and
the District of Columbia and their political subdivisions, agencies and
instrumentalities, the interest from which is exempt from Federal income taxes
although it may be subject to State and local taxes. TEPCE may not invest in
such obligations having a maturity of more than one year (except for variable
rate obligations with a demand feature) and it has a net asset value which
is sought to be maintained at $1.00 per share. KFS is also the Investment
Manager and Principal Underwriter of the Kemper California Tax-Free Income Fund
("KCF"). KCF invests a minimum of 50% and may invest up to 100% of its assets
in municipal securities issued by California entities, thereby enabling it to
pay dividends, which are partially or wholly exempt from California income
taxes, to California residents. Each Unitholder of a State Trust may elect to
have distributions of principal (including capital gains, if any) or interest
or both automatically invested without charge in shares of either KMBF or
TEPCE. Unitholders in the California Trust will also have the option of having
their distributions of principal (including capital gains, if any) or interest
or both automatically invested without charge in shares of KCF. In addition,
investors may reinvest in any other mutual fund underwritten or advised by KFS
(the "Kemper Funds"), other than those Kemper Funds sold with a contingent
deferred sales charge. Since the portfolio securities and investment
objectives of such Kemper Funds may differ significantly from that of the
Trust, Unitholders should carefully consider the consequences, including the
fact that distributions from such Kemper Funds may be taxable, before selecting
such Kemper Funds for reinvestment. Detailed information with respect to the
investment objectives and the management of the Kemper Funds is contained in
their respective prospectuses, which can be obtained from the Sponsor upon
request. An investor should read the appropriate prospectus prior to making
the election to reinvest.
Unitholders who are receiving distributions in cash
may elect to participate in distribution reinvestment by filing with the
Program Agent an election to have such distributions reinvested without charge.
Such election must be received by the Program Agent at least ten days prior to
the Record Date applicable to any distribution in order to be in effect for
such Record Date. Any such election shall remain in effect until a subsequent
notice is received by the Program Agent. See "Unitholders - Distribution to
Unitholders."
The Program Agent is Investors Fiduciary Trust
Company. All inquiries concerning participation in distribution reinvestment
should be directed to the Kemper Service Company, a service agent for the
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Program Agent at P.O. Box 419430, Kansas City, Missouri 64173-0216, telephone
(800) 422-2848.
INTEREST AND ESTIMATED LONG-TERM AND CURRENT RETURNS
As of the opening of business on the date indicated
therein, the Estimated Current Returns and the Estimated Long-Term Returns for
each State Trust were as set forth under "Essential Information" for the
applicable State Trust in Part Two of this Prospectus. Estimated Current
Returns are calculated by dividing the estimated net annual interest income per
Unit by the Public Offering Price. The estimated net annual interest income
per Unit will vary with changes in fees and expenses of the Trustee, the
Sponsor and the Evaluator and with the principal prepayment, redemption,
maturity, exchange or sale of Securities while the Public Offering Price will
vary with changes in the offering price of the underlying Securities;
therefore, there is no assurance that the present Estimated Current Returns
will be realized in the future. Estimated Long-Term Returns are calculated
using a formula which (1) takes into consideration, and determines and factors
in the relative weightings of, the market values, yields (which takes into
account the amortization of premiums and the accretion of discounts) and
estimated retirements of all of the Securities in the State Trust and (2) takes
into account the expenses and sales charge associated with each State Trust
Unit. Since the market values and estimated retirements of the Securities and
the expenses of the State Trust will change, there is no assurance that the
present Estimated Long-Term Returns will be realized in the future.
Estimated Current Returns and Estimated Long-Term Returns are expected to
differ because the calculation of Estimated Long-Term Returns reflects the
estimated date and amount of principal returned while Estimated Current
Returns calculations include only net annual interest income and Public
Offering Price.
FEDERAL TAX STATUS OF THE STATE TRUSTS
All Municipal Bonds deposited in the State Trusts
were accompanied by copies of opinions of bond counsel to the issuers thereof,
given at the time of original delivery of the Municipal Bonds, to the effect
that the interest thereon is exempt from gross income for Federal income tax
purposes. In addition, bond counsel to the issuing authorities rendered
opinions as to the exemption of interest on such Municipal Bonds, when held by
residents of the State in which the issuers of such Municipal Bonds are
located, from State income taxes and, where applicable, local income taxes.
Gain realized on the sale or redemption of the Municipal Bonds by the Trustee
or of a Unit by a Unitholder is, however, includable in gross income for
Federal income tax purposes as capital gain, which gain may be long or short
term. Such gain does not include any amounts received in respect of accrued
interest or earned original issue discount. It should be noted that under
recently enacted legislation described below that subjects accretion of market
discount on tax-exempt bonds to taxation as ordinary income, gain realized on
the sale or redemption of Municipal Bonds by the Trustee or of Units by a
Unitholder that would have been treated as capital gain under prior law is
treated as ordinary income to the extent it is attributable to accretion of
market discount. Market discount can arise based on the price a Trust Fund
pays for Municipal Bonds or the price a Unitholder pays for his or her Units.
In connection with the offering of Units of the State
Trusts, neither the Sponsor, the Trustee, the Auditors nor their respective
counsel have made any review of the proceedings relating to the issuance of
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the Municipal Bonds or the bases for such opinions.
At the time of the closing for each Trust, except
with respect to the various series of Ohio Tax-Exempt Bond Trust, Chapman and
Cutler, counsel for the Sponsor, rendered an opinion under then existing law
substantially to the effect that:
Each State Trust is not an association taxable as a
corporation for Federal income tax purposes and interest and accrued original
issue discount on Bonds which is excludable from gross income under the
Internal Revenue Code of 1986 (the "Code") will retain its status when
distributed to Unitholders, except to the extent such interest is subject to
the alternative minimum tax, an additional tax on branches of foreign
corporations and the environmental tax (the "Superfund Tax"), as noted below.
Each Unitholder is considered to be the owner of a
pro rata portion of each asset of the respective State Trust in the proportion
that the number of Units of such Trust held by him bears to the total number of
Units outstanding of such State Trust under subpart E, subchapter J of chapter
1 of the Code and will have a taxable event when such State Trust disposes of a
Bond, or when the Unitholder redeems or sells his Units. Unitholders must
reduce the tax basis of their Units for their share of accrued interest
received by a State Trust, if any, on Bonds delivered after the Unitholders
pay for their Units to the extent that such interest accrued on such Bonds
during the period from the Unitholder's settlement date to the date such
Bonds are delivered to a State Trust and, consequently, such Unitholders may
have an increase in taxable gain or reduction in capital loss upon the
disposition of such Units. Gain or loss upon the sale or redemption of Units
is measured by comparing the proceeds of such sale or redemption with the
adjusted basis of the Units. If the Trustee disposes of Bonds (whether by
sale, payment on maturity, redemption or otherwise), gain or loss is
recognized to the Unitholder. The amount of any such gain or loss is
measured by comparing the Unitholder's pro rata share of the total proceeds
from such disposition with the Unitholder's basis for his or her fractional
interest in the asset disposed of. In the case of a Unitholder
who purchases Units, such basis (before adjustment for earned original issue
discount and amortized bond premium, if any) is determined by apportioning the
cost of the Units among each of the State Trust's assets ratably according to
the value as of the date of acquisition of the Units. The tax cost reduction
requirements of the Code relating to amortization of bond premium may, under
some circumstances, result in the Unitholder realizing a taxable gain when his
Units are sold or redeemed for an amount equal to his original cost.
Sections 1288 and 1272 of the Internal Revenue Code
of 1986 (the "Code") provide a complex set of rules governing the accrual of
original issue discount. These rules provide that original issue discount
accrues either on the basis of a constant compound interest rate or ratably
over the term of the Municipal Bond, depending on the date the Municipal Bond
was issued. In addition, special rules apply if the purchase price of a
Municipal Bond exceeds the original issue price plus the amount of original
issue discount which would have previously accrued based upon its issue price
(its "adjusted issue price"). The application of these rules will also vary
depending on the value of the Municipal Bond on the date a Unitholder acquires
his Units, and the price the Unitholder pays for his Units. Investors with
questions regarding these Code
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sections should consult with their tax advisers.
"The Revenue Reconcilliation Act of 1993" (the "Tax
Act") was recently enacted. The Tax Act subjects tax-exempt bonds to the
market discount rules of the Code effective for bonds purchased after April 30,
1993. In general, market discount is the amount (if any) by which the stated
redemption price at maturity exceeds an investor's purchase price (except to
the extent that such difference, if any, is attributable to original issue
discount not yet accrued). Under the Tax Act, accretion of market discount is
taxable as ordinary income; under prior law the accretion had been treated as
capital gain. Market discount that accretes while a Trust Fund holds a
Municipal Bond would be recognized as ordinary income by the Unitholders when
principal payments are received on the Municipal Bond, upon sale or at
redemption (including early redemption), or upon the sale or redemption of his
or her Units, unless a Unitholder elects to include market discount in taxable
income as it accrues. The market discount rules are complex and Unitholders
should consult their tax advisers regarding these rules and their application.
In the case of all Unitholders (both individuals and
corporations), interest on all or certain Bonds held by the respective State
Trusts may be treated as an item of tax preference for purposes of computing
the alternative minimum tax. Accordingly, investments in Units may subject
Unitholders to (or result in increased liability under) the alternative minimum
tax. Due to the complexity of the alternative minimum tax, Unitholders are
urged to consult their tax advisers regarding the impact, if any, of the
alternative minimum tax.
In the case of certain corporations, the alternative
minimum tax and the Superfund Tax depend upon the corporation's alternative
minimum taxable income, which is the corporation's taxable income with certain
adjustments. One of the adjustment items used in computing the alternative
minimum taxable income and the Superfund Tax of a corporation (other than an S
Corporation, Regulated Investment Company, Real Estate Investment Trust, or
REMIC) is an amount equal to 75% of the excess of such corporation's "adjusted
current earnings" over an amount equal to its alternative minimum taxable
income (before such adjustment item and the alternative tax net operating loss
deduction). "Adjusted current earnings" includes all tax-exempt interest,
including interest on all the Municipal Bonds in a State Trust. Unitholders
are urged to consult their tax advisers with respect to the particular tax
consequences to them including the corporate alternative minimum tax, the
Superfund Tax and the branch profits tax imposed by Section 884 of the Code.
Counsel for the Sponsor has also advised that under
Section 265 of the Code, interest on indebtedness incurred or continued to
purchase or carry Units of a State Trust is not deductible for Federal income
tax purposes. The Internal Revenue Service has taken the position that such
indebtedness need not be directly traceable to the purchase or carrying of
Units (however, these rules generally do not apply to interest paid on
indebtedness incurred to purchase or improve a personal residence). Also,
under Section 265 of the Code, certain financial institutions that acquire
Units would generally not be able to deduct any of the interest expense
attributable to ownership of such Units. Investors with questions regarding
these issues should consult with their tax advisers.
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In the case of certain Municipal Bonds in the State
Trusts, the opinions of bond counsel indicate that interest on such securities
received by a "substantial user" of the facilities being financed with the
proceeds of these securities or persons related thereto, for periods while such
securities are held by such a user or related person, will not be excludable
from Federal gross income, although interest on such securities received by
others would be excludable from Federal gross income. "Substantial user" and
"related person" are defined under U.S. Treasury Regulations. Any person who
believes that he or she may be a "substantial user" or a "related person" as so
defined should contact his or her tax adviser.
With respect to the various series of Ohio Tax-Exempt
Bond Trust, Squire, Sanders & Dempsey rendered an opinion at the time of each
closing for each Ohio Trust which was substantially similar to the foregoing.
Under existing law, the State Trusts are not
associations taxable as a corporation and the income of the Trust Funds will be
treated as the income of the Unitholders under the income tax laws of the State
of Missouri.
All statements of law in the Prospectus concerning
exclusion from gross income for Federal, State or other tax purposes are the
opinions of counsel and are to be so construed.
At the respective times of issuance of the Municipal
Bonds, opinions relating to the validity thereof and to the exclusion of
interest thereon from Federal gross income are rendered by bond counsel to the
respective issuing authorities. Neither the Sponsor nor Chapman and Cutler has
made any special review for the State Trusts of the proceedings relating to the
issuance of the Municipal Bonds or of the basis for such opinions.
For taxpayers other than corporations, net capital
gains are presently subject to a maximum marginal stated tax rate of 28
percent. However, it should be noted that legislative proposals are introduced
from time to time that affect tax rates and could affect relative differences
at which ordinary income and capital gains are taxed.
Under the Code, taxpayers must disclose to the
Internal Revenue Service the amount of tax-exempt interest earned during the
year.
Section 86 of the Code, in general, provides that
fifty percent of Social Security benefits are includible in gross income to the
extent that the sum of "modified adjusted gross income" plus fifty percent of
the Social Security benefits received exceeds a "base amount." The base amount
is $25,000 for unmarried taxpayers, $32,000 for married taxpayers filing a
joint return and zero for married taxpayers who do not live apart at all times
during the taxable year and who file separate returns. Modified adjusted gross
income is
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adjusted gross income determined without regard to certain otherwise
allowable deductions and exclusions from gross income and by including tax
exempt interest. To the extent that Social Security benefits are includible in
gross income, they will be treated as any other item of gross income.
In addition, under the Tax Act, for taxable years
beginning after December 31, 1993, up to 85 percent of Social Security benefits
are includible in gross income to the extent that the sum of "modified adjusted
gross income" plus fifty percent of Social Security benefits received exceeds
an "adjusted base amount." The adjusted base amount is $34,000 for married
taxpayers, $44,000 for married taxpayers filing a joint return and zero for
married taxpayers who do not live apart at all times during the taxable year
and who file separate returns.
Although tax-exempt interest is included in modified
adjusted gross income solely for the purpose of determining what portion, if
any, of Social Security benefits will be included in gross income, no
tax-exempt interest, including that received from the Trust Fund, will be
subject to tax. A taxpayer whose adjusted gross income already exceeds the
base amount must include fifty percent of his Social Security benefits in gross
income whether or not he receives any tax-exempt interest. A taxpayer whose
modified adjusted gross income (after inclusion of tax-exempt interest) does
not exceed the base amount need not include any Social Security benefits in
gross income.
For a discussion of the State tax status of income
earned on Units of a State Trust, see the discussion of tax status for the
applicable trust. Except as noted therein, the exemption of interest on State
and local obligations for Federal income tax purposes discussed above does not
necessarily result in exemption under the income or other tax laws of any state
or city. The laws of the several states vary with respect to the
taxation of such obligations.
All statements in the Prospectus concerning exemption
from Federal, state or other taxes are the opinions of counsel and are to be so
construed.
DESCRIPTION AND STATE TAX STATUS OF THE STATE TRUSTS
ARIZONA TRUSTS. Arizona is the nation's sixth
largest state in terms of area and ranks among the leading states in three
economic indices of growth. For the ten year period 1978-88, Arizona ranked
second nationally in both population growth and growth in employment and third
in growth of personal income.
According to figures reported by the Arizona
Department of Economic Security, Arizona has been one of the fastest growing
states in the nation. While the United States' population increased 11 percent
between 1970 and 1980, Arizona realized a 53 percent growth rate. More
recently this growth has slowed to a more manageable rate. The population of
Arizona has grown consistently at a rate between 2.2% and
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2.4% annually during the years 1988 through 1990, and is predicted to
remain in that range through 1992. The 1990 census results indicate that the
population of Arizona rose 35% between 1980 and 1990, a rate exceeded only in
Nevada and Alaska. Nearly 950,000 residents were added during this period.
Arizona's main economic sectors include services,
tourism and manufacturing. Mining and agriculture are also significant,
although they tend to be more capital than labor intensive. Services is the
single largest economic sector. Many of these jobs are directly related to
tourism. The need to provide services for these visitors has contributed
substantially to employment gains in the State.
In 1988, unemployment In the State was 6.3%.
Unemployment in Arizona decreased to 5.2% in 1989 and increased slightly to
5.3% in 1990. Arizona's unemployment rates in 1989 and 1990 were very similar
to the national rates of 5.3% and 5.4% respectively. Arizona's 5.2%
unemployment rate in September of 1991 increased to 6.2% in October and 7.3% in
November, surpassing the national rate in November of 6.8%. The unemployment
rate in Arizona for 1991 as a whole is estimated at 5.5%, compared to a
national rate estimated at 6.8%, and is forecasted to remain relatively
constant for the next two years.
On June 27, 1991, America West Airlines filed a
Chapter 11 reorganization petition in bankruptcy. America West is the sixth
largest employer in Maricopa County, employing approximately 10,000 persons
within the county, and 15,000 nationwide. At the first meeting of creditors,
representatives of the airline stated that as many as 1,500 employees might be
laid off over the next few months, most in Phoenix and Las Vegas. Over 300
employees have received lay-off notices. The effect of the America West
bankruptcy on the state economy and, more particularly, the Phoenix economy, is
uncertain.
Similarly, jobs will be lost by the anticipated
closing of Williams Air Force Base in Chandler, Arizona, in 1993. Williams Air
Force Base was selected as one of the military Installations to be closed as
a cost-cutting measure by the Defense Base Closure and Realignment Commission,
whose recommendations were subsequently approved by the President and the
United States House of Representatives. Williams Air Force Base injects
approximately $340 million in the local economy annually, and employs 1,851
civilians.
Growth in the number of jobs in Arizona has been
consistent for the last few years at the rate of 2.4% to 2.5%. Job growth for
1991 is estimated at 1.8%, but should improve slightly in 1992. As of
September of 1991, only fifteen states were experiencing job growth greater
than one percent, and several were experiencing job losses at or near a three
percent annualized rate. In Arizona, the two sectors that have been
consistency strong during the last several years are government and services.
Jobs were lost in the manufacturing sector, for the third straight year, and in
the construction industry, for the fifth consecutive year.
The deterioration of Arizona banks and savings and
loans, apparent in 1988 and especially marked in 1989, continued through 1990.
Slower construction and real estate activity is at the heart of Arizona's
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financial industry's current weakness. In the early 1980s, Phoenix and other
metropolitan areas of Arizona began experiencing an economic and population
"boom," and Arizona's institutions aggressively pursued many facets of real
estate lending. By 1986, the metropolitan areas of Arizona were overbuilt in
many categories of construction and were burdened with excessive levels of
completed inventory. The tax law amendments in 1986 exacerbated the financial
impact of the saturated market. The elimination of certain tax benefits
associated with income- producing properties contributed to the decline in
growth. Further, the value of real estate in Arizona began a downward spiral,
reflective of the overbuilt market and inventory which continues today. These
problems translated into a cumulative $488 million loss for Arizona banks and a
cumulative $2.329 billion loss for Arizona savings and loans in 1989.
In the near future, Arizona's financial institutions
are likely to continue to experience problems until the excess inventories of
commercial and residential properties are absorbed. Longer-term prospects are
brighter, since population growth is still strong by most standards, and
Arizona's climate and tourist industry still continue to stimulate the State's
economy. However, the previously robust place of growth by financial
institutions is not likely to be repeated over an extended period.
Arizona operates on a fiscal year beginning July 1
and ending June 30. Fiscal year 1992 refers to the year ending June 30, 1992.
Total General Fund revenues of $3.5 billion are
expected during fiscal year 1992. Approximately 43.2% of this budgeted revenue
comes from sales and use taxes, 36.0% from income taxes (both individual and
corporate) and 5.3% from property taxes. All taxes total approximately $3.3
billion, or 93% of the General Fund revenues. Non-tax revenue includes items
such as income from the state lottery, licenses, fees and permits, and
interest. Lottery income totals approximately 34.6% of non-tax revenue.
For fiscal year 1992, the budget calls for
expenditures of $3.5 billion. Major appropriation include $1.3 billion to the
Department of Education (for K-12), $369.9 million for the administration of
the Arizona Health Care Cost Containment System program ("AHCCCS") (the State's
alternative to Medicaid), $357.4 million to the Department of Economic
Security, and $255.9 million to the Department of Corrections. The budget for
fiscal year 1991 also totalled approximately $3.5 billion, and the budget for
fiscal year 1990 totalled $3.17 billion.
Most or all of the Bonds of the Arizona Trust are not
obligations of the State of Arizona, and are not supported by the State's
taxing powers. The particular source of payment and security for each of the
Bonds is detailed in the instruments themselves and in related offering
materials. There can be no assurances, however, with respect to whether the
market value of marketability of any of the Bonds issued by an entity other
than the State of Arizona will be affected by the financial or other condition
of the State or of any entity located within the State. In addition, it should
be noted that the State of Arizona, as well as counties,
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municipalities, political subdivisions and other public authorities of
the state, are subject to limitations imposed by Arizona's constitution with
respect to ad valorem taxation, bonded indebtedness and other matters. For
example, the legislature cannot appropriate revenues in excess of 7% of the
total personal income of the state in any fiscal year. These limitations may
affect the ability of the issuers to generate revenues to satisfy their debt
obligations.
Local governments have experienced many of the same
fiscal difficulties for many of the same reasons and, in several cases, have
been prevented by Constitutional limitations on bonded indebtedness from
securing necessary funds to undertake street, utility and other infrastructure
expansions, improvements and renovations in order to meet the needs of rapidly
increasing populations. In this regard, the voters of the cities of Phoenix
and Tucson in 1984 authorized the issuance of general obligation and revenue
bonds aggregating $525 million and $330 million, respectively, and in May
1986, the voters of Maricopa County, in which the City of Phoenix is located,
and Pima County, in which the City of Tucson is located, authorized the
issuance of bonds aggregating $261 million and $219.4 million, respectively, to
finance various short- and long-term capital projects, including infrastructure
expansions, improvements and replacements. Also, in 1986, the voters in
Maricopa and Pima Counties voted a 1/2% increase in the State sales taxes to
pay for highway construction in those counties. In April 1988 the voters of
the City of Phoenix authorized the issuance of general obligation bonds
aggregating $1.1 billion.
Although most of the Bonds in the Arizona Trust are
revenue obligations of local governments or authorities in the State, there can
be no assurance that the fiscal and economic conditions referred to above will
not affect the market value or marketability of the Bonds or the ability of the
respective obligors to pay principal of and interest on the Bonds when due.
The State of Arizona was recently sued by fifty-four
school districts within the state, claiming that the State's funding system for
school buildings and equipment is unconstitutional. The lawsuit does not seek
damages, but requests that the court order the State to create a new financing
system that sets minimum standards for buildings and furnishings that apply on
a statewide basis. The complaint alleges that some school districts have
sufficient funds to build outdoor swimming pools, while others have classrooms
that leak in the rain. It is unclear, at this time, what affect any judgment
would have on state finances or school district budgets.
The U.S. Department of Education recently determined
that Arizona's educational funding system did not meet federal requirements of
equity. This determination could mean a loss in federal funds of approximately
$50 million.
Certain other circumstances are relevant to the
market value, marketability and payment of any hospital and health care revenue
bonds in the Arizona Trust. The Arizona Legislature attempted unsuccessfully
in its 1984 regular and special sessions to enact legislation designed to
control health care
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costs, ultimately adopting three referenda measures placed
on the November 1984 general election ballot which in various ways would have
regulated hospital and health care facility expansions, rates and revenues. At
the same time, a coalition of Arizona employers proposed two initiatives voted
on in the November 1984 general election which would have created a State
agency with power to regulate hospital and health care facility expansions and
rates generally. All of these referenda and initiative propositions were
rejected by the voters in the November 1984 general election. Pre-existing
State certificate-of-need laws regulating hospital and health care facilities'
expansions and services have expired, and a temporary moratorium prohibiting
hospital bed Increases and new hospital construction projects and a temporary
freeze on hospital rates and charges at June 1984 levels has also expired.
Because of such expirations and increasing health care costs, it is expected
that the Arizona Legislature will at future sessions continue to attempt to
adopt legislation concerning these matters. The effect of any such legislation
or of the continued absence of any legislation restricting hospital bed
increases and limiting new hospital construction on the ability of Arizona
hospitals and other health care providers to pay debt service on their revenue
bonds cannot be determined at this time.
Arizona does not participate in the federally
administered Medicaid program. Instead, the state administers an alternative
program, AHCCCS, which provides health care to indigent persons meeting certain
financial eligibility requirements, through managed care programs. In fiscal
year 1992, AHCCCS will be financed approximately 52.7% by federal funds, 33.1%
by state funds, and 13.6% by county funds.
Under state law, hospitals retain the authority to
raise rates with notification and review by, but not approval from, the
Department of Health Services. Hospitals in Arizona have experienced
profitability problems along with those in other states. At least two Phoenix
based hospitals have defaulted on or reported difficulties in meeting their
bond obligations during the past three years.
Insofar as tax-exempt Arizona public utility
pollution control revenue bonds are concerned, the issuance of such bonds and
the periodic rate increases needed to cover operating costs and debt service
are subject to regulation by the Arizona Corporation Commission, the only
significant exception being the Salt River Project Agricultural Improvement and
Power District which, as a Federal instrumentality, is exempt from rate
regulation. On July 15, 1991, several creditors of Tucson Electric Power
Company ("Tucson Electric") filed involuntary petitions under Chapter 11 of the
U.S. Bankruptcy Code to force Tucson Power to reorganize under the supervision
of the bankruptcy court On December 31, 1991, the Bankruptcy Court
approved the utility's motion to dismiss the July petition after five months of
negotiations between Tucson Electric and its creditors to restructure the
utility's debts and other obligations. After the dismissal of the bankruptcy
petition, the Arizona Corporation Commission approved a permanent 15% rate
hike. The rate increase had been approved by the Commission on an interim
basis several months earlier, pending the dismissal or withdrawal of the
bankruptcy petitions. Tucson Electric serves approximately 270,000 customers,
primarily in the Tucson area. Inability of any regulated public utility to
secure necessary rate increases could adversely affect, to an indeterminable
extent, its ability to pay debt service on its pollution control revenue bonds.
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At the time of the closing for each Arizona Trust,
Special Counsel to the Fund for Arizona tax matters rendered an opinion under
then existing Arizona income tax law applicable to taxpayers whose income is
subject to Arizona income taxation substantially to the effect that:
(1) For Arizona income tax purposes, each Unitholder
will be treated as the owner of a pro rata portion of the Arizona Trust, and
the income of the Trust therefore will be treated as the income of the
Unitholder under State law;
(2) For Arizona income tax purposes, interest on the
Bonds which is excludable from Federal gross income and which is exempt from
Arizona income taxes when received by the Arizona Trust, and which would be
excludable from Federal gross income and exempt from Arizona income taxes if
received directly by a Unitholder, will retain its status as tax-exempt
interest when received by the Arizona Trust and distributed to the Unitholders;
(3) To the extent that interest derived from the
Arizona Trust by a Unitholder with respect to the Bonds is excludable from
Federal gross income, such interest will not be subject to Arizona income
taxes;
(4) Each Unitholder will receive taxable gain or loss
for Arizona income tax purposes when Bonds held in the Arizona Trust are sold,
exchanged, redeemed or paid at maturity, or when the Unitholder redeems or
sells Units, at a price that differs from original cost as adjusted for
amortization of Bond discount or premium and other basis adjustments, including
any basis reduction that may be required to reflect a Unitholder's share of
interest, if any, accruing on Bonds during the interval between the
Unitholder's settlement date and the date such Bonds are delivered to the
Arizona Trust, if later;
(5) Amounts paid by the Insurer under an insurance
policy or policies issued to the Trust, if any, with respect to the Bonds in
the Trust which represent maturing interest on defaulted obligations held by
the Trustee will be exempt from State income taxes if, and to the same extend
as, such interest would have been so exempt if paid by the issuer of the
defaulted obligations;
(6) Arizona law does not permit a deduction for
interest paid or incurred on indebtedness incurred or continued to purchase or
carry Units In the Arizona Trust, the interest on which is exempt from Arizona
Income taxes; and
(7) Neither the Bonds nor the Units will be subject
to Arizona property taxes, sales tax or use tax.
ARKANSAS TRUSTS. The Constitution of Arkansas
specifically prohibits the creation of any State general obligation debt unless
authorized in a Statewide general election. Although the State of Arkansas
defaulted on some of its general obligation debt during the depression in the
later 1930's, it has not failed to pay the principal and interest on any of its
general obligations when due since that time.
Act 496 of 1981, as amended, the "Arkansas Water
Resources Development Act of 1981" ("Act 496"), authorized the issuance of
State Water Resources Development General Obligation Bonds by the State of
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Arkansas, acting by and through the Arkansas Soil and Water Conservation
Commission. The issuance of bonds pursuant to Act 496 was approved by the
electors of the State at the general election on November 2, 1982. The total
principal amount of bonds issued during any fiscal biennium may not exceed
$15,000,000, and the total principal of all bonds issued under Act 496 may not
exceed $100,000,000. All Bonds to be issued under Act 496 shall be direct
general obligations of the State, the principal and interest of which are
payable from the general revenues of the State. Pursuant to Act 496, the State
of Arkansas has issued and outstanding two series of bonds in the aggregate
principal amount of $28,075,000 under Act 496.
Deficit spending has been prohibited by statute in
Arkansas since 1945. The Revenue Stabilization Law requires that before any
State spending can take place, there must be an appropriation by the General
Assembly and there must be funds available in the fund from which the
appropriation has been made. The State is prohibited from borrowing money to
put into any State fund from which appropriations can be paid.
Information regarding the financial condition of the
State is included for the purpose of providing information about general
economic conditions that may affect issuers of the Bonds in Arkansas. The
Arkansas economy represents approximately 2.0% of the total United States'
economy. Its small size causes the Arkansas economy to follow the national
economy. Fluctuations in the national economy are often mirrored by coinciding
or delayed fluctuations in the Arkansas economy.
Arkansas' economy is both agricultural and manufacturing
based. Only five states generate a larger proportion of earnings from
agriculture, and only 17 states generate a larger proportion of earnings from
manufacturing. Similarly, only 10 states have a larger proportion of
employment in agriculture and only 18 states have a larger proportion of
employment in manufacturing. Thus, the State of Arkansas feels the full force
of the business cycle and also sees the growth swing from positive to negative
as conditions in agriculture change.
Agriculture has had a depressant effect on the Arkansas
economy regardless of the phase the business cycle was in. In recent years,
agricultural employment in Arkansas has been on the decline. In both 1987 and
1988, agricultural employment declined by 1.6%. Agriculture employment also
declined in 1989 by 1.6% and should continue to decline according to State
forecasters as labor intensive production is shifted to less labor intensive
production.
Employment in Arkansas' construction industry decreased
2.3% in 1988. This followed a 5.6% decline in 1987. In 1989, State
forecasters anticipated a decline in growth rate of 2.5%. A further decline of
0.7% is expected in 1990.
During the past two decades, Arkansas' economic base has
shifted from agriculture to light
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manufacturing. In 1986, Arkansas ranked fifth in the United States
with a 2.1% growth of new manufacturing jobs. The diversification of economic
interests has lessened Arkansas' cyclical sensitivity to impact by any single
sector. During 1988, total employment increased by 3.4% and total
nonagricultural wage and salary employment increased by 2.8%. Total employment
growth in Arkansas exceeded the growth rate of total employment in the United
States. The average unemployment rate declined from 8.1% in 1987 to 7.7% in
1988. The increase in earnings along with the rise in employment generated a
6.9% increase in total personal income in 1988.
Counties and municipalities may issue general obligation
bonds (pledging an ad valorem tax), special obligation bonds (pledging other
specific tax revenues) and revenue bonds (pledging only specific revenues from
sources other than tax revenues). School districts may issue general
obligation bonds (pledging ad valorem taxes). Revenue bonds may also be issued
by agencies and instrumentalities of counties, municipalities and the State of
Arkansas but as in all cases of revenue bonds, neither the full faith and
credit nor the taxing power of the State of Arkansas or any municipality or
county thereof is pledged to the repayment of those bonds. Revenue bonds can
be issued only for public purposes, including, but not limited to, industry,
housing, health care facilities, airports, port facilities and water and sewer
projects.
At the time of the closing for each Arkansas Trust
Special Counsel to each Arkansas Trust for Arkansas tax matters rendered an
opinion under then existing Arkansas income tax law applicable to taxpayers
whose income is subject to Arkansas income taxation substantially to the effect
that:
The opinion of Chapman and Cutler, counsel for Van
Kampen Merritt Inc., concludes that each Trust, including the Arkansas Trust,
will be governed for Federal tax purposes by the provisions of Subchapter J of
Chapter 1 of the Code. Although there are no Arkansas income tax statutes
similar to Subchapter J of Chapter 1 of the Code, Arkansas statutory provisions
operate to reach the same result that is reached under the Federal system.
Arkansas law defines Arkansas gross income for residents similarly to the
definition of Federal gross income, and that definition of Arkansas gross
income specifically excludes interest on obligations of the State of Arkansas
or any political subdivision thereof.
Based upon the foregoing and, in reliance upon the
opinion of Chapman and Cutler, counsel to Van Kampen Merritt Inc., the Sponsor,
and upon an examination of such other documents and an Investigation of such
other matters of law as we have deemed necessary, it is our opinion that the
application of existing Arkansas income tax law to Arkansas Unitholders would
be as follows:
The Arkansas Trust is not taxable as a corporation or
otherwise for purposes of Arkansas income taxation;
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Each Arkansas Unitholder will be treated as the owner of
a pro rata portion of the Arkansas Trust for Arkansas income tax purposes, and
the income of the Arkansas Trust will therefore be treated as the income of the
Arkansas Unitholders under Arkansas law;
Interest on bonds, issued by the State of Arkansas, or
by or on behalf of political subdivisions, agencies or Instrumentalities
thereof, that would be exempt from Federal income taxation when paid directly
to an Arkansas Unitholder will be exempt from Arkansas income taxation when
received by the Arkansas Trust and attributed to such Arkansas Unitholder and
when distributed to such Arkansas Unitholder; and
Distribution of Income to Arkansas Unitholders
consisting of gains realized upon the sale or other disposition of obligations
held by the Arkansas Trust will be subject to Arkansas income taxation to the
extent that such income would be subject to Arkansas income taxation if the
obligations were held or sold or otherwise disposed of directly by the Arkansas
Unitholders.
CALIFORNIA TRUSTS. The Trust will invest substantially
all of its assets in California Municipal Obligations. The Trust is therefore
susceptible to political, economic or regulatory factors affecting issuers of
California Municipal Obligations. These include the possible adverse effects
of certain California constitutional amendments, legislative measures, voter
initiatives and other matters that are described below. The following
information provides only a brief summary of the complex factors affecting the
financial situation in California (the "State") and is derived from sources
that are generally available to investors and are believed to be accurate. No
Independent verification has been made of the accuracy or completeness of any
of the following information. It is based in part on information obtained from
various State and local agencies in California or contained in official
statements for various California Municipal Obligations.
There can be no assurance that future statewide or
regional economic difficulties, and the resulting impact on State or local
governmental finances generally, will not adversely affect the market value of
California Municipal Obligations held in the portfolio of the Fund or the
ability of particular obligors to make timely payments of debt service on (or
relating to) those obligations.
California's economy is the largest among the 50 states
and one of the largest in the world. The State's population of over 30 million
represents 12% of the total United States population and grew by 27% in the
1980s. Total personal income in the State, at an estimated $630 billion in
1991, accounts for 13% of all personal income in the nation. Total employment
is almost 14 million, the majority of which is in the service, trade and
manufacturing sectors.
Reports issued by the State Department of Finance and
the Commission on State Finance (the "COSF") indicate that the State's economy
is suffering its worst recession since the 1930s, with prospects for recovery
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slower than for the nation as a whole. The State has lost over 800,000 jobs
since the start of the recession and additional significant job losses are
expected before an upturn begins. The largest job losses have been in Southern
California, led by declines in the aerospace and construction industries.
Weaknesses statewide occurred in manufacturing, construction, services and
trade. Unemployment was 7.5% for 1991 (compared to 6.7% nationally), and is
expected to be higher than the national average in the near future. The
State's economy is only expected to pull out of the recession slowly once the
national recovery has begun. Delay In recovery will exacerbate shortfalls in
State revenues.
Certain California municipal obligations may be
obligations of issuers which rely in whole or in part, directly or indirectly,
on ad valorem property taxes as a source of revenue. The taxing powers of
California local governments and districts are limited by Article XIIIA of the
California Constitution, enacted by the voters in 1978 and commonly known as
"Proposition 13." Briefly, Article XIIIA limits to 1% of full cash value the
rate of ad valorem property taxes on real property and generally restricts the
reassessment of property to 2% per year, except upon new construction or change
of ownership (subject to a number of exemptions). Taxing entities may,
however, raise ad valorem taxes above the 1% limit to pay debt service on
voter-approved bonded indebtedness.
Under Article XIIIA, the basic 1% ad valorem tax levy is
applied against the assessed value of property as of the owner's date of
acquisition (or as of March 1, 1975, if acquired earlier), subject to certain
adjustments. This system has resulted in widely varying amounts of tax on
similarly situated properties. Several lawsuits have been flied challenging
the acquisition-based assessment system of Proposition 13 and on June 18, 1992
the U.S. Supreme Court announced a decision upholding Proposition 13.
Article XIIIA prohibits local governments from raising
revenues through ad valorem property taxes above the 1% limit; it also requires
voters of any governmental unit to give approval to levy any "special tax."
However, court decisions allowed non-voter approved levy of "general taxes"
which were not dedicated to a specific use. In response to these decisions,
the voters of the State in 1986 adopted an initiative statute which imposed
significant new limits on the ability of local entities to raise or levy
general taxes, except by receiving majority local voter approval. Significant
elements of this initiative, "Proposition 62", have been overturned in recent
court cases. An initiative proposed to reenact the provisions of Proposition
62 as a constitutional amendment was defeated by the voters in November 1990,
but such a proposal may be renewed in the future.
The State and its local governments are subject to an
annual "appropriations limit" imposed by Article XIIIB of the California
Constitution, enacted by the voters in 1979 and significantly amended by
Propositions 98 and 111 in 1988 and 1990, respectively. Article XIIIB
prohibits the State or any covered local government from spending
"appropriations subject to limitation" in excess of the appropriations limit
imposed. "Appropriations subject to limitation" are authorizations to
spend proceeds of taxes," which consists 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 cost of providing the product or
service, but "proceeds of
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taxes" excludes most State subventions to local governments. No limit is
imposed on appropriations of funds which are not "proceeds of taxes" excludes
most State subventions to local governments. No limit is imposed on
appropriations or funds which are not "proceeds of taxes," such as reasonable
user charges or fees, and certain other non-tax funds, including bond proceeds.
Among the expenditures not included in the Article XIIIB
appropriations limit are (1) the debt service cost of bonds issued or
authorized prior to January 1, 1979, or subsequently authorized by the voters,
(2) appropriations arising from certain emergencies declared by the Governor,
(3) appropriations for certain capital outlay projects, (4) appropriations by
the State of post-1989 increases in gasoline taxes and vehicle weight fees, and
(5) appropriations made in certain cases of emergency.
The appropriations limit for each year is adjusted
annually to reflect changes in cost of living and population, and any transfers
of service responsibilities between government units. The definitions for such
adjustments were liberalized in 1990 by Proposition 111 to more closely follow
growth in California's economy.
"Excess" revenues are measured over a two-year cycle.
Local governments must return any excess to taxpayers by rate reduction. The
State must refund 50% of any excess, with the other 50% paid to schools and
community colleges. With more liberal annual adjustment factors since 1988,
and depressed revenues since 1990 because of the recession, few governments are
currently operating near their spending limits, but this condition may change
over time. Local governments may by voter approval exceed their spending
limits for up to four years.
During fiscal year 1986-87, State receipts from proceeds
of taxes exceeded its appropriations limit by $1.1 billion, which was returned
to taxpayers. Appropriations subject to limitation were under the State limit
by $1.2 billion, $259 million, $1.6 million, $7.5 billion and $5.2 billion for
the five most recent fiscal years ending with 1991-92. State appropriations
are expected to be $5.1 billion under the limit for Fiscal Year 1992-93.
Because of the complex nature of Articles XIIIA and
XIIIB of the California Constitution (described briefly above), the ambiguities
and possible inconsistencies in their terms, and the impossibility of
predicting future appropriations or changes in population and cost of living,
and the probability of continuing legal challenges, it is not currently
possible to determine fully the impact of Article XIIIA or Article XIIIB on
California Municipal Obligations or on the ability of the State or local
governments to pay debt service on such California Municipal Obligations. It
is not presently possible to predict the outcome of any pending litigation with
respect to the ultimate scope, impact or constitutionality of either Article
XIIIA or Article XIIIB, or the impact of any such determinations upon State
agencies or local governments, or upon their ability to pay debt service on
their obligations. Future initiative or legislative changes in laws or the
California Constitution may also affect the ability of the State or local
issuers to repay their obligations.
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As of November 6, 1992, California had approximately
$16.7 billion of general obligation bonds outstanding, and $8.6 billion
remained authorized but unissued. In addition, at June 30, 1992, the State had
lease-purchase obligations, payable from the State's General Fund, of
approximately $2.9 billion. Of the State's outstanding general obligation
debt, approximately 28% is presently self liquidating (for which program
revenues are anticipated to be sufficient to reimburse the General Fund for
debt service payments). Three general obligation bond propositions, totalling
$3.7 billion were approved by voters in 1992. In fiscal year 1991-92, debt
service on general obligation bonds and lease-purchase debt was approximately
3.2% of General Fund revenues. The State has paid the principal of and
interest on its general obligation bonds, lease-purchase debt and short-term
obligations when due.
The principal sources of General Fund revenues are the
California personal income tax (45% of total revenues), the sales tax (35%),
bank and corporation taxes (12%), and the gross premium tax on insurance (3%).
The State maintains a Special Fund for Economic Uncertainties (the "Economic
Uncertainties Fund"), derived from General Fund revenues, as a reserve to meet
cash needs of the General Fund, but which is required to be replenished as soon
as sufficient revenues are available. Year-end balances in the Economic
Uncertainties Fund are included for financial reporting purposes in the General
Fund balance. In recent years, the State has budgeted to maintain the Economic
Uncertainties Fund at around 3% of General Fund expenditures but essentially no
reserve is budgeted in 1992-93.
Throughout the 1980s, State spending increased rapidly
as the State population and economy also grew rapidly, including increased
spending for many assistance programs to local governments, which were
constrained by Proposition 13 and other laws. The largest State program is
assistance to local public school districts. In 1988, an initiative
(Proposition 98) was enacted which (subject to suspension by a two-thirds vote
of the Legislature and the Governor) guarantees local school districts and
community college districts a minimum share of State General Fund revenues
(currently about 37%).
Since the start of 1990-91 Fiscal Year, the State has
faced adverse economic, fiscal and budget conditions. The economic recession
seriously affected State tax revenues. It 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
(education, 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 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, 1992, the State's General Fund had an accumulated deficit, on a budget
basis, of approximately $2.2 billion.
As the 1990-91 fiscal year ended in the midst of a
continuing recession and very weak revenues, the Governor estimated that a
"budget gap" of $14.3 billion would have to be resolved in order to reconcile
the excess of projected expenditures for existing programs, at currently
mandated growth rates, over expected
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<PAGE> 32
revenues, the need to repay the 1990-91 budget deficit, and the need to
restore a budget reserve. This budget gap was closed through a combination of
temporary and permanent changes in laws and one-time budget adjustments. The
major features of the budget compromise were program funding reductions
totalling $5.0 billion; a total of $5.1 billion of increased State revenues;
savings of $2.1 billion from transferring certain health and welfare programs
to counties to be funded by increased sales tax and vehicle license fees to be
given directly to counties; and additional miscellaneous savings and revenue
gains and one time accounting charges totalling $2.1 billion.
The 1991-92 Budget Act was based on economic forecasts
that recovery from the recession would begin in the summer or fall of 1991, but
as the severity of the recession increased, revenues lagged significantly and
continually behind projections from the start of the fiscal year. As a result,
revenues for the 1991-92 Fiscal Year were more than $4 billion lower than
originally projected and expenditures were higher than originally projected.
As a consequence of the large budget imbalances built up
over two consecutive years, the State used up all of its available cash
resources. In late June 1992, the State was required to issue $475 million of
short-term revenue anticipation warrants to cover obligations coming due on
June 30 and July 1. These warrants were repaid on July 24, 1992.
At the outset of the 1992-93 Fiscal Year, the State
estimated that approximately $7.9 billion of budget actions would be required
to end the 1992-93 Fiscal Year. With the failure to enact a budget by July 1,
1992, the State had no legal authority to pay many of its vendors until the
budget was passed; nevertheless, certain obligations (such as debt service,
school apportionments, welfare payments and employee salaries) were payable
because of continuing or special appropriations or court orders. However, the
State Controller did not have enough cash to pay all of these ongoing
obligations as they came due, as well as valid obligations incurred in the
prior fiscal year.
Starting on July 1, 1992, the Controller was required to
issue "registered warrants" in lieu of normal warrants backed by cash to pay
many State obligations. Available cash was used to pay constitutionally
mandated and priority obligations. Between July 1 and September 3, 1992, the
Controller issued an aggregate of approximately $3.8 billion of registered
warrants, all of which were called for redemption by September 4, 1992
following enactment of the 1992-93 Budget Act and issuance by the State of $3.3
billion of Interim Notes.
The Legislature enacted the 1992-93 Budget Bill on
August 29, 1992, and it was signed by the Governor on September 2, 1992. The
1992-93 Budget Act provides for expenditures of $57.4 billion and consists of
General Fund expenditures of $40.8 billion and Special Fund and Bond Fund
expenditures of $16.6 billion. The Department of Finance estimated there would
be a balance In the Special Fund for Economic Uncertainties of $28 million on
June 30, 1993.
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The $7.9 billion budget gap was closed through a combination of
increased revenues and transfers and expenditure cuts. The principle
reductions were in health and welfare, K-12 schools and community colleges,
State aid to local governments, higher education (partially offset by increased
student fees) and various other programs. In addition, funds were transferred
from special funds, collections of State revenues were accelerated, and other
adjustments were made.
The 1992-93 Budget was prepared and the estimate that it will be in
balance (with a reserve of $28 million at June 30, 1993) was based upon
economic assumptions made by the Department of Finance in May, 1992, which
projected, among other things, gradual recovery beginning in the latter part of
1992. In October the COSF reported that conditions were worse than the May
forecast, with a stagnant economy now predicted for up to another two years.
The COSF predicted that, if no corrective actions were taken, the 1992-93
Fiscal Year budget could be approximately $2.4 billion out of balance.
The State's severe financial difficulties for the current and upcoming
budget years will result in continued pressure upon various local governments,
particularly school districts and counties which depend on State aid. Despite
efforts in recent years to increase taxes and reduce governmental expenditures,
there can be no assurance that the State will not face budget gaps in the
future.
State general obligation bonds are currently rated "Aa" by Moody's and
"A+" by S&F. Both of these ratings were recently reduced from "AAA" levels
which the State held until late 1991. There can be no assurance that such
ratings will be maintained in the future. It should be noted that the
creditworthiness of obligations issued by local California issuers may be
unrelated to the creditworthiness of obligations issued by the State of
California, and that there is no obligation on the part of the State to make
payment on such local obligations in the event of default.
The State is involved in certain legal proceedings (described in the
State's recent financial statements) that, if decided against the State, may
require the State to make significant future expenditures or may substantially
impair revenues.
Property tax revenues received by local governments declined more than
50% following passage of Proposition 13. Subsequently, the California
Legislature enacted measures to provide for the redistribution of the State's
General Fund surplus to local agencies, the reallocation of certain State
revenues to local agencies and the assumption of certain governmental functions
by the State to assist municipal issuers to raise revenues. Total local
assistance from the State's General Fund totaled approximately $33 billion in
fiscal year 1991-92 (about 75% of General Fund expenditures) and has been
budgeted at $31.1 billion for fiscal year 1992-93, including the effect of
implementing reductions in certain aid programs. To the extent the State
should be constrained by its Article XIIIB appropriations limit, or its
obligation to conform to Proposition 98, or other fiscal considerations, the
absolute level, or the rate of growth, of State assistance to local governments
may be reduced. Any such reductions in State aid could compound the serious
fiscal constraints already experienced by many local governments, particularly
counties. At least one rural county (Butte)
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publicly announced that it might enter bankruptcy proceedings in August
1990, although such plans were apparently put off after the Governor approved
legislation to provide additional funds for the county. Other counties have
also indicated that their budgetary condition is extremely grave. The Richmond
United School District (Contra Costa County) entered bankruptcy proceedings in
May 1991, but the proceedings have been dismissed.
California Municipal Obligations which are assessment bonds or
Mello-Roos bonds may be adversely affected by a general decline in real estate
values or a slowdown in real estate sales activity. In many cases, such bonds
are secured by land which is undeveloped at the time of issuance but
anticipated to be developed within a few years after issuance. In the event of
such reduction or slowdown, such development may not occur or may be delayed,
thereby increasing the risk of a default on the bonds. Because the special
assessments or taxes securing these bonds are not the personal liability of the
owners of the property assessed, the lien on the property is the only security
for the bonds. Moreover, in most cases the issuer of these bonds is not
required to make payments on the bonds in the event of delinquency in the
payment of assessments or taxes, except from amounts, if any, in a reserve fund
established for the bonds.
Certain California long-term lease obligations, though typically
payable from the general fund of the municipality, are subject to "abatement"
in the event the facility being leased is unavailable for beneficial use and
occupancy by the municipality during the term of the lease. Abatement is not a
default, and there may be no remedies available to the holders of the
certificates evidencing the lease obligation in the event abatement occurs.
The most common causes of abatement are failure to complete construction of the
facility before the end of the period during which lease payments have been
capitalized and uninsured casualty losses to the facility (e.g., due to
earthquake). In the event abatement occurs with respect to a lease obligation,
lease payments may be interrupted (if all available insurance proceeds and
reserves are exhausted) and the certificates may not be paid when due.
Several years ago the Richmond United School District (the "District")
entered into a lease transaction in which certain existing properties of the
District were sold and leased back in order to obtain funds to cover operating
deficits. Following a fiscal crisis in which the District's finances were
taken over by a State receiver (including a brief period under bankruptcy court
protection), the District failed to make rental payments on this lease,
resulting in a lawsuit by the Trustee for the Certificate of Participation
holders, in which the State was a named defendant (on the grounds that it
controlled the District's finances). One of the defenses raised in answer to
this lawsuit was the invalidity of the original lease transaction. The case is
still in very preliminary stages, and it is not known how it will be resolved.
If the case goes to trial, a judgment against the Trustee may have adverse
implications for lease transactions of a similar nature by other California
entities.
The repayment of industrial Development Securities secured by real
property may be affected by California laws limiting foreclosure rights of
creditors. Health Care and Hospital Securities may be affected
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by changes in State regulations governing cost reimbursements to
health care providers under Medi-Cal (the State's Medicaid program), including
risks related to the policy of awarding exclusive contracts to certain
hospitals.
Limitations on ad valorem property taxes may particularly affect "tax
allocation" bonds issued by California redevelopment agencies. Such bonds are
secured solely by the increase in assessed valuation of a redevelopment project
area after the start of redevelopment activity. In the event that assessed
values in the redevelopment project decline (for example, because of a major
natural disaster such as an earthquake), the tax increment revenue may be
insufficient to make principal and interest payments on these bonds. Both
Moody's and S&P suspended ratings on California tax allocation bonds after the
enactment of Article XIIIA and Article XIIIB, and only resumed such ratings on
a selective basis.
Proposition 87, approved by California voters in 1988, requires that
all revenues produced by a tax rate increase go directly to the taxing entity
which increased such tax rate to repay that entity's general obligation
indebtedness. As a result, redevelopment agencies (which, typically, are the
Issuers of Tax Allocation Securities) no longer receive an increase in tax
increment when taxes on property in the project area are increased to repay
voter-approved bonded indebtedness.
The effect of these various constitutional and statutory changes upon
the ability of California municipal securities issuers to pay interest and
principal on their obligations remains unclear. Furthermore, other measures
affecting the taxing or spending authority of California or its political
subdivisions may be approved or enacted in the future. Legislation has been or
may be introduced which would modify existing taxes or other revenue-raising
measures or which either would further limit or, alternatively, would increase
the abilities of state and local governments to impose new taxes or increase
existing taxes. It is not presently possible to determine the impact of any
such legislation on California Municipal Obligations in which the Fund may
invest future allocations of state revenues to local governments or the
abilities of state or local governments to pay the interest on, or repay the
principal of, such California Municipal Obligations.
Substantially all of California is within an active geologic region
subject to major seismic activity. Any California Municipal Obligation in the
Portfolio could be affected by an interruption of revenues because of damaged
facilities, or, consequently, income tax deductions for casualty losses or
property tax assessment reductions. Compensatory financial assistance could be
constrained by the inability of (i) an issuer to have obtained earthquake
insurance coverage at reasonable rates; (ii) an insurer to perform on its
contracts of insurance in the event of widespread losses; or (iii) the Federal
or State government to appropriate sufficient funds within their respective
budget limitations.
At the time of the closing for each California Trust, Special Counsel
to each California Trust for California tax matters, rendered an opinion under
then existing California income tax law applicable to taxpayers whose income is
subject to California income taxation substantially to the effect that:
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(1) The California Trust is not an association taxable
as a corporation and the income of the California Trust will be treated as the
income of the Unitholders under the Income tax laws of California;
(2) amounts treated as interest on the underlying
Securities in the California Trust which are exempt from tax under California
personal income tax and property tax laws when received by the California Trust
will, under such laws, retain their status as tax-exempt interest when
distributed to Unitholders. However, interest on the underlying Securities
attributed to a Unitholder which is a corporation subject to the California
franchise tax laws may be includable in its gross income for purposes of
determining its California franchise tax. Further, certain interest which is
attributable to a Unitholder subject to the California personal income tax and
which is treated as an item of tax preference for purposes of the federal
alternative minimum tax pursuant to Section 57(a)(5) of the Internal Revenue
Code of 1986 may also be treated as an Item of tax preference that must be
taken into account in computing such Unitholder's alternative minimum taxable
income for purposes of the California alternative minimum tax enacted by 1987
California Statutes, chapter 1138. However, because of the provisions of the
California Constitution exempting the interest on bonds issued by the State
of California, or by local governments within the state, from taxes levied on
income, the application of the new California alternative minimum tax to
Interest otherwise exempt from the California personal income tax in some
cases may be unclear;
(3) under California income tax law, each Unitholder in
the California Trust will have a taxable event when the California Trust
disposes of a Security (whether by sale, exchange, redemption, or payment at
maturity) or when the Unitholder redeems or sells Units. Because of the
requirement that tax cost basis be reduced to reflect amortization of bond
premium, under some circumstances a Unitholder may realize taxable gains when
Units are sold or redeemed for an amount equal to, or less than, their original
cost. The total cost of each Unit in the California Trust to a Unitholder is
allocated among each of the Bond issues held in the California Trust (in
accordance with the proportion of the California Trust comprised by each Bond
issue) in order to determine his 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. Unitholders'
bases in their Units, and the bases for their fractional interest in each Trust
asset, may have to be adjusted for their pro rata share of accrued interest
received, if any, on Securities delivered after the Unitholders' respective
settlement dates;
(4) under the California personal property tax laws,
bonds (including the Securities in the California Trust) or any interest
therein is exempt from such tax;
(5) any proceeds paid under the insurance policy issued
to the California Trust with respect to the Securities which represent maturing
interest on defaulted obligations held by the Trustee will be exempt from
California personal income tax if, and to the same extent as, such interest
would have been so exempt if paid by the issuer of the defaulted obligations;
and
(6) under Section 17280(b)(2) of the California Revenue
and Taxation Code, interest on indebtedness incurred or continued to purchase
or carry Units of the California Trust is not deductible for the purposes of
the California personal income tax. While there presently is no California
authority interpreting this provision, Section 17280(b)(2) directs the
California Franchise Tax Board to prescribe regulations determining the proper
allocation and apportionment of Interest costs for this purpose. The Franchise
Tax Board has not
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yet proposed or prescribed such regulations. In interpreting
the generally similar Federal provision, the Internal Revenue Service has taken
the position that such indebtedness need not be directly traceable to the
purchase or carrying of Units (although the Service has not contended that a
deduction for interest on indebtedness incurred to purchase or improve a
personal residence or to purchase goods or services for personal consumption
will be disallowed). In the absence of conflicting regulations or other
California authority, the California Franchise Tax Board generally has
interpreted California statutory tax provisions in accord with Internal Revenue
Service interpretations of similar Federal provisions.
At the respective times of issuance of the Securities,
opinions relating to the validity thereof and to the exemption of interest
thereon from Federal income tax and California personal income tax are rendered
by bond counsel to the respective issuing authorities. Except in certain
instances in which Special Counsel acted as bond counsel to issuers of
Securities, and as such made a review of proceedings relating to the issuance
of certain Securities at the time of their issuance, Special Counsel has not
made any special review for the California Trusts of the proceedings relating
to the issuance of the Securities or of the basis for such opinions.
COLORADO TRUSTS. The State Constitution requires that
expenditures for any fiscal year not exceed revenues for such fiscal year. By
statute, the amount of General Fund revenues available for appropriation is
based upon revenue estimates which, together with other available resources,
must exceed annual appropriations by the amount of the unappropriated reserve
(the "Unappropriated Reserve"). The Unappropriated Reserve has varied in
recent fiscal years, having been set by 5% for fiscal year 1986 and fiscal year
1987, 6% for fiscal year 1988 and 4% thereafter. However, the State reduced
the Unappropriated Reserve requirement for fiscal year 1991 and fiscal year
1992 to 3% to enable it to respond to prison overcrowding. For fiscal year
1992 and thereafter, General Fund appropriations are also limited to an amount
equal to the cost of performing certain required reappraisals of taxable
property plus an amount equal to the lesser of (i) five percent of Colorado
personal income or (ii) 106% of the total General Fund appropriations for the
previous fiscal year. This restriction does not apply to any General Fund
appropriations which are required as a result of a new federal law, a final
state or federal court order or moneys derived from the increase in the rate or
amount of any tax or fee approved by a majority of the registered electors of
the State voting at any general election. In addition, the limit on the level
of General Fund appropriations may be exceeded for a given fiscal year upon the
declaration of a State fiscal emergency by the State General Assembly.
Based on the State's December 1991 estimates, the 1991
fiscal year end fund balance was $16.3 million, and the State estimates a
balance of approximately $56 million at the end of the 1992 fiscal year. For
both years, such fund balances are less than the 3% Unappropriated Reserve
requirement. See "State Finances" below.
There is a statutory restriction on the amount of annual
increases in taxes that the various taxing jurisdictions in Colorado can levy
without electoral approval. This restriction does not apply to taxes levied to
pay general obligation debt. Periodic attempts have been made to limit further
the amount of annual
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increases in taxes that can be levied without voter approval.
Initiated amendments to the State constitution affecting local government
financing were defeated at the general elections in 1986, 1988 and 1990.
Legislation is introduced in the Colorado General Assembly from time to time
providing, in part, for similar limitations. Such initiated or legislative
proposals have contained provisions limiting increases in taxes as well as
rates and charges and imposing spending limits on various levels of government.
Although no such proposal has been enacted to date at the State level, it is
possible that if such a proposal were enacted, there would be an adverse impact
on State or local government financing. It is not possible to predict whether
any such proposals will be enacted in the future or, if enacted, their possible
impact on State or local government financing.
On January 27, 1992, the Colorado Secretary of State
certified initiated petitions proposing a constitutional amendment (the
"Amendment") for inclusion on the ballot at the general election to be held on
November 3, 1992. If adopted by the voters, the Amendment would, in general,
be effective December 31, 1992, and could severely restrict the ability of the
State and local governments to increase revenues and impose taxes. The
Amendment would apply to the State and all local governments, including home
rule entities ("Districts"). Enterprises, defend as government-owned
businesses authorized to issue revenue bonds and receiving under 10% of annual
revenue in grants from all Colorado state and local governments combined, are
excluded from the provisions of the Amendment.
The provisions of the Amendment are unclear and would
probably require judicial interpretation if adopted. Among other provisions,
beginning November 4, 1992, the Amendment would require voter approval prior to
tax increases, creation of debt, or mill levy or valuation for assessment ratio
increases. The Amendment would also limit increases in government spending and
property tax revenues to specified percentages. The Amendment would require
that District property tax revenues yield no more than the prior year's
revenues adjusted for inflation, voter approved changes and (except with regard
to school districts) changes in assessment rolls. School districts would be
allowed to adjust tax levies for changes in student enrollment. Pursuant to
the Amendment, local government spending would be limited by the same formula,
and State spending would be limited by inflation plus the percentage change in
State population in the prior calendar year. The bases for future spending and
revenue limits are 1992 fiscal year spending and 1991 property taxes collected
in 1992. Debt service changes, reductions and voter-approved revenue changes
are excluded from the calculation bases. The Amendment would also prohibit new
or increased real property transfer tax rates, new State real property taxes
and local District income taxes.
As the State experienced revenue shortfalls in the
mid-1980s, it adopted various measures, including impoundment of funds by the
Governor, reduction of appropriations by the General Assembly, a temporary
increase in the sales tax, deferral of certain tax reductions and inter-fund
borrowings. On a GAAP basis, the State had unrestricted General Fund balances
at June 30 of approximately $4.4 million in fiscal year 1986, $45.1 million in
fiscal year 1987, $100.3 million in fiscal year 1988, $134.8 million in fiscal
year 1989 and $35.1 million in fiscal year 1990; for fiscal year 1991, the
State had a zero balance for unrestricted funds in the General Fund.
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The adopted budget for fiscal year 1993 projects General
Fund revenues of $3.1 billion and appropriated $3.0 billion. Based upon the
estimated fiscal year 1992 carryover surplus, the State has projected a $135.6
million year end balance for fiscal year 1993. This amount is greater than the
required 3.0% reserve of $88.6 million. The principal General Fund revenue
sources are the individual income tax (53.8% of total estimated 1992 fiscal
year receipts), excise taxes (33.8%) and the corporate income tax (4.2%).
The State Constitution prohibits the State from
incurring debt except for limited purposes, for limited periods of time and in
inconsequential amounts. The State courts have defined debt to mean any
obligation of the State requiring payment out of future years' general
revenues. As a consequence, the State has no outstanding general obligation
debt.
The State's economy is reliant upon several significant
factors such as mining, tourism, agriculture, construction, manufacture of high
technology products and durable goods and trade. Activities related to
tourism have grown during the past several years, while sectors of the economy
related to mining and construction have contracted. Employment in
manufacturing, transportation, retail trade, services, government and finance,
insurance and real estate have shown modest gains from 1986 through 1990.
Construction of the new international airport in Denver is expected to have a
positive effect on the State's economy.
The growth of the State economy has historically
exceeded that of the national economy. Statewide, real personal income
increased 1.6% between 1989 and 1990. According to the most current
information available from the Colorado Department of Revenue, retail trade
sales increased 6.4% from approximately $42.6 billion to $45.4 billion from
1989 to 1990. For the first nine months of 1991, retail trade sales totaled
$35.7 billion, an increase of 7.8% over sales during the same time period in
1990. Figures supplied by the Colorado Division of Employment and Training
indicate that for the years 1986 through 1989 the State's unemployment rate
exceeded the national rate; however, this trend was reversed for 1990 and 1991.
In 1991, the State's annual average unemployment rate was 5.0% (compared to a
national unemployment rate of 5.5%). The seasonally adjusted unemployment rate
for April 1992 for the State was 5.6% as compared to 7.1% for the United
States.
Economic conditions in the State may have continuing
effects on other governmental units within the State (including issuers of the
Bonds in the Colorado Trust), which, to varying degrees, have also experienced
reduced revenues as a result of recessionary conditions and other factors. At
the time of the closing for each Colorado Trust, Special Counsel to the Fund
for Colorado tax matters rendered an opinion under then existing Colorado
income tax law applicable to taxpayers whose income is subject to Colorado
income taxation substantially to the effect that:
Because Colorado income tax law is based upon the
Federal law, the Colorado Trust is not an association taxable as a corporation
for purposes of Colorado income taxation.
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With respect to Colorado Unitholders, in view of the relationship between
Federal and Colorado tax computations described above:
(1) Each Colorado Unitholder will be treated as owning
a pro rata share of each asset of the Colorado Trust for Colorado income tax
purposes in the proportion that the number of Units of such Trust held by the
Unitholder bears to the total number of outstanding Units of the Colorado
Trust, and the income of the Colorado Trust will therefore be treated as the
income of each Colorado Unitholder under Colorado law in the proportion
described;
(2) interest on Bonds that would not be includable in
Colorado adjusted gross income when paid directly to a Colorado Unitholder will
be exempt from Colorado income taxation when received by the Colorado Trust and
attributed to such Colorado Unitholder and when distributed to such Colorado
Unitholder;
(3) any proceeds paid under an insurance policy or
policies issued to the Colorado Trust with respect to the Bonds in the Colorado
Trust which represent maturing interest on defaulted obligations held by the
Trustee will be excludable from Colorado adjusted gross income if, and to the
same extent as, such interest would have been so excludable if paid by the
issuer of the defaulted obligations;
(4) any proceeds paid under individual policies
obtained by issuers of Bonds in the Colorado Trust which represent maturing
interest on defaulted obligations held by the Trustee will be excludable from
Colorado adjusted gross income if, and to the same extent as, such interest
would have been so excludable if paid in the normal course by the issuer of the
defaulted obligations;
(5) each Colorado Unitholder will realize taxable gain
or loss when the Colorado Trust disposes of a Bond (whether by sale, exchange,
redemption, or payment at maturity) or when the Colorado Unitholder redeems or
sells Units at a price that differs from original cost as adjusted for
amortization of bond discount or premium and other basis adjustments (including
any basis reduction that may be required to reflect a Colorado Unitholder's
share of interest, if any, accruing on Bonds during the interval between the
Colorado Unitholder's settlement date and the date such Bonds are delivered to
the Colorado Trust, if later);
(6) tax cost reduction requirements relating to
amortization of bond premium may, under some circumstances, result in Colorado
Unitholders realizing taxable gain when their Units are sold or redeemed for an
amount equal to or less than their original cost; and
(7) if interest on indebtedness incurred or continued
by a Colorado Unitholder to purchase Units in the Colorado Trust is not
deductible for Federal income tax purposes, it also will be nondeductible for
Colorado income tax purposes.
Unitholders should be aware that all tax-exempt
interest, including their share of interest on the Bonds paid to the Colorado
Trust, is taken into account for purposes of determining eligibility for the
Colorado Property Tax/Rent/Heat Rebate.
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KANSAS TRUSTS. At the time of the closing for each
Kansas Trust, Special Counsel to each Kansas Trust for Kansas tax matters,
rendered an opinion under then existing Kansas income tax law applicable to
taxpayers whose income is subject to Kansas income taxation substantially to
the effect that:
The Trust is not an association taxable as a corporation for Kansas
income tax purposes;
Each Unitholder of the Trust will be treated as the
owner of a pro rata portion of the Trust, and the income and deductions of the
Trust will therefore be treated as income of the Unitholder under Kansas law;
Interest on Bonds issued after December 31, 1987 by the
State of Kansas or any of its political subdivisions will be exempt from income
taxation imposed on individuals, corporations and fiduciaries (other than
insurance companies, banks, trust companies or savings and loan associations)
however, interest on Bonds issued prior to January 1, 1988 by the State of
Kansas or any of its political subdivisions will not be exempt from income
taxation imposed on individuals, corporations and fiduciaries (other than
insurance companies, banks, trust companies or savings and loan associations)
unless the laws of the State of Kansas authorizing the issuance of such Bonds
specifically exempt the interest on the Bonds from income taxation by the State
of Kansas;
Interest on Bonds issued by the State of Kansas or any
of its political subdivisions will be subject to the tax imposed on banks,
trust companies and savings and loan associations under Article 11. Chapter 79
of the Kansas statutes;
Interest on Bonds issued by the State of Kansas or any
of its political subdivisions will be subject to the tax imposed on insurance
companies under Article 40, Chapter 28 of the Kansas statutes unless the laws
of the State of Kansas authorizing the issuance of such Bonds specifically
exempt the interest on the Bonds from income taxation by the State of Kansas;
interest on the Bonds which is exempt from Kansas income taxation when received
by the Trust will continue to be exempt when distributed to a Unitholder (other
than a bank, trust company or savings and loan association);
Each Unitholder of the Trust will recognize gain or loss
for Kansas income tax purposes if the Trustee disposes of a Bond (whether by
sale, exchange, payment on maturity, retirement or otherwise) or if the
Unitholder redeems or sells Units of the Trust to the extent that such
transaction results in a recognized gain or loss for federal income tax
purposes;
Interest received by the Trust on the Bonds is exempt
from intangibles taxation imposed by any counties, cities and townships
pursuant to present Kansas law; and
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No opinion is expressed regarding whether the gross
earnings derived from the Units is subject to intangibles taxation imposed by
any counties, cities and townships pursuant to present Kansas law.
KENTUCKY TRUSTS. The Commonwealth of Kentucky leads the
nation in total tonnage of coal produced and ranks among the top 10 states in
the value of all minerals produced. Tobacco is the dominant agricultural crop
and Kentucky ranks second among the states in the total cash value of tobacco
raised. The manufacturing mix in the state reflects a significant
diversification. In addition to the traditional concentration of tobacco
processing plants and bourbon distilleries, there is considerable durable goods
production, such as automobiles, heavy machinery, consumer appliances and
office equipment. The State's parks system and the horse breeding and racing
industry, symbolized by the Kentucky Derby, play an important role in an
expanding tourist business in the state.
Current economic problems, including particularly the
continuing high unemployment rate, have had varying effects on the differing
geographic areas of the State and the political subdivisions located within
such geographic areas. Although revenue obligations of the State or its
political subdivisions may be payable from a specific source or project, there
can be no assurance that further economic difficulties and the resulting impact
on State and local governmental finances will not adversely affect the market
value of the Bonds in a Kentucky Trust or the ability of the respective
obligors to pay debt service of such Bonds.
At the time of the closing for each Kentucky Trust,
Special Counsel to each Kentucky Trust for Kentucky tax matters rendered an
opinion under then existing Kentucky income tax law applicable to taxpayers
whose income is subject to Kentucky income taxation substantially to the effect
that:
Because Kentucky income tax law is based upon the
Federal law and in explicit reliance upon the opinion of Chapman and Cutler
referred to above, and in further reliance on the determination letter to us of
the Revenue Cabinet of Kentucky dated May 10, 1984, it is our opinion that the
application of existing Kentucky income tax law would be as follows:
Each Kentucky Unitholder will be treated as the owner of
a pro rata portion of the Kentucky Trust for Kentucky income tax purposes, and
the income of the Kentucky Trust will therefore be treated as the income of the
Kentucky Unitholders under Kentucky law;
Interest on Bonds that would be exempt from Federal
income taxation when paid directly to a Kentucky Unitholder will be exempt from
Kentucky income taxation when: (i) received by the Kentucky Trust and
attributed to such Kentucky Unitholder; and (ii) when distributed to such
Kentucky Unitholder;
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Each Kentucky Unitholder will realize taxable gain or
loss when the Kentucky Trust disposes of a Bond (whether by sale, exchange,
redemption or payment of maturity) or when the Kentucky Unitholder redeems or
sells Units at a price that differs from original cost as adjusted for
amortization or accrual, as appropriate, of bond discount or premium and other
basis adjustments (including any basis reduction that may be required to
reflect a Kentucky Unitholder's share of interest, if any, accruing on Bonds
during the interval between the Kentucky Unitholder's settlement date and the
date such Bonds are delivered to the Kentucky Trust, if later);
Tax cost reduction requirements relating to amortization
of bond premium may, under some circumstances, result in Kentucky Unitholders
realizing taxable gain when their Units are sold or redeemed for an amount
equal to or less than their original cost;
Units of the Kentucky Trust, to the extent the same
represent an ownership in obligations issued by or on behalf of the
Commonwealth of Kentucky or governmental units of the Commonwealth of Kentucky,
the interest on which is exempt from Federal and Kentucky income taxation will
not be subject to ad valorem taxation by the Commonwealth of Kentucky or any
political subdivision thereof, and
If interest on indebtedness incurred or continued by a
Kentucky Unitholder to purchase Units in the Kentucky Trust is not deductible
for Federal income tax purposes, it also will be nondeductible for Kentucky
income tax purposes.
MICHIGAN TRUSTS. Investors should be aware that the
economy of the State of Michigan has, in the past, proven to be cyclical, due
primarily to the fact that the leading sector of the State's economy is the
manufacturing of durable goods. While the State's efforts to diversify its
economy have proven successful, as reflected by the fact that the share of
employment in the State in the durable goods sector has fallen from 33.1
percent in 1960 to 17.9 percent in 1990, durable goods manufacturing still
represents a sizable portion of the State's economy. As a result, any
substantial national economic downturn is likely to have an adverse effect on
the economy of the State and on the revenues of the State and some of its local
governmental units.
In May 1986, Moody's Investors Service raised the
State's general obligation bond rating to "A1." In October 1989, Standard &
Poor's Corporation raised its rating on the State's general obligation bonds to
"AA".
The State's economy could continue to be affected by
changes in the auto industry, notably consolidation and plant closings
resulting from competitive pressures and over-capacity. Such actions could
adversely affect State revenues and the financial impact on the local units of
government in the areas in which plants are closed could be more severe.
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General Motors Corporation has announced the scheduled
closing of several of its plants in Michigan in 1993 and 1994. The impact
these closures will have on the State's revenues and expenditures is not
currently known. The impact on the financial condition of the municipalities
in which the plants are located may be more severe than the impact on the State
itself.
In recent years, the State has reported its financial
results in accordance with generally accepted accounting principles. For each
of the five fiscal years ending with the fiscal year ended September 30, 1989,
the State reported positive year-end General Fund balances and positive cash
balances in the combined General Fund/School Aid Fund. For the fiscal years
ending September 30, 1990 and 1991, the State reported negative year-end General
Fund Balances of $310.4 million and $169.4 million, respectively. A positive
cash balance in the combined General Fund/School Aid Fund was recorded at
September 30, 1990. Since 1991 the State has experienced deteriorating cash
balances which have necessitated short term borrowing and the deferral of
certain scheduled cash payments. The State borrowed $700 million for cash flow
purposes in the 1992 fiscal year. The State has a Budget Stabilization Fund
which, after a transfer of $230 million to the General Fund for the 1991 State
fiscal year, had an accrued balance of $182 million as of September 30, 1991.
In the 1991-92 State fiscal year, mid-year actions were
taken to avoid a State general fund budget deficit, including expenditure
reductions, deferrals of scheduled payment dates of various types of State aid
into the 1992-93 state fiscal year, a $150 million transfer from the State's
Budget Stabilization Fund, and accounting and retirement funding changes.
While current estimates indicate the State may have ended the 1991-92 fiscal
year with a general fund deficit in the range of $50 million to $100 million,
the State has not yet produced its year-end financial reports and the actual
results are not known.
While the 1992-93 State budget has been adopted, current
projections indicate a deficit may occur without additional actions being
taken, and ongoing reviews of spending patterns will be conducted in
departments (such as Corrections, Social Services and Military Affairs) that
have been identified as possibly underfunded. If later estimates match the
initial assessments, additional actions will be required to be taken to address
any projected negative balance in the 1992-93 fiscal year.
The Michigan Constitution of 1963 limits the amount of
total revenues of the State raised from taxes and certain other sources to a
level for each fiscal year equal to a percentage of the State's personal income
for the prior calendar year. In the event that the State's total revenues
exceeds the limit by 1 percent or more, the Michigan Constitution of 1963
requires that the excess be refunded to taxpayers.
In April 1991, the State enacted legislation which
temporarily froze assessed values on existing real property in 1992 by
requiring that the assessment as equalized for the 1991 tax year be used on the
1992 assessment roll and be adjusted only to reflect additions, losses, splits
and combinations. Additional property tax relief measures have been proposed,
some of which could adversely affect either the amount or timing
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of the receipt of property tax revenue by local units of government.
Although all or most of the Bonds in each Michigan Trust
are revenue obligations or general obligations of local governments or
authorities rather than general obligations of the State of Michigan itself,
there can be no assurance that any financial difficulties the State may
experience will not adversely affect the market value or marketability of the
Bonds or the ability of the respective obligors to pay interest on or principal
of the Bonds, particularly in view of the dependency of local governments and
other authorities upon State aid and reimbursement programs and, in the case of
bonds issued by the State Building Authority, the dependency of the State
Building Authority on the receipt of rental payments from the State to meet
debt service requirements upon such bonds. In the 1991 fiscal year, the State
deferred certain scheduled cash payments to municipalities, school districts,
universities and community colleges. While such deferrals were made up at
specified later dates, similar future deferrals could have an adverse impact on
the cash position of some local governmental units. Additionally, the State
reduced revenue sharing payments to municipalities below that level provided
under formulas by $10.9 million in the 1991 fiscal year and $34.4 million in
the 1992 fiscal year.
The Michigan Trust may contain general obligation bonds
of local units of government pledging the full faith and credit of the local
unit which are payable from the levy of ad valorem taxes on taxable property
within the jurisdiction of the local unit. Such bonds issued prior to December
22, 1978, or issued after December 22, 1978 with the approval of the electors
of the local unit, are payable from property taxes levied without limitation as
to rate or amount. With respect to bonds issued after December 22, 1978, and
which were not approved by the electors of the local unit, the tax levy of the
local unit for debt service purposes is subject to constitutional, statutory
and charter tax rate limitations. In addition, several major industrial
corporations have instituted challenges of their ad valorem property tax
assessments in a number of local municipal units in the State. If successful,
such challenges could have an adverse impact on the ad valorem tax bases of
such units which could adversely affect their ability to raise funds for
operating and debt service requirements.
At the time of the closing for each Michigan Trust,
Special Counsel to each Michigan Trust for Michigan tax matters rendered an
opinion under then existing Michigan income tax law applicable to taxpayers
whose income is subject to Michigan income taxation substantially to the effect
that:
(1) A Michigan Trust and the owners of Units will be
treated for purposes of the Michigan income tax laws and the Single Business
Tax in substantially the same manner as they are for purposes of the Federal
income tax laws, as currently enacted. Accordingly, we have relied upon the
opinion of Chapman and Cutler as to the applicability of Federal income tax
under the Internal Revenue Code of 1986 to a Michigan Trust and the Holders of
Units;
(2) Under the income tax laws of the State of Michigan,
a Michigan Trust is not an association taxable as a corporation; the income of
a Michigan Trust will be treated as the income of the Unitholders and be deemed
to have been received by them when received by a Michigan Trust. Interest on
the underlying Bonds which is exempt from tax under these laws when received by
a Michigan Trust will retain its status as tax
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exempt interest to the Unitholders;
(3) For purposes of the foregoing Michigan tax laws,
each Unitholder will be considered to have received his pro rata share of Bond
interest when it is received by a Michigan Trust and each Unitholder will have
a taxable event when a Michigan Trust disposes of a Bond (whether by sale,
exchange, redemption or payment at maturity) or when the Unitholder redeems or
sells his Certificate to the extent the transaction constitutes a taxable event
for Federal income tax purposes. The tax cost of each unit to a Unitholder
will be established and allocated for purposes of these Michigan tax laws in
the same manner as such cost is established and allocated for Federal income
tax purposes;
(4) Under the Michigan Intangibles Tax, a Michigan
Trust is not taxable and the pro rata ownership of the underlying Bonds, as
well as the interest thereon, will be exempt to the Unitholders to the extent
the Michigan Trust consists of obligations of the State of Michigan or its
political subdivisions or municipalities, or of obligations of possessions of
the United States;
(5) The Michigan Single Business Tax replaced the tax
on corporate and financial institution income under the Michigan Income Tax,
and the Intangible Tax with respect to those intangibles of persons subject to
the Single Business Tax the income from which would be considered in computing
the Single Business Tax. Persons are subject to the Single Business Tax only
if they are engaged in "business activity", as defined in the Act. Under the
Single Business Tax, both interest received by a Michigan Trust on the
underlying Bonds and any amount distributed from a Michigan Trust to a
Unitholder, if not included in determining taxable income for Federal income
tax purposes, is also not included in the adjusted tax base upon which the
Single Business Tax is computed, of either a Michigan Trust or the Unitholders.
If a Michigan Trust or the Unitholders have a taxable event for Federal income
tax purposes when a Michigan Trust disposes of a Bond (whether by sale,
exchange, redemption or payment at maturity) or the Unitholder redeems or sells
his Certificate, an amount equal to any gain realized from such taxable event
which was included in the computation of taxable income for Federal income tax
purposes (plus an amount equal to any capital gain of an individual realized in
connection with such event but excluded in computing that individual's Federal
taxable income) will be included in the tax base against which, after
allocation, apportionment and other adjustments, the Single Business Tax is
computed. The tax base will be reduced by an amount equal to any capital loss
realized from such a taxable event, whether or not the capital loss was
deducted in computing Federal taxable income in the year the loss occurred.
Unitholders should consult their tax advisor as to their status under
Michigan law;
(6) Any proceeds paid under an insurance policy issued
to the Trustee of a Trust, or paid under individual policies obtained by
issuers of Bonds, which, when received by the Unitholders, represent maturing
interest on defaulted obligations held by the Trustee, will be excludable from
the Michigan income tax laws and the Single Business Tax if, and to the same
extent as, such interest would have been so excludable if paid by the issuer of
the defaulted obligations. While treatment under the Michigan Intangibles Tax
is not premised upon the characterization of such proceeds under the Internal
Revenue Code, the Michigan Department of Treasury should adopt the same
approach as under the Michigan income tax laws and the Single Business tax; and
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(7) As the Tax Reform Act of 1986 eliminates the
capital gain deduction for tax years beginning after December 31, 1986, the
federal adjusted gross income, the computation base for the Michigan Income
Tax, of a Unit Holder will be increased accordingly to the extent such capital
gains are realized when the Michigan Trust disposes of a Bond or when the Unit
Holder redeems or sells a Unit, to the extent such transaction constitutes a
taxable event for Federal income tax purposes.
MINNESOTA TRUSTS. In the early 1980s, the State of
Minnesota experienced financial difficulties due to a downturn in the State's
economy resulting from the national recession. As a consequence, the State's
revenues were significantly lower than anticipated in the July 1, 1979 to June
30, 1981 biennium and the July 1, 1981 to June 30, 1983 biennium.
In response to revenue shortfalls, the legislature
broadened and increased the State sales tax, increased income taxes (by
increasing rates and eliminating deductions) and reduced appropriations and
deferred payment of State aid, including appropriations for and aids to local
governmental units. The State's fiscal problems affected other governmental
units within the State, such as local government, school districts and state
agencies, which, in varying degrees, also faced cash flow difficulties. In
certain cases, revenues of local governmental units and agencies were reduced
by the recession.
Because of the State's fiscal problems, Standard &
Poor's Corporation reduced its rating on the State's outstanding general
obligation bonds from AAA to AA+ in August 1981 and to AA in March 1982.
Moody's Investors Service, Inc. lowered its rating on the State's outstanding
general obligation bonds from Aaa to Aa in April 1982. The State's economy
recovered in the July 1, 1983 to June 30, 1985 biennium, and substantial
reductions in the individual Income tax were enacted in 1984 and 1985. Standard
& Poor's raised Its rating on the State's outstanding general obligation bonds
to AA+ in January 1985. In 1986, 1987 and 1991, legislation was required to
eliminate projected budget deficits by raising additional revenue, reducing
expenditures, including aid to political subdivisions and higher education, and
making other budgetary adjustments. A budget forecast released by the
Minnesota Department of Finance on February 27, 1992 projected a $569 million
budget shortfall, primarily attributable to reduced income tax receipts, for
the biennium ending June 30, 1993. Planning estimates for the 1994-95 biennium
projected a budget shortfall of $1.75 million (less a $300 million reserve).
(The projections generally do not include increases for inflation or operating
costs, except where Minnesota law requires them.) The State responded by
enacting legislation that made substantial accounting changes, reduced the
budget reserve by $160 million to $240 million, reduced appropriations for
state agencies and higher education, and imposed a sales tax on purchases by
local governmental units. A revised forecast released by the Department of
Finance on November 24, 1992 reflects these legislative changes and projects a
$217 million General Fund surplus at the end of the current biennium, June 30,
1993, plus a $240 million cash flow account, against a total budget for the
biennium of approximately $14.6 billion, and planning estimates for the 1994-95
biennium project a budget shortfall of $986 million (less the $217 million
balance carried forward and the $240 million cash flow account). Although
Standard & Poor's affirmed its rating on the State's general obligation bonds
in connection with a July 1992 issue, it revised its outlook for the rating to
"negative."
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State grants and aids represent a large percentage of
the total revenues of cities, towns, counties and school districts in
Minnesota. Even with respect to bonds that are revenue obligations and not
general obligations of the issuer, there can be no assurance that the fiscal
problems referred to above will not adversely affect the market value or
marketability of the bonds or the ability of the respective obligors to pay
interest on and principal of the bonds.
At the time of the closing for each Minnesota Trust,
Special Counsel to each Minnesota Trust for Minnesota tax matters rendered an
opinion under then existing Minnesota income tax law applicable to taxpayers
whose income is subject to Minnesota income taxation substantially to the
effect that:
(1) We understand that a Minnesota Trust will have no
income other than (i) interest income on bonds issued by the State of Minnesota
and its political and governmental subdivisions, municipalities and
governmental agencies and instrumentalities and on bonds issued by possessions
of the United States which would be exempt from Federal and Minnesota income
taxation when paid directly to an individual, trust or estate (and the term
"Bonds" as used herein refers only to such Bonds), (ii) gain on the disposition
of such Bonds, and (iii) proceeds paid under certain insurance policies issued
to the Trustee or to the issuers of the Bonds which represent maturing interest
or principal payments on defaulted Bonds held by the Trustee.
"Taxable income" for Minnesota income tax purposes is
the same as "taxable Income" for Federal income tax purposes with certain
modifications that (with one exception) do not apply to the present
circumstances. The exception is that corporations must add to Federal taxable
income the amount of any interest received on the obligations of states and
their agencies and instrumentalities, political and governmental subdivisions,
and municipalities. The terms "trust" and "corporation" have the same meanings
for Minnesota income tax purposes, as relevant to the Minnesota tax status of a
Minnesota Trust, as for Federal income tax purposes.
In view of the relationship between Federal and Minnesota law described
in the preceding paragraph and the opinion of Chapman and Cutler with respect
to Federal tax treatment of a Minnesota Trust and its Unitholders: (1) a
Minnesota Trust will be treated as a trust rather than a corporation for
Minnesota income tax purposes and will not be deemed the recipient of any
Minnesota taxable income; (2) each Unitholder of a Minnesota Trust will be
treated as the owner of a pro rata portion of a Minnesota Trust for Minnesota
income tax purposes and the income of a Minnesota Trust will therefore be
treated as the income of the Unitholders under Minnesota law; (3) interest on
the Bonds will be exempt from Minnesota income taxation of Unitholders who are
individuals, trusts and estates when received by a Minnesota Trust and
attributed to such Unitholders and when distributed to such Unitholders (except
as hereinafter provided with respect to "industrial development bonds" and
"private activity bonds" held by "substantial users"); (4) interest on the
Bonds will be includible in the Minnesota taxable income (subject to allocation
and apportionment) of Unitholders that are corporations; (5) each Unitholder
will realize taxable gain or loss when a Minnesota Trust disposes of a Bond
(whether by sale, exchange, redemption or payment at maturity) or when the
Unitholder redeems or sells Units at a price which differs from original cost
as adjusted for amortization of bond discount or premium and other basis
adjustments (including any basis reduction that may be required
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to reflect a Unitholder's share of interest, if any, accruing on Bonds
during the interval between the Unitholder's settlement date and the date such
Bonds are delivered to a Minnesota Trust, if later); (6) tax cost reduction
requirements relating to amortization of bond premium may, under some
circumstances, result in Unitholders realizing taxable gain when their Units
are sold or redeemed for an amount equal to or less than their original cost;
(7) any proceeds paid under the insurance policy issued to the Trustee with
respect to the Bonds which represent maturing interest on defaulted obligations
held by the Trustee will be excludible from Minnesota gross income if, and to
the same extent as, such interest would have been so excludible if paid by the
issuer of the defaulted obligations; (8) any proceeds paid under individual
insurance policies obtained by issuers of Bonds which represent maturing
interest on defaulted obligations held by the Trustee will be excludible from
Minnesota gross income if, and to the same extent as, such interest would have
been so excludible if paid in the normal course by the issuer of the defaulted
obligations; (9) net capital gains of Unitholders attributable to the Bonds
will be fully includible in the Minnesota taxable income of Unitholders
(subject to allocation and apportionment In the case of corporate Unitholders);
and (10) interest on Bonds includible in the computation of "alternative
minimum taxable income" for Federal income tax purposes will also be includible
in the computation of "alternative minimum taxable income" for Minnesota income
tax purposes.
Interest income attributable to Bonds that are
"industrial development bonds" or "private activity bonds," as those terms are
defined in the Internal Revenue Code, will be taxable under Minnesota law to a
Unitholder who is a "substantial user" of the facilities financed by the
proceeds of such Bonds (or a "related person" to such a "substantial user") to
the same extent as if such Bonds were held by such Unitholder.
MISSOURI TRUSTS. The following discussion regarding
constitutional limitations and the economy of the State of Missouri is Included
for the purpose of providing general information that may or may not affect
Issuers of the Bonds In Missouri.
In November 1981, the voters of Missouri adopted a tax
limitation amendment to the constitution of the State of Missouri (the
"Amendment"). The Amendment prohibits increases in local taxes, licenses or
fees by political subdivisions without approval of the voters of such political
subdivision. The Amendment also limits the growth in revenues and expenditures
of the State to the rate of growth in the total personal income of the citizens
of Missouri. The limitation may be exceeded if the General Assembly declares
an emergency by a two-thirds vote. The Amendment did not limit revenue growth
at the State level in fiscal 1982 through 1988 with the exception of fiscal
1984. Management Report No. 85-20, which was issued on March 5, 1985 by State
Auditor Margaret Kelly, indicates that state revenues exceeded the allowable
increase by $30.52 million in fiscal 1984, and a taxpayer lawsuit has been
filed pursuant to the Amendment seeking a refund of the revenues in excess of
the limit.
The economy of Missouri is diverse and includes
manufacturing, retail and wholesale trade, services, agriculture, tourism and
mining. In recent years, growth in the wholesale and retail trade has offset
the more slowly growing manufacturing and agricultural sectors of the economy.
In 1991, the unemployment rate in
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Missouri was 6.6%, and according to preliminary seasonally adjusted
figures, the rate dropped to 5.4% in December 1992. There can be no assurance
that general economic conditions or the financial circumstances of Missouri or
its political subdivisions will not adversely affect the market value of the
Bonds or the ability of the obligor to pay debt service on such Bonds.
Currently, Moody's Investors Service rates Missouri
general obligation bonds "Aaa" and Standard & Poor's Corporation rates Missouri
general obligation bonds "AAA". Although these ratings indicate that the State
of Missouri is in relatively good economic health, there can be, of course, no
assurance that this will continue or that particular bond issues may not be
adversely affected by changes in the State or local economic or political
conditions.
The foregoing information constitutes only a brief
summary of some of the general factors which may impact certain issuers of
Bonds and does not purport to be a complete or exhaustive description of all
adverse conditions to which the issuers of obligations held by the Missouri
Trust are subject. Additionally, many factors including national economic,
social and environmental policies and conditions, which are not within the
control of the issuers of the Bonds, could affect or could have an adverse
impact on the financial condition of the State and various agencies and
political subdivisions located in the State. The Sponsor is unable to predict
whether or to what extent such factors or other factors may affect the issuers
of the Bonds, the market value or marketability of the Bonds or the ability of
the respective issuers of the Bonds acquired by the Missouri Trust to pay
interest on or principal of the Bonds.
At the time of the closing for each Missouri Trust,
Special Counsel for Missouri tax matters rendered an opinion under then
existing Missouri income tax law applicable to taxpayers whose income is
subject to Missouri income taxation substantially to the effect that:
The assets of the Missouri Trust will consist of debt obligations issued by or
on behalf of the State of Missouri (the "State") or counties, municipalities,
authorities or political subdivisions thereof (the "Missouri Bonds") or by the
Commonwealth of Puerto Rico, Guam and the United States Virgin Islands (the
"Possession Bonds") (collectively, the "Bonds").
Neither the Sponsor nor its counsel have independently
examined the Bonds to be deposited in and held in the Missouri Trust. However,
although no opinion is expressed herein regarding such matters, it is assumed
that: (i) the Bonds were validly issued, (ii) the interest thereon is
excludable from gross income for Federal income tax purposes and (iii)
interest on the Missouri Bonds, if received directly by a Unitholder, would be
exempt from the Missouri income tax applicable to individuals and corporations
("Missouri state income tax"). The opinion set forth below does not address
the taxation of persons other than full time residents of Missouri. No opinion
is expressed regarding whether the gross earnings derived from the Units is
subject to intangible taxation imposed by counties, cities and townships
pursuant to present Kansasm law.
In the opinion of Chapman and Cutler, counsel to the Sponsor under
existing law:
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(1) The Missouri Trust is not an association taxable as
a corporation for Missouri income tax purposes, and each Unitholder of the
Missouri Trust will be treated as the owner of a pro rata portion of the
Missouri Trust and the income of such portion of the Missouri Trust will be
treated as the income of the Unitholder for Missouri state income tax purposes;
(2) Interest paid and original issue discount, if any,
on the Bonds which would be exempt from the Missouri state income tax if
received directly by a Unitholder will be exempt from the Missouri state income
tax when received by the Missouri Trust and distributed to such Unitholder;
however, no opinion is expressed herein regarding taxation of interest paid and
original issue discount, if any, on the Bonds received by the Missouri Trust
and distributed to Unitholders under any other tax imposed pursuant to Missouri
law, including but not limited to the franchise tax imposed on financial
institutions pursuant to Chapter 148 of the Missouri Statutes;
(3) To the extent that interest paid and original issue
discount, if any, derived from the Missouri Trust by a Unitholder with respect
to Possession Bonds is excludable from gross income for Federal income tax
purposes pursuant to 48 U.S.C. Section 745, 48 U.S.C. Section 142 3a, and 48
U.S.C. Section 1403, such interest paid and original issue discount, if any,
will not be subject to the Missouri state income tax; however, no opinion is
expressed herein regarding taxation of interest paid and original issue
discount, if any, on the Bonds received by the Missouri IM-IT Trust and
distributed to Unitholders under any other tax imposed pursuant to Missouri
law, including but not limited to the franchise tax imposed on financial
institutions pursuant to Chapter 148 of the Missouri Statutes;
(4) Each Unitholder of the Missouri Trust will
recognize gain or loss for Missouri state income tax purposes if the Trustee
disposes of a bond (whether by redemption, sale, or otherwise) or if the
Unitholder redeems or sells Units of the Missouri Trust to the extent that such
a transaction results in a recognized gain or loss to such Unitholder for
Federal income tax purposes. Due to the amortization of bond premium and other
basis adjustments required by the Internal Revenue Code, a Unitholder under
some circumstances, may realize taxable gain when his or her Units are sold or
redeemed for an amount equal to their original cost;
(5) Any insurance proceeds paid under policies which
represent maturing interest on defaulted obligations which are excludable from
gross income for Federal income tax purposes will be excludable from Missouri
state income tax to the same extent as such interest would have been paid by
the issuer of such Bonds held by the Missouri Trust; however, no opinion is
expressed herein regarding taxation of interest paid and original issue
discount, if any, on the Bonds received by the Missouri Trust and distributed
to Unitholders under any other tax imposed pursuant to Missouri law, including
but not limited to the franchise tax imposed on financial institutions pursuant
to Chapter 148 of the Missouri Statutes;
(6) The Missouri state income tax does not permit a
deduction of interest paid or incurred on indebtedness incurred or continued to
purchase or carry Units in the Trust, the interest on which is exempt
from such Tax; and
(7) The Missouri Trust will not be subject to the
Kansas City, Missouri Earnings and Profits Tax and each Unitholder's share of
income of the Bonds held by the Missouri Trust will not generally be subject to
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the Kansas City, Missouri Earnings and Profits Tax or the City of St. Louis
Earnings Tax (except in the case of certain Unitholders, including
corporations, otherwise subject to the St. Louis City Earnings Tax).
NEW JERSEY TRUSTS. Each New Jersey Trust consists of a
portfolio of Bonds. The Trust is therefore susceptible to political, economic
or regulatory factors affecting issuers of the Bonds. The following
information provides only a brief summary of some of the complex factors
affecting the financial situation in New Jersey (the "State") and is derived
from sources that are generally available to investors and is believed to be
accurate. It is based in part on information obtained from various State and
local agencies in New Jersey. No independent verification has been made of any
of the following information. New Jersey is the ninth largest state in
population and the fifth smallest in land area. With an average of 1,046
people per square mile, it is the most densely populated of all the states.
The state's economic base is diversified, consisting of a variety of
manufacturing, construction and service industries, supplemented by rural areas
with selective commercial agriculture. Historically, New Jersey's average per
capita income has been well above the national average, and in 1991 the State
ranked second among States in per capita personal income ($25,372).
The New Jersey Economic Policy Council, a statutory arm
of the New Jersey Department of Commerce and Economic Development, has reported
in New Jersey Economic Indicators, a monthly publication of the New Jersey
Department of Labor, Division of Labor Market and Demographic Research, that in
1988 and 1989 employment in New Jersey's manufacturing sector failed to benefit
from the export boom experienced by many Midwest states and the State's service
sectors, which had fueled the State's prosperity since 1982, lost momentum. In
the meantime, the prolonged fast growth in the State in the mid 1980s resulted
in a tight labor market situation, which has led to relatively high wages and
housing prices. This means that, while the incomes of New Jersey residents are
relatively high, the State's business sector has become more vulnerable to
competitive pressures. New Jersey is currently experiencing a recession and,
as a result of the factors described above, such recession could last longer
than the national recession, although signs of a slow recovery both on the
national and State level have been reported.
The onset of the national recession (which officially
began in July 1990 according to the National Bureau of Economic Research)
caused an acceleration of New Jersey's job losses in construction and
manufacturing. In addition, the national recession caused an employment
downturn in such previously growing sectors as wholesale trade, retail trade,
finance, utilities and trucking and warehousing. Reflecting the downturn, the
rate of unemployment in the State rose from a low of 3.6% during the first
quarter of 1989 to an estimated 8% in December 1992, which is below the
national average of 7.3% in December 1992. Economic recovery is likely to be
slow and uneven in New Jersey, with unemployment receding at a correspondingly
slow pace, due to the fact that some sectors may lag due to continued excess
capacity. In addition, employers even in rebounding sectors can be expected to
remain cautious about hiring until they become convinced that improved business
will be sustained. Also, certain firms will continue to merge or downsize to
increase profitability.
Debt Service. The primary method for State financing of
capital projects is through the sale of the
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general obligation bonds of the State. These bonds are backed by the
full faith and credit of the State tax revenues and certain other fees are
pledged to meet the principal and interest payments and if provided, redemption
premium payments, if any, required to repay the bonds. As of June 30, 1992,
there was a total authorized bond indebtedness of approximately $6.96 billion,
of which $3.32 billion was issued and outstanding, $2.6 billion was retired
(including bonds for which provision for payment has been made through the sale
and issuance of refunding bonds) and $1.04 billion was unissued. The debt
service obligation for such outstanding indebtedness is $444.3 million for
fiscal year 1993.
New Jersey's Budget and Appropriation System. The State
operates on a fiscal year beginning July 1 and ending June 30. At the end of
fiscal year 1989, there was a surplus in the State's general fund (the fund
into which all State revenues not otherwise restricted by statute are deposited
and from which appropriations are made) of $411.2 million. At the end of
fiscal year 1990, there was a surplus In the general fund of $1 million. It is
estimated that New Jersey closed its fiscal year 1992 with a surplus of $762.9
million. In order to provide additional revenues to balance future budgets, to
redistribute school aid and to contain real property taxes, on June 27, 1990,
and July 12, 1990, Governor Florio signed into law legislation which was
estimated to raise approximately $2.8 billion in additional taxes (consisting
of $1.5 billion in sales and use taxes and $1.3 billion in income taxes), the
biggest tax hike in New Jersey history. There can be no assurance that
receipts and collections of such taxes will meet such estimates.
The first part of the tax hike took effect on July 1,
1990, with the increase in the State's sales and use tax rate from 6% to 7% and
the elimination of exemptions for certain products and services not previously
subject to the tax, such as telephone calls, paper products (which has since
been reinstated), soaps and detergents, janitorial services, alcoholic
beverages and cigarettes. At the time of enactment, it was projected that
these taxes would raise approximately $1.5 billion in additional revenue.
Projections and estimates of receipts from sales and use taxes, however, have
been subject to variance in recent fiscal years.
The second part of the tax hike took effect on January
1, 1991, in the form of an increased state income tax on individuals. At the
time of enactment, it was projected that this increase would raise
approximately $1.3 billion in additional income taxes to fund a new school aid
formula, a new homestead rebate program and state assumption of welfare and
social services costs. Projections and estimates of receipts from income
taxes, however, have also been subject to variance in recent fiscal years.
Under the legislation, income tax rates increased from their previous range of
2% to 3.5% to a new range of 2% to 7%, with the higher rates applying to
married couples with incomes exceeding $70,000 who file joint returns, and to
individuals filing single returns with incomes of more than $35,000.
The Florio administration has contended that the income
tax package will help reduce local property tax increases by providing more
state aid to municipalities. Under the income tax legislation the State will
assume approximately $289 million in social services costs that previously were
paid by counties and municipalities and funded by property taxes. In addition,
under the new formula for funding school aid, an extra $1.1 billion is proposed
to be sent by the State to school districts beginning in 1991, thus reducing
the
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need for property tax increases to support education programs.
Effective July 1, 1992, the State's sales and use tax rate decreased
from 7% to 6%.
On June 30, 1992, the New Jersey Legislature adopted a
$14.9 billion State budget for fiscal year 1993 by overriding Governor Florio's
veto of the spending plan. The budget reflected a $1.1 billion cut from
Governor Florio's proposed $16 billion budget, including a $385 million
reduction in the State homestead rebate program and $421 million in cuts in
salaries and other spending by the State bureaucracy and including the prospect
of 1,400 to 6,300 layoffs of State employees. The budget also reflects the
loss of revenue, projected at $608 million, as a result of the reduction in the
sales and use tax rate from 7% to 6% effective July 1, 1992 and the use of
$1.3 billion in pension savings to balance the budget, with $770 million
available only in fiscal 1993 and $569 million that will recur annually in the
future.
Litigation. The State is a party in numerous legal
proceedings pertaining to matters incidental to the performance of routine
governmental operations. Such litigation includes, but is not limited to,
claims asserted against the State arising from alleged torts, alleged breaches
of contracts, condemnation proceedings and other alleged violations of State
and Federal laws. Included in the State's outstanding litigation are cases
challenging the following: the formula relating to State aid to public schools,
the method by which the State shares with its counties maintenance recoveries
and costs for residents in State institutions, unreasonably low Medicaid
payment rates for long-term facilities in New Jersey, the obligation of
counties to maintain Medicaid or Medicare eligible residents of institutions
and facilities for the developmentally disabled, taxes paid into the Spill
Compensation Fund (a fund established to provide money for use by the State to
remediate hazardous waste sites and to compensate other persons for damages
incurred as a result of hazardous waste discharge) based on Federal preemption,
the various provisions, and the constitutionality, of the Fair Automobile
Insurance Reform Act of 1990, the State's method of funding the judicial
system, certain provisions of New Jersey's hospital rate-setting system,
recently enacted legislation calling for a revaluation of several New Jersey
public employee pension funds in order to provide additional revenues for the
State's general fund, and the exercise of discretion by State agencies in
making certain personnel reductions. Adverse judgments in these and other
matters could have the potential for either a significant loss of revenue or a
significant unanticipated expenditure by the State. Adverse judgments in these
and other matters could have the potential for either a significant loss of
revenue or a significant unanticipated expenditure by the State.
At any given time, there are various numbers of claims
and cases pending against the State, State agencies and employees seeking
recovery of monetary damages that are primarily paid out of the fund created
pursuant to the New Jersey Tort Claims Act. In addition, at any given time,
there are various numbers of contract claims against the State and State
agencies seeking recovery of monetary damages. The State is unable to estimate
its exposure for these claims.
Debt Ratings. For many years, both Moody's Investors
Service, Inc. and Standard and Poor's
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Corporation rated New Jersey general obligation bonds Aaa and "AAA",
respectively. Currently, Moody's Investors Service, Inc. rates New Jersey
general obligation bonds Aaa. On July 3, 1991, however, Standard and Poor's
Corporation downgraded New Jersey general obligation bonds to "AA+." On June 4,
1992, Standard and Poor's Corporation placed New Jersey general obligation
bonds on CreditWatch with negative implications, citing as its principal reason
for its caution the unexpected denial by the federal government of New Jersey's
request for $450 million in retroactive Medicaid payments for psychiatric
hospitals. These funds were critical to closing a $1 billion gap in the
State's $15 billion budget for fiscal year 1992 which ended on June 30, 1992.
Under New Jersey state law, the gap in the budget must be closed before the new
budget year begins on July 1, 1992. Standard and Poor's suggested the State
could close fiscal 1992's budget gap and help fill fiscal 1993's hole by a
reversion of $700 million of pension contributions to its general fund under a
proposal to change the way the State calculates its pension liability.
On July 6, 1992, Standard and Poor's Corporation
reaffirmed its "AA+" rating for New Jersey general obligation bonds and removed
the debt from its CreditWatch list, although it stated that New Jersey's
long-term financial outlook is negative. Standard and Poor's Corporation is
concerned that the State is entering fiscal 1993 with a slim $26 million
surplus and remains concerned about whether the sagging State economy will
recover quickly enough to meet lawmakers' revenue projections. It also remains
concerned about the recent federal ruling leaving in doubt how much the State
is due in retroactive Medicaid reimbursements and a ruling by a federal judge,
now on appeal, of the State's method for paying for uninsured hospital
patients. There can be no assurance that these ratings will continue or that
particular bond issues may not be adversely affected by changes in the State or
local economic or political conditions.
On August 24, 1992, Moody's Investors Service, Inc.
downgraded New Jersey general obligation bonds to "Aa1," stating that the
reduction reflects a developing pattern of reliance on nonrecurring measures to
achieve budgetary balance, four years of financial operations marked by revenue
shortfalls and operating deficits, and the likelihood that serious financial
pressures will persist.
At the time of the closing for each New Jersey Trust
Special Counsel to each New Jersey Trust for New Jersey tax matters rendered an
opinion under then existing New Jersey income tax law applicable to taxpayers
whose income is subject to New Jersey income taxation substantially to the
effect that:
(1) Each New Jersey Trust will be recognized as a trust
and not an association taxable as a corporation. Each New Jersey Trust will
not be subject to the New Jersey Corporation Business Tax or the New Jersey
Corporation Income Tax;
(2) With respect to the non-corporate Unitholders who
are residents of New Jersey, the income of a New Jersey Trust which is
allocable to each such Unitholder will be treated as the income of such
Unitholder under the New Jersey Gross Income Tax. Interest on the underlying
Bonds which would be exempt from New Jersey Gross Income Tax if directly
received by such Unitholder will retain its status as tax-exempt interest when
received by the New Jersey Trust and distributed to such Unitholder. Any
proceeds paid under the insurance policy issued to the Trustee of a New Jersey
Trust with respect to the Bonds or under individual
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policies obtained by issuers of Bonds which represent maturing interest
on defaulted obligations held by the Trustee will be exempt from New Jersey
Gross Income Tax if, and to the same extent as, such interest would have been
so exempt if paid by the issuer of the defaulted obligations;
(3) A non-corporate Unitholder will not be subject to
the New Jersey Gross Income Tax on any gain realized either when a New Jersey
Trust disposes of a Bond (whether by sale, exchange, redemption, or
payment at maturity), when the Unitholder redeems or sells his Units or upon
payment of any proceeds under an insurance policy issued to the Trustee of a
New Jersey Trust with respect to the Bonds or under individual policies
obtained by issuers of Bonds which represent maturing principal on defaulted
obligations held by the Trustee. Any loss realized on such disposition may not
be utilized to offset gains realized by such Unitholder on the disposition of
assets the gain on which is subject to the New Jersey Gross Income Tax;
(4) Units of a New Jersey Trust may be taxable on the
death of a Unitholder under the New Jersey Transfer Inheritance Tax Law or the
New Jersey Estate Tax Law; and
(5) If a Unitholder is a corporation subject to the New
Jersey Corporation Business Tax or New Jersey Corporation Income Tax, interest
from the Bonds in a New Jersey Trust which is allocable to such corporation
will be includable in its entire net income for purposes of the New Jersey
Corporation Business Tax or New Jersey Corporation Income Tax, less any
interest expense incurred to carry such investment to the extent such interest
expense has not been deducted in computing Federal taxable income. Net gains
derived by such corporation on the disposition of the Bonds by a New Jersey
Trust or on the disposition of its Units will be included in its entire net
income for purposes of the New Jersey Corporation Business Tax or New Jersey
Corporation Income Tax. Any proceeds paid under an insurance policy issued to
the Trustee of a New Jersey Trust with respect to the Bonds or under individual
policies obtained by issuers of Bonds which represent maturing interest or
maturing principal on defaulted obligations held by the Trustee will be
included in its entire net income for purposes of the New Jersey Corporation
Business Tax or New Jersey Corporation Income Tax if, and to the same extent
as, such interest or proceeds would have been so included if paid by the issuer
of the defaulted obligations.
NEW YORK TRUSTS. The portfolio includes certain Bonds
issued by New York State (the "State"), by its various public bodies (the
"Agencies"), and/or by other entities located within the State, including the
City of New York (the "City").
Some of the more significant events relating to the
financial situation in New York are summarized below. This section provides
only a brief summary of the complex factors affecting the financial situation
in New York and is based in part on official statements issued by, and on other
information reported by, the State, the City and the Agencies in connection
with the issuance of their respective securities. There can be no assurance
that future statewide or regional economic difficulties, and the resulting
impact on State or local government finances generally, will not adversely
affect the market value of New York Municipal Obligations held in the portfolio
of the New York Trust or the ability of particular obligors to make timely
payments of debt service on (or relating to) those obligations.
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The State has historically been one of the wealthiest
states in the nation. For decades, however, the State economy has grown more
slowly than that of the nation as a whole, gradually eroding the State's
relative economic affluence. Statewide, urban centers have experienced
significant changes involving migration of the more affluent to the suburbs and
an influx of generally less affluent residents. Regionally, the older
Northeast cities have suffered because of the relative success that the South
and the West have had in attracting people and business. The City has also had
to face greater competition as other major cities have developed financial and
business capabilities which make them less dependent on the specialized
services traditionally available almost exclusively in the City.
The State has for many years had a very high State and
local tax burden relative to other states. The burden of State and local
taxation, in combination with the many other causes of regional economic
dislocation, has contributed to the decisions of some businesses and
individuals to relocate outside, or not locate within, the State.
A national recession commenced in mid-1990. The
downturn continued throughout the 1991 calendar year. After a period of modest
growth in the first half of calendar 1992, the Division of the Budget projects
slower growth thereafter in the 1992 calendar year and the first half of the
1993 calendar year. The State has suffered a more severe economic downturn.
The national recession has been more severe in the State because of factors
such as a significant retrenchment in the financial services industry, cutbacks
in defense spending, and an overbuilt real estate market.
On January 21, 1992, the Governor released the
recommended 1992-93 Executive Budget which included the revised 1991-92 State
Financial Plan (the "Revised 1991-92 State Financial Plan") indicating a
projected $531 million General Fund cash basis operating deficit in the 1991-92
fiscal year. The projected $531 million deficit was met through tax and
revenue anticipation notes (the "1992 Deficit Notes") which were issued on
March 30, 1992 and are required by law to be repaid in the State's 1992-93
fiscal year. The $531 million projected deficit follows $407 million in
administrative actions taken by the Governor intended to reduce 1991-92
disbursements and to increase revenues.
The recommended 1992-93 Executive Budget contains
projections for the 1992-93 State fiscal year which began on April 1, 1992.
The Governor indicated that, for the 1992-93 fiscal year, the State faced a
$4.8 billion budget gap, including the $531 million needed in the 1992-93
fiscal year to repay the 1992 Deficit Notes. The recommended 1992-93 Executive
Budget reflects efforts to achieve budgetary balance by reducing disbursements
by $3.5 billion and increasing revenues by $1.3 billion from levels previously
anticipated.
The 1992-93 State budget was enacted by the Legislature
on April 2, 1992 and was balanced through a variety of spending cuts and
revenue increases, as reflected in the State Financial Plan for the 1992-93
fiscal year (the "1992-93 State Financial Plan") announced on April 13, 1992.
The 1992-93 State Financial
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Plan projects that General Fund receipts and transfers from other funds
will total $31.382 billion, after provision to repay the 1992 Deficit Notes.
The 1992-93 State Financial Plan includes increased taxes and other revenues,
deferral of scheduled personal income and corporate tax reductions, significant
reductions from previously projected levels in aid to localities and State
operations and other budgetary actions that limit the growth in General Fund
disbursements.
Pursuant to statute, the State updates the State Financial Plan
at least on a quarterly basis. The first quarterly revision to the State
Financial Plan for the State's 1992-93 fiscal year was Issued on July
30, 1992 (the "Revised 1992-93 State Financial Plan"). Although the Revised
1992-93 State Financial Plan is based on an economic projection that the
State's economy will perform more poorly than the nation as a whole, there can
be no assurance that the State economy will not experience worse-than-predicted
results in the 1992-93 fiscal year, with corresponding material and adverse
effects on the State's projections of receipts and disbursements. This, in
turn, could adversely affect the State's ability to achieve a balanced budget
on a cash basis for such fiscal year.
In addition, the State's projections are subject to
certain risks, including adverse decisions in pending litigations, particularly
those involving Federal Medicaid reimbursements and payments by hospitals and
health maintenance organizations, potential changes in the timing of Federally
mandated estimated tax payments that would require parallel changes at the
State level, and further deterioration in the national economy.
The 1992-93 State Financial Plan results in sharp
reductions in aid to all levels of local governmental units from amounts
expected. There can be no assurance, however, that localities that suffer cuts
will not be adversely affected, leading to further requests for State financial
assistance.
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.
For a number of years the State has encountered
difficulties in achieving a balance of expenditures and revenues. The 1991-92
fiscal year was the fourth consecutive year in which the State incurred a
cash-basis operating deficit in the General Fund and issued deficit notes.
There can be no assurance that the State will not continue to face budgetary
difficulties in the future, due to a number of factors including economic,
fiscal and political factors, and that such difficulties will not lead to
further adverse consequences for the State.
As a result of changing economic conditions and
information, public statements or reports may be
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released by the Governor, members of the State Legislature, and their
respective staffs, as well as others involved in the budget negotiation process
from time to time. Those statements or reports may contain predictions,
projections or other items of information relating to the State's financial
condition as reflected in the 1992-93 State Financial Plan, that may vary
materially and adversely from the information provided herein.
As of June 30, 1992, the total amount of long-term State
general obligation debt authorized but unissued stood at $3.0 billion, of which
approximately $1.5 billion was part of a general obligation bond authorization
for highway and bridge construction and rehabilitation. As of the same date,
the State had approximately $5.0 billion in general obligation bonds and $224
million in bond anticipation notes outstanding. The State issued $3.9
billion in tax and revenue anticipation notes ("TRANS") on June 21, 1991,
$531 million In 1992 Deficit Notes on March 30, 1992 and $2.3 billion in
TRANS on April 28, 1992.
The State anticipates that its borrowings for capital
purposes in 1992-93 will consist of approximately $863 million in general
obligation bonds. The State also expects to issue approximately $178 million
in general obligation bonds for the purpose of redeeming outstanding bond
anticipation notes. The Legislature has also authorized the issuance of up to
$105 million in certificates of participation for equipment purchases and real
property purposes during the State's 1992-93 fiscal year. The projection of
the State regarding its borrowings for the 1992-93 fiscal year may change if
actual receipts fall short of State projections or if other circumstances
require.
In June 1990, legislation was enacted creating the "New
York Local Government Assistance Corporation" ("LGAC"), a public benefit
corporation empowered to issue long-term obligations to fund certain payments
to local governments traditionally funded through the State's annual seasonal
borrowing. To date, LGAC has issued its bonds to provide net proceeds of $2.75
billion. LGAC has been authorized to issue additional bonds to provide net
proceeds of $975 million during the State's 1992- 93 fiscal year, of which $350
million has been issued to date.
The $2.3 billion in TRANs issued by the State in April
1992 were rated SP-1 by S&F and MIG-2 by Moody's. The $3.9 billion in TRANs
issued by the State in June, 1991 were rated the same. S&P in so doing stated
that the outlook is changed to "negative" from "stable." The $4.1 billion in
TRANs issued by the State in June, 1990 and the $775 million in TRANs issued by
the State in March, 1990 were rated the same. In contrast, the $3.9 billion of
TRANs issued by the State in May, 1989 had been rated SP-1+ by S&P and MIG-1 by
Moody's.
As of the date of this prospectus, Moody's rating of the
State general obligation bonds stood at A, but under review for possible
downgrade and S&P's rating stood at A- with a negative outlook. Moody's placed
the bonds under review on January 6, 1992. Previously, Moody's lowered its
rating to A on June 6, 1990, its rating having been A1 since May 27, 1986. S&P
lowered its rating from A to A on January 13, 1992.
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S&P's previous ratings were A from March 1990 to January 1992, AA- from
August, 1987 to March, 1990 and A+ from November, 1982 to August, 1987.
On September 18, 1992, Moody's in placing the bonds
under review for possible downgrade stated:
Chronic financial problems weigh most heavily in the
evaluation of New York State's credit. In the past five years, the State has
been unable to maintain a balanced budget and has had to issue deficit notes
in each of the past four years. The budget for the fiscal year which began
April 1, 1992 was adopted nearly on time, relies somewhat less on non-recurring
actions, and provides for some expenditure reductions, mainly due to a planned
reduction in the size of the State workforce. However, although growth in
major aid programs to local governments is modest, major structural reform of
State programs which would provide enduring budget relief has not been enacted.
The State budget is still narrowly balanced and the State could face additional
fiscal pressure if the economy performs worse than anticipated or
cost-reduction programs fail to generate anticipated savings.
On November 16, 1992, S&P, in affirming its A- rating
and negative outlook of the State's general obligation bonds, stated: The
rating reflects ongoing economic weakness, four years of operating deficits and
a large accumulated deficit position. The ratings outlook is "negative," as
budget balance remains fragile.
The City accounts for approximately 41% of the State's
population and personal income, and the City's financial health affects the
State in numerous ways.
In February 1975, the New York State Urban Development
Corporation ("UDC"), which had approximately $1 billion of outstanding debt,
defaulted on certain of its short-term notes. Shortly after the UDC default
the City entered a period of financial crisis. Both the State Legislature and
the United States Congress enacted legislation in response to this crisis.
During 1975, the State Legislature (i) created the Municipal Assistance
Corporation ("MAC") to assist with long-term financing for the City's
short-term debt and other cash requirements and (ii) created the State
Financial Control Board (the "Control Board") to review and approve the City's
budgets and City four-year financial plans (the financial plans also apply to
certain City-related public agencies (the "Covered Organizations")).
Over the past three years, the rate of economic growth
in the City has slowed substantially, and the City's economy is currently in
recession. The City projects, and its current five-year financial plan
assumes, a continuation of the recession in the New York City region in the
1992 calendar years with a recovery early in the 1993 calendar year. The Mayor
is responsible for preparing the City's four-year financial plan, including the
City's current financial plan. The City Comptroller has issued reports
concluding that the recession of the City's economy will be more severe and
last longer than is assumed in the Financial Plan.
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For each of the 1981 through 1991 fiscal years, the City
achieved balanced operating results as reported in accordance with generally
accepted accounting principles ("GAAP") and expects to achieve balanced
operating results for the 1992 fiscal year. During its 1991 fiscal year, as a
result of the recession, the City experienced significant shortfalls from its
July 1990 projections in virtually every major category of tax revenues. The
City was required to close substantial budget gaps in its 1990 and 1991 fiscal
years in order to maintain balanced operating results. There can be no
assurance that the City will continue to maintain a balanced budget, or that it
can maintain a balanced budget without additional tax or other revenue
increases or reductions in City services, which could adversely affect the
City's economic base. The City Comptroller has issued reports that have warned
of the adverse effects on the City's economy of the tax increases that were
imposed during fiscal years 1991 and 1992.
Pursuant to State law, the City prepares a four-year
annual financial plan which is reviewed and revised on a quarterly basis and
which includes the City's capital, revenue and expense projections. The City
is required to submit its financial plans to review bodies, including the
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 certain powers, including prior approval of
City financial plans, proposed borrowings and certain contracts.
The City depends on the State for State aid both to
enable the City to balance its budget and to meet its cash requirements. As a
result of the national and regional economic recession, the State's projections
of tax revenues for its 1991 and 1992 fiscal years were substantially reduced.
For its 1993 fiscal year, the State, before taking any remedial action
reflected in the State budget enacted by the State Legislature on April 2, 1992
reported a potential budget deficit of $4.8 billion. If the State experiences
revenue shortfalls or spending increases beyond its projections during its 1993
fiscal year or subsequent years, such developments could also result in
reductions in projected State aid to the City. In addition, there can be no
assurance that State budgets in future fiscal years will be adopted by the
April 1 statutory deadline and that there will not be adverse effects on the
City's cash flow and additional City expenditures as a result of such delays.
The City's projections set forth in the Financial Plan are based on various
assumptions and contingencies which are uncertain and which may not
materialize. Changes in major assumptions could significantly affect the
City's ability to balance its budget as required by State law and to meet its
annual cash flow and financing requirements. Such assumptions and
contingencies include the timing of any regional and local economic recovery,
the absence of wage increases in excess of the increases assumed in its
financial plan, employment growth, provision of State and Federal aid and
mandate relief, State legislative approval of future State budgets, levels of
education expenditures as may be required by State law, adoption of future City
budgets by the New York City Council, and approval by the Governor or the State
Legislature and the cooperation of MAC, with respect to various other actions
proposed in such financial plan.
The City's ability to maintain a balanced operating
budget is dependent on whether it can implement necessary service and personnel
reduction programs successfully. The financial plan submitted to the Control
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Board on June 11, 1992 contains substantial proposed expenditure cuts for the
1993 through 1996 fiscal years. The proposed expenditure reductions will be
difficult to implement because of their size and the substantial expenditure
reductions already imposed on City operations in the past two years.
Attaining a balanced budget is also dependent upon the
City's ability to market its securities successfully in the public credit
markets. The City's financing program for fiscal years 1993 through 1996
contemplates issuance of $13.3 billion of general obligation bonds primarily to
reconstruct and rehabilitate the City's infrastructure and physical assets and
to make primarily capital investments. A significant portion of such bond
financing is used to reimburse the City's general fund for capital expenditures
already incurred. In addition, the City issues revenue and tax anticipation
notes to finance its seasonal working capital requirements. The terms and
success of projected public sales of City general obligation bonds and notes
will be subject to prevailing market conditions at the time of the sale, and no
assurance can be given that the credit markets will absorb the projected
amounts of public bond and note sales. In addition, future developments
concerning the City and public discussion of such developments, the City's
future financial needs and other issues may affect the market for outstanding
City general obligation bonds and notes. If the City were unable to sell its
general obligation bonds and notes, it would be prevented from meeting its
planned operating and capital expenditures.
The City Comptroller, the staff of the Control Board,
the Office of the State Deputy Comptroller for the City of New York (the
"OSDC") and other agencies and public officials have issued reports and made
public statements which, among other things, state that projected revenues may
be less and future expenditures may be greater than those forecast in the
financial plan. In addition, the Control Board and other agencies 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. It is reasonable to expect that such reports and
statements will continue to be issued and to engender public comment.
The City achieved balanced operating results as reported
in accordance with GAAP for the 1991 fiscal year. During the 1990 and 1991
fiscal years, the City implemented various actions to offset a projected budget
deficit of $3.2 billion for the 1991 fiscal year, which resulted from declines
in City revenue sources and increased public assistance needs due to the
recession. Such actions included $822 million of tax increases and substantial
expenditure reductions.
The most recent quarterly modification to the City's
financial plan submitted to the Control Board on May 7, 1992 (the "1992
Modification") projects a balanced budget in accordance with GAAP for the 1992
fiscal year after taking into account a discretionary transfer of $455 million
to the 1993 fiscal year as the result of a 1992 fiscal year surplus. In order
to achieve a balanced budget for the 1992 fiscal year, during the 1991 fiscal
year, the City proposed various actions for the 1992 fiscal year to close a
projected gap of $3.3 billion in the 1992 fiscal year.
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On June 11, 1992, the City submitted to the Control
Board the Financial Plan for the 1993 through 1996 fiscal years, which relates
to the City, the Board of Education ("BOE") and the City University of New York
("CUNY") and is based on the City's expense and capital budgets for the City's
1993 fiscal year. The 1993-1996 Financial Plan projects revenues and
expenditures for the 1993 fiscal year balanced in accordance with GAAP.
The 1993-1996 Financial Plan sets forth actions to close
a previously projected gap of approximately $1.2 billion In the 1993 fiscal
year. The gap-closing actions for the 1993 fiscal year include $489 million of
discretionary transfers from a City surplus in the 1992 fiscal year.
The Financial Plan also sets forth projections and
outlines a proposed gap-closing program for the 1994 through 1996 fiscal years
to close projected budget gaps. On August 26, 1992, the City modified the
1993-96 Financial Plan. As modified, the Financial Plan projects a balanced
budget for fiscal year 1993 based upon revenues of $29.6 billion but projects
budget gaps of $1.3 billion, $1.2 billion and $1.7 billion, respectively, in
the 1994 through 1996 fiscal years.
Various actions proposed in the Financial Plan are
subject to approval by the Governor and approval by the State Legislature, and
the proposed increase in Federal aid is subject to approval by Congress and the
President. In addition, MAC has set conditions upon its cooperation in the
City's realization of the proposed transitional funding contained in the
Financial Plan for the 1994 fiscal year. If these actions cannot be
implemented, the City will be required to take other actions to decrease
expenditures or increase revenues to maintain a balanced financial plan.
The City is a defendant in a significant number of
lawsuits. Such litigation includes, but is not limited to, actions commenced
and claims asserted against the City arising out of alleged constitutional
violations, torts, breaches of contracts and other violations of law and
condemnation proceedings. While the ultimate outcome and fiscal impact, if
any, on the proceedings and claims are not currently predictable, adverse
determination in certain of them might have a material adverse effect upon the
City's ability to carry out its financial plan. As of June 30, 1991, legal
claims in excess of $322 billion were outstanding against the City for which
the City estimated its potential future liability to be $2.1 billion.
As of the date of this prospectus, Moody's rating of the
City's general obligation bonds stood at Baal and S&P's rating stood at A-. On
February 11, 1991, Moody's lowered its rating from A.
On October 19, 1992, in confirming its Baal rating,
Moody's noted that:
Financial operations continue to be satisfactorily
maintained. Nevertheless, significant gaps in the later years of the (four
year financial) plan remain and have not changed from prior projections. The
ability of
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the City to successfully close those gaps, as well as fully
implement all currently planned gap closing measures without slippage will be a
politically and financially complex task.
On October 1992, S&P affirmed its A- rating with a
negative outlook, stating that:
Per capita debt remains high, and debt service as a
portion of total spending will continue to grow above 10% as the city issues
$3-4 billion of new bonds for the next several years. Economically, the City
is in one of its deepest recessions, with additional job losses this year
expected to approach 130,000 before moderating in 1993. Long-term job growth
is expected to be slow.
City financial plans will continue to be burdened by
weak economic factors and continued risks to State and federal actions that the
City is relying on to balance future budgets.
The outlook remains negative. Labor negotiations also
present some risk, given City assumptions of no wage increase in 1993-1994.
The City projected balanced fiscal 1992 financial operations in the
financial plan presented to the Financial Control Board on November 6, 1991.
Modification to the 1992-1996 plan fell short of establishing structural
balance over the plan period. It focused more on finding additional monies to
support current spending levels than on aligning the scope of government
services within the constraints of what is affordable from ongoing revenues.
City officials are revising and expanding details of the plan to be revealed in
the preliminary budget submission scheduled for January 16, 1992. S&P expects
the plan to provide substantial details on how the City will bring recurring
expenditures more in line with recurring revenues.
Previously, Moody's had raised its rating to A in May,
1988, to Baal in December, 1985, to Baa in November, 1983 and to Bal in
November, 1981. S&P had raised its rating to A- in November, 1987, to BBB+ in
July, 1985 and to BBB in March, 1981.
On May 9, 1990, Moody's revised downward its rating on
outstanding City revenue anticipation notes from MIG-1 to MIG-2 and rated the
$900 million Notes then being sold MIG-2. On April 30, 1991 Moody's confirmed
its MIG-2 rating for the outstanding revenue anticipation notes and for the
$1.25 billion in notes then being sold. On April 29, 1991, S&P revised
downward its rating on City revenue anticipation notes from SP-1 to SP-2.
As of December 31, 1992, the City and MAC had,
respectively, $15.6 billion and $5.2 billion of outstanding net long-term
indebtedness.
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Certain Agencies of the State have faced substantial
financial difficulties which could adversely affect the ability of such
Agencies to make payments of interest on, and principal amounts of, their
respective bonds. The difficulties have in certain instances caused the State
(under so-called "moral obligation" provisions which are non-binding statutory
provisions for State appropriations to maintain various debt service reserve
funds) to appropriate funds on behalf of the Agencies. Moreover, it is
expected that the problems faced by these Agencies 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
Agencies having financial difficulties to meet their obligations could result
in a default by one or more of the Agencies. 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
Agencies. In addition, any default in payment on any general obligation of any
Agency 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.
As of September 30, 1991, the State reported that there
were eighteen Agencies that each had outstanding debt of $100 million or more.
These eighteen Agencies had an aggregate of $57.1 billion of outstanding debt,
including refunding bonds, of which the State was obligated under
lease-purchase, contractual obligation or moral obligation provisions on $23.6
billion.
The State is a defendant in numerous legal proceedings
pertaining to matters incidental to the performance of routine governmental
operations. Such litigation includes, but is not limited to, claims asserted
against the State arising from alleged torts, alleged breaches of contracts,
condemnation proceedings and other alleged violations of State and Federal
laws. Included in the State's outstanding litigation are a number of cases
challenging the constitutionality or the adequacy and effectiveness of a
variety of significant social welfare programs primarily involving the State's
mental hygiene programs. Adverse judgments in these matters generally could
result in injunctive relief coupled with prospective changes in patient care
which could require substantial increased financing of the litigated programs
in the future.
The State is also engaged in a variety of contract and
tort claims wherein significant monetary damages are sought. Actions commenced
by several Indian nations claim that significant amounts of land were
unconstitutionally taken from the Indians in violation of various treaties and
agreements during the eighteenth and nineteenth centuries. The claimants seek
recovery of approximately six million acres of land as well as compensatory and
punitive damages.
Adverse developments in the foregoing proceedings or new
proceedings could adversely affect the financial condition of the State in the
1992-93 fiscal year or thereafter.
Certain localities in addition to New York City could
have financial problems leading to requests for
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additional State assistance. The 1992-93 State Financial Plan includes
a significant reduction in State aid to localities in such programs as revenue
sharing and aid to education from projected base-line growth in such programs.
It is expected that such reductions will result in the need for localities to
reduce their spending or increase their revenues. The potential impact on the
State of such actions by localities is not included in projections of State
revenues and expenditures in the State's 1992-93 fiscal year.
Fiscal difficulties experienced by the City of Yonkers
("Yonkers") resulted in the creation of the Financial Control Board for the
City of Yonkers (the "Yonkers Board") by the State in 1984. The Yonkers Board
is charged with oversight of the fiscal affairs of Yonkers. Future actions
taken by the Governor or the State Legislature to assist Yonkers could result
in allocation of State resources in amounts that cannot yet be determined.
Municipalities and school districts have engaged in
substantial short-term and long-term borrowings. In 1990, the total
indebtedness of all localities in the State was approximately $26.9 billion, of
which $13.5 billion was debt of New York City (excluding $7.1 billion in MAC
debt). State law requires the Comptroller to review and make recommendations
concerning the budgets of those local government units other than New York City
authorized by State law to issue debt to finance deficits during the period
that such deficit financing is outstanding. Seventeen localities had
outstanding indebtedness for State financing at the close of their fiscal year
ending in 1990. In 1992, an unusually large number of local government units
requested authorization for deficit financings. According to the Comptroller,
ten local government units have been authorized to issue deficit financing in
the aggregate amount of $131.1 million. Certain proposed Federal expenditure
reductions could reduce, or in some cases eliminate, Federal funding of some
local programs and accordingly might impose substantial increased expenditure
requirements on affected localities. If the State, New York City or any of the
Agencies were to suffer serious financial difficulties jeopardizing their
respective access to the public credit markets, the marketability of notes and
bonds issued by localities within the State, including bonds in the New York
Trust, could be adversely affected. Localities also face anticipated and
potential problems resulting from certain pending litigation, judicial
decisions, and long-range economic trends. The longer-range potential problems
of declining urban population, increasing expenditures, and other economic
trends could adversely affect certain localities and require increasing State
assistance in the future.
At the time of the closing for each New York Trust,
Special Counsel to each New York Trust for New York tax matters rendered an
opinion under then existing New York income tax law applicable to taxpayers
whose income is subject to New York income taxation substantially to the effect
that:
(1) Each New York Trust is not an association taxable
as a corporation and the income of a New York Trust will be treated as the
income of the Unitholders under the income tax laws of the State and the City
of New York. Individuals who reside in New York State or City will not be
subject to State and City tax on interest income which is exempt from Federal
income tax under section 103 of the Internal Revenue Code of 1986 and derived
from obligations of New York State or a political subdivision thereof, although
they will be subject to New York State and City tax with respect to any gains
realized when such obligations are sold,
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redeemed or paid at maturity or when any such Units are sold or redeemed.
NORTH CAROLINA TRUSTS. The economic profile of North
Carolina consists primarily of manufacturing, agriculture, tourism and mining.
The North Carolina Employment Security Commission's preliminary figures
indicate that non-agricultural payroll employment accounted for approximately
3,147,800 jobs in December 1992, the largest segment of which was the
approximately 838,200 in manufacturing. During the period 1985 to 1990, per
capita income in North Carolina grew from approximately $11,669 to
approximately $16,266, an increase of 39.4%.
Agriculture is a basic element in the economy of North
Carolina. Gross agricultural income in 1991 was $4.9 billion, which placed
North Carolina tenth in cash receipts in commodities. A strong agribusiness
sector also supports farmers with farm inputs (fertilizer, insecticide,
pesticide and farm machinery) and processing of commodities produced by farmers
(vegetable canning and cigarette manufacturing).
The North Carolina Department of Commerce, Division of
Travel and Tourism, has reported that in 1992 approximately $7.3 billion was
spent on tourism in the State (up 12.3% from 1989). The Department also
estimated that approximately 252,000 people as of 1992 were employed in
tourism-related jobs. The North Carolina Employment Security Commission
estimated the North Carolina unemployment rate in December 1992 to be 5.3% of
the labor force (not seasonally adjusted) and 5.5% (seasonally adjusted), as
compared with an unemployment rate nationwide of 7.0% (not seasonally adjusted)
and 7.3% (seasonably adjusted).
General obligations of the State are currently rated
"AAA" and "Aaa" by Standard & Poor's and Moody's, respectively. There can be
no assurance that the economic conditions in which these ratings, or the
ratings of the other bonds in the Portfolio, are based will continue or that
particular bond issues may not be adversely affected by changes in economic or
political conditions, by uncertainties peculiar to the issuers thereof or the
revenue sources from which they are to be paid. The factual information
provided above was derived from publications of various North Carolina
departments or agencies and has not been independently verified. Investors are
encouraged to consult the Schedule of Investments at Date of Deposit for the
North Carolina Trust and their own investment advisors regarding the merits of
particular bonds in the Portfolio.
The assets of the Trust will consist of interest-bearing
obligations issued by or on behalf of the State of North Carolina, its
political subdivisions and authorities and, provided the interest thereon is
exempt from North Carolina income taxes by the laws or treaties of the United
States, by or on behalf of the United States territories or possessions
(including Puerto Rico, the Virgin Islands, Guam and the Northern Mariana
Islands), their political subdivisions and authorities (the "North Carolina
Bonds").
At the time of the closing for each North Carolina
Trust, Special Counsel to the Fund for North
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Carolina tax matters rendered an opinion under then existing North
Carolina income tax law applicable to taxpayers whose income is subject to
North Carolina income taxation substantially to the effect that:
The North Carolina Trust is not an association taxable
as a corporation for North Carolina income tax purposes. Interest on the North
Carolina Bonds which is exempt from North Carolina income tax when received by
the North Carolina Trust will retain its status as tax-exempt interest when
distributed to Unitholders. For North Carolina income tax purposes, each
Unitholder will have a taxable event when, upon redemption or sale of his
Units, he receives cash or other property. Gain or loss will be determined by
computing the difference between the proceeds of such a redemption or sale and
the Unitholder's adjusted basis for the Units.
For North Carolina income tax purposes, each Unitholder
will have a taxable event when the North Carolina Trust disposes of one of the
North Carolina Bonds (whether by sale, payment at maturity, retirement or
otherwise); provided that when any of the North Carolina Bonds held by the
North Carolina Trust have been issued under an act of the General Assembly of
North Carolina that provides that all income from such North Carolina Bond,
including a profit made from the sale thereof, shall be free from all taxation
by the State of North Carolina, any such profit received by the Trust will
retain its tax-exempt status in the hands of each Unitholder. Ownership of the
Units representing a pro rata ownership of the North Carolina Bonds is exempt
from the North Carolina tax on intangible personal property so long as the
corpus of the Trust is composed entirely of North Carolina obligations or is
composed entirely of obligations of the United States and its possessions and
North Carolina and at least eighty percent (80%) of the fair market value of
such obligations represents North Carolina obligations; provided that for this
exemption to apply, the Trustee must periodically provide to the North Carolina
Department of Revenue such information about the North Carolina Trust as
required by applicable law.
Interest on indebtedness paid or accrued by a Unitholder
in connection with ownership of Units in the North Carolina Trust will not be
deductible by the Unitholder for North Carolina state income tax purposes.
Amortization of North Carolina Bond premiums is
mandatory for North Carolina state income tax purposes for all North Carolina
resident Unitholders. Amortization for the taxable year is accomplished by
lowering the basis or adjusted basis of the Units, with no deduction against
gross income for the year.
Trust Units will be subject to North Carolina
inheritance and estate tax if owned by a North Carolina resident on the date of
his death. Neither the North Carolina Bonds nor the Units will be subject to
the North Carolina sales tax or use tax.
OHIO TRUSTS. The Ohio Trust will invest substantially
all of its net assets in obligations (or in certificates of participation in
obligations) issued by or on behalf of the State of Ohio, political
subdivisions
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thereof, or agencies or instrumentalities of the State or its
political subdivisions (Ohio Obligations). The Ohio Trust is therefore
susceptible to political, economic or regulatory factors that may affect
issuers of Ohio Obligations. (The timely payment of principal of, and interest
on, certain Ohio Obligations in the Ohio Trust has been guaranteed by bond
insurance purchased by the issuers, the Ohio Trust or other parties. The
timely payment of debt service on Ohio Obligations that are so insured may not
be subject to the factors referred to in this section of the Prospectus.) The
following information constitutes only a brief summary of some of the complex
factors that may affect the financial situation of issuers in Ohio, and is not
applicable to "conduit" obligations on which the public issuer itself has no
financial responsibility. This information is derived from official statements
published in connection with the issuance of securities of certain Ohio issuers
and from other publicly available documents, and is believed to be accurate.
No independent verification has been made of any of the following information.
The creditworthiness of Ohio Obligations of local Ohio
issuers is generally unrelated to that of obligations issued by the State
itself, and generally there is no responsibility on the part of the State to
make payments on those local obligations. There may be specific factors that
are from time to time applicable in connection with investment in particular
Ohio Obligations or in those obligations of particular Ohio issuers, and it is
possible the investment will be in particular Ohio Obligations or in those
Obligations of particular issuers as to which those factors apply. However,
the information set forth below is intended only as a general summary and not
as a discussion of any specific factors that may affect any particular issue or
issuer of Ohio Obligations.
Ohio is the seventh most populous state, with a 1990
Census count of 10,847,000 indicating a 0.5% population increase from 1980.
The Ohio economy, while diversifying more into the
service and other non-manufacturing areas, continues to rely in part on durable
goods manufacturing largely concentrated in motor vehicles and equipment,
steel, rubber products and household appliances. As a result, general economic
activity in Ohio, as in many other industrially-developed states, tends to be
more cyclical than in some other states and in the nation as a whole.
Agriculture also is an important segment of the economy, with over half the
State's area devoted to farming and approximately 20% of total employment is in
agribusiness.
The State's overall unemployment rate is commonly
somewhat higher than the national figure (for example, the reported 1990
average monthly rate was 5.7%, compared to the national figure of 5.5%;
however, for both 1991 and 1992 that State rate was below the national rate,
the State rates were 6.4% and 7.2%, and the national rates 6.7% and 7.4%). The
unemployment rate, and its effects, vary among particular geographic areas of
the State.
There can be no assurance that future state-wide or
regional economic difficulties, and the resulting impact on State or local
government finances generally, will not adversely affect the market value of
Ohio
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Obligations held in the portfolio of the Ohio Trust or the ability of the
particular obligors to make timely payments of debt service on (or lease
payments relating to) those obligations.
The State operates on the basis of a fiscal biennium for
its appropriations and expenditures, and is precluded by law from completing a
fiscal year ending June 30 (FY) or biennium in a deficit position. Most State
operations are financed through the General Revenue Fund (GRF), for which
personal income and sales-use taxes are the major sources. Growth and
depletion of GRF ending fund balances show a consistent pattern related to
national economic conditions, with the FY-ending balance reduced during less
favorable national economic periods and increased during more favorable
economic periods. The State has established procedures for, and has timely
taken, necessary actions to ensure a resource/expenditure balance during less
favorable economic periods. These include general and selected reductions in
appropriations spending; none have been applied to appropriations needed for
debt service or lease rentals on any State obligations.
Key end of biennium fund balances at June 30, 1989 were
$475.1 million (GRF) and $353 million in the Budget Stabilization Fund (BSF, a
cash and budgetary management fund). In the latest complete biennium,
necessary corrective steps were taken in FY 1991 to respond to lower receipts
and higher expenditures in certain categories than earlier estimated. Those
steps included selected reductions in appropriations spending and the transfer
of $64 million from the BSF to the GRF. The State reported 1991
biennium-ending fund balances of $135.3 million (GRF) and $300 million (BSF).
To allow time to complete the resolution of certain
Senate and House differences in the budget and appropriations for the current
biennium (beginning July 1, 1991), an interim appropriations act was enacted,
effective July 1, 1991; it included debt service and lease rental
appropriations for the entire 1992-93 biennium, while continuing most other
appropriations for 31 days at 97% of FY 1991 monthly levels. The general
appropriations act for the entire biennium was passed on July 11, 1991 and
signed by the Governor. It authorized the transfer, which has been made, of
$200 million from the BSF to the GRF and provided for transfers in FY 1993 back
to the BSF if revenues are sufficient for the purpose (which the State Office
of Budget and Management, OBM, at present thinks unlikely).
Based on updated FY financial results and the economic
forecast for the State, both in light of the continuing uncertain nationwide
economic situation, OBM projected, and there was timely addressed, an FY 1992
imbalance in GRF resources and expenditures. GRF receipts were significantly
below original forecasts, a shortfall resulting primarily from lower
collections of certain taxes, particularly sales and use taxes. Higher than
earlier projected expenditure levels resulted from higher spending in certain
areas, particularly human services including Medicaid. As an initial action,
the Governor ordered most State agencies to reduce GRF appropriations spending
in the final six months of the FY 1992 by a total of approximately $196 million
(debt service and lease rental obligations were not affected). The General
Assembly authorized the transfer, made late in the FY, to the GRF the $100.4
million BSF balance and additional amounts from certain other funds, and made
adjustments in the timing of certain tax payments. Other administrative
revenue and spending actions resolved the remaining GRF imbalance. The
administration and the General Assembly are reviewing
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the longer term fiscal situation, particularly that through the June
30, 1993 end of the current biennium; a significant shortfall is currently
projected for FY 1993, to be addressed by appropriate legislative and
administrative actions. As a first step the Governor ordered, effective July
1, 1992, selected GRF appropriations spending reductions totalling $315.6
million.
The incurrence or assumption of debt by the State
without a popular vote is, with limited exceptions, prohibited by current
provisions of the State Constitution. The State may incur debt to cover casual
deficits or failures in revenues or to meet expenses not otherwise provided
for, but limited in amount to $750,000. The Constitution expressly precludes
the State from assuming the debts of any local government or corporation. (An
exception in both cases is for any debt incurred to repel invasion, suppress
insurrection or defend the State in war.)
By 12 constitutional amendments (the last adopted in
1987), Ohio voters have authorized the incurrence of State debt to which taxes
or excises were pledged for payment. At October 21, 1992, $396 million
(excluding certain highway bonds payable primarily from highway use charges) of
this debt was outstanding, with the only such State debt then still authorized
to be incurred being portions of the highway bonds, and the following: (a) up
to $100 million of obligations for coal research and development may be
outstanding at any one time ($38.6 million outstanding); and (b) of $1.2
billion of obligations for local infrastructure improvements, no more than $120
million may be issued in any calendar year ($312.5 million outstanding, $840
million remaining to be issued.)
The Constitution also authorizes the issuance of State
obligations for certain purposes the owners of which are not given the right to
have excises or taxes levied to pay debt service. Those special obligations
include bonds and notes issued by, among others, the Ohio Public Facilities
Commission and the Ohio Building Authority; $3.7 billion of those obligations
were outstanding at January 2, 1993. A 1990 constitutional amendment
authorizes greater State and political subdivision participation in the
provision of individual and family housing, including borrowing for that
purpose. The General Assembly may for that purpose authorize the issuance of
State obligations secured by a pledge of all or such portion as it authorizes
of State revenues or receipts, although the obligations may not be supported by
the State's full faith and credit.
State and local agencies issue revenue obligations that
are payable from revenues from or relating to certain facilities, which
obligations are not "debt" within constitutional provisions or payable from
taxes. In general, payment obligations under lease-purchase agreements of Ohio
public agencies (in which certificates of participation may be issued) are
limited in duration to the issuer's fiscal period, and are renewable only upon
appropriations being made available for the subsequent fiscal period.
Local school districts in Ohio receive a major portion
(on a state-wide basis, recently approximately 46%) of their operating moneys
from State subsidies, but are dependent on local property taxes, and in 88
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districts income taxes, for significant portions of their budgets. Litigation
has recently been filed, similar to that in other states, questioning the
constitutionality of Ohio's system of school funding. A small number of the
State's 612 local school districts have in any year required special assistance
to avoid year-end deficits. A current program provides for school district
cash need borrowing directly from commercial lenders, with diversion of State
subsidy distributions to repayment if needed; in FY 1991 under this program 26
districts borrowed a total of $41.8 million (including over $27 million by one
district), and in FY 1992 borrowings totaled $61.9 million (including $46.6
million for one district). FY 1993 loan approvals (through January 19, 1993)
total $92 million for 22 districts (including $75 million for one district).
Ohio's 943 incorporated cities and villages rely
primarily on property and municipal income taxes for their operations, and,
with other local governments, receive local government support and property tax
relief moneys distributed by the State. For those few municipalities that on
occasion have faced significant financial problems, established procedures
provide for a joint State/local commission to monitor the municipality's fiscal
affairs, and for development of a financial plan developed to eliminate
deficits and cure any defaults. Since inception in 1979, these procedures have
been applied to 22 cities and villages, in 16 of which the fiscal situation has
been resolved and the procedures terminated. At present the State itself does
not levy any ad valorem taxes on real or tangible personal property. Those
taxes are levied by political subdivisions and other local taxing districts.
The Constitution has since 1934 limited the amount of the aggregate levy
(including a levy for unvoted general obligations) of property taxes by all
overlapping subdivisions, without a vote of the electors or a municipal charter
provision, to 1% of true value in money, and statutes limit the amount of that
aggregate levy to 10 mills per $1 of assessed valuation (commonly referred to
as the "ten-mill limitation"). Voted general obligations of subdivisions are
payable from property taxes unlimited as to amount or rate.
At the time of the closing for each Ohio Trust, Special
Council to each Ohio Trust for Ohio tax matters rendered an opinion under then
existing Ohio income tax law applicable to taxpayers whose income is subject to
Ohio income taxation substantially to the effect that:
(1) An Ohio Trust is not taxable as a corporation or
otherwise for purposes of the Ohio personal income tax, the Ohio corporation
franchise tax or the Ohio dealers in intangibles tax;
(2) Income of an Ohio Trust will be treated as the
income of the Unitholders for purposes of the Ohio personal income tax, Ohio
municipal income taxes and the Ohio corporation franchise tax in proportion to
the respective interest therein of each Unitholder;
(3) Interest on obligations issued by or on behalf of
the State of Ohio, political subdivisions thereof, or agencies or
instrumentalities thereof ("Ohio Obligations"), or by the governments of Puerto
Rico, the Virgin Islands or Guam ("Territorial Obligations") held by the Trust
is exempt from the Ohio personal income tax and Ohio school district income
taxes, and is excluded from the net income base of the Ohio corporation
franchise tax when distributed or deemed distributed to Unitholders;
(4) Proceeds paid to an Ohio Trust under insurance
policies representing maturing interest on defaulted
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obligations held by the Ohio Trust will be exempt from Ohio income tax,
Ohio municipal income taxes and the net income base of the Ohio corporation
franchise tax if, and to the same extent as, such interest would be exempt from
such taxes if paid directly by the issuer of such obligations; and
(5) Gains and losses realized on the sale, exchange or
other disposition by an Ohio Trust of Ohio Obligations are excluded in
determining adjusted gross and taxable income for purposes of the Ohio personal
income tax, Ohio municipal income taxes and Ohio school district income taxes,
and are excluded from the net income base of the Ohio corporation franchise tax
when distributed or deemed distributed to Unitholders.
SOUTH CAROLINA TRUSTS. Although all or most of the
Bonds in the South Carolina Quality Trust are revenue obligations of local
governments or authorities rather than general obligations of the State of
South Carolina itself, there can be no assurance that any financial
difficulties the State may experience will not adversely affect the market
value or marketability of the Bonds or the ability of the respective obligors
to pay interest on or principal of the Bonds. The information regarding the
financial condition of the State is included for the purpose of providing
information about general economic conditions that may affect issuers of the
Bonds in South Carolina.
From the early 1920's to the present nine, the State's
economy has been dominated by the textile industry with over one out of every
three manufacturing workers directly or indirectly related to the textile
industry. While the textile industry is still the major industrial employer in
the State, since 1950 the State's economy has undergone a gradual transition.
The economic base of the State has diversified as the trade and service sectors
developed and with the added development of the durable goods manufacturing
industries, South Carolina's economy now resembles more closely that of the
United States.
South Carolina has experienced growth in personal income
and employment in recent years. Personal income in the State increased by 7.9%
in the fiscal year ended June 30, 1991, while that of the U.S. increased by
4.8%. For this same fiscal year, unemployment in South Carolina was 5.7%,
compared with the national rate of 6.3%.
Growth in employment in South Carolina was also
favorable in 1989. The State's most recently released level of seasonally
adjusted total nonagricultural employment was $1,520,800 as of November 1989,
an increase of 64,200 jobs over the November 1988 level of 1,456,600. The
average annual unemployment rate for 1988 was 4.5% for the State, considerably
below the comparable national rate of 5.5%. The State seasonally adjusted
unemployment rate of 4.7% as of November 1989, remained below the national rate
of 5.3%. In late September 1989, Hurricane Hugo hit South Carolina causing
considerable damage and destruction. The State estimates that the
total value of such damage and destruction is approximately $6 billion. The
State, its political subdivisions and private entities, in some instances, have
or will receive financial assistance from the Federal Emergency Management
Agency and have or will be reimbursed by their respective insurers. The State
is unable to determine at this time with accuracy the total financial impact of
Hurricane Hugo on the State with respect to uninsured losses or operational
costs.
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The State Constitution requires the General Assembly to
provide a balanced budget and requires that if there be a deficit, such deficit
shall be provided for in the succeeding fiscal year. The State Constitution
also provides that the State Budget and Control Board may, if a deficit appears
likely, effect such reductions in appropriations as may be necessary to prevent
a deficit. At the November 6, 1984 general election there was approved a
constitutional amendment providing that annual increases in State
appropriations may not exceed the average growth rate of the economy of the
State and that the annual increase in the number of State employees may not
exceed the average growth of population of the State. The State Constitution
also establishes a Reserve Fund to be maintained in an amount equal to 4% of
General Fund revenue for the latest fiscal year. Despite the efforts of the
State Budget and Control Board, deficits were experienced in each of the fiscal
years ended June 30, 1981, June 30, 1982, June 30, 1985 and June 30, 1986. All
deficits have been funded out of the Reserve Fund. For the fiscal years ending
June 30, 1983 and 1984, the State had cash surpluses. As of June 30, 1985 the
General Fund reserve was $89,100,000.
At its July 1985 meeting the State Budget and Control
Board, acting upon advice that a shortfall in General Fund revenues for the
fiscal year ending June 30, 1985 might develop, froze all supplemental
appropriations pending the final accounting of the General Fund for fiscal year
1985. On August 8, 1985, the Office of the Comptroller General advised the
State Budget and Control Board that General Fund expenditures for the fiscal
year ended June 30, 1985 did exceed General Fund revenues by $11,936,636.
Obedient to the constitutional mandate that a casual deficit shall be provided
for in the succeeding fiscal year, the State Budget and Control Board delayed
certain hiring and capital improvements scheduled to be made in fiscal year
1986 in an amount sufficient to meet the fiscal year 1985 budget shortfall. In
January of the fiscal year ended June 30, 1986 the State Budget and Control
Board was advised of a possible shortfall of $46,346,968. The Board
immediately reduced State agency appropriations by the amount of the
anticipated shortfall. Notwithstanding this action, at the end of fiscal year
1986, it became apparent that a shortfall would result. In August of 1986, the
State Budget and Control Board voted to fund the deficit by transferring
$37,353,272 from the Reserve Fund to the General Fund, bringing the balance in
the Reserve Fund to $51.8 million.
At the November 5, 1986 meeting of the Budget and
Control Board, the Board of Economic Advisors advised that it had reduced its
revenue estimate for the current fiscal year by $87,434,452. As required by
the provisions of the Capital Expenditure Fund, the Board applied $27,714,661
budgeted for this fund to the anticipated shortfall. This action left a
remaining shortfall of $59,719,791 which the Budget and Control Board funded by
imposing a 2.6% cut in expenditures. In a February 1987 meeting of the Board,
a further cut in expenditures of 0.8% was ordered.
After net downward revisions of $122 million in
estimated revenues during the year, the actual revenue collections exceeded the
final estimate by $37 million, resulting in a surplus for the fiscal year
ending June 30, 1987, of $20.5 million. The General Reserve Fund received $6.6
million during the year in accordance with the Appropriation Act, and $17
million of the year-end surplus was transferred to the
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<PAGE> 75
General Reserve Fund, bringing the balance in the General Reserve Fund
to $75.4 million at June 30, 1987. On August 5, 1988, it was announced that
for the fiscal year ending June 30, 1988, the Budgetary General Fund had a
surplus of $107.5 million. The surplus resulted from a $117.3 million excess
of revenues over expenditures. The State will use $52.6 million of the surplus
to fund supplemental appropriations, $28.3 million to fund the Capital Reserve,
and $20.5 million for an early buy-out of a school bus lease agreement The
General Assembly will decide how the State will spend the remaining $6.1
million.
The General Reserve Fund received $25.1 million during
the 1987-88 fiscal year in accordance with the Appropriation Act During the
year, the General Assembly reduced the required funding of the General Reserve
Fund from 4% to 3% of the latest completed fiscal year's actual revenue. The
General Assembly used $14.4 million of the resulting excess to fund the
1987-1988 Supplemental Appropriation Act, leaving $86.1 million in the General
Reserve Fund at June 30, 1988. The full-funding amount at that date, however,
was only $80.8 million. In accordance with the 1988-1989 Appropriation Act,
the excess of $5.3 million will help fund 1988-1989 appropriations.
At the November 8, 1988 general election there was
approved a constitutional amendment reducing from 4% to 3% the amount of
General Fund revenue which must be kept in the General Reserve Fund, and
removing the provisions requiring a special vote to adjust this percentage.
The amendment also created a Capital Reserve Fund equal to 2% of General Fund
revenue. Before March 1 of each year, the Capital Reserve Fund must be used to
offset mid-year budget reductions before mandating cuts in operating
appropriations, and after March 1, the Capital Reserve Fund may be appropriated
by a special vote in separate legislation by the General Assembly to finance in
cash previously authorized capital improvement bond projects, retire bond
principal or interest on bonds previously issued, and for capital improvements
or other nonrecurring purposes which must be ranked in order of priority of
expenditure. Monies in the Capital Reserve Fund not appropriated or any
appropriation for a particular project or item which has been reduced due to
application of the monies to year-end deficit must go back to the General Fund.
For the fiscal year ended June 30, 1989, the State had a
surplus of $129,788,135. At June 30, 1989, the balance in the General Reserve
Fund was $87,999,428.
Because of anticipated revenue shortfalls for the fiscal
year 1989-1990, the State Budget and Control Board committed $42.4 million of
the $58.7 million Capital Reserve Fund in April, 1990. Lack of sufficient
funding at year end resulted in an additional use of $4.5 million from the
Capital Reserve Fund. After the above reductions, the State had a fiscal year
1989-1990 surplus of $13,159,892 which was used to fund supplemental
appropriations of $1,325,000 and the Capital Reserve Fund at $11,834,892. At
June 30, 1990, the balance in the General Reserve Fund was $94,114,351.
During 1990-91 fiscal year, the State Budget and Control
Board has approved mid-year budget changes in November of 1990 and again in
February of 1991, to offset lower revenue estimates. Those changes
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<PAGE> 76
included committing the Capital Reserve Fund appropriation
($62,742,901) and reducing agency appropriations in an additional amount
necessary to offset (together with automatic expenditure reductions that are
tied to revenue levels) what would otherwise be a projected deficit of
approximately $132.6 million. On May 14 and May 21, 1991, the Budget and
Control Board, responding to April revenue figures and unofficial estimates
indicating an additional shortfall of $30 to $50 million, ordered an immediate
freeze on all personnel activities, from hiring to promotions; a freeze on
purchasing, with limited exceptions; and an indefinite halt to new contracts
and contract renewals. The Board also asked the General Assembly for the power
to furlough government workers periodically during the next fiscal year.
In the past the State's budgetary accounting principles
allowed revenue to be recorded only when the State received the related cash.
On July 30, 1991, the Budget and Control Board approved a change in this
principle for sales tax revenue beginning with the fiscal year ended June 30,
1991. The Board's resolution requires that sales taxes collected by merchants
in June and received by the State in July be reported as revenue in June rather
than in July. This change resulted in a $5.2 million decrease in reported
1990-91 sales tax revenue and a one-time $83.1 million addition to fund
balance. The one-time adjustment increases the fund balance to the level it
would be if the new principle had been in effect in years before 1990-91.
Following such action, the year-end balance in the General Reserve Fund was
$33.4 million.
At its July 30, 1991, meeting the Budget and Control
Board also took action with respect to the current fiscal year. On July 26,
1991, the Board of Economic Advisors advised the Budget and Control Board that
it projected a revenue shortfall of $148 million for the fiscal year 1991-92
budget of $3.581 billion. In response, the Budget and Control Board eliminated
the two percent (2%) Capital Reserve Fund appropriation of $65.9 million and
reduced other expenditures across the board by one percent (1%). Also an
additional two percent (2%) of appropriated expenditures were ordered held back
unexpended until further review in January of 1992. These expenditure
reduction measures, when coupled with required current year revenue transfers
and the $33.4 million carried forward in the General Reserve Fund, result in a
current estimate of a fiscal year end balance of $57 million in the General
Reserve Fund.
Prospective investors should study with care the
portfolio of Bonds in the South Carolina Trust and should consult with their
investment advisers as to the merits of particular issues in the portfolio.
At the time of the closing for each South Carolina
Trust, Special Counsel for each South Carolina Trust for South Carolina tax
matters rendered an opinion under then existing South Carolina income tax law
applicable to taxpayers whose income is subject to South Carolina income
taxation substantially to the effect that:
By the provision of paragraph (j) of Section 3 of
Article 10 of the South Carolina Constitution (revised 1977) intangible
personal property is specifically exempted from any and all ad valorem
taxation.
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<PAGE> 77
Pursuant to the provisions of Section 12-1-60 the
interest of all bonds, notes or certificates of indebtedness issued by or on
behalf of the State of South Carolina and any authority, agency, department or
institution of the State and all counties, school districts, municipalities,
divisions and subdivisions of the State and all agencies thereof are exempt
from income taxes and that the exemption so granted extends to all recipients
of interest paid thereon through the Trust. (This opinion does not extend to
so-called 63-20 obligations.) The income of the Trust would be treated as
income to each Unitholder of the Trust in the proportion that the number of
Units of the Trust held by the Unitholder bears to the total number of Units of
the Trust outstanding. For this reason, interest derived by the Trust that
would not be includable in income for South Carolina income tax purposes when
paid directly to a South Carolina Unitholder will be exempt from South Carolina
income taxation when received by the Trust and attributed to such South
Carolina Unitholder.
Each Unitholder will recognize gain or loss for South
Carolina state income tax purposes if the Trustee disposes of a Bond (whether
by sale, payment on maturity, retirement or otherwise) or if the Unitholder
redeems or sells his Unit. The Trust would be regarded, under South Carolina
law, as a common trust fund and therefore not subject to taxation under any
income tax law of South Carolina.
The above described opinion of Special Counsel has been
concurred in by an informal ruling of the South Carolina Tax Commission
pursuant to Section 12-3-170 of the South Carolina Code.
VIRGINIA TRUSTS. The Commonwealth's financial condition
is supported by a broad-based economy, including manufacturing, tourism,
agriculture, ports, mining and fisheries. The federal government is also a
major employer in Virginia, due to the heavy concentration of federal employees
in the metropolitan Washington, D.C. segment of Northern Virginia and the
military employment in the Hampton Roads area, which houses the nation's
largest concentration of military installations, although federal and State
deficit reduction efforts could have a significant impact on growth in the
government sector.
In 1989, Virginia's per capita personal income of
$18,927 was the highest of the southeastern states and exceeded the national
average of $17,596. In 1989, Virginia ranked 11th in per capita income, with
an average approximately 7% greater than the national average. Virginia
unemployment rates have generally followed a pattern similar to the national
rate but have consistently been at least 15% lower than the national rate over
the past five-year period.
The Commonwealth of Virginia has historically operated
on a fiscally conservative basis and is required by its Constitution to have a
balanced biennial budget. At the end of the June 30, 1990, fiscal year, the
General Fund had an ending fund balance computed on a budgetary cash basis of
$174.8 million, of which $8.5 million was in required reserve, with the
remainder designated for the completion of capital projects and mandatory
operating reappropriations for the next fiscal year. Computed on a modified
accrual basis in accordance with generally accepted accounting principles, the
General Fund balance at the end of
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the fiscal year ended June 30, 1990, was minus $139.6 million, compared with a
positive General Fund balance at the end of the fiscal year ended June 30,
1989, of $346.2 million. Contributing to the reduction were $281.9 million in
deferred credits, representing estimated tax refunds associated with income
taxes withheld for the period January through June, 1990, and a shortfall of
General Fund revenues (primarily income taxes) of $150.9 million below
estimates, attributable in substantial part to an economic slowdown in the
economy. As a result, the General Fund had to borrow $25 million from various
non-general funds to provide temporary working capital. Nonetheless, the
Commonwealth met all of its obligations for the fiscal year, and the total
budget for the 1988-90 biennium remained balanced.
The Commonwealth has projected a $2.0 billion revenue
shortfall for the 1990-92 biennium. To date, state officials have addressed
such shortfall with an austerity program, including budget cuts and department
fund transfers, but without a general tax increase.
As of June 30, 1990, outstanding debt backed by the full
faith and credit of the Commonwealth aggregated $501.4 million. Of this
amount, $450.0 million was also secured by revenue producing capital projects.
Debt service on the balance equaled 0.2% of total General Fund expenditures in
fiscal year 1990.
The Virginia Constitution contains limits on the amount
of general obligation bonds which the Commonwealth can issue. These limits are
substantially in excess of current levels of outstanding bonds, and at June 30,
1990 would permit an additional total of approximately $5.08 billion of bonds
secured by revenue-producing projects and approximately $5.48 billion of
unsecured general obligation bonds, with not more than approximately $1.38
billion of the latter to be issued in any four-year period. Bonds which are
not secured by revenue-producing projects must be approved in a state-wide
election.
The Commonwealth of Virginia has consistently maintained
ratings of AAA by Standard & Poor's and Aaa by Moody's on its general
obligation indebtedness, reflecting in part its sound fiscal management,
diversified economic base and low debt ratios. There can be no assurance that
these conditions will continue. Nor are these same conditions necessarily
applicable to securities which are not general obligations of the Commonwealth.
Securities issued by specific municipalities, governmental authorities or
similar issuers may be subject to economic risks or uncertainties peculiar to
the issuers of such securities or the sources from which they are to be paid.
At the time of the closing for each Virginia Trust,
Special Counsel to each Virginia Trust for Virginia tax matters rendered an
opinion under then existing Virginia income tax law applicable to taxpayers
whose income is subject to Virginia income taxation substantially to the effect
that:
The assets of the Trust will consist of interest-bearing
obligations issued by or on behalf of the Commonwealth of Virginia ("Virginia")
or counties, municipalities, authorities or political subdivisions
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thereof (the "Bonds").
Neither the Sponsor nor its counsel have independently
examined the Bonds to be deposited in and held in the Trust. However,
although no opinion is expressed herein regarding such matters, it is assumed
that: (i) the Bonds were validly issued, (ii) the interest thereon is
excludible from gross income for federal income tax purposes and (iii) the
interest thereon is exempt from income tax imposed by Virginia that is
applicable to individuals and corporations (the "Virginia Income Tax"). The
opinion set forth below does not address the taxation of persons other than
full time residents of Virginia.
(1) The Virginia Quality Trust is not an association
taxable as a corporation for purposes of the Virginia Income Tax and each
Unitholder of the Trust will be treated as the owner of a pro rata portion of
the assets held by the Trust and the income of such portion of the Virginia
Quality Trust will be treated as income of the Unitholder for purposes of the
Virginia Income Tax.
(2) Income on the Bonds which is exempt from Virginia
Income Tax when received by the Virginia Quality Trust and which would be
exempt from Virginia Income Tax if received directly by a Unitholder, will
retain its status as exempt from such tax when received by the Trust and
distributed to such Unitholder.
(3) Each Unitholder will recognize gain or loss for
purposes of the Virginia Income Tax if the Trustee disposes of a bond (whether
by redemption, sale or otherwise) or if the Unitholder redeems or sells Units
of the Trust to the extent that such a transaction results in a recognized gain
or loss to such Unitholder for federal income tax purposes, except as described
in this paragraph. Virginia has by law provided that all income from certain
tax-exempt obligations issued under the laws of Virginia, including any profits
made from the sale of such Bonds, shall be exempt from all taxation by
Virginia. Although we express no opinion, the Virginia Department of Taxation
has indicated that the gain on the sale of such tax-exempt obligations,
recognized for federal income tax purposes, would not be subject to Virginia
income taxation. Accordingly, any such gain relating to the disposition of any
Bond that would not be subject to Virginia Income Tax if the Bond was held
directly by a Unitholder will retain its tax-exempt status for purposes of the
Virginia Income Tax when the Bond is disposed of by the Virginia Quality Trust
or when the Unitholder is deemed to have disposed of his pro rata portion of
such Bond upon the disposition of his Unit provided that such gain can be
determined with reasonable certainty and substantiated.
(4) The Virginia Income Tax does not permit a deduction
of interest paid on indebtedness incurred or continued to purchase or carry
Units in the Virginia Quality Trust to the extent that interest income related
to the ownership of Units is exempt from the Virginia Income Tax.
In the case of Unitholders subject to the Virginia Bank
Franchise Tax, the income derived by such a Unitholder from his pro rata
portion of the Bonds held by the Virginia Quality Trust may affect the
determination of such Unitholders' Bank Franchise Tax. Prospective investors
subject to the Virginia Bank Franchise Tax should consult their tax advisors.
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<PAGE> 80
PUBLIC OFFERING OF UNITS
PUBLIC OFFERING PRICE. Units of each State Trust are
offered at the Public Offering Price, plus accrued interest to the expected
settlement date. The Public Offering Price per Unit is equal to the aggregate
bid side evaluation of the Municipal Bonds in the State Trust's
portfolio (as determined pursuant to the terms of a contract with the
Evaluator, by Kenny Information Services, Inc., a non-affiliated firm regularly
engaged in the business of evaluating, quoting or appraising comparable
securities), plus or minus cash, if any, in the Principal Account, held or owed
by the State Trust, divided by the number of outstanding Units of the State
Trust, plus the sales charge applicable to a Unit of such State Trust.
The sales charge is based upon the dollar weighted
average maturity of the State Trust and is determined in accordance with the
table set forth below. For purposes of this computation, Municipal Bonds will
be deemed to mature on their expressed maturity dates unless: (a) the
Municipal Bonds have been called for redemption or funds or securities have
been placed in escrow to redeem them on an earlier call date, in which case
such call date will be deemed to be the date upon which they mature; or (b)
such Municipal Bonds are subject to a "mandatory tender", in which case such
mandatory tender will be deemed to be the date upon which they mature. The
effect of this method of sales charge computation will be that different sales
charge rates will be applied to the State Trust based upon the dollar weighted
average maturity of such State Trust's portfolio, in accordance with the
following schedule:
<TABLE>
<CAPTION>
DOLLAR PERCENT OF PERCENT OF NET
Weighted Average Public Offering Amount
Years to Maturity Price Invested
-----------------
<S> <C> <C>
0 to 3.99 years . . . . . . . . . . . . . . . . . . . . . . 2.00% 2.041%
4 to 7.99 years . . . . . . . . . . . . . . . . . . . . . . 3.50 3.627
8 to 14.99 years . . . . . . . . . . . . . . . . . . . . . 4.50 4.712
15 or more years . . . . . . . . . . . . . . . . . . . . . 5.50 5.820
</TABLE>
The sales charge per Unit will be reduced as set forth below:
<TABLE>
<CAPTION>
DOLLAR WEIGHTED AVERAGE
YEARS TO MATURITY*(2)
4 TO 7.99 8 TO 14.99 15 OR MORE
--------------------------------------
AMOUNT OF INVESTMENT SALES CHARGE (% OF PUBLIC OFFERING PRICE)
-------------------- -----------------------------------------
<S> <C> <C> <C>
$1 to $99,999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.50% 4.50% 5.50%
$100,000 to $499,999 . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.25 4.25 5.00
$500,000 to $999,999 . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.00 4.00 4.50
$1,000,000 or more . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.75 3.75 4.00
</TABLE>
* If the dollar weighted average maturity of a State Trust is under
3.99 years, the sales charge is 2% and 1.5% of the Public Offering Price for
purchases of $1 to $249,999 and $250,000 or more, respectively.
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The reduced sales charges as shown on the preceding
charts will apply to all purchases of Units on any one day by the same
purchaser from the same firm and for this purpose, purchases of Units of a
Series of the Trust will be aggregated with concurrent purchases of Units of
any other unit investment trust that may be offered by the Sponsor.
Additionally, Units purchased in the name of a spouse or child (under 21) of
such purchaser will be deemed to be additional purchases by such purchaser.
The reduced sales charges will also be applicable to a trust or other fiduciary
purchasing for a single trust estate or single fiduciary account.
The Sponsor intends to permit officers, directors and
employees of the Sponsor and Evaluator and in the sole direction of the
Sponsor, registered representatives of selling firms to purchase Units of the
Trust without a sales charge, although a transaction processing fee may be
imposed on such trades.
The Public Offering Price per Unit of a State Trust on
the date shown on the cover page of Part Two of the Prospectus or on any
subsequent date will vary from the amounts stated under "Essential Information"
in Part Two due to fluctuations in the prices of the underlying Municipal
Bonds. The aggregate bid side evaluation of the Municipal Bonds shall be
determined (a) on the basis of current bid prices of the Municipal Bonds, (b)
if bid prices are not available for any particular Municipal Bond, on the basis
of current bid prices for comparable bonds, (c) by determining the value of the
Municipal Bonds on the bid side of the market by appraisal, or (d) by any
combination of the above.
The foregoing evaluations and computations shall be made
as of the Evaluation Time stated under "Essential Information" in Part Two, on
each business day effective for all sales made during the preceding 24-hour
period, and for purposes of resales and repurchases of Units.
The interest on the Municipal Bonds in each State Trust,
less the related estimated fees and expenses, is estimated to accrue in the
annual amounts per Unit set forth under "Essential Information" in Part Two.
The amount of net interest income which accrues per Unit may change as
Municipal Bonds mature or are redeemed, exchanged or sold, or as the expenses
of a State Trust change or as the number of outstanding Units of such State
Trust changes.
Payment for Units must be made on or before the fifth
business day following purchase (the "settlement date"). A purchaser becomes
the owner of Units on the settlement date. If a Unitholder desires to have
certificates representing Units purchased, such certificates will be delivered
on the fifth business day
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<PAGE> 82
following a written request therefor, or shortly thereafter. For
information with respect to redemption of Units purchased, but as to which
certificates requested have not been received, see "Redemption" below.
PUBLIC DISTRIBUTION OF UNITS. The Sponsor has qualified
Units of each State Trust for sale in the State for which such State Trust is
named. Units will be sold through dealers who are members of the National
Association of Securities Dealers, Inc. and through others. Sales may be made
to or through dealers at prices which represent discounts from the Public
Offering Price as set forth in the table below. Certain commercial banks are
making Units of the Trust available to their customers on an agency basis. A
portion of the sales charge paid by their customers is retained by or
remitted to the banks, in an amount not exceeding the discounts shown in the
table below. Under the Glass-Steagall Act, banks are prohibited from
underwriting Trust Units; however, the Glass-Steagall Act does permit certain
agency transactions and the banking regulators have indicated that these
particular agency transactions are permitted under such Act. In addition, state
securities laws on this issue may differ from the interpretations of Federal law
expressed herein and banks and financial institutions may be required to
register as dealers pursuant to state law.
<TABLE>
<CAPTION>
DOLLAR WEIGHTED AVERAGE
YEARS TO MATURITY*(3)
4 TO 7.99 8 TO 14.99 15 OR MORE
-------------------------------------------------------
DISCOUNT PER UNIT
AMOUNT OF INVESTMENT (% OF PUBLIC OFFERING PRICE)
-------------------- --------------------------------------------------------
<S> <C> <C> <C>
$1 to $99,999 . . . . . . . . . . . . . . . 2.00% 3.00% 4.00%
$100,000 to $499,999 . . . . . . . . . . . . 1.75 2.75 3.50
$500,000 to $999,999 . . . . . . . . . . . . 1.50 2.50 3.00
$1,000,000 or more . . . . . . . . . . . . . 1.25 2.25 2.50
</TABLE>
In addition to such discounts, the Sponsor may, from
time to time, pay or allow an additional discount, in the form of cash or other
compensation, to dealers employing registered representatives who sell, during
a specified time period, a minimum dollar amount of Units of the Trust and
other unit investment trusts underwritten by the Sponsor.
The Sponsor reserves the right to change the levels of
discounts at any time. The difference between the discount allowed to firms
and the sales charge will be retained by the Sponsor.
- -------------
* If the dollar weighted average maturity of a Trust is under 3.99
years, the concession or agency commission is 1.00% of the Public Offering
Price.
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The Sponsor reserves the right to reject, in whole or in part, any order
for the purchase of Units.
PROFITS OF SPONSOR. The Sponsor will retain a portion
of the sales charge on each Unit sold from its inventory, representing the
difference between the Public Offering Price of the Units, calculated as stated
under "Public Offering Price," and the discounts allowed to firms selling such
Units. The Sponsor may realize additional profit or loss as a result of the
possible change in the daily evaluation of the Municipal Bonds in the State
Trusts from its inventory.
MARKET FOR UNITS
While not obligated to do so, the Sponsor intends to,
subject to change at any time, maintain a market for Units of the State Trust
offered hereby and to offer to purchase said Units at prices, as determined by
the Evaluator, based on the aggregate bid prices of the underlying Municipal
Bonds in such State Trusts, together with accrued interest to the expected date
of settlement. Accordingly, Unitholders who wish to dispose of their Units
should inquire of their broker or bank as to the current market prices in order
to determine whether there is in existance any price in excess of the
Redemption Price and, if so, the amount thereof.
REDEMPTION
A Unitholder who does not dispose of Units in the
secondary market described above may cause their Units to be redeemed by the
Trustee by making a written request to the Trustee, Investors Fiduciary Trust
Company, P.O. Box 419430, Kansas City, Missouri 64173-0216 and, in the case of
Units evidenced by a certificate, by tendering such certificate to the Trustee,
properly endorsed or accompanied by a written instrument or instruments of
transfer in form satisfactory to the Trustee. Unitholders must sign such
written request, and such certificate or transfer instrument, exactly as their
names appear on the records of the Trustee and on any certificate representing
the Units to be redeemed. If the amount of the redemption is $25,000 or less
and the proceeds are payable to the Unitholders(s) of record at the address of
record, no signature guarantee is necessary for redemptions by individual
account owners (including joint owners). Additional documentation may be
requested, and a signature guarantee is always required, from corporations,
executors, administrators, trustees, guardians or associations. The signatures
must be guaranteed by a commercial bank or trust company, savings & loan
association or by a member firm of a national securities exchange. A
certificate should only be sent by registered or certified mail for the
protection of the Unitholder. Since tender of the certificate is required for
redemption when one has been issued, Units represented by a certificate cannot
be redeemed until the certificate representing such Units has been received by
the purchasers.
Redemption shall be made by the Trustee on the seventh
calendar day following the day on which a tender for redemption is received, or
if the seventh calendar day is not a business day, on the first business day
prior thereto (the "Redemption Date"), by payment of cash equivalent to the
Redemption Price for such
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<PAGE> 84
State Trust, determined as set forth below under "Computation of
Redemption Price," as of the Evaluation Time stated under "Essential
Information" in Part Two, next following such tender, multiplied by the number
of Units being redeemed. The price received upon redemption might be more or
less than the amount paid by the Unitholder depending on the value of the
Municipal Bonds in the State Trust's portfolio at the time of redemption. Any
Units redeemed shall be cancelled and any undivided fractional interest in the
State Trust will be extinguished.
Under regulations issued by the Internal Revenue
Service, the Trustee is required to withhold a specified percentage of the
principal amount of a Unit redemption if the Trustee has not been furnished the
redeeming Unitholder's tax identification number in the manner required by such
regulations. Any amount so withheld is transmitted to the Internal Revenue
Service and may be recovered by the Unitholder only when filing a tax return.
Under normal circumstances the Trustee obtains the Unitholder's tax
identification number from the selling broker. However, any time a
Unitholder elects to tender Units for redemption, such Unitholder should make
sure that the Trustee has been provided a certified tax identification number in
order to avoid this possible "back-up withholding." In the event the Trustee
has not been previously provided such number, one must be provided at the time
redemption is requested.
Any amounts paid on redemption representing interest
shall be withdrawn from the Interest Account for such State Trust to the extent
that funds are available for such purpose. All other amounts paid on
redemption shall be withdrawn from the Principal Account for such State Trust.
The Trustee is empowered to sell Municipal Bonds for such State Trust in order
to make funds available for the redemption of Units of such State Trust. Such
sale may be required when Municipal Bonds would not otherwise be sold and might
result in lower prices then might otherwise be realized. To the extent
Municipal Bonds are sold, the size and diversity of such State Trust will be
reduced.
The Trustee is irrevocably authorized in its discretion,
if the Sponsor does not elect to purchase any Units tendered for redemption, in
lieu of redeeming such Units, to sell such Units in over-the-counter market for
the account of tendering Unitholders at prices which will return to such
Unitholders amounts in cash, net after brokerage commissions, transfer taxes
and other charges, equal to or in excess of the Redemption Price for such
Units. In the event of any such sale, the Trustee shall pay the net proceeds
thereof to the Unitholders on the day they would otherwise be entitled to
receive payment of the Redemption Price.
The right of redemption may be suspended and payment
postponed (1) for any period during which the New York Stock Exchange is
closed, other than customary weekend and holiday closings, or during which (as
determined by the Securities and Exchange Commission) trading on the New York
Stock Exchange is restricted; (2) for any period during which an emergency
exists as a result of which disposal by the Trustee of Municipal Bonds is not
reasonably practicable or it is not reasonably practicable fairly to determine
the value of the underlying Municipal Bonds in accordance with the Agreement;
or (3) for such other period as the Securities and Exchange Commission may by
order permit. The Trustee is not liable to any person or in any way for any
loss or damage which may result from any such suspension or postponement.
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COMPUTATION OF REDEMPTION PRICE. The Redemption Price
for Units of each State Trust is computed by the Evaluator as of the Evaluation
Time stated under "Essential Information" in Part Two next occurring after the
tendering of a Unit for redemption and on any other business day desired by it,
by
A. adding (1) the principal cash on hand held or owed
by the State Trust other than cash deposited in the Trust Fund to purchase
Municipal Bonds not applied to the purchase of such Bonds; (2) the aggregate
value of the Municipal Bonds held in the State Trust, as determined by the
Evaluator on the basis of bid prices therefor; and (3) interest accrued and
unpaid on the Municipal Bonds in the State Trust as of the date of computation;
and
B. deducting therefrom (1) amounts representing any
applicable taxes or governmental charges payable out of the State Trust and for
which no deductions have been previously made for the purpose of additions to
the Reserve Account described under "Expenses of the Trust"; (2) amounts
representing estimated accrued expenses of the State Trust including,
but not limited to, unpaid fees and expenses of the Trustee (including legal and
auditing fees and any insurance costs), the Evaluator, the Sponsor and bond
counsel, if any; (3) cash held for distribution to Unitholders of record as of
the business day prior to the evaluation being made; and (4) other liabilities
incurred by the State Trust; and
C. finally, dividing the results of such computation
by the number of Units of the State Trust outstanding as of the date thereof.
UNITHOLDERS
OWNERSHIP OF UNITS. Ownership of Units of any State
Trust will not be evidenced by a certificate unless a Unitholder or the
Unitholder's registered broker/dealer or the clearing agent for such
broker/dealer makes a written request to the Trustee. Units are transferable
by making a written request to the Trustee and, in the case of Units evidenced
by a certificate, by presenting and surrendering such certificate to the
Trustee properly endorsed or accompanied by a written instrument or
instruments of transfer which should be sent registered or certified mail for
the protection of Unitholders. Unitholders must sign such written request, and
such certificate or transfer instrument, exactly as their names appear on the
records of the Trustee and on any certificate representing the Units to be
transferred. Such signatures must be guaranteed by a commercial bank or trust
company, savings and loan association or by a member firm of a national
securities exchange.
Units may be purchased and certificates, if requested,
will be issued in denominations of one Unit or any multiple thereof subject to
any minimum investment requirement established by the Sponsor from time to
time. Any certificate issued will be numbered serially for identification,
issued in fully registered form and will be tranferable only on the books of
the trustee. The Trustee may require a Unitholder to pay a fee for each
certificate re-issued or transferred, and to pay any governmental charge that
may be imposed in connection with each such transfer or interchange. The
Trustee at the present time does not intend to charge for the normal transfer
or interchange of certificates. Destroyed, stolen, mutilated or lost
certificates will be replaced upon delivery to the Trustee of satisfactory
indemnity (generally amounting to 3% of the market
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value of the Units), affidavit of loss, evidence of ownership and payment of
expenses incurred.
DISTRIBUTIONS TO UNITHOLDERS. Interest received by each
State Trust, including any portion of the proceeds from a disposition of
Municipal Bonds which represents accrued interest, is credited by the Trustee
to the Interest Account for such State Trust. All other receipts are credited
by the Trustee to a separate Principal Account for such State Trust. During
each year the distributions to the Unitholders of the State Trusts as of each
Record Date (see "Essential Information" in Part Two) will be made on the
following Distribution Date or shortly thereafter to Unitholders of record of
such state trust on the preceding record date (which is the first day of each
month). Unitholders of the State Trusts will receive an amount substantially
equal to one-twelfth, one-fourth or one-half (depending on the distribution
option selected) of such holders' pro rata share of the estimated annual income
to the Interest Account of such State Trust, after deducting estimated
expenses. In addition, the Trustee will distribute on each semi-annual
Distribution Date or shortly thereafter, to each Unitholder of record of a
State Trust on the preceding Record Date, an amount substantially equal to such
holders' pro rata share of the cash balance, if any, in the Principal Account
of such State Trust computed as of the close of business on the preceding
Record Date. However, no distribution will be required if the balance
in the Principal Account of the State Trust is less than $1.00 per Unit; if such
balance is between $5.00 and $10.00 per Unit, distributions will be made on each
quarterly Distribution Date; and if such balance exceeds $10.00 per Unit, such
amounts will be distributed on the next monthly Distribution Date. Persons who
purchase Units of a State Trust between a Record Date and a Distribution Date
will receive their first distribution on the second Distribution Date following
their purchase of Units. All distributions of principal and interest will be
paid in cash unless a Unitholder has elected to reinvest principal and/or
interest payments in shares of one of the reinvestment funds. See "Distribution
Reinvestment." Interest distributions per Unit for each State Trust will be in
the amounts shown under "Essential Information" in the applicable Part Two and
may change as underlying Municipal Bonds in such State Trust are redeemed, paid
or sold, or as expenses of the State Trust change or the number of outstanding
Units of the State Trust changes.
Since interest on Municipal Bonds in each of the State
Trusts is payable at varying intervals, usually in semiannual installments, and
distributions of income are made to Unitholders of the State Trusts at what may
be different intervals from receipt of interest, the interest accruing to the
State Trusts may not be equal to the amount of money received and available for
distribution from the Interest Account of such Series. Therefore, on each
Distribution Date the amount of interest actually on deposit in the Interest
Account of such State Trust and available for distribution may be slightly more
or less than the interest distribution made. In order to eliminate
fluctuations in interest distributions resulting from such variances, the
Trustee is authorized by the Agreement to advance such amounts as may be
necessary to provide interest distributions of approximately equal amounts.
The Trustee will be reimbursed, without interest, for any such advances from
funds available in the Interest Account of such State Trust.
Because the interest to which Unitholders of the State
Trusts are entitled will at most times exceed the amount available for
distribution, there will almost always remain an item of accrued interest that
is accounted for daily and added to the value of Units. If Unitholders of a
State Trust sell or redeem all or a portion of their Units, they will be paid
their proportionate share of the accrued interest of such State Trust
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to, but not including, the fifth business day after the date of a sale or to
the date of tender in the case of a redemption.
Unitholders purchasing Units will initially receive
distributions in accordance with the election of the prior owner. Unitholders
desiring to change their distribution option may do so by sending written
notice to the Trustee, together with their certificate (if one was issued).
Certificates should only be sent by registered or certified mail to minimize
the possibility of loss. If written notice and any certificate are received by
the Trustee not later than January 1 or July 1 of a year, the change will
become effective on January 2 or July 2 for distributions commencing with
February 15 or August 15, respectively, of that year. If notice is not
received by the Trustee, the Unitholder will be deemed to have elected to
continue with the same option.
STATEMENTS TO UNITHOLDERS. With each distribution, the
Trustee will furnish each Unitholder a statement of the amount of interest and
the amount of other receipts, if any, which are being distributed, expressed in
each case as a dollar amount per Unit.
The accounts of each State Trust are required to be
audited annually, at the State Trust's expense, by independent auditors
designated by the Sponsor, unless the Trustee determines that such an audit
would not be in the best interest of the Unitholders of such State Trust. The
accountants' report will be furnished by the Trustee to any Unitholder of such
State Trust upon written request.
Within a reasonable period of time after the end of each
calendar year, the Trustee shall furnish to each person who at any time during
the calendar year was a Unitholder of a State Trust a statement covering the
calendar year, setting forth:
A. As to the Interest Account:
1. The amount of interest received on the Municipal
Bonds and the percentage of such amount by states and territories in which the
issuers of such Bonds are located;
2. The amount paid from the Interest Account of such
State Trust representing accrued interest of any Units redeemed;
3. The deductions from the Interest Account of such
State Trust for applicable taxes, if any, fees and expenses (including auditing
fees) of the Trustee, the Evaluator, the Sponsor and bond counsel, if any;
4. Any amounts credited by the Trustee to a Reserve
Account for such State Trust described under "Expenses of the Trust"; and
5. The net amount remaining after such payments and
deductions, expressed both as a total dollar amount and a dollar amount per
Unit outstanding on the last business day of such calendar year.
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B. As to the Principal Account:
1. The dates of the maturity, liquidation or
redemption of any of the Municipal Bonds in such State Trust and the net
proceeds received therefrom excluding any portion credited to the Interest
Account;
2. The amount paid from the Principal Account of such
Series representing the principal of any Units redeemed;
3. The deductions from the Principal Account of such
Series for payment of applicable taxes, if any, fees and expenses (including
auditing expenses) of the Trustee, the Evaluator, the Sponsor and bond counsel,
if any;
4. Any amounts credited by the Trustee to a Reserve
Account for such Series described under "Expenses of the Trust"; and
5. The net amount remaining after distributions of
principal and deductions, expressed both as a dollar amount and as a dollar
amount per Unit outstanding on the last business day of such calendar year.
C. The following information:
1. A list of the Municipal Bonds in such State Trust
as of the last business day of such calendar year;
2. The number of Units of such State Trust
outstanding on the last business day of such calendar year;
3. The Redemption Price of such State Trust based on
the last Trust Fund Evaluation made during such calendar year; and
4. The amount actually distributed during such
calendar year from the Interest and Principal Accounts of such State Trust
separately stated, expressed both as total dollar amounts and as dollar amounts
per Unit of such State Trust outstanding on the Record Date for each such
distribution.
RIGHTS OF UNITHOLDERS. A Unitholder may at any time
tender Units to the Trustee for redemption. No Unitholder of a State Trust
shall have the right to control the operation and management of the Trust or
such State Trust in any manner, except to vote with respect to amendment of the
Agreement or termination of the Trust or such State Trust. The death or
incapacity of any Unitholder will not operate to terminate the Trust or any
State Trust nor entitle legal representatives or heirs to claim an accounting
or to bring any action or proceeding in any court for partition or winding up
of the Trust or any State Trust.
INVESTMENT SUPERVISION
The Sponsor may not alter the portfolio of the State
Trusts by the purchase, sale or substitution of Municipal Bonds, except in the
special circumstances noted below. Thus, with the exception of the
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redemption or maturity of Municipal Bonds in accordance with their
terms, and/or the sale of Municipal Bonds to meet redemption requests, the
assets of the State Trusts will remain unchanged under normal circumstances.
The Sponsor may direct the Trustee to dispose of
Municipal Bonds the value of which has been affected by certain adverse events
including default in the payment of principal or interest, institution of
certain legal proceedings, default under other documents which may adversely
affect debt service, default in the payment of interest on other obligations of
the same issuer, decline in projected income pledged for debt service on
revenue bonds, or decline in their price or the occurrence of other market
factors, including advance refunding, so that in the opinion of the Sponsor the
retention of such Municipal Bonds in a State Trust would be detrimental to the
interest of its Unitholders. The proceeds from any such sales, exclusive of
any portion which represents accrued interest, will be credited to the
Principal Account of such Trust Fund for distribution to its Unitholders.
The Sponsor is required to instruct the Trustee to
reject any offer made by an issuer of the Municipal Bonds to issue new
obligations in exchange or substitution for any of such Municipal Bonds
pursuant to a refunding financing plan, except that the Sponsor may instruct
the Trustee to accept or reject such an offer or to take any other action with
respect thereto as the Sponsor may deem proper if (a) the issuer is in default
with respect to such Municipal Bonds; or (b) in the written opinion of the
Sponsor, there is a reasonable basis to believe that the issuer will default
with respect to such Municipal Bonds in the foreseeable future. Any
obligations received in exchange or substitution will be held by the Trustee
subject to the terms and conditions of the Agreement to the same extent as the
Municipal Bonds originally deposited thereunder. Within five days after such
deposit, notice of such exchange and deposit shall be given by the Trustee to
each unitholder of such State Trust registered on the books of the Trustee,
including an identification of the Municipal Bonds eliminated and the Municipal
Bonds substituted therefor.
The Trustee may sell Municipal Bonds, designated by the
Sponsor, from a State Trust for the purpose of redeeming Units of such State
Trust tendered for redemption and the payment of expenses.
ADMINISTRATION OF THE TRUST
THE TRUSTEE. The Trustee, Investors Fiduciary Trust
Company, is a trust company specializing in investment related services,
organized and existing under the laws of Missouri, having its trust office at
127 West 10th Street, Kansas City, Missouri 64105. The Trustee is subject to
supervision and examination by the Division of Finance of the State of Missouri
and the Federal Deposit Insurance Corporation. Investors Fiduciary Trust
Company is jointly owned by DST Systems, Inc. and Kemper Financial Services,
Inc., an affiliate of the Sponsor.
The Trustee, whose duties are ministerial in nature, has
not participated in selecting the portfolio of
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any Trust Fund. For information relating to the responsibilities of the
Trustee under the Agreement, reference is made to the material set forth under
"Unitholders."
In accordance with the Agreements, the Trustee shall
keep proper books of record and account of all transactions at its office.
Such records shall include the name and address of, and the number of Units
held by, every Unitholder of each State Trust. Such books and records shall be
open to inspection by any Unitholder of such State Trust at all reasonable
times during the usual business hours. The Trustee shall make such annual or
other reports as may from time to time be required under any applicable state
or Federal statute, rule or regulation. The Trustee shall keep a certified
copy or duplicate original of the Agreements on file in its office available
for inspection at all reasonable times during usual business hours by any
Unitholder, together with a current list of the Municipal Bonds held in each
State Trust. Pursuant to the Agreements, the Trustee may employ one or more
agents for the purpose of custody and safeguarding of Municipal Bonds
comprising the portfolios.
Under the Agreement, the Trustee or any successor
trustee may resign and be discharged of the trust created by the Agreement by
executing an instrument in writing and filing the same with the Sponsor.
The Trustee or successor trustee must mail a copy of the
notice of resignation to all Unitholders then of record, not less than sixty
days before the date specified in such notice when such resignation is to take
effect. The Sponsor upon receiving notice of such resignation is obligated to
appoint a successor trustee promptly. If, upon such resignation, no successor
trustee has been appointed and has accepted the appointment within
thirty days after notification, the retiring Trustee may apply to a court of
competent jurisdiction for the appointment of a successor. In case the Trustee
becomes incapable of acting or is adjudged a bankrupt or is taken over by public
authorities, the Sponsor may remove the Trustee and appoint a successor trustee
as provided in the Agreement. Notice of such removal and appointment shall be
mailed to each Unitholder by the Sponsor. Upon execution of a written acceptance
of such appointment by a successor trustee, all the rights, powers, duties and
obligations of the original Trustee shall vest in the successor.
The Trustee shall be a corporation organized under the
laws of the United States or any state thereof, which is authorized under such
laws to exercise trust powers. The Trustee shall have at all times an
aggregate capital, surplus and undivided profits of not less than $2,000,000.
THE EVALUATOR. Kemper Unit Investment Trusts, a service
of Kemper Securities, Inc., the Sponsor, also serves as Evaluator. The
Evaluator may resign or be removed by the Trustee, which is to use its best
efforts to appoint a satisfactory successor. Such resignation or removal shall
become effective upon acceptance of appointment by the successor evaluator.
If, upon resignation of the Evaluator no successor has accepted appointment
within thirty days after notice of resignation, the Evaluator may apply to a
court of competent jurisdiction for the appointment of a successor. Notice of
such resignation or removal and
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appointment shall be mailed by the Trustee to each Unitholder. At the
present time, pursuant to a contract with the Evaluator, Muller Data Corporation
a non-affiliated firm regularly engaged in the business of evaluating, quoting
or appraising comparable securities, provides portfolio evaluations of the
Municipal Bonds in the State Trusts which are then reviewed by the Evaluator.
In the event the Sponsor is unable to obtain current evaluations from Muller
Data Corporation, it may make its own evaluations or it may utilize the services
of any other non-affiliated evaluator or evaluators it deems appropriate.
AMENDMENT AND TERMINATION. The Agreement may be amended
by the Trustee and the Sponsor without the consent of any of the Unitholders:
(1) to cure any ambiguity or to correct or supplement any provision which may
be defective or inconsistent; (2) to change any provision thereof as may be
required by the Securities and Exchange Commission or any successor
governmental agency; or (3) to make such provisions as shall not adversely
affect the interest of the Unitholders. The Agreement with respect to any
State Trust may also be amended in any respect by the Sponsor and the Trustee,
or any of the provisions thereof may be waived, with the written consent of the
holders of Units representing 66-2/3% of the Units then outstanding of such
State Trust, provided that no such amendment or waiver will reduce the interest
in the State Trust of any Unitholder thereof without the consent of such
Unitholder or reduce the percentage of Units required to consent to any such
amendment or waiver without the consent of all Unitholders of such State Trust.
In no event shall the Agreement be amended to increase the number of Units of a
State Trust issuable thereunder or to permit, except in accordance with the
provisions of the Agreement, the acquisition of any Municipal Bonds in addition
to or in substitution for those in a State Trust. The Trustee shall promptly
notify Unitholders of the substance of any such amendment.
The Agreement provides that each State Trust shall
terminate upon the maturity, redemption or other disposition, as the case may
be, of the last of the Municipal Bonds held in such State Trust. If the value
of a State Trust shall be less than the applicable minimum value stated
under "Essential Information" in Part Two the Trustee may, in its discretion,
and shall, when so directed by the Sponsor, terminate the State Trust. A State
Trust may be terminated at any time by the holders of Units representing 66-2/3%
of the Units thereof then outstanding. Notwithstanding the foregoing, in no
event shall any State Trust continue beyond the mandatory termination date shown
in Part Two under "Essential Information." In the event of termination of a
State Trust, written notice thereof will be sent by the Trustee to all
Unitholders of such State Trust. Within a reasonable period after termination,
the Trustee will sell any Municipal Bonds remaining in the State Trust and,
after paying all expenses and charges incurred by the State Trust, will
distribute to Unitholders thereof (upon surrender for cancellation of
certificates for Units, if issued) their pro rata share of the balances
remaining in the Interest and Principal Accounts of such State Trust.
LIMITATIONS ON LIABILITY. The Sponsor: The Sponsor is
liable for the performance of its obligations arising from its responsibilities
under the Agreement, but will be under no liability to the Unitholders for
taking any action or refraining from any action in good faith pursuant to the
Agreement or for errors in judgment, except in cases of its own gross
negligence, bad faith or willful misconduct. The Sponsor shall not be liable
or responsible in any way for depreciation or loss incurred by reason of the
sale of any Municipal Bonds.
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The Trustee: The Agreement provides that the Trustee
shall be under no liability for any action taken in good faith in reliance upon
prima facie properly executed documents or for the disposition of monies,
Municipal Bonds, or certificates except by reason of its own gross negligence,
bad faith or willful misconduct, nor shall the Trustee be liable or responsible
in any way for depreciation or loss incurred by reason of the sale by the
Trustee of any Municipal Bonds. In the event that the Sponsor shall fail to
act, the Trustee may act and shall not be liable for any such action taken by
it in good faith. The Trustee shall not be personally liable for any taxes or
other governmental charges imposed upon or in respect of the Municipal Bonds or
upon the interest thereon. In addition, the Agreement contains other customary
provisions limiting the liability of the Trustee. The Trustee, whose duties
are ministerial, did not participate in the selection of Municipal Bonds for
the State Trusts.
The Evaluator: The Trustee and Unitholders may rely on
any evaluation furnished by the Evaluator and shall have no responsibility for
the accuracy thereof. The Agreement provides that the determinations made by
the Evaluator 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 or Unitholders for errors in judgment, but
shall be liable only for its gross negligence, lack of good faith or willful
misconduct.
EXPENSES OF THE TRUST
Except with respect to those series indicated in the
next sentence and except as otherwise stated under "Essential Information" in
Part Two of the Prospectus, the Sponsor will not charge any State Trust an
advisory fee and will receive no fee from the Trust for services performed as
Sponsor. The Sponsor will charge Kemper Tax-Exempt Income Trust, Multi-State
Series 45 and subsequent series or annual surveillance fee for services
performed for such Trust Funds in an amount not to exceed the amount shown
under "Essential Information" in Part Two, but in no event will such
compensation when combined with all compensation received from Kemper Tax-Exempt
Insured Income Trust, Multi-State Series 23, 24, 32 and subsequent series,
Kemper Tax-Exempt Insured Income Trust, Series A-74 and subsequent series and
Kemper Tax-Exempt Income Trust, Multi-State Series 45 and subsequent series
exceed the aggregate cost to the Sponsor for providing such services. Such fee
shall be based on the total number of Units of such State Trust Fund outstanding
as of the January Record Date for any annual period. The Sponsor paid all the
expenses of creating and establishing the Trust, including the cost of the
initial preparation, printing and execution of the Prospectus, Agreements and
the certificates, legal and accounting expenses, advertising and selling
expenses, payment of closing fees, expenses of the Trustee, initial evaluation
fees and other out-of-pocket expenses.
The Trustee receives for its services a fee calculated
on the basis of the annual rate set forth under "Essential Information" in Part
Two per $1,000 principal amount of Municipal Bonds in each State Trust, based
on the largest aggregate principal amount of Municipal Bonds in the State Trust
at any time during the monthly, quarterly or semi-annual period, as
appropriate. The Trustee also receives indirect benefits to
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the extent that it holds funds on deposit in the various non-interest
bearing accounts created pursuant to the Agreement; however, the Trustee is also
authorized by the Agreement to make from time to time certain non-interest
bearing advances to the State Trusts. See "Unitholders - Distributions to
Unitholders."
For evaluation of Municipal Bonds in the State Trusts,
the Evaluator receives a fee, payable monthly calculated on an annual rate as
set forth under "Essential Information" in Part Two, based upon the largest
aggregate principal amount of Municipal Bonds in such State Trust at any time
during such monthly period.
The Trustee's, Sponsor's (if any) and Evaluator's fees
for the State Trusts are payable monthly on or before each Distribution Date by
deductions from the Interest Accounts thereof to the extent funds are available
and then from the Principal Accounts. Such fees may be increased without
approval of the Unitholders by amounts not exceeding a proportionate increase
in the Consumer Price Index entitled "All Services Less Rent of Shelter,"
published by the United States Department of Labor, or any equivalent index
substituted therefor.
The following additional charges are or may be incurred
by a State Trust: (a) fees for the Trustee's extraordinary services; (b)
expenses of the Trustee (including legal and auditing expenses, but not
including any fees and expenses charged by any agent for custody and
safeguarding of Municipal Bonds) and of bond counsel, if any; (c) various
governmental charges; (d) expenses and costs of any action taken by the Trustee
to protect the Trust or such State Trust, or the rights and interests of the
Unitholders; (e) indemnification of the Trustee for any loss, liability or
expense incurred by it in the administration of the Trust or such State Trust
without gross negligence, bad faith or willful misconduct on its part; (f)
indemnification of the Sponsor for any loss, liability or expense incurred in
acting as Sponsor of the State Trust without gross negligence, bad faith or
willful misconduct; and (g) expenditures incurred in contacting Unitholders
upon termination of the State Trust. The fees and expenses set forth herein
are payable out of the appropriate State Trust and, when owed to the Trustee,
are secured by a lien on such State Trust.
Fees and expenses of a State Trust shall be deducted
from the Interest Account thereof, or, to the extent funds are not available in
such Account, from the Principal Account. The Trustee may withdraw from the
Principal Account or the Interest Account of any State Trust such amounts, if
any, as it deems necessary to establish a reserve for any taxes or other
governmental charges or other extraordinary expenses payable out of the State
Trust. Amounts so withdrawn shall be credited to a separate account maintained
for the State Trust known as the Reserve Account and shall not be considered a
part of the State Trust when determining the value of the Units until such time
as the Trustee shall return all or any part of such amounts to the appropriate
account.
THE SPONSOR
The Sponsor, Kemper Unit Investment Trusts, with an
office at 77 W. Wacker Drive, 5th Floor,
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Chicago, Illinois 60601, (800) 621-5024, is a service of Kemper
Securities, Inc., which is a wholly-owned subsidiary of Kemper Financial
Companies, Inc., a financial services holding company which, in turn, is a
wholly-owned subsidiary of Kemper Corporation. The Sponsor acts as principal
underwriter of a number of other Kemper unit investment trusts and will act as
underwriter of any other unit investment trust products developed by the Sponsor
in the future. As of April 30, 1993, the total stockholder's equity of Kemper
Securities, Inc. was approximately $426,125,017 (unaudited).
If at any time the Sponsor shall fail to perform any of
its duties under the Agreement or shall become incapable of acting or shall be
adjudged a bankrupt or insolvent or its affairs are taken over by public
authorities, then the Trustee may (a) appoint a successor sponsor at rates of
compensation deemed by the Trustee to be reasonable and not exceeding such
reasonable amounts as may be prescribed by the Securities and Exchange
Commission, or (b) terminate the Agreement and liquidate the Trust or any State
Trust as provided therein or (c) continue to act as Trustee without terminating
the Agreement.
The foregoing financial information with regard to the
Sponsor relates to the Sponsor only and not to this Trust or any State Trust.
Such information is included in this Prospectus only for the purpose of
informing investors as to the financial responsibility of the Sponsor and its
ability to carry out its contractual obligations with respect to the State
Trusts. More comprehensive financial information can be obtained upon request
from the Sponsor.
LEGAL OPINIONS
The legality of the Units offered hereby and certain
matters relating to federal tax law were originally passed upon by Chapman and
Cutler, 111 West Monroe Street, Chicago, Illinois 60603, as counsel for the
Sponsor.
INDEPENDENT AUDITORS
The statement of net assets, including the schedule of investments,
appearing in Part Two of this Prospectus and Registration Statement, with
information pertaining to the specific State Trust to which such statement
relates, has been audited by Ernst & Young, independent auditors, as set forth
in their report appearing in Part Two and is included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
DESCRIPTION OF SECURITIES RATINGS*(4)
* As published by the rating companies.
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Standard & Poor's Corporation. _ A brief description of
the applicable Standard & Poor's Corporation rating symbols and their meanings
follows:
A Standard & Poor's corporate or municipal bond rating
is a current assessment of the creditworthiness of an obligor with respect to a
specific debt obligation. This assessment may take into consideration obligors
such as guarantors, insurers, or lessees.
The bond rating is not a recommendation to purchase,
sell or hold a security, inasmuch as it does not comment as to market price or
suitability for a particular investor.
The ratings are based on current information furnished
by the issuer and obtained by Standard & Poor's from other sources it considers
reliable. Standard & Poor's does not perform an audit in connection with any
rating and may, on occasion, rely on unaudited financial information. The
ratings may be changed, suspended, or withdrawn as a result of changes in, or
unavailability of, such information, or for other circumstances.
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 obligations;
III. Protection afforded by, and relative position of,
the obligation in the event of bankruptcy, reorganization or other arrangement,
under the laws of bankruptcy and other laws affecting creditors' rights.
AAA _ Bonds rated AAA have the highest rating assigned
by Standard & Poor's to a debt obligation. Capacity to pay interest and repay
principal is extremely strong.
AA _ Bonds rated AA have a very strong capacity to pay
interest and repay principal and differ from the highest rated issues only in
small degree.
A _ Bonds rated A have a strong capacity to pay
interest and repay principal although they are somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than bonds
in higher rated categories.
BBB _ Bonds rated BBB are regarded as having an
adequate capacity to pay interest and repay principal. Whereas they normally
exhibit adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest
and repay principal for bonds in this category than for bonds in higher rated
categories.
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Plus (+) or Minus (-): The ratings from "AA" to "A" may
be modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
Provisional Ratings: The letter "p" indicates the
rating is provisional. A provisional rating assumes the successful completion
of the project being financed by the bonds being rated and indicates that
payment of debt service requirements is largely or entirely dependent upon the
successful and timely completion of the project. This rating, however, while
addressing credit quality subsequent to completion of the project, makes no
comment on the likelihood of, or the risk of default upon failure of, such
completion. The investor should exercise his own judgment with respect to such
likelihood and risk.
Moody's Investors Service, Inc. _ A brief description of
the applicable Moody's Investors Service, Inc. rating symbols and their
meanings follow:
Aaa _ Bonds which are rated Aaa are judged to be of the
best quality. They carry the smallest degree of investment risk and are
generally referred to as "gilt edge." Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of
such issues. Their safety is so absolute that with the occasional exception of
oversupply in a few specific instances, characteristically, their market value
is affected solely by money market fluctuations.
Aa _ Bonds which are rated Aa are judged to be of
high quality by all standards. Together with the Aaa group they comprise what
are generally known as high grade bonds. They are rated lower than the best
bonds because margins of protection may not be as large as in Aaa securities or
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. Their market value is virtually immune to all but
money market influences, with the occasional exception of oversupply in a few
specific instances.
A _Bonds which are rated A possess many favorable
investment attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest are considered
adequate, but elements may be present which suggest a susceptibility to
impairment sometime in the future. The market value of A-rated bonds may be
influenced to some degree by economic performance during a sustained period of
depressed business conditions, but, during periods of normalcy, A- rated bonds
frequently move in parallel with Aaa and Aa obligations, with the occasional
exception of oversupply in a few specific instances.
A1 _ Bonds which are rated A1 offer the maximum in
security within their quality group, can be bought for possible upgrading in
quality, and additionally, afford the investor an opportunity to gauge more
precisely the relative attractiveness of offerings in the market place.
Baa _ Bonds which are rated Baa are considered as lower
medium grade obligations, i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear adequate for the
96
<PAGE> 97
present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and, in fact, have speculative
characteristics as well. The market value of Baa-rated bonds is more sensitive
to changes in economic circumstances and, aside from occasional speculative
factors applying to some bonds of this class, Baa market valuations move in
parallel with Aaa, Aa and A obligations during periods of economic normalcy,
except in instances of oversupply.
Conditional Ratings: Bonds rated "Con(-)" are ones 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 operation experience, (c)
rentals which begin when facilities are completed, or (d) payments to which
some other limiting condition attaches. Parenthetical rating denotes probable
credit stature upon completion of construction or elimination of basis of
condition.
Note: Moody's applies numerical modifiers, 1, 2, and 3
in each generic rating classification from Aa through B in certain areas of its
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.
97
<PAGE> 17
Kemper Tax-Exempt Income Trust
Multi-State Series 28
Missouri Trust
Part Two
Dated January 28, 1994
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.
NOTE: Part Two of this Prospectus May Not Be Distributed unless Accompanied
by Part One.
<PAGE> 18
Kemper Tax-Exempt Income Trust
Multi-State Series 28
Missouri Trust
Essential Information
As of January 3, 1994
Sponsor: Kemper Financial Services, Inc.
Evaluator: Kemper Unit Investment Trusts
Trustee: Investors Fiduciary Trust Company
<TABLE>
<S> <C>
GENERAL INFORMATION
Principal Amount of Municipal Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,645,000
Number of Units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,043
Fractional Undivided Interest in the Trust per Unit . . . . . . . . . . . . . . . . . . . . . 1/2,043
Principal Amount of Municipal Bonds per Unit . . . . . . . . . . . . . . . . . . . . . . . . $ 805.19
Public Offering Price:
Aggregate Bid Price of Municipal Bonds in the Portfolio . . . . . . . . . . . . . . . . . . $1,717,927
Aggregate Bid Price of Municipal Bonds per Unit . . . . . . . . . . . . . . . . . . . . . . $ 840.88
Cash per Unit (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ -
Sales Charge 5.820% (5.5% of Public Offering Price) . . . . . . . . . . . . . . . . . . . . $ 48.94
Public Offering Price per Unit (exclusive of accrued interest) (2) . . . . . . . . . . . . . $ 889.82
Redemption Price per Unit (exclusive of accrued interest) . . . . . . . . . . . . . . . . . . $ 840.88
Excess of Public Offering Price per Unit Over Redemption Price per Unit . . . . . . . . . . . $ 48.94
Minimum Value of the Trust under which Trust Agreement may be terminated . . . . . . . . . . $ 400,000
Date of Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . November 6, 1986
Mandatory Termination Date . . . . . . . . . . . . . . . . . . . . . . . December 31, 2036
</TABLE>
Annual Evaluation Fee: $.30 per $1,000 principal amount of Municipal Bonds.
Evaluations for purpose of sale, purchase or redemption of Units are made as of
the close of business of the Sponsor next following receipt of an order for a
sale or purchase of Units or receipt by Investors Fiduciary Trust Company of
Units tendered for redemption.
<TABLE>
<CAPTION>
SPECIAL INFORMATION BASED ON VARIOUS DISTRIBUTION OPTIONS
MONTHLY QUARTERLY SEMIANNUAL
----------------------------------------------
<S> <C> <C> <C>
Calculation of Estimated Net Annual
Interest Income per Unit (3):
Estimated Annual Interest Income . . . . . . . . . . . $54.9088 $54.9088 $54.9088
Less: Estimated Annual Expense . . . . . . . . . . . . 1.9835 1.7098 1.5636
----------------------------------------------
Estimated Net Annual Interest Income . . . . . . . . . $52.9253 $53.1990 $53.3452
----------------------------------------------
----------------------------------------------
Calculation of Interest Distribution per Unit:
Estimated Net Annual Interest Income . . . . . . . . . $52.9253 $53.1990 $53.3452
Divided by 12, 4 and 2, respectively . . . . . . . . . $ 4.4104 $13.2998 $26.6726
Estimated Daily Rate of Net Interest
Accrual per Unit . . . . . . . . . . . . . . . . . . . $ .1470 $ .1478 $ .1482
Estimated Current Return Based on Public
Offering Price (3) . . . . . . . . . . . . . . . . . . 5.95% 5.98% 6.00%
Estimated Long-Term Return (3) . . . . . . . . . . . . . 4.38% 4.41% 4.43%
</TABLE>
Trustee's Annual Fees and Expenses (including Evaluator's Fee): $1.9835,
$1.7098 and $1.5636 ($.9770, $.9046 and $.9999 of which represent expenses) per
Unit under the monthly, quarterly and semiannual distribution options,
respectively.
Record and Computation Dates: First day of the month, as follows: monthly -
each month; quarterly - January, April, July and October; semiannual - January
and July.
Distribution Dates: Fifteenth day of the month, as follows: monthly - each
month; quarterly - January, April, July and October; semiannual - January and
July.
i
<PAGE> 19
1. This amount, if any, represents principal cash or overdraft which is an
asset or liability of the Trust and is included in the Public Offering
Price.
2. Units are offered at the Public Offering Price plus accrued interest to the
date of settlement (five business days after purchase). On January 3,
1994, there was added to the Public Offering Price of $889.82, accrued
interest to the settlement date of January 10, 1994 of $8.64, $8.72 and
$8.79 for a total price of $898.46, $898.54 and $898.61 for the monthly,
quarterly and semiannual distribution options, respectively.
3. The Estimated Long-Term Return and Estimated Current Return will vary. For
detailed explanation, see Part One of this prospectus.
ii
<PAGE> 20
Report of Independent Auditors
Unitholders
Kemper Tax-Exempt Income Trust
Multi-State Series 28 Missouri Trust
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Kemper Tax-Exempt Income Trust Multi-State
Series 28 Missouri Trust as of September 30, 1993, and the related statements
of operations and changes in net assets for each of the three years in the
period then ended. These financial statements are the responsibility of the
Trust's sponsor. 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 investments owned as of September 30, 1993,
by correspondence with the custodial bank. An audit also includes assessing
the accounting principles used and significant estimates made by the sponsor,
as well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Kemper Tax-Exempt Income
Trust Multi-State Series 28 Missouri Trust at September 30, 1993, and the
results of its operations and the changes in its net assets for each of the
three years in the period then ended in conformity with generally accepted
accounting principles.
/s/ ERNST & YOUNG
ERNST & YOUNG
Kansas City, Missouri
January 14, 1994
1
<PAGE> 21
Kemper Tax-Exempt Income Trust
Multi-State Series 28
Missouri Trust
Statement of Assets and Liabilities
September 30, 1993
<TABLE>
<S> <C> <C>
ASSETS
Municipal Bonds, at value (cost $1,589,883) (Note 1) $1,727,128
Accrued interest 17,934
Cash 17,186
----------
1,762,248
LIABILITIES AND NET ASSETS
Accrued liabilities 757
Net assets, applicable to 2,043 Units outstanding (Note 5):
Cost of Trust assets, exclusive of interest (Note 1) $1,589,883
Unrealized appreciation (Note 2) 137,245
Distributable funds 34,363
---------------------------
Net assets $1,761,491
----------
----------
</TABLE>
See accompanying notes to financial statements.
2
<PAGE> 22
Kemper Tax-Exempt Income Trust
Multi-State Series 28
Missouri Trust
Statement of Operations
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
1993 1992 1991
------------------------------------------
<S> <C> <C> <C>
Investment income - interest $125,552 $128,414 $129,269
Expenses:
Trustee's fees and related expenses 3,410 1,981 1,865
Evaluator's fees 557 564 567
------------------------------------------
Total expenses 3,967 2,545 2,432
------------------------------------------
Net investment income 121,585 125,869 126,837
Realized and unrealized gain on investments:
Realized gain 8,437 - 461
Unrealized appreciation during the year 46,797 59,359 74,018
------------------------------------------
Net gain on investments 55,234 59,359 74,479
------------------------------------------
Net increase in net assets resulting
from operations $176,819 $185,228 $201,316
------------------------------------------
------------------------------------------
</TABLE>
See accompanying notes to financial statements.
3
<PAGE> 23
Kemper Tax-Exempt Income Trust
Multi-State Series 28
Missouri Trust
Statement of Changes of Net Assets
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
1993 1992 1991
---------------------------------------------
<S> <C> <C> <C>
Operations:
Net investment income $ 121,585 $ 125,869 $ 126,837
Realized gain on investments 8,437 - 461
Unrealized appreciation on investments
during the year 46,797 59,359 74,018
---------------------------------------------
Net increase in net assets resulting
from operations 176,819 185,228 201,316
Distributions to Unitholders:
Net investment income (122,700) (124,659) (125,717)
Principal from investment transactions (237,294) - (20,205)
---------------------------------------------
Total increase (decrease) in net assets (183,175) 60,569 55,394
Net assets:
At the beginning of the year 1,944,666 1,884,097 1,828,703
---------------------------------------------
At the end of the year (including distributable
funds applicable to Trust Units of $34,363,
$35,472 and $34,262 at September 30, 1993,
1992 and 1991, respectively) $1,761,491 $1,944,666 $1,884,097
---------------------------------------------
---------------------------------------------
Trust Units outstanding at the end of the year 2,043 2,043 2,043
---------------------------------------------
---------------------------------------------
</TABLE>
See accompanying notes to financial statements.
4
<PAGE> 24
Kemper Tax-Exempt Income Trust
Multi-State Series 28
Missouri Trust
Schedule of Investments
September 30, 1993
<TABLE>
<CAPTION>
REDEMPTION PRINCIPAL
NAME OF ISSUER AND TITLE OF BOND COUPON RATE MATURITY DATE PROVISIONS(2) RATING(1) AMOUNT(4) VALUE(3)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Bi-State Development Agency, 7.25 % 01/02/2013 2002 @ 100 S.F. Baa1* $ 200,000 $ 215,480
Missouri/Illinois Metro District, 1996 @ 102
Parking Revenue Refunding
Facility, Letter of Credit,
Mitsubishi Trust & Bank Corp.
Health and Educational Facilities 7.40 09/01/2013 1996 @ 102 A* 300,000 324,051
Authority of the State of Missouri,
Health Facility Revenue Refunding
Bonds (Freeman Hospital Project),
Series 1986.
Missouri Housing Development 6.00 03/15/2020 2003 @ 100 S.F. AA 70,000 71,811
Commission, Housing Development 1994 @ 102.5
Bonds (Federally Insured
Multifamily Mortgage Loans),
Series 1977.
Missouri Housing Development 6.60 07/15/2021 2004 @ 100 S.F. AA+ 235,000 240,078
Commission, Housing Development 1994 @ 102
Bonds (Federally Insured Mortgage
Loans), Series 1978.
Missouri Housing Development 7.00 09/15/2022 2005 @ 100 S.F. AA+ 280,000 287,403
Commission, Housing Development 1994 @ 102.25
Bonds (Federally Insured Mortgage
Loans), Series 1979B.
Missouri Housing Development 6.875 07/15/2010 1995 @ 100 S.F. AA+ 75,000 76,674
Commission, Mortgage Purchase 1994 @ 102
Bonds (FHA Insured or VA
Guaranteed Mortgage Loans),
Series 1979.
Missouri State Environmental 8.25 11/15/2014 1996 @ 103 Aa3* 185,000 208,427
Improvement and Energy Resources
Authority, Pollution Control
Revenue Bonds (Associated Electric
National Rural, Series 84, G-4).
City of Springfield, Missouri, 5.25 03/01/2007 1994 @ 101 AA 300,000 303,204
Public Utility Revenue Bonds,
Refunding, Series of 1977. --------------------------
$1,645,000 $1,727,128
--------------------------
--------------------------
</TABLE>
See accompanying notes to Schedule of Investments.
5
<PAGE> 25
Kemper Tax-Exempt Income Trust
Multi-State Series 28
Missouri Trust
Notes to Schedule of Investments
1. All ratings are by Standard & Poor's Corporation, unless marked with the
symbol "*", in which case the rating is by Moody's Investors Service, Inc.
The symbol "NR" indicates Bonds for which no rating is available.
2. There is shown under this heading the year in which each issue of Bonds is
initially redeemable and the redemption price for that year or, if
currently redeemable, the redemption price currently in effect; unless
otherwise indicated, each issue continues to be redeemable at declining
prices thereafter, but not below par value. In addition, certain Bonds in
the Portfolio may be redeemed in whole or in part other than by operation
of the stated redemption or sinking fund provisions under certain unusual
or extraordinary circumstances specified in the instruments setting forth
the terms and provisions of such Bonds. "S.F." indicates a sinking fund is
established with respect to an issue of Bonds. Redemption pursuant to call
provisions generally will, and redemption pursuant to sinking fund
provisions may, occur at times when the redeemed Bonds have a valuation
which represents a premium over the call price or par.
To the extent that the Bonds were deposited in the Trust at a price higher
than the price at which they are redeemed, this will represent a loss of
capital when compared with the original Public Offering Price of the Units.
To the extent that the Bonds were acquired at a price lower than the
redemption price, this may represent an increase in capital when compared
with the original Public Offering Price of the Units. Distributions of net
income will generally be reduced by the amount of the income which would
otherwise have been paid with respect to redeemed Bonds and, unless
utilized to pay for Units tendered for redemption, there will be
distributed to Unitholders the principal amount and any premium received on
such redemption. In this event the estimated current return and estimated
long-term return may be affected by such redemptions.
3. See Note 1 to the accompanying financial statements for a description of
the method of determining cost and value.
6
<PAGE> 26
Kemper Tax-Exempt Income Trust
Multi-State Series 28
Missouri Trust
Notes to Schedule of Investments (continued)
4. At September 30, 1993, the Portfolio of the Trust consists of 8 obligations
issued by entities located in Missouri. All of the issues are payable from
the income of a specific project or authority and are not supported by an
issuer's power to levy taxes. The sources of payment for the revenue bonds
are divided as follows: Electric Systems, 2; Hospitals and Health Care, 1;
Housing, 4; Parking, 1. Approximately 40% of the aggregate principal
amount of Bonds in the Trust are obligations of issuers whose revenue is
primarily derived from mortgage loans to housing projects for low to
moderate income families. Approximately 30% of the aggregate principal
amount of Bonds in the Trust are obligations of public utility issuers.
All of the Bonds in the Trust are subject to call by the issuers within
five years after September 30, 1993.
See accompanying notes to financial statements.
7
<PAGE> 27
Kemper Tax-Exempt Income Trust
Multi-State Series 28
Missouri Trust
Notes to Financial Statements
1. SIGNIFICANT ACCOUNTING POLICIES
VALUATION OF MUNICIPAL BONDS
Municipal Bonds (Bonds) are stated at bid prices as determined by Kemper Unit
Investment Trusts (A Service of Kemper Securities, Inc.), the "Evaluator" of
the Trust. The aggregate bid prices of the Bonds are determined by the
Evaluator based on (a) current bid prices of the Bonds, (b) current bid prices
for comparable bonds, (c) appraisal, or (d) any combination of the above.
COST OF MUNICIPAL BONDS
Cost of the Trust's Bonds was based on the offering prices of the Bonds on
November 6, 1986 (Date of Deposit). The premium or discount (including any
original issue discount) existing at November 6, 1986, is not being amortized.
Realized gain (loss) from Bond transactions is reported on an identified cost
basis.
2. UNREALIZED APPRECIATION AND DEPRECIATION
Following is an analysis of net unrealized appreciation at September 30, 1993:
<TABLE>
<S> <C>
Gross unrealized depreciation $ -
Gross unrealized appreciation 137,245
--------
Net unrealized appreciation $137,245
--------
--------
</TABLE>
3. TRANSACTIONS WITH AFFILIATES
The Trustee, Investors Fiduciary Trust Company, is 50% owned by Kemper
Financial Services, Inc., the Trust's sponsor and an affiliate of Kemper Unit
Investment Trusts. Prior to July 1, 1991, the Trustee's fee (not including the
reimbursement of out-of-pocket expenses), calculated monthly, was at the annual
rate of $1.08, $.86 and $.60 under the monthly, quarterly and semiannual
distribution options, respectively, per $1,000 principal amount of Bonds in the
Trust, based on the largest aggregate principal amount of Bonds in the Trust at
any time during such
8
<PAGE> 28
Kemper Tax-Exempt Income Trust
Multi-State Series 28
Missouri Trust
Notes to Financial Statements (continued)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
monthly, quarterly or semiannual periods. Effective July 1, 1991, such fees
were revised to $1.25, $1.00 and $.70 under the monthly, quarterly and
semiannual distribution options, respectively. The Evaluator received a fee,
payable monthly, at an annual rate of $.30 per $1,000 principal amount of
Bonds, based on the largest aggregate principal amount of Bonds in the Trust at
any time during such monthly period.
The Trustee has voluntarily waived their fees from January 1, 1991 to June 30,
1992 for a total of $1,333 for the year ending September 30, 1991 and $1,462
for the year ending September 30, 1992.
4. FEDERAL INCOME TAXES
The Trust is not an association taxable as a corporation for federal income tax
purposes. Each Unitholder is considered to be the owner of a pro rata portion
of the Trust under Subpart E, Subchapter J of Chapter 1 of the Internal Revenue
Code of 1986, as amended. Accordingly, no provision has been made for federal
income taxes.
5. OTHER INFORMATION
COST TO INVESTORS
The cost to initial investors of Units of the Trust was based on the aggregate
offering price of the Bonds on the date of an investor's purchase, plus a sales
charge of 4.7% of the Public Offering Price (equivalent to 4.932% of the net
amount invested). The Public Offering Price for secondary market transactions
is based on the aggregate bid price of the Bonds plus or minus a pro rata share
of cash or overdraft in the Principal Account, if any, on the date of an
investor's purchase, plus a sales charge of 5.5% of the Public Offering Price
(equivalent to 5.820% of the net amount invested).
9
<PAGE> 29
Kemper Tax-Exempt Income Trust
Multi-State Series 28
Missouri Trust
Notes to Financial Statements (continued)
5. OTHER INFORMATION (CONTINUED)
DISTRIBUTIONS
Distributions of net investment income to Unitholders are declared and paid in
accordance with the option (monthly, quarterly or semiannual) selected by the
investor. Such income distributions, on a record date basis, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------------------------------------------------------------------
SEPTEMBER 30, 1993 SEPTEMBER 30, 1992 SEPTEMBER 30, 1991
DISTRIBUTION ----------------------------------------------------------------------------------------
PLAN PER UNIT TOTAL PER UNIT TOTAL PER UNIT TOTAL
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Monthly $59.94 $ 58,935 $60.79 $ 63,403 $61.23 $ 63,864
Quarterly 60.97 23,012 61.10 23,279 61.67 23,498
Semiannual 61.15 40,753 61.35 37,977 61.96 38,355
-------- -------- --------
$122,700 $124,659 $125,717
-------- -------- --------
-------- -------- --------
</TABLE>
10
<PAGE> 30
Kemper Tax-Exempt Income Trust
Multi-State Series 28
Missouri Trust
Notes to Financial Statements (continued)
5. OTHER INFORMATION (CONTINUED)
Selected data for a Unit of the Trust outstanding throughout each year -
<TABLE>
<CAPTION>
MONTHLY QUARTERLY SEMIANNUAL
YEAR ENDED SEPTEMBER 30 YEAR ENDED SEPTEMBER 30 YEAR ENDED SEPTEMBER 30
1993 1992 1991 1993 1992 1991 1993 1992 1991
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
--------------------------------------------------------------------------------------------
Investment income - interest $ 61.45 $ 62.86 $ 63.27 $ 61.45 $ 62.86 $ 63.27 $ 61.45 $ 62.86 $ 63.27
Expenses 2.14 1.31 1.43 1.83 1.17 1.12 1.66 1.17 .82
--------------------------------------------------------------------------------------------
Net investment income 59.31 61.55 61.84 59.62 61.69 62.15 59.79 61.69 62.45
Distributions to Unitholders:
Net investment income (59.94) (60.79) (61.23) (60.97) (61.10) (61.67) (61.15) (61.35) (61.96)
Principal from investment
transactions (116.15) - (9.89) (116.15) - (9.89) (116.15) - (9.89)
Net gain on investments 27.06 29.05 36.45 27.06 29.05 36.45 27.06 29.05 36.45
--------------------------------------------------------------------------------------------
Change in net asset value (89.72) 29.81 27.17 (90.44) 29.64 27.04 (90.45) 29.39 27.05
Net asset value:
Beginning of the year 946.30 916.49 889.32 957.12 927.48 900.44 958.02 928.63 901.58
--------------------------------------------------------------------------------------------
End of the year, including
distributable funds $856.58 $946.30 $916.49 $866.68 $957.12 $927.48 $867.57 $958.02 $928.63
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE> 31
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Independent
Auditors" and to the use of our report dated January 14, 1994, in this
Post-Effective Amendment to the Registration Statement (Form S-6) and related
Prospectus of Kemper Tax-Exempt Income Trust Multi-State Series 28 Missouri
Trust dated January 28, 1994.
/s/ ERNST & YOUNG
ERNST & YOUNG
Kansas City, Missouri
January 28, 1994
<PAGE> 32
CONTENTS OF POST-EFFECTIVE AMENDMENT
TO REGISTRATION STATEMENT
This Post-Effective amendment to the Registration Statement comprises the
following papers and documents:
The facing sheet
The prospectus
The signatures
The Consent of Independent
Accountants
<PAGE> 33
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, The
Registrant, Kemper Tax-Exempt Insured Income Trust, Series A-44, Kemper
Tax-Exempt Income Trust, Multi-State Series 28, certifies that it meets all of
the requirements for effectiveness of this registration statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this Amendment
to the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Chicago, and State of Illinois, on
the 28th day of January, 1994.
KEMPER TAX-EXEMPT INSURED INCOME TRUST,
SERIES A-44, KEMPER TAX-EXEMPT
INCOME TRUST, MULTI-STATE SERIES 28
Registrant
By: Kemper Unit Investment Trusts
(a service of Kemper
Securities, Inc.)
Depositor
By /s/ C. Perry Moore
C. Perry Moore
Attorney-In-Fact
Pursuant to the requirements of the Securities Act of 1933, this
Amendment to the Registration Statement has been signed below on January 28,
1994 by the following persons, who constitute a majority of the Board of
Directors of Kemper Securities, Inc.
SIGNATURE TITLE
James R. Boris Chairman and Chief Executive Officer
James R. Boris
Donald F. Eller Senior Executive Vice President and Director
Donald F. Eller
Stanley R. Fallis Senior Executive Vice President, Chief Financial
Stanley R. Fallis Officer and Director
Frank V. Geremia Senior Executive Vice President and Director
Frank V. Geremia
David B. Mathis Director
David B. Mathis
Robert T. Jackson Director
Robert T. Jackson
Jay B. Walters Senior Executive Vice President and Director
Jay B. Walters
Frederick C. Hosken Senior Executive Vice President and Director
Frederick C. Hosken
Charles M. Kierscht Director
Charles M. Kierscht
Arthur J. McGivern Director
Arthur J. McGivern
C. Perry Moore
C. Perry Moore
C. Perry Moore signs this document pursuant to power of attorney filed
with the Securities and Exchange Commission with (a) Amendment No. 1 to the
Registration Statement on Form S-6 for Kemper Tax-Exempt Insured Income Trust,
Series A-70 and Multi-State Series 28 and Kemper Tax-Exempt Income Trust,
Multi-State Series 42 (Registration No. 33-35425, (b) Amendment No. 1 to the
Registration Statement of Form S-6 for Kemper Tax-Exempt Insured Income Trust,
Series A-72 and Multi-State Series 30 (Registration No. 33-37178) and (c)
Amendment No. 1 to the Registration Statement of Form S-6 for Kemper Tax-Exempt
Insured Income Trust, Multi-State Series 51 (Registration No. 33-48398).
