<PAGE>
Registration No. 33-7632
S E C U R I T I E S A N D E X C H A N G E C O M M I S
S I O
N
Washington, D.C. 20549
POST-EFFECTIVE AMENDMENT NO. 7
to
F O R M S-6
FOR REGISTRATION UNDER THE SECURITIES ACT OF
1933
OF SECURITIES OF UNIT INVESTMENT TRUSTS
REGISTERED ON FORM N-8B-2
A. Exact Name of Trust:
TAX EXEMPT SECURITIES TRUST,
INSURED SERIES 14
B.
Names of Depositors:
SMITH BARNEY INCORPORATED
<TABLE>
<S> <C>
C. Complete addresses of depositor's principal executive
offices:
SMITH BARNEY
INC.
1345 Avenue of the Americas
New York, New York 10105
D. Names and complete address of agent for service:
STEPHEN J. TREADWAY
Smith Barney
Inc.
1345 Avenue of the Americas
New York, New York 10105
</TABLE>
It is proposed that this filing will become effective August 15,
1994
pursuant to paragraph (b) of Rule 485.
<PAGE>
TAX EXEMPT SECURITIES TRUST
CROSS-REFERENCE SHEET
Pursuant to Regulation C
under the Securities Act of 1933
(Form N-8B-2 Items required by Instruction
as to the Prospectus in Form S-6)
<TABLE>
Form N-89B-2 Form S-6
Item Number Heading in Prospectus
I. Organization and General Information
<C> <S> <C>
1. . . . . . . . . (a) Name of trust Prospectus front cover
(b) Title of securities issued . .
2.Name and address of each depositor Sponsors: Prospectus back
cover
3. . . . Name and address of trustee Trustee
4.Name and address of each principal underwriterSponsors:
Prospectus back cover
5. . .State of organization of trust Tax Exempt Securities
Trust
6.Execution and termination of trust agreementTax Exempt
Securities Trust - The
Trust:
Amendment and Termination
of the Trust Agreement 7. .
. . . . . . . . Changes of name *
8. . . . . . . . . . . . Fiscal year *
9. . . . . . . . . . . . .Litigation *
II. General Description of the Trust and
Securities of the Trust
10.(a) Registered or bearer securities Rights of Unit Holders
(b) Cumulative or distributive securities
(c) Redemption . . . . . . . . . .
(d) Conversion, transfer, etc. . .
(e) Periodic payment plan. . . . . *
(f) Voting rights. . . . . . . . .
(g) Notice to certificate holders Rights of Unit Holders -
Reports and Records:
Sponsors -
Responsibility: Trustee -
Resignation: Amendment
and Termination of the
Trust Agreement -
Amendment
(h) Consents required. . . . . . . Sponsors - Responsibility:
Amendment and Termination
of the Trust Agreement (i) Other
provisions . . . . . . . Tax Exempt Securities Trust - Tax Status
11.Type of securities comprising units Prospectus front cover:
Tax Exempt Securities
Trust - Portfolio
12.Certain information regarding periodic
payment certificates. . . . . . . *
13.. .(a) Load, fees, expenses, etc. Prospectus front cover:
Summary of Essential
Information; Public
Offering - Offering
Price; Public Offering -
Sponsors' and
Underwriters' Profits:
Tax Exempt Securities
Trust - Expenses and
Charges
<PAGE>
Form N-89B-2 Form S-6
Item Number Heading in Prospectus
II. General Description of the Trust and
Securities of the Trust
<C> <S> <C>
(b) Certain information regarding periodic
payment certificates . . . . *
(c) Certain percentages. . . . . . Public Offering - Offering
Price
(d) Certain other fees, etc, payable by holders
Rights of Unit Holders - Certificates
(e) Certain profits receivable by depositors,
principal underwriters, trustee or
affiliated persons . . . . . . Public Offering - Sponsors'
and Underwriters' Profits:
Rights of Unit Holders -
Redemption of Units -
Purchase by the Sponsors of
Units Tendered for
Redemption
(f) Ratio of annual charges to income*
14.. .Issuance of trust's securities Tax Exempt Securities
Trust - The Trust: Rights
of Unit Holders -
Certificates
15.Receipt and handling of payments from purchasers*
16.Acquisition and disposition of underlying
securities . . . . . . . . . . . . Tax Exempt Securities Trust
- Portfolio: Sponsors -
Responsibility
17.. . . . .Withdrawal or redemption Rights of Unit Holders -
Redemption of Units
18.(a) Receipt, custody and disposition of incomeRights of Units
Holders - Distribution of
Interest and Principal:
Rights of Unit Holders -
Reports and Records
(b) Reinvestment of distributions *
(c) Reserves or special funds. . . Rights of Unit Holders -
Distribution of Interest
and Principal: Tax Exempt
Securities Trust - Expenses
and Charges - Other Charges (d) Schedule of
distributions. . . *
19.. . Records, accounts and reports Rights of Unit Holders -
Reports and Records:
Rights of Unit Holders -
Distribution of Interest
and Principal
20.Certain miscellaneous provisions of trust agreementAmendment
and Termination of the Trust
(a) Amendment. . . . . . . . . . . Agreement: Trustee -
Resignation: Trustee -
(b) Termination . . . . . . . . . Resignation: Trustee -
Limitations on Liability:
(c) and (d) Trustee, removal and successorSponsors -
Responsibility: Sponsors - Resignation
(e) and (f) Depositors, removal and successor
21.. . . . Loans to security holders *
22.. . . . .Limitations on liability Sponsors - Limitations on
Liability: Trustee -
Limitations on Liability:
Tax Exempt Securities
Trust - Portfolio
23.. . . . . . .Bonding arrangements *
24.Other material provisions of trust agreement*
______
* Inapplicable, answer negative or not required.
<PAGE>
<PAGE> Form N-89B-2 Form S-6
Item Number Heading in Prospectus
III. Organization, Personnel and
Affiliated Persons of Depositor
<C> <S> <C>
25.. . . .Organization of depositors Sponsors
26.. . . Fees received by depositors *
27.. . . . . .Business of depositors Sponsors
28.Certain information as to officials and
affiliated persons of depositors [Contents of Registration
Statement]
29.. Voting securities of depositors *
30.. .Persons controlling depositors *
31.Payments by depositor for certain services
rendered to trust . . . . . . . . *
32.Payments by depositors for certain other services
rendered to trust . . . . . . . . *
33.Remuneration of employees of depositors for
certain services rendered to trust *
34.Remuneration of other persons for certain services
rendered to trust . . . . . . . . *
IV. General Description of the Trust and
Securities of the Trust
35.Distribution of trust's securities by statesPublic Offering -
Distribution of Units
36.Suspension of sales of trust's securities*
37.Revocation of authority to distribute*
38.. . . .(a) Method of distribution Public Offering -
Distribution of Units
(b) Underwriting agreements. . . .
(c) Selling agreements . . . . . .
39.(a) Organization of principal underwritersSponsors
(b) N.A.S.D. membership of principal underwriters
40.Certain fees received by principal underwriters*
41.(a) Business of principal underwritersSponsors
(b) Branch offices of principal underwriters*
(c) Salesmen of principal underwriters*
42.Ownership of trust's securities by certain persons*
43.Certain brokerage commissions received by principal
underwriters. . . . . . . . . . . *
44.. . . . . (a) Method of valuation Prospectus front cover:
Public Offering -
Offering Price: Public
Offering - Distribution
of Units
(b) Schedule as to offering price *
(c) Variation in offering price to certain personsPublic
Offering - Distribution of Units
45.. Suspension of redemption rights *
46.. . . . .(a) Redemption Valuation Rights of Unit Holders -
Redemption of Units -
Computation of Redemption
Price per Unit
(b) Schedule as to redemption price *
47.Maintenance of position in underlying securities
Public Offering - Market for Units: Rights of Unit Holders -
Redemption of Units - Purchase by the Sponsors of Units
tendered for Redemption; Rights of Unit Holders - Redemption
of Units - Computation of Redemption Price per Unit
______
* Inapplicable, answer negative or not required.<PAGE>
<PAGE> Form N-89B-2 Form S-6
Item Number Heading in Prospectus
V. Information Concerning the Trustee
or Custodian
<C> <S> <C>
48.Organization and regulation of trusteeTrustee
49.. . .Fees and expenses of trustee Tax Exempt Securities
Trust - Expenses and
Charges
50.. . . . . . . . . .Trustee's lien Tax Exempt Securities
Trust - Expenses and
Charges - Other Charges
VI. Information Concerning Insurance of
Holders of Securities
51.Insurance of holders of trust's securities*
VI. Policy of Registrant
52. (a) Provisions of trust agreement with respect to
selection or elimination of underlying securitiesProspectus
front cover: Sponsors-Responsibility
(b)Transactions involving elimination of
underlying securities . . . . . *
(c)Policy regarding substitution or elimination
of underlying securities. . . . Sponsors - Responsibility
(d)Fundamental policy not otherwise covered*
53. Tax status of trust . . . . . . Prospectus front cover: Tax
Exempt Securities Trust -
Tax Status
VIII. Financial and Statistical Information
54. Trust's securities during last ten years*
55. . . . . . . . . . . . . . . . . *
56. Certain information regarding periodic payment
securities . . . . . . . . . . . . *
57. . . . . . . . . . . . . . . . . *
58. . . . . . . . . . . . . . . . . *
59. Financial statements (Instruction 1(c) to form S-6)
Statement of Financial Condition of The Tax Exempt Securities
Trust
______
* Inapplicable, answer negative or not required.
<PAGE>
</TABLE>
INSURED SERIES 14
[S] [C]
In the opinion of counsel, under existing law interest income to the
Trust and, with certain exceptions, to Unit holders is exempt from all
Federal income tax, but may be subject to state and local taxes.
Capital gains, if any, are subject to tax. Investors should retain both
parts of this Prospectus for future reference.
THE INITIAL PUBLIC OFFERING OF UNITS IN THE TRUST HAS
BEEN COMPLETED. THE UNITS OFFERED HEREBY ARE
ISSUED AND OUTSTANDING UNITS WHICH HAVE BEEN
ACQUIRED BY THE SPONSORS EITHER BY PURCHASE FROM
THE TRUSTEE OF UNITS TENDERED FOR REDEMPTION OR IN
THE SECONDARY MARKET. SEE PART B, "RIGHTS OF UNIT
HOLDERS--REDEMPTION OF UNITS--PURCHASE BY THE
SPONSORS OF UNITS TENDERED FOR REDEMPTION" AND
"MARKET FOR UNITS". THE PRICE AT WHICH THE UNITS
OFFERED HEREBY WERE ACQUIRED WAS NOT LESS THAN
THE REDEMPTION PRICE DETERMINED AS PROVIDED
HEREIN. SEE PART B, "RIGHTS OF UNIT HOLDERS--
REDEMPTION OF UNITS--COMPUTATION OF REDEMPTION
PRICE PER UNIT".
INSURED SERIES 14 is a unit investment trust designated as the
National Trust formed for the purpose of obtaining for its Unit holders
tax-exempt interest income and conservation of capital through investment
in a fixed portfolio of long term municipal bonds. As a result of the
insurance on the bonds the Units were rated AAA by Standard & Poor's
Corporation as of the Date of Deposit (See "Portfolio of Securities".) The
bonds are issued on behalf of states, counties, territories, possession and
municipalities of the United States and authorities or political subdivisions
thereof. The interest on such bonds is exempt from all Federal income tax
(except in certain instances depending upon the Unit holder) under existing
law in the opinion of recognized bond counsel to the issuing governmental
authorities.
THE OBJECTIVES of the Trust are tax-exempt income and conservation
of capital through an investment in a diversified portfolio consisting
primarily of insured municipal bonds. There is, of course, no guarantee
that the Trust's objectives will be achieved since the payment of interest
and preservation of principal are dependent upon the continued ability of
the issuers and the obligors of the bonds, and the insurers thereof, to meet
such obligations. The insurance does not protect Unit holders from the
risk that the value of the Units may decline.
INSURANCE, guaranteeing the scheduled payment of all principal and
interest throughout the life of certain of the Bonds in the Trust has been
obtained at either cost of the issuer at the time of issuance, at the cost of
a holder prior to the purchase of the Bond by the Trust, or at the cost of
the Sponsor at the Date of Deposit. Insurance guaranteeing the scheduled
payments of principal and interest on the remainder of the Bonds in the
portfolio of the Trust ("Portfolio Insurance") has been obtained by the
Trust from Financial Guaranty Insurance Company ("Financial Guaranty")
and applies only while such Bonds are retained in the Trust. Pursuant to
an irrevocable commitment obtained from Financial Guaranty, in the event
of the sale of a Bond covered by Portfolio Insurance, the Trustee has the
right to obtain permanent insurance ("Permanent Insurance") for such
Bonds upon payment of a single predetermined premium from the proceeds
of the sale of such Bond. The monthly cost of the Portfolio Insurance on
the Bonds while held in the Trust is accounted for as an expense of the
Trust. Any amount paid for Permanent Insurance on a Bond sold by the
Trust will be accounted for as an offset to the amount received on the sale.
All insurance relates only to the Bonds in the Trust and not to the Units
offered hereby or to the market value thereof. On the Date of Deposit, the
Units were rated "AAA" by Standard & Poor's Corporation. The Sponsor
has been advised that the basis for the "AAA" rating on the Units of the
Trust was the "AAA" claims-paying ability rating of the Insurers of the
Bonds in such Trusts. The Sponsor has not sought to confirm the rating
on the Units subsequent to the Date of Deposit. (See Part B--"Insurance".)
THE PUBLIC OFFERING PRICE of the Units is equal to the aggregate
bid price of the underlying securities in the Trust's portfolio divided by the
number of Units outstanding, plus a sales charge equal to 3.25% of the
Public Offering Price (3.359% of the aggregate bid price of the Securities
per Unit). A proportional share of accrued and undistributed interest on
the securities at the date of delivery of the Units to the purchaser is also
added to the Public Offering Price.
THE SPONSOR, although not obligated to do so, intends to maintain a
market for the Units at prices based upon the aggregate bid price of the
underlying securities, as more fully described in Part B, "Market for
Units". If such a market is not maintained, a Unit holder may be able to
dispose of his Units only through redemption at prices based upon the
aggregate bid price of the underlying securities. The market value of the
underlying securities includes the value attributable to the insurance on the
securities. (See Part B--"Insurance".)
MONTHLY DISTRIBUTIONS of principal and interest received by the
Trust will be made on or shortly after the fifteenth day of each month to
holders of record on the first day of that month. For further information
regarding the distributions by the Trust, see the "Summary of Essential
Information".
THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION,
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
Prospectus Part A dated August 15, 1994
Note: Part A of this Prospectus may not be distributed unless
accompanied by Part B.
<PAGE>
<TABLE>
TAX EXEMPT SECURITIES TRUST, INSURED SERIES 14
SUMMARY OF ESSENTIAL INFORMATION AS OF MAY 23,
1994+
Sponsor: SMITH BARNEY INC.
Trustee: UNITED STATES TRUST COMPANY
OF NEW YORK
Evaluator: KENNY S&P EVALUATION SERVICES
<S> <C>
Principal Amount of Securities in Trust $4,740,000
Number of Units 6,356
Fractional Undivided Interest in Trust per Unit 1/6,356
Principal Amount of Securities in Trust per Unit $745.75
Public Offering Price per Unit #* $ 819.34
Sales Charge (3.25% of Public Offering Price)# $
26.62
Approximate Redemption and Sponsor's Repurchase
Price per Unit
(per Unit Bid Price of Securities)#** $792.72
Calculation of Estimated Net Annual Interest Income per
Unit:
Estimated Annual Interest Income per Unit $
57.08
Less Estimated Annual Expenses per Unit $ 1.47
Less Annual Insurance Premium per Unit $
.99
Estimated Net Annual Interest Income per
Unit $ 54.62
Monthly Interest Distribution per Unit $ 4.55
Daily Rate (360-day basis) of Income Accrual per Unit $
.1517
Estimated Current Return Based on Public Offering
Price# 6.66%
Estimated Long-Term Return# 5.32%
<FN>
#Subject to changes in the prices of the underlying
securities. The aggregate bid price of the securities is determined
on each business day as of the Evaluation Time.
*Plus $15.99 per Unit representing accrued interest and
the net of cash on hand, accrued expenses and amounts
distributable to Unit holders through the expected date of
settlement (five business days after May 23, 1994). (See "Public
Offering--Offering Price".)
The sales charge was previously reduced because prerefundings
of Portfolio securities have shortened the average life of the
Trust.
**Plus $14.79 per Unit representing accrued interest and
the net of cash on hand, accrued expenses and amounts
distributable to Unit holders of record as of May 23, 1994 on a
pro rata basis. (See "Redemption of Units--Computation of
Redemption Price per Unit".)
</TABLE>
Record Dates: The first day of each month
Distribution Dates: The fifteenth day of each month
Evaluation Time: Close of trading on the New York Stock
Exchange (currently 4:00 P.M. New York time)
Date of Deposit and Trust Agreement: September 1, 1987
Mandatory Termination Date: January 1, 2037
Minimum Value of Trust: Trust may be terminated if the value
of the Trust is less than $3,500,000 and must be terminated if the
value of the Trust is less than $1,750,000
Trustee's Annual Fee: $1.26 per $1,000 principal amount of bonds
($5,972 per year on the basis of bonds in the principal amount of
$4,740,000) plus expenses.
Evaluator's Fee: $.30 per bond per evaluation Number of
issues: 15 Number of States: 9
As of May 23, 1994, 13 (89%) of the Bonds were rated by
Standard & Poor's Corporation (78% being rated AAA and 11%
being rated A) and 2 (11%) were rated by Moody's Investors
Service (10% being rated Aa and 1% being ratd Baa). Ratings
assigned by the bond rating services are subject to change from
time to time.
<PAGE>
Additional Considerations - Investment in the Trust should be made
with an understanding that the value of the underlying Portfolio may
decline with increases in interest rates. Approximately 23% of the
Bonds in the Trust consist of hospital revenue bonds (including
obligations of health care facilities). Approximately 11% of the
Bonds in the Trust consist of obligations of municipal housing
authorities. Approximately 11% of the Bonds in the Trust consist of
bonds which are subject to the Mortgage Subsidy Bond Tax Act of
1980. Approximately 20% of the Bonds in the Trust consist of bonds
in the power facilities category. Approximately 5% of the Bonds in
the Trust are bonds issued for the financing of nuclear power plants.
(See Part B, "Tax Exempt Securities Trust-Portfolio" for a brief
summary of additional considerations relating to certain of these
issues.)
+ The percentages referred to in this summary are each computed
on the basis of the aggregate bid price of the Bonds as of May 23,
1994.
<TABLE>
FINANCIAL AND STATISTICAL INFORMATION
Selected data for each Unit outstanding
IncomePrincipal
Units Net AssetDistributions
Distributions
Period Ended Outstanding Value Per UnitPer Unit
Per Unit
<S> <C> <C> <C> <C>
April 30, 1992 6,826 $ 1,033.81$ 76.34 $
39.90
April 30, 1993 6,733 1,030.2673.40 36.14
April 30, 1994 6,431 810.7266.72
182.21
</TABLE>
INDEPENDENT AUDITORS' REPORT
To the Unit Holders, Sponsor and Trustee of
Tax Exempt Securities Trust, Insured Series 14:
We have audited the accompanying balance sheet of Tax Exempt
Securities Trust, Insured Series 14, including the portfolio of
securities, as of April 30, 1994, and the related statements of
operations and changes in net assets for each of the years in the
three-year period ended April 30, 1994. These financial statements
are the responsibility of the Trustee (see Note 6). Our responsibility
is to express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. Our procedures included
confirmation of securities owned as of April 30, 1994 by
correspondence with the Trustee. An audit also includes assessing
the accounting principles used and significant estimates made by the
Trustee, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Tax Exempt
Securities Trust, Insured Series 14 as of April 30, 1994, and the
results of its operations and changes in its net assets for each of the
years in the three-year period ended April 30, 1994, in conformity
with generally accepted accounting principles.
KPMG PEAT MARWICK
New York, New York
June 23, 1994
<TABLE>
<PAGE>
TAX EXEMPT SECURITIES TRUST, INSURED SERIES 14
BALANCE SHEET
April 30, 1994
ASSETS
<S> <C>
Investments in tax exempt bonds, at market value
(Cost $4,596,245) (Note 3 to Portfolio of Securities) $5,104,309
Accrued interest 130,014
Total Assets $5,234,323
LIABILITIES AND NET ASSETS
Overdraft payable $19,853
Accrued expenses 725
Total Liabilities20,578
Net Assets (6,431 units of fractional undivided
interest outstanding):
Original cost to investors (Note 1) $7,244,604
Less initial underwriting commission (sales charge)
(Note 1) 340,496
6,904,108
Cost of bonds sold or redeemed since date of deposit
(September 1, 1987)(2,307,863
)
Net unrealized market appreciation 508,064
5,104,309
Undistributed net investment income 103,871
Undistributed proceeds from bonds sold or redeemed
5,565
Net Assets 5,213,745
Total Liabilities and Net Assets $5,234,323
Net asset value per unit $810.72
STATEMENTS OF OPERATIONS
For the years ended April 30, 1994, 1993 and 1992
1994 1993 1992
<S> <C>
<C> <C>
Investment Income-interest (Note 2) . . . . . . . . . . . . . . . . . . . . $ 433,204$
508,042 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
539,820
Less expenses:
Trustee's fees and expenses . . . . . . . . . . . . . . . . . . . . . .
8,255 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,005 8,394
Evaluator's fees. . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,433 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,677 1,210
Insurance expense . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,317
7,535 . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,617
Total expenses. . . . . . . . . . . . . . . . . . . . . . . . . . 16,005
18,217 . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,221
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . 417,199
489,825 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
520,599
Realized and unrealized gain on investments:
Net realized loss on securities transactions (Note 5) . . . . . . . . .(14,254
) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (20,110) (9,49
7 )
Net increase (decrease) in unrealized market
appreciation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (204,947
) . . . . . . . . . . . . . . . . . . . . . . . . . . . 249,641
102,729
Net gain (loss) on investments. . . . . . . . . . . . . . . . . . . . . (219,201
) . . . . . . . . . . . . . . . . . . . . . . . . . . . 229,531
93,232
Net increase in net assets resulting from operations. . . . . . . . . . $197,998$
719,356 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 613,831
The accompanying Notes to Financial Statements are an integral part
of these statements.
TAX EXEMPT SECURITIES TRUST, INSURED SERIES 14
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended April 30, 1994, 1993 and 1992
<PAGE>
1994 1993 1992
Operations:
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . $417,199$
489,825 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 520,599
Net realized loss on securities transactions (Note 5) . . . . . . . . .(14,254
) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (20,110) (9,49
7 )
Net increase (decrease) in unrealized market
appreciation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (204,947
) . . . . . . . . . . . . . . . . . . . . . . . . . . . 249,641
102,729
Net increase in net assets resulting from operations. . . . . . . . . . 197,998
719,356 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
613,831
Distributions to Unit Holders:
Net investment income (Note 4). . . . . . . . . . . . . . . . . . . . .(441,628
) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(498,716) (521,
097)
Proceeds from securities sold or redeemed . . . . . . . . . . . . . . .
(1,201,551 )
(245,517)
(272,357 )
Total Distributions . . . . . . . . . . . . . . . . . . . . . . . (1,643,179
) . . . . . . . . . . . . . . . . . . . . . . . . . . . (744,233)
(793,454)
Unit Redemptions by Unit Holders (Note 3):
Accrued interest at date of redemption. . . . . . . . . . . . . . . . .(4,996
) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(1,765) -
Value of Units at date of redemption. . . . . . . . . . . . . . . . . . (272,830
) . . . . . . . . . . . . . . . . . . . . . . . . . . . (93,450)
-
Total Distributions . . . . . . . . . . . . . . . . . . . . . . . (277,826
) . . . . . . . . . . . . . . . . . . . . . . . . . . . (95,215)
Decrease in net assets. . . . . . . . . . . . . . . . . . . . . . . . .(1,723,007
) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(120,092)
(179,623)
Net Assets:
Beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,936,752
7,056,844 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,236,467
End of year (including undistributed net
investment income of $103,871, $133,296
and $143,952, respectively) . . . . . . . . . . . . . . . . . . . . . $5,213,745$
6,936,752 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
7,056,844
</TABLE>
NOTES TO FINANCIAL STATEMENTS
(1) The original cost to the investors represents the aggregate initial
public offering price as of the date of deposit (September 1,
1987) exclusive of accrued interest, computed on the basis of the
aggregate offering price of the Securities. The initial
underwriting commission (sales charge) was 4.70% of the
aggregate public offering price (4.932% of the aggregate offering
price of the Securities).
(2) Interest income represents interest earned on the Trust's
portfolio and has been recorded on the accrual basis.
(3) 395 Units were redeemed by the Trustee for the three years
ended April 30, 1994 (302 Units and 93 Units being redeemed
in 1994 and 1993, respectively).
(4) Interest received by the Trust is distributed to Unit holders on
the fifteenth day of each month, after deducting applicable
expenses.
(5) The loss from the sale or redemption of securities is computed
on the basis of the average cost of the issue sold or redeemed.
(6) The Trustee has custody of and responsibility for all accounting
and financial books, records, financial statements and related
data of each Trust and is responsible for establishing and
maintaining a system of internal control directly related to, and
designed to provide reasonable assurance as to the integrity and
reliability of, financial reporting of each Trust. The Trustee is
also responsible for all estimates of expenses and accruals
reflected in each Trust's financial statements. The Evaluator
determines the price for each underlying Bond included in each
Trust's Portfolio of Securities on the basis set forth in Part B,
"Public Offering - Offering Price". Under the Securities Act of
1933, as amended (the "Act"), the Sponsor is deemed to be issuer
of each Trust's Units. As such, the Sponsor has the
responsibility of issuer under the Act with respect to financial
statements of each Trust included in the Registration Statement.
<PAGE>
<TABLE>
TAX EXEMPT SECURITIES TRUST, INSURED SERIES 14
NATIONAL INSURED TRUST - PORTFOLIO OF SECURITIES -
April 30, 1994
Ratings
Redemption Principal
Market
Security Description (1)
Provisions (2) Amount
Value (3)
<S> <C> <C>
<C> <C>
Dade County Health Facilities
Authority, Florida, Hospital Revenue
Bonds, Baptist Hospital of Miami AAA (c) 5/1/97 @
102 $ 500,000$546,660
Project, 7.375% due 5/1/2013 (p)
Palm Beach County, Florida, Solid
Waste Authority Revenue Bonds, A 7/1/97 @
103 500,000563,345
8.75% due 7/1/2010 S.F. 7/1/05
@ 100
Illinois Health Facilities Authority
Revenue Bonds, Sisters of the Third
Order of St. Francis, 7.50% due 6/1/2016 AAA 6/1/96 @
102 500,000539,810
(Financial Guaranty Ins.) (Note 4) (p)
New Mexico Mortgage Finance Authority,
Single Family Mortgage Program Bonds,
8.00% due 1/1/2017 AAA 7/1/97 @
103 545,000570,468
(Financial Guaranty Ins.) (Note 4) S.F. 1/1/15
@ 100
North Carolina Eastern Municipal Power
Agency, Power System Revenue Bonds, AAA 1/1/95 @
103 275,000293,626
10.00% due 1/1/2017 (p)
Hamilton County, Ohio, Health System
Revenue Bonds, St. Francis - St. George Baa* 5/29/94 @
106 50,00053,076
Hospital Issue, 9.375% due 7/1/2015 S.F. 7/1/99
@ 100
Hamilton County, Ohio, Sewer System
Revenue Bonds, Metropolitan Sewer
District of Greater Cincinnati, AAA 6/1/96 @
102 260,000280,376
7.50% due 12/1/2010 (p)
Hampden Township Sewer Authority,
Pennsylvania, Guaranteed Sewer
Revenue Bonds, 8.875% due 10/1/2005 AAA 10/1/95 @
100 315,000333,982
(MBIA Ins.) (Note 4) S.F. 4/1/01
@ 100
Piedmont Municipal Power Agency, South
Carolina, Electric Revenue Bonds,
7.00% due 1/1/2013 AAA 1/1/96 @
102 275,000289,160
(Financial Guaranty Ins.) (Note 4) S.F. 1/1/05
@ 100
The City of Austin, Texas, Certificates of
Participation, Lease Rentals Water and
Wasterwater Utility Office Project,
7.875% due 11/15/2003 AAA 11/15/97
@ 102 150,000166,102
(BIG Ins.) (Note 4)
7.90% due 11/15/2004 AAA 11/15/97
@ 102 310,000343,527
(BIG Ins.) (Note 4)
Collin County, Texas, Community
College District Bonds,
6.30% due 8/15/2006 AAA 8/15/96 @
100 230,000232,707
(Financial Guaranty Ins.) (Note 4)
A-6
<PAGE>
TAX EXEMPT SECURITIES TRUST, INSURED SERIES 14
NATIONAL INSURED TRUST - PORTFOLIO OF SECURITIES -
April 30, 1994
(Continued)
Ratings
Redemption Principal
Market
Security Description (1)
Provisions (2) Amount
Value (3)
Lower Colorado River Authority,
Texas, Revenue Refunding Bonds, AAA 1/1/97 @
102 $ 135,000$140,558
6.75% due 1/1/2006 S.F. 1/1/03
@ 100
(AMBAC Ins.) (Note 4)
Houston, Texas, Sewer System Prior
Lien Revenue Bonds, 7.125% due 12/1/2016 AAA 12/1/96 @
102 250,000270,627
(MBIA Ins.) (Note 4) (p)
Intermountain Power Agency, Special
Obligation Crossover Bonds, Aa* 7/1/96 @
100 500,000 480,285
6.00% due 7/1/2015
$4,795,000$5,104,309
The accompanying Notes are an integral part of this Portfolio.
A-7
<PAGE>
TAX EXEMPT SECURITIES TRUST, INSURED SERIES 14
NATIONAL INSURED TRUST - PORTFOLIO OF SECURITIES -
April 30, 1994
(Continued)
At April 30, 1994 the net unrealized market appreciation of all tax
exempt bonds was comprised of the following:
<S> <C>
Gross unrealized market appreciation $ 541,923
Gross unrealized market depreciation (33,859)
Net unrealized market appreciation $ 508,064
</TABLE>
NOTES TO PORTFOLIO OF SECURITIES:
(1) All Ratings are by Standard & Poor's Corporation, except those
identified by an asterisk (*) which are by Moody's Investors
Service. The meaning of the applicable rating symbols is set
forth in Part B, "Ratings".
(2) There is shown under this heading the year in which each issue
of bonds initially or currently is redeemable and the redemption
price for that year; unless otherwise indicated, each issue
continues to be redeemable at declining prices thereafter, but
not below par. "S.F." indicates a sinking fund has been or will
be established with respect to an issue of bonds. The prices at
which bonds may be redeemed or called prior to maturity may
or may not include a premium and, in certain cases, may be less
than the cost of the bonds to the Trust. Certain bonds in the
portfolio, including bonds not listed as being subject to
redemption provisions, may be redeemed in whole or in part
other than by operation of the stated redemption or sinking
fund provisions under certain unusual or extraordinary
circumstances specified in the instruments setting forth the
terms and provisions of such bonds. For example, see
discussion of obligations of municipal housing authorities under
"Tax Exempt Securities Trust-Portfolio" in Part B.
(3) The market value of securities as of April 30, 1994 was
determined by the Evaluator on the basis of bid prices for the
securities at such date.
(4) Insurance to maturity has been obtained previously from the
listed Insurance Company for these Bonds. The AAA ratings
on these Bonds are based in part on the creditworthiness and
claims-paying ability of the Insurance Company insuring such
Bond to maturity. No premium is payable therefore by the
Trust.
All other bonds in the portfolio are insured by the Portfolio
Insurance Policy obtained by the Trust. (See Part B, "Insurance
on the Bonds in the Portfolio of a Trust").
(p) It is anticipated that these bonds will be redeemed prior to
their scheduled maturity, pursuant to a pre-refunding, as
reflected under the column "Redemption Provisions".
(c) Continuance of the rating is contingent upon Standard &
Poor's Corporation's receipt of an executed copy of the
escrow agreement or closing documentation confirming
investments and cash flows.
A-8
<PAGE>
<TABLE>
Prospectus
This Prospectus contains information concerning the Trust and
the Sponsors, but does not contain all the information set forth
in the registration statements and exhibits relating thereto, which
the Trust has filed with the Securities and Exchange Commission,
Washington, D.C. under the Securities Act of 1933 and the
Investment Company Act of 1940, and to which reference is
hereby made.
<S><C><C>
Index:
Page
Summary of Essential Information. . . . . . . . . . . . . . . . . . . . . . . . A-
2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Insured Series 14
Financial and Statistical Information . . . . . . . . . . . . . . . . . . . . . A-
3
Report of Independent Auditors. . . . . . . . . . . . . . . . . . . . . . . . . A-3
Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-
4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Portfolios of Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . A-
6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,356 Units
Tax Exempt Securities Trust - Insured Series. . . . . . . . . . . . . . . . . . 1
The Trusts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Objectives. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Estimated Current Return and Estimated Long-Term Return . . . . . . . . . . . 36
PROSPECTUS
Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Dated August 15, 1994
Insurance on the Bonds in the Portfolio of a Trust. . . . . . . . . . . . . . 41
Expenses and Charges. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Public Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Offering Price. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Method of Evaluation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Sponsor
Distribution of Units . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Market for Units. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
SMITH BARNEY INC.
Exchange Option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Reinvestment Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Sponsor's Profits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Rights of Unit Holders. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Certificates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
1345 Avenue of the Americas
Distribution of Interest and Principal. . . . . . . . . . . . . . . . . . . . 48
New York, New York 10105
Reports and Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
(800) 298-UNIT
Redemption of Units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Sponsor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Limitations on Liability. . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Responsibility. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Resignation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Limitations on Liability. . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Resignation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Evaluator . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Limitations on Liability. . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Responsibility. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Resignation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Amendment and Termination of the Trust Agreement. . . . . . . . . . . . . . . . 55
Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Legal Opinions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Auditors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Ratings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
</TABLE>
This Prospectus does not constitute an offer to sell, or a
solicitation of an offer to buy, securities in any state to any
person to whom it is not lawful to make such offer in such state.
<PAGE>
[TEXT]
PROSPECTUS-PART B
Note that Part B of the Prospectus may not be distributed
unless accompanied by Part A.
TAX EXEMPT SECURITIES TRUST--INSURED SERIES
The Trusts
Each Trust is one of a series of similar but separate unit
investment trusts created under the laws of the State of New York by a
Trust Indenture and Agreement and related Reference Trust Agreement,
dated the Date of Deposit (collectively, the "Trust Agreement"), among
Smith Barney Shearson Inc. and Kidder, Peabody & Co. Incorporated
(the "Sponsors"), United States Trust Company of New York, as
Trustee, and Kenny Information Systems, Inc., as Evaluator. Each trust
containing Bonds of a State for which such Trust is named (a "State
Trust") and each National Trust and Selected Term Trust is referred to
herein as the "Trust" or "Trusts," unless the context
requires otherwise. On the Date of Deposit the Sponsors deposited with
the Trustee interest-bearing obligations (the "Bonds"), including contracts
and funds (represented by a certified check or checks and/or an
irrevocable letter or letters of credit, issued by a major commercial bank)
for the purchase of certain such obligations (such Bonds being referred
to herein as the "Securities"). The Trustee thereafter delivered to the
Sponsors registered certificates of beneficial interest (the "Certificates")
representing the units (the "Units") comprising the
entire ownership of each Trust. The initial public offering of Units in
each Trust has been completed. The Units offered hereby are issued and
outstanding Units which have been acquired by the Sponsors either by
<PAGE>
purchase from the Trustee of Units tendered for redemption or in the
secondary market. See "Rights of Unit Holders--Redemption of
Units--Purchase by the Sponsors of Units Tendered for Redemption" and
"Public Offering--Market for Units".
Objectives
The objectives of a Trust in the Insured Series are tax-exempt
income and conservation of capital through an investment in a diversified
portfolio of insured municipal bonds. There is, of course, no guarantee
that a Trust's objectives will be achieved since the payment of interest
and the preservation of principal are dependent upon the continued ability
of the issuers of the bonds or the creditworthiness of the insurers to meet
such obligations. The insurance does not protect Unit holders from the
risk that the value of the Units may decline before the ratings of the
Bonds subsequent to the Date of Deposit, set forth in Part A - "Portfolio
of Securities" may have declined due to, among other factors (including
a decline in the creditworthiness of an insurer in the case of an insured
trust which may also result in a decline in the AAA ratings of the Units
of an insured trust), a decline in the creditworthiness of the
issuer of said Bonds.
Portfolio
The following factors, among others, were considered in
selecting Bonds for each Trust: (1) all the Bonds of the National Trust
and the Selected Term Trust are obligations of the states, counties,
territories, or municipalities of the United States and authorities or
political subdivisions thereof, so that the interest on them will, in the
opinion of recognized bond counsel to the issuing governmental
authorities, be exempt from Federal income
tax under existing law to the extent described in "Tax Status", (2) all the
Bonds deposited in a State Trust are obligations of the State for which
such Trust is named or of the counties, territories or municipalities of
such State, and authorities or political subdivisions thereof, or of the
Territory of Guam or the Commonwealth of Puerto Rico, so that the
interest on them will, in the opinion
of recognized bond counsel to the issuing governmental authorities, be
exempt from Federal income tax under existing law to the extent
described in "Tax Status" and from state income taxes in the state for
which such State Trust is named to the extent described in Part C - "Tax
Exempt Securities Trust -Taxes," (3) the Bonds are diversified as to
purpose of issue and location of issuer, except in the case of a State
Trust where the Bonds are diversified only
as to purpose of issue, (4) in the opinion of the Sponsors, the Bonds are
fairly valued relative to other bonds of comparable quality and maturity,
and (5) whether insurance guaranteeing the timely payment, when due,
of all principal and interest on the Bonds was available.
<PAGE>
The Bonds in the Portfolio of a Trust were chosen in part on
the basis of their respective maturity dates. The Selected Term Trust
will contain Bonds which will have a dollar-weighted average portfolio
maturity of more than three years but not more than ten years from the
Date of Deposit. The National
Trust or a State Trust not specified as to term will have a dollar-weighted
average portfolio maturity of more than ten years from the Date of
Deposit. For the actual maturity dates of each of the Bonds contained in
each Trust, see Part A, "Portfolio or Securities". A sale or other
disposition of a Bond by the Trust prior to the maturity of such Bond
may be at a price which results in a loss to the Trust. The inability of an
issuer to pay the principal amount due upon
the maturity of a Bond would result in a loss to the Trust.
Additional Considerations Regarding the Trusts
Most of the Bonds in the Portfolio of a State Trust are
subject to redemption prior to their stated maturity date pursuant to
sinking fund or call provisions. (See Part A-"Portfolio Summary as
of Date of Deposit" for information relating to the particular State
Trust described therein.) In general, a call or redemption provision
is more likely to be exercised when the offering price valuation of a
bond is higher than its call or redemption price, as it might be in
periods of declining interest rates, than when such price valuation is
less than the bond's call or redemption price. To the extent that a
Bond was deposited in a State Trust at a price higher than the price
at which it is redeemable, redemption will result in a loss of capital
when compared with the original public offering price of the Units.
Conversely, to the extent that a Bond was acquired at a price lower
than the redemption price, redemption will result in an increase in
capital when compared with the original public offering price of the
Units. Monthly distributions will generally be reduced by the amount
of the income which would otherwise have been paid with respect to
redeemed bonds. The Estimated Current Return and Estimated
Long-Term Return of the Units may be affected by such
redemptions. Each Portfolio of Securities in Part A contains a listing
of the sinking fund and call provisions, if any, with respect to each
of the Bonds in a State Trust. Because certain of the Bonds may
from time to time under certain circumstances be sold or redeemed
or will mature in accordance with their terms and the proceeds from
such events will be distributed to Unit holders and will not be
reinvested, no assurance can be given that a State Trust will retain
for any length of time its present size and composition. Neither the
Sponsors nor the Trustee shall be liable in any way for any default,
failure or defect in any Bond.
The Portfolio of the State Trust may consist of some Bonds
whose current market values were below face value on the Date of
<PAGE>
Deposit. A primary reason for the market value of such Bonds being
less than face value at maturity is that the interest coupons of such
Bonds are at lower rates than the current market interest rate for
comparably rated Bonds, even though at the time of the issuance of
such Bonds the interest coupons thereon represented then prevailing
interest rates on comparably rated Bonds then newly issued. Bonds
selling at market discounts tend to increase in market value as they
approach maturity when the principal amount is payable. A market
discount tax-exempt Bond held to maturity will have a larger portion
of its total return in the form of taxable ordinary income and less in
the form of tax-exempt income than a comparable Bond bearing
interest at current market rates. Under the provisions of the Internal
Revenue Code in effect on the date of this Prospectus any ordinary
income attributable to market discount will be taxable but will not be
realizeduntil maturity, redemption or sale of the Bonds or Units.
As set forth under "Portfolio Summary as of Date of
Deposit", the State Trust may contain or be concentrated in one or
more of the classifications of Bonds referred to below. A State Trust
is considered to be "concentrated" in a particular category when the
Bonds in that category constitute 25% or more of the aggregate value
of the Portfolio. (See Part A-"Portfolio Summary as of Date of
Deposit" for information relating to the particular State Trust
described therein.) An investment in Units of the State Trust should
be made with an understanding of the risks that these investments
may entail, certain of which are described below.
General Obligation Bonds. Certain of the Bonds in the
Portfolio may be general obligations of a governmental entity that are
secured by the taxing power of the entity. General obligation bonds
are backed by the issuer's pledge of its full faith, credit and taxing
power for the payment of principal and interest. However, the taxing
power of any governmental entity may be limited by provisions of
state constitutions or laws and an entity's credit will depend on many
factors, including an erosion of the tax base due to population
declines, natural disasters, declines in the state's industrial base or
inability to attract new industries, economic limits on the ability to
tax without eroding the tax base and the extent to which the entity
relies on Federal or state aid, access to capital markets or other
factors beyond the entity's control.
As a result of the recent recession's adverse impact upon
both their revenues and expenditures, as well as other factors, many
state and local governments are confronting deficits and potential
deficits which are the most severe in recent years. Many issuers are
facing highly difficult choices about significant tax increases and/or
spending reductions in order to restore budgetary balance. Failure to
implement these actions on a timely basis could force the issuers to
depend upon market access to finance deficits or cash flow needs.
<PAGE>
In addition, certain of the Bonds in the State Trust may be
obligations of issuers (including California issuers) who rely in whole
or in part on ad valorem real property taxes as a source of revenue.
Certain proposals, in the form of state legislative proposals or voter
initiatives, to limit ad valorem real property taxes have been
introduced in various states, and an amendment to the constitution of
the State of California, providing for strict limitations on ad valorem
real property taxes, has had a significant impact on the taxing powers
of local governments and on the financial conditions of school
districts and local governments in California. It is not possible at this
time to predict the final impact of such measures, or of similar future
legislative or constitutional measures, on school districts and local
governments or on their abilities to make future payments on their
outstanding debt obligations.
Industrial Development Revenue Bonds ("IDRs"). IDRs,
including pollution control revenue bonds, are tax-exempt securities
issued by states, municipalities, public authorities or similar entities
("issuers") to finance the cost of acquiring, constructing or
improving various projects, including pollution control facilities and
certain industrial development facilities. These projects are usually
operated by corporate entities. IDRs are not general obligations of
governmental entities backed by their taxing power. Issuers are only
obligated to pay amounts due on the IDRs to the extent that funds are
available from the unexpended proceeds of the IDRs or receipts or
revenues of the issuer under arrangements between the issuer and the
corporate operator of a project. These arrangements may be in the
form of a lease, installment sale agreement, conditional sale
agreement or loan agreement, but in each case the payments to the
issuer are designed to be sufficient to meet the payments of amounts
due on the IDRs.
IDRs are generally issued under bond resolutions,
agreements or trust indentures pursuant to which the revenues and
receipts payable under the issuer's arrangements with the corporate
operator of a particular project have been assigned and pledged to the
holders of the IDRs or a trustee for the benefit of the holders of the
IDRs. In certain cases, a mortgage on the underlying project has
been assigned to the holders of the IDRs or a trustee as additional
security for the IDRs. In addition, IDRs are frequently directly
guaranteed by the corporate operator of the project or by another
affiliated company. Regardless of the structure, payment of IDRs is
solely dependent upon the creditworthiness of the corporate operator
of the project or corporate guarantor. Corporate operators or
guarantors that are industrial companies may be affected by many
factors which may have an adverse impact on the credit quality of
the particular company or industry. These include cyclicality of
revenues and earnings, regulatory and environmental restrictions,
litigation resulting from accidents or environmentally-caused
<PAGE>
illnesses, extensive competition (including that of low-cost foreign
companies), unfunded pension fund liabilities or off-balance sheet
items, and financial deterioration resulting from leveraged buy-outs
or takeovers. However, certain of the IDRs in the Portfolio may be
additionally insured or secured by letters of credit issued by banks
or otherwise guaranteed or secured to cover amounts due on the
IDRs in the event of default in payment by an issuer.
Hospital and Health Care Facility Bonds. The ability of
hospitals and other health care facilities to meet their obligations with
respect to revenue bonds issued on their behalf is dependent on
various factors, including the level of payments received from private
third-party payors and government programs and the cost of
providing health care services.
A significant portion of the revenues of hospitals and other
health care facilities is derived from private third-party payors and
government programs, including the Medicare and Medicaid
programs. Both private third-party payors and government programs
have undertaken cost containment measures designed to limit
payments made to health care facilities. Furthermore, government
programs are subject to statutory and regulatory changes, retroactive
rate adjustments, administrative rulings and government funding
restrictions, all of which may materially decrease the rate of program
payments for health care facilities. There can be no assurance that
payments under governmental programs will remain at levels
comparable to present levels or will, in the future, be sufficient to
cover the costs allocable to patients participating in such programs.
In addition, there can be no assurance that a particular hospital or
other health care facility will continue to meet the requirements for
participation in such programs.
The costs of providing health care services are subject to
increase as a result of, among other factors, changes in medical
technology and increased labor costs. In addition, health care facility
construction and operation is subject to federal, state and local
regulation relating to the adequacy of medical care, equipment,
personnel, operating policies and procedures, rate-setting, and
compliance with building codes and environmental laws. Facilities
are subject to periodic inspection by governmental and other
authorities to assure continued compliance with the various standards
necessary for licensing and accreditation. These regulatory
requirements are subject to change and, to comply, it may be
necessary for a hospital or other health care facility to incur
substantial capital expenditures or increased operating expenses to
effect changes in its facilities, equipment, personnel and services.
Hospitals and other health care facilities are subject to claims
and legal actions by patients and others in the ordinary course of
<PAGE>
business. Although these claims are generally covered by insurance,
there can be no assurance that a claim will not exceed the insurance
coverage of a health care facility or that insurance coverage will be
available to a facility. In addition, a substantial increase in the cost
of insurance could adversely affect the results of operations of a
hospital or other health care facility. The Clinton Administration may
impose regulations which could limit price increases for hospitals or
the level of reimbursements for third-party payors or other measures
to reduce health care costs and make health care available to more
individuals, which would reduce profits for hospitals. Some states,
such as New Jersey, have significantly changed their reimbursement
systems. If a hospital cannot adjust to the new system by reducing
expenses or raising rates, financial difficulties may arise. Also, Blue
Cross has denied reimbursement for some hospitals for services other
than emergency room services. The lost volume would reduce
revenues unless replacement patients were found.
Certain hospital bonds may provide for redemption at par at
any time upon the sale by the issuer of the hospital facilities to a
non-affiliated entity, if the hospital becomes subject to ad valorem
taxation, or in various other circumstances. For example, certain
hospitals may have the right to call bonds at par if the hospital may
be legally required because of the bonds to perform procedures
against specified religious principles or to disclose information that
is considered confidential or privileged. Certain FHA-insured bonds
may provide that all or a portion of these bonds, otherwise callable
at a premium, can be called at par in certain circumstances. If a
hospital defaults upon a bond obligation, the realization of Medicare
and Medicaid receivables may be uncertain and, if the bond
obligation is secured by the hospital facilities, legal restrictions on
the ability to foreclose upon the facilities and the limited alternative
uses to which a hospital can be put may severely reduce its collateral
value.
The Internal Revenue Service is currently engaged in a
program of intensive audits of certain large tax-exempt hospital and
health care facility organizations. Although these audits have not yet
been completed, it has been reported that the tax-exempt status of
some of these organizations may be revoked. At this time, it is
uncertain whether any of the hospital and health care facility bonds
held by the State Trust will be affected by such audit proceedings.
Single Family and Multi-Family Housing Bonds.
Multi-family housing revenue
bonds and single family mortgage revenue bonds are state and local
housing issues that have been issued to provide financing for various
housing projects. Multi-family housing revenue bonds are payable
primarily from the revenues derived from mortgage loans to housing
<PAGE>
projects for low to moderate income families. Single-family mortgage
revenue bonds are issued for the purpose of acquiring from
originating financial institutions notes secured by mortgages on
residences.
Housing obligations are not general obligations of the issuer
although
certain obligations may be supported to some degree by Federal,
state or local housing subsidy programs. Budgetary constraints
experienced by these programs as well as the failure by a state or
local housing issuer to satisfy the qualifications required for coverage
under these programs or any legal or administrative determinations
that the coverage of these programs is not available to a housing
issuer, probably will result in a decrease or elimination of subsidies
available for payment of amounts due on the issuer's obligations.
The ability of housing issuers to make debt service payments on their
obligations will also be affected by various economic and
non-economic developments including, among other things, the
achievement and maintenance of sufficient occupancy levels and
adequate rental income in multi-family projects, the rate of default
on mortgage loans underlying single family issues and the ability of
mortgage insurers to pay claims, employment and income conditions
prevailing in local markets, increases in construction costs, taxes,
utility costs and other operating expenses, the managerial ability of
project managers, changes in laws and governmental regulations and
economic trends generally in the localities in which the projects are
situated. Occupancy of multi-family housing projects may also be
adversely affected by high rent levels and income limitations imposed
under Federal, state or local programs.
All single family mortgage revenue bonds and certain
multi-family housing revenue bonds are prepayable over the life of
the underlying mortgage or mortgage pool, and therefore the average
life of housing obligations cannot be determined. However, the
average life of these obligations will ordinarily be less than their
stated maturities. Single-family issues are subject to mandatory
redemption in whole or in part from prepayments on underlying
mortgage loans; mortgage loans are frequently partially or
completely prepaid prior to their final stated maturities as a result of
events such as declining interest rates, sale of the mortgaged
premises, default, condemnation or casualty loss. Multi-family issues
are characterized by mandatory redemption at par upon the
occurrence of monetary defaults or breaches or covenants by the
project operator. Additionally, housing obligations are generally
subject to mandatory partial redemption at par to the extent that
proceeds from the sale of the obligations are not allocated within a
stated period (which may be within a year of the date of issue). To
the extent that these obligations were valued at a premium when a
Holder purchased Units, any prepayment at par would result in a loss
<PAGE>
of capital to the Holder and, in any event, reduce the amount of
income that would otherwise have been paid to Holders.
The tax exemption for certain housing revenue bonds
depends on qualification under Section 143 of the Internal Revenue
Code of 1986, as amended (the "Code"), in the case of single family
mortgage revenue bonds or Section 142(a)(7) of the Code or other
provisions of Federal law in the case of certain multi-family housing
revenue bonds (including Section 8 assisted bonds). These sections
of the Code or other provisions of Federal law contain certain
ongoing requirements, including requirements relating to the cost and
location of the residences financed with the proceeds of the single
family mortgage revenue bonds and the income levels of tenants of
the rental projects financed with the proceeds of the multi-family
housing revenue bonds. While the issuers of the bonds and other
parties, including the originators and servicers of the single-family
mortgages and the owners of the rental projects financed with the
multi-family housing revenue bonds, generally covenant to meet
these ongoing requirements and generally agree to institute
procedures designed to ensure that these requirements are met, there
can be no assurance that these ongoing requirements will be
consistently met. The failure to meet these requirements could cause
the interest on the bonds to become taxable, possibly retroactively
from the date of issuance, thereby reducing the value of the bonds,
subjecting the Holders to unanticipated tax liabilities and possibly
requiring the Trustee to sell the bonds at reduced values.
Furthermore, any failure to meet these ongoing requirements might
not constitute an event of default under the applicable mortgage or
permit the holder to accelerate payment of the bond or require the
issuer to redeem the bond. In any event, where the mortgage is
insured by the Federal Housing Administration, its consent may be
required before insurance proceeds would become payable to redeem
the mortgage bonds.
Power Facility Bonds. The ability of utilities to meet their
obligations with
respect to revenue bonds issued on their behalf is dependent on
various factors, including the rates they may charge their customers,
the demand for a utility's services and the cost of providing those
services. Utilities, in particular investor-owned utilities, are subject
to extensive regulations relating to the rates which they may charge
customers. Utilities can experience regulatory, political and
consumer resistance to rate increases. Utilities engaged in long-term
capital projects are especially sensitive to regulatory lags in granting
rate increases. Any difficulty in obtaining timely and adequate rate
increases could adversely affect a utility's results of operations.
The demand for a utility's services is influenced by, amoung
other factors,
<PAGE>
competition, weather conditions and economic conditions. Electric
utilities, for example, have experienced increased competition as a
result of the availability of other energy sources, the effects of
conservation on the use of electricity, self-generation by industrial
customers and the generation of electricity by co-generators and
other independent power producers. Also, increased competition will
result if federal regulators determine that utilities must open their
transmission lines to competitors. Utilities which distribute natural
gas also are subject to competition from alternative fuels, including
fuel oil, propane and coal.
The utility industry is an increasing cost business making the
cost of generating electricity more expensive and heightening its
sensitivity to regulation. A utility's costs are influenced by the
utility's cost of capital, the availability and cost of fuel and other
factors. In addition, natural gas pipeline and distribution companies
have incurred increased costs as a result of long-term natural gas
purchase contracts containing "take or pay" provisions which require
that they pay for natural gas even if natural gas is not taken by them.
There can be no assurance that a utility will be able to pass on these
increased costs to customers through increased rates. Utilities incur
substantial capital expenditures for plant and equipment. In the future
they will also incur increasing capital and operating expenses to
comply with environmental legislation such as the Clean Air Act of
1990, and other energy, licensing and other laws and regulations
relating to, among other things, air emissions, the quality of drinking
water, waste water discharge, solid and hazardous substance handling
and disposal, and siting and licensing of facilities. Environmental
legislation and regulations are changing rapidly and are the subject
of current public policy debate and legislative proposals. It is
increasingly likely that some or many utilities will be subject to more
stringent environmental standards in the future that could result in
significant capital expenditures. Future legislation and regulation
could include, among other things, regulation of so-called
electromagnetic fields associated with electric transmission and
distribution lines as well as emissions of carbon dioxide and other
so-called greenhouse gases associated with the burning of fossil fuels.
Compliance with these requirements may limit a utility's operations
or require substantial investments in new equipment and, as a result,
may adversely affect a utility's results of operations.
The electric utility industry in general is subject to various
external factors including (a) the effects of inflation upon the costs
of operation and construction, (b) substantially increased capital
outlays and longer construction periods for larger and more complex
new generating units, (c) uncertainties in predicting future load
requirements, (d)
increased financing requirements coupled with limited availability of
<PAGE>
capital, (e) exposure to cancellation and penalty charges on new
generating units under construction, (f) problems of cost and
availability of fuel, (g) compliance with rapidly changing and
complex environmental, safety and licensing requirements, (h)
litigation and proposed legislation designed to delay or prevent
construction of generating and other facilities, (i) the uncertain
effects of conservation on the use of electric energy, (j) uncertainties
associated with the development of a national energy policy, (k)
regulatory, political and consumer resistance to rate increases and (l)
increased competition as a result of the availability of other energy
sources. These factors may delay the construction and increase the
cost of new facilities, limit the use of, or necessitate costly
modifications to, existing facilities, impair the access of electric
utilities to credit markets, or substantially increase the cost of credit
for electric generating facilities. The Sponsors cannot predict at this
time the ultimate effect of such factors on the ability of any issuers
to meet their obligations with respect to Bonds.
The National Energy Policy Act ("NEPA"), which became
law in October, 1992, makes it mandatory for a utility to permit
non-utility generators of electricity access to its transmission system
for wholesale customers, thereby increasing competition for electric
utilities. NEPA also mandated demand-side management policies to
be considered by utilities. NEPA prohibits the Federal Energy
Regulatory Commission from mandating electric utilities to engage
in retail wheeling, which is competition among suppliers of electric
generation to provide electricity to retail customers (particularly
industrial retail customers) of a utility. However, under NEPA, a
state can mandate retail wheeling under certain conditions.
There is concern by the public, the scientific community, and
the U.S. Congress regarding environmental damage resulting from
the use of fossil fuels. Congressional support for the increased
regulation of air, water, and soil contaminants is building and there
are a number of pending or recently enacted legislative proposals
which may affect the electric utility industry. In particular, on
November 15, 1990, legislation was signed into law that substantially
revises the Clean Air Act (the "1990 Amendments"). The 1990
Amendments seek to improve the ambient air quality throughout the
United States by the year 2000. A main feature of the 1990
Amendments is the reduction of sulphur dioxide and nitrogen oxide
emissions caused by electric utility power plants, particularly those
fueled by coal. Under the 1990 Amendments the U.S. Environmental
Protection Agency ("EPA") must develop limits for nitrogen oxide
emissions by 1993. The sulphur dioxide reduction will be achieved
in two phases. Phase I addresses specific generating units named in
the 1990 Amendments. In Phase II the total U.S. emissions will be
capped at 8.9 million tons by the year 2000. The 1990 Amendments
contain provisions for allocating allowances to power plants based on
<PAGE>
historical or calculated levels. An allowance is defined as the
authorization to emit one ton of sulphur dioxide.
The 1990 Amendments also provide for possible further
regulation of toxic air emissions from electric generating units
pending the results of several federal government studies to be
conducted over the next three to four years with respect to
anticipated hazards to public health, available corrective
technologies, and mercury toxicity.
Electric utilities which own or operate nuclear power plants
are exposed to risks inherent in the nuclear industry. These risks
include exposure to new requirements resulting from extensive
federal and state regulatory oversight, public controversy,
decomissioning costs, and spent fuel and radioactive waste disposal
issues. While nuclear power construction risks are no longer of
paramount concern, the emerging issue is radioactive waste disposal.
In addition, nuclear plants typically require substantial capital
additions and modifications throughout their operating lives to meet
safety, environmental, operational and regulatory requirements and
to replace and upgrade various plant systems. The high degree of
regulatory monitoring and controls imposed on nuclear plants could
cause a plant to be out of service or on limited service for long
periods. When a nuclear facility owned by an investor-owned utility
or a state or local municipality is out of service or operating on a
limited service basis, the utility operator or its owners may be liable
for the recovery of replacement power costs. Risks of substantial
liability also arise from the operation of nuclear facilities and from
the use, handling, and possible radioactive emissions associated with
nuclear fuel. Insurance may not cover all types or amounts of loss
which may be experienced in connection with the ownership and
operation of a nuclear plant and severe financial consequences could
result from a significant accident or occurrence. The Nuclear
Regulatory Commission has promulgated regulations mandating the
establishment of funded reserves to assure financial capability for the
eventual decommissioning of licensed nuclear facilities. These funds
are to be accrued from revenues in amounts currently estimated to
be sufficient to pay for decommissioning costs.
The ability of state and local joint action power agencies to
make payments on bonds they have issued is dependent in large part
on payments made to them pursuant to power supply or similar
agreements. Courts in Washington, Oregon and Idaho have held that
certain agreements between the Washington Public Power Supply
System ("WPPSS") and the WPPSS participants are unenforceable
because the participants did not have the authority to enter into the
agreements. While these decisions are not specifically applicable to
agreements entered into by public entities in other states, they may
cause a reexamination of the legal structure and economic viability
<PAGE>
of certain projects financed by joint power agencies, which might
exacerbate some of the problems referred to above and possibly lead
to legal proceedings questioning the enforceability of agreements
upon which payment of these bonds may depend.
Water and Sewer Revenue Bonds. Water and sewer bonds
are generally payable from user fees. The ability of state and local
water and sewer authorities to meet their obligations may be affected
by failure of municipalities to utilize fully the facilities constructed
by these authorities, economic or population decline and resulting
decline in revenue from user charges, rising construction and
maintenance costs and delays in construction of facilities, impact of
environmental requirements, failure or inability to raise user charges
in response to increased costs, the difficulty of obtaining or
discovering new supplies of fresh water, the effect of conservation
programs and the impact of "no growth" zoning ordinances. In some
cases this ability may be affected by the continued availability of
Federal and state financial assistance and of municipal bond
insurance for future bond issues.
University and College Bonds. The ability of universities and
colleges to meet their obligations is dependent upon various factors,
including the size and diversity of their sources of revenues,
enrollment, reputation, management expertise, the availability and
restrictions on the use of endowments and other funds, the quality
and maintenance costs of campus facilities, and, in the case of public
institutions, the financial condition of the relevant state or other
governmental entity and its policies with respect to education. The
institution's ability to maintain enrollment levels will depend on such
factors as tuition costs, demographic trends, geographic location,
geographic diversity and quality of the student body, quality of the
faculty and the diversity of program offerings.
Legislative or regulatory action in the future at the Federal,
state or local level may directly or indirectly affect eligibility
standards or reduce or eliminate the availability of funds for certain
types of student loans or grant programs, including student aid,
research grants and work-study programs, and may affect indirect
assistance for education.
Lease Rental Bonds. Lease rental bonds are issued for the
most part by governmental authorities that have no taxing power or
other means of directly raising revenues. Rather, the authorities are
financing vehicles created solely for the construction of buildings
(administrative offices, convention centers and prisons, for example)
or the purchase of equipment (police cars and computer systems, for
example) that will be used by a state or local government (the
"lessee"). Thus, the bonds are subject to the ability and willingness
of the lessee government to meet its lease rental payments which
<PAGE>
include debt service on the bonds. Willingness to pay may be subject
to changes in the views of citizens and government officials as to the
essential nature of the finance project. Lease rental bonds are
subject, in almost all cases, to the annual appropriation risk, i.e., the
lessee government is not legally obligated to budget and appropriate
for the rental payments beyond the current fiscal year. These bonds
are also subject to the risk of abatement in many states-rental bonds
cease in the event that damage, destruction or condemnation of the
project prevents its use by the lessee. (In these cases, insurance
provisions and reserve funds designed to alleviate this risk become
important credit factors). In the event of default by the lessee
government, there may be significant legal and/or practical
difficulties involved in the reletting or sale of the project. Some of
these issues, particularly those for equipment purchase, contain the
so-called "substitution safeguard", which bars the lessee government,
in the event it defaults on its rental payments, from the purchase or
use of similar equipment for a certain period of time. This safeguard
is designed to insure that the lessee government will appropriate the
necessary funds even though it is not legally obligated to do so, but
its legality remains untested in most, if not all, states.
Capital Improvement Facility Bonds. The Portfolio of a State
Trust may contain Bonds which are in the capital improvement
facilities category. Capital improvement bonds are bonds issued to
provide funds to assist political subdivisions or agencies of a state
through acquisition of the underlying debt of a state or local political
subdivision or agency which bonds are secured by the proceeds of
the sale of the bonds, proceeds from investments and the
indebtedness of a local political subdivision or agency. The risks of
an investment in such bonds include the risk of possible prepayment
or failure of payment of proceeds on and default of the underlying
debt.
Solid Waste Disposal Bonds. Bonds issued for solid water
disposal facilities are generally payable from tipping fees and from
revenues that may be earned by the facility on the sale of electrical
energy generated in the combustion of waste products. The ability of
solid waste disposal facilities to meet their obligations depends upon
the continued use of the facility, the successful and efficient
operation of the facility and, in the case of waste-to-energy facilities,
the continued ability of the facility to generate electricity on a
commercial basis. All of these factors may be affected by a failure
of municipalities to fully utilize the facilities, an insufficient supply
of waste for disposal due to economic or population decline, rising
construction and maintenance costs, any delays in construction of
facilities, lower-cost alternative modes of waste processing and
changes in environmental regulations. Because of the relatively short
history of this type of financing, there may be technological risks
involved in the satisfactory construction or operation of the projects
<PAGE>
exceeding those associated with most municipal enterprise projects.
Increasing environmental regulation on the federal, state and local
level has a significant impact on waste disposal facilities. While
regulation requires more waste producers to use waste disposal
facilities, it also imposes significant costs on the facilities. These
costs include compliance with frequently changing and complex
regulatory requirements, the cost of obtaining construction and
operating permits, the cost of conforming to prescribed and changing
equipment standards and required methods of operation and, for
incinerators or waste-to-energy facilities, the cost of disposing of the
waste residue that remains after the disposal process in an
environmentally safe manner. In addition, waste disposal facilities
frequently face substantial opposition by environmental groups and
officials to their location and operation, to the possible adverse
effects upon the public health and the environment that may be
caused by wastes disposed of at the facilities and to alleged improper
operating procedures. Waste disposal facilities benefit from laws
which require waste to be disposed of in a certain manner but any
relaxation of these laws could cause a decline in demand for the
facilities' services. Finally, waste-to-energy facilities are concerned
with many of the same issues facing utilities insofar as they derive
revenues from the sale of energy to local power utilities (see Power
Facility Bonds above).
Moral Obligation Bonds. The State Trust may also include
"moral obligation" bonds. If an issuer of moral obligation bonds is
unable to meet its obligations, the repayment of the bonds becomes
a moral commitment but not a legal obligation of the state or
municipality in question. Even though the state may be called on to
restore any deficits in capital reserve funds of the agencies or
authorities which issued the bonds, any restoration generally requires
appropriation by the state legislature and accordingly does not
constitute a legally enforceable obligation or debt of the state. The
agencies or authorities generally have no taxing power.
Refunded Bonds. Refunded Bonds are typically secured by
direct obligations of the U.S. Government, or in some cases
obligations guaranteed by the U.S. Government, placed in an escrow
account maintained by an independent trustee until maturity or a
predetermined redemption date. These obligations are generally
noncallable prior to maturity or the predetermined redemption date.
In a few isolated instances to date, however, bonds which were
thought to be escrowed to maturity have been called for redemption
prior to maturity.
Airport, Port and Highway Revenue Bonds. Certain facility
revenue bonds are payable from and secured by the revenues from
the ownership and operation of particular facilities, such as airports
(including airport terminals and maintenance facilities), bridges,
<PAGE>
marine terminals, turnpikes and port authorities. For example, the
major portion of gross airport operating income is generally derived
from fees received from signatory airlines pursuant to use
agreements which consist of annual payments for airport use,
occupancy of certain terminal space, facilities, service fees,
concessions and leases. Airport operating income may therefore be
affected by the ability of the airlines to meet their obligations under
the use agreements. The air transport industry is experiencing
significant variations in earnings and traffic, due to increased
competition, excess capacity, increased aviation fuel, deregulation,
traffic constraints, the current recession and other factors. As a
result, several airlines are experiencing severe financial difficulties.
Several airlines including America West Airlines have sought
protection from their creditors under Chapter 11 of the Bankruptcy
Code. In addition, other airlines such as Midway Airlines, Inc.,
Eastern Airlines, Inc. and Pan American Corporation have been
liquidated. However, within the past few months Northwest Airlines,
Continental Airlines and Trans World Airlines have emerged from
bankruptcy. The Sponsors cannot predict what effect these industry
conditions may have on airport revenues which are dependent for
payment on the financial condition of the airlines and their usage of
the particular airport facility.
Similarly, payment on bonds related to other facilities is
dependent on revenues from the projects, such as use fees from
ports, tolls on turnpikes and bridges and rents from buildings.
Therefore, payment may be adversely affected by reduction in
revenues due to such factors and increased cost of maintenance or
decreased use of a facility, lower cost of alternative modes of
transportation or scarcity of fuel and reduction or loss of rents.
Special Tax Bonds. Special tax bonds are payable from and
secured by the revenues derived by a municipality from a particular
tax such as a tax on the rental of a hotel room, on the purchase of
food and beverages, on the rental of automobiles or on the
consumption of liquor. Special tax bonds are not secured by the
general tax revenues of the municipality, and they do not represent
general obligations of the municipality. Therefore, payment on
special tax bonds may not be adversely affected by a reduction in
revenues realized from the underlying special tax due to a general
decline in the local economy or population or due to a decline in the
consumption, use or cost of the goods and services that are subject
to taxation. Also, should spending on the particular goods or services
that are subject to the special tax decline, the municipality may be
under no obligation to increase the rate of the special tax to ensure
that sufficient revenues are raised from the shrinking taxable base.
Tax Allocation Bonds. Tax allocation bonds are typically
secured by incremental tax revenues collected on property within the
<PAGE>
areas where redevelopment projects, financed by bond proceeds are
located ("project areas"). Such payments are expected to be made
from projected increases in tax revenues derived from higher
assessed values of property resulting from development in the
particular project area and not from an increase in tax rates. Special
risk considerations include: reduction of, or a less than anticipated
increase in, taxable values of property in the project area, caused
either by economic factors beyond the Issuer's control (such as a
relocation out of the project area by one or more major property
owners) or by destruction of property due to natural or other
disasters; successful appeals by property owners of assessed
valuations; substantial delinquencies in the payment of property
taxes; or imposition of any constitutional or legislative property tax
rate decrease.
Transit Authority Bonds. Mass transit is generally not
self-supporting from fare revenues. Therefore, additional financial
resources must be made available to ensure operation of mass transit
systems as well as the timely payment of debt service. Often such
financial resources include Federal and state subsidies, lease rentals
paid by funds of the state or local government or a pledge of a
special tax such as a sales tax or a property tax. If fare revenues or
the additional financial resources do not increase appropriately to pay
for rising operating expenses, the ability of the issuer to adequately
service the debt may be adversely affected.
Convention Facility Bonds. The Portfolio of a State Trust
may contain Bonds of issuers in the convention facilities category.
Bonds in the convention facilities category include special limited
obligation securities issued to finance convention and sports facilities
payable from rental payments and annual governmental
appropriations. The governmental agency is not obligated to make
payments in any year in which the monies have not been
appropriated to make such payments. In addition, these facilities are
limited use facilities that may not be used for purposes other than as
convention centers or sports facilities.
Puerto Rico. The Portfolio may contain bonds of issuers
which will be affected by general economic conditions in Puerto
Rico. Puerto Rico's unemployment rate remains significantly higher
than the U.S. unemployment rate. Furthermore, the economy is
largely dependent for its development upon U.S. policies and
programs that are being reviewed and may be eliminated.
The Puerto Rican economy is affected by a number of
Commonwealth and Federal investment incentive programs. For
example, Section 936 of the Internal Revenue Code (the "Code")
provides for a credit against Federal income taxes for U.S.
companies operating on the island if certain requirements are met.
<PAGE>
The Omnibus Budget Reconciliation Act of 1993 imposes limits on
such credit, effective for tax years beginning after 1993. In addition,
from time to time proposals are introduced in Congress which, if
enacted into law, would eliminate some or all of the benefits of
Section 936. Although no assessment can be made at this time of the
precise effect of such limitation, it is expected that the limitation of
Section 936 credits would have a negative impact on Puerto Rico's
economy.
Aid for Puerto Rico's economy has traditionally depended
heavily on Federal programs, and current Federal budgetary policies
suggest that an expansion of aid to Puerto Rico is unlikely. An
adverse effect on the Puerto Rican economy could result from other
U.S. policies, including a reduction of tax benefits for distilled
products, further reduction in transfer payment programs such as
food stamps, curtailment of military spending and policies which
could lead to a stronger dollar.
In a plebiscite held in November, 1993, the Puerto Rican
electorate chose to continue Puerto Rico's Commonwealth status.
Previously proposed legislation, which was not enacted, would have
preserved the federal tax exempt status of the outstanding debts of
Puerto Rico and its public corporations regardless of the outcome of
the referendum, to the extent that similar obligations issued by states
are so treated and subject to the provisions of the Code currently in
effect. There can be no assurance that any pending or future
legislation finally enacted will include the same or similar protection
against loss of tax exemption. The November 1993 plebiscite can be
expected to have both direct and indirect consequences on such
matters as the basic characteristics of future Puerto Rico debt
obligations, the markets for these obligations, and the types, levels
and quality of revenue sources pledged for the payment of existing
and future debt obligations. Such possible consequences include,
without limitation, legislative proposals seeking restoration of the
status of Section 936 benefits otherwise subject to the limitations
discussed above. However, no assessment can be made at this time
of the economic and other effects of a change in federal laws
affecting Puerto Rico as a result of the November 1993 plebiscite.
Litigation and Legislation. To the best knowledge of the
Sponsors, there is
no litigation pending as of the Initial Date in respect of any Bonds
which might reasonably be expected to have a material adverse effect
upon the State Trust. At any time after the Initial Date of Deposit,
litigation may be initiated on a variety of grounds, or legislation may
be enacted, with respect to Bonds in the Trust. Litigation, for
example, challenging the issuance of pollution control revenue bonds
under environmental protection statutes may affect the validity of
Bonds or the tax-free nature of their interest. While the outcome of
<PAGE>
litigation of this nature can never be entirely predicted, opinions of
bond counsel are delivered on the date of issuance of each Bond to
the effect that the Bond has been validly issued and that the interest
thereon is exempt from Federal income tax. In addition, other factors
may arise from time to time which potentially may impair the ability
of issuers to make payments due on the Bonds.
Under the Federal Bankruptcy Act, a political subdivision or
public agency or instrumentality of any state, including
municipalities, may proceed to restructure or otherwise alter the
terms of its obligations, including those of the type comprising the
State Trust's Portfolio. The Sponsors are unable to predict what
effect, if any, this legislation might have on the State Trust.
From time to time Congress considers proposals to tax the
interest on state and local obligations, such as the Bonds. The
Supreme Court clarified in South Carolina v. Baker (decided April
20, 1988) that the U.S. Constitution does not prohibit Congress from
passing a nondiscriminatory tax on interest on state and local
obligations. This type of legislation, if enacted into law, could
adversely affect an investment in Units. Holders are urged to consult
their own tax advisers.
Tax Exemption. In the opinion of bond counsel rendered on
the date of issuance of each Bond, the interest on each Bond is
excludable from gross income under existing law for regular Federal
income tax purposes (except in certain circumstances depending on
the Holder) but may be subject to state and local taxes. As discussed
under Taxes below, interest on some or all of the Bonds may become
subject to regular Federal income tax, perhaps retroactively to their
date of issuance, as a result of changes in Federal law or as a result
of the failure of issuers (or other users of the proceeds of the Bonds)
to comply with certain ongoing requirements.
Moreover, the Internal Revenue Service announced on June
14, 1993 that it will be expanding its examination program with
respect to tax-exempt bonds. The expanded examination program
will consist of, among other measures, increased enforcement against
abusive transactions, broader audit coverage (including the expected
issuance of audit guidelines) and expanded compliance achieved by
means of expected revisions to the tax-exempt bond information
return forms. At this time, it is uncertain whether the tax exempt
status of any of the Bonds would be affected by such proceedings,
or whether such effect, if any, would be retroactive.
In certain cases, a Bond may provide that if the interest on
the Bond should ultimately be determined to be taxable, the Bond
would become due and payable by its issuer, and, in addition, may
provide that any related letter of credit or other security could be
<PAGE>
called upon if the issuer failed to satisfy all or part of its obligation.
In other cases, however, a Bond may not provide for the acceleration
or redemption of the Bond or a call upon the related letter of credit
or other security upon a determination of taxability. In those cases
in which a Bond does not provide for acceleration or redemption or
in which both the issuer and the bank or other entity issuing the
letter of credit or other security are unable to meet their obligations
to pay the amounts due on the Bond as a result of a determination of
taxability, the Trustee would be obligated to sell the Bond and, since
it would be sold as a taxable security, it is expected that it would
have to be sold at a substantial discount from current market price.
In addition, as mentioned above, under certain circumstances Holders
could be required to pay income tax on interest received prior to the
date on which the interest is determined to be taxable.
Moreover, a State Trust is subject to certain additional
risk factors:
California Trust
California's economy is the largest among the 50 states. The
State's January 1, 1992 population of 31 million represented
approximately 12.0% of the total United States population. Total
employment was about 14 million, the majority of which was in the
service, trade and manufacturing sectors.
Since the start of the 1990-91 fiscal year, the State has faced
the worst economic, fiscal and budget conditions since the 1930s.
Construction, manufacturing (especially aerospace), and financial
services, among others, have all been severely affected. Job losses
have been the worst of any post-war recession. Employment levels
are expected to stabilize by late 1993. However, pre-recession job
levels are not expected to be reached for several more years.
Unemployment reached 10% in November 1992 and is expected to
remain above 9% through 1993 and 1994. According to the
<PAGE>
Department of Finance, recovery from the recession in California is
not expected in meaningful terms until late 1993 or 19994,
notwithstanding signs of recovery elsewhere in the nation.
After three years of recession, California's economy seems
to be stabilizing, however, economic signals remain mixed. On the
plus side, nonfarm employment in April was essentially unchanged
from the December level. The unemployment rate seems to be
moving down, although the large April drop, from 9.4% to 8.6%,
probably exaggerates the improvement. Personal income growth is
improving gradually, from gains of 2% or less in 1991 to slightly
<PAGE>
over 3% at the beginning of 1993, and taxable sales are stabilizing
after a lengthy decline.
There are still ample signs of weakness. Manufacturing
employment continues to decline, with deep losses in aerospace,
reflecting defense cuts and weak commercial markets. Despite
strong output and sales gains, electronics firms continue to cut
payrolls. All manufacturing industries, with the exception of apparel
and textiles, are posting employment losses. Housing, usually an
engine of recovery, remains in a slump. Permit volume has
averaged a 95,000 unit annual rate in recent months, actually
somewhat below 1992's 98,000 total. Nonresidential construction
continues to hit new recession lows, reflecting oversupplied
commercial office, retail and hotel markets.
Employment continues to decline in normally stable industries such
as banking, the utilities and most segments of wholesale and retail
trade. Food, department and apparel stores are shedding jobs and
government employment is down 30,000 jobs over the past year.
The department of Finance, in its May 1993 Revision of the
Governor's 1993-94 Budget, states that it expects this essentially flat
pattern of economic activity to persist throughout 1993, with
employment by year end only marginally higher than in April.
Gains in service industries, mainly health care, temporary agencies
(in business services), motion picture production and amusements are
expected to continue. There should be modest increases in wholesale
and retail trade. The finance and transportation and utilities groups
will be stable to down slightly. Assuming a modest pickup in
homebuilding, construction employment will also be flat this year.
Against these, manufacturing and government will continue to lose
jobs. The largest losses in percentage terms will be in aerospace
manufacturing and the Federal Department of Defense, reflecting
cuts in the military budget. Budget constraints will also affect State
and local government.
The recession has seriously affected State tax revenues,
which basically mirror economic conditions. It has also caused
increased expenditures for health and welfare programs. The State
is also facing a structural imbalance in its budget with the largest
programs supported by the General Fund--K-14 education
(kindergarten through community college), health, welfare and
corrections--growing at rates significantly higher than the growth
rates for the principal revenue sources of the General Fund. As a
result, the State entered a period of chronic budget imbalance, with
expenditures exceeding revenues for four of the last five fiscal years.
Revenues declined in 1990-91 over 1989-90, the first time since the
1930s. By June 30, 1993, the State's General Fund had an
accumulated deficit, on a budget basis, of approximately $2.75
billion. Further consequence of the larger budget imbalances over the
<PAGE>
last three fiscal years has been that the State depleted its available
cash resources and has had to use a series of external borrowings to
meet its cash needs.
The 1992-93 Governor's Budget proposed expenditures of
$56.3 billion in General and Special Funds for the 1992-93 fiscal
year, a 1.6% increase over corresponding figures for the 1991-92
fiscal year. General Fund expenditures were projected at $43.8
billion, an increase of 0.2% over the 1992-93 Revised Governor's
Budget. The Budget estimated $45.7 billion of revenues and
transfers for the General Fund (a 4.7% increase over 1991-92) and
$12.4 billion for Special Funds (a 9.6% increase over 1991-92). To
balance the proposed budget, program reductions totaling $4.365
billion and revenue and transfer increases of $872 million were
proposed for the 1991-92 and 1992-93 fiscal years. By the time of
the Governor's May Revision issued on May 20, 1992, the
Administration estimated that the 1992-93 Budget needed to address
a gap of about $7.9 billion, much of which was needed to repay the
accumulated budget deficits of the previous two years.
The severity of the budget actions needed led to a long delay
in adopting the budget. With the failure to adopt a budget by July
1, 1992, which would have allowed the State to carry out its normal
annual cash flow borrowing, the Controller was forced to issue
registered warrants to pay a variety of obligations representing prior
year's or continuing appropriations, and mandates from court orders.
Available funds were used to make constitutionally-mandated
payments, such as debt service on bonds and revenue anticipations
warrants. After that date, all remaining outstanding registered
warrants (about $2.9 billion) were called for redemption from
proceeds of the issuance of 1992 Interim Notes after the budget was
adopted.
The 1992-93 Budget Act provided for expenditures of $57.4
billion, consisting of General Fund expenditures of $40.8 billion and
Special Fund and Bond Fund expenditures of $16.6 billion. The
Department of Finance estimates there will be a balance in the
Special Fund for Economic Uncertainties of $28 million on June 30,
1993.
The $7.9 billion budget gap was closed through a
combination of increased revenues and transfers and expenditure cuts
such as:
1. General fund savings in health and welfare
programs totaling $1.6 billion.
2. General fund reductions of $1.9 billion for
K-12 schools and community colleges.
<PAGE>
3. General fund savings of $1.3 billion by
revising the State aid program to local
governments originally enacted after
Proposition 13.
4. Program cuts for higher education totaling
$415 million.
5. A total of $1.6 billion of transfers and
accelerated collections of State revenues.
6. Approximately $1.0 billion from various
additional program reductions.
Shortly after the 1992-93 Budget Act was enacted, it became
evident the economic conditions in the State were not beginning to
improve in the second half of 1992, as assumed by the Department
of Finance's May 1992 economic estimates. This was exacerbated
by enactment of an initiative measure in November 1992 repealing
a sales tax for certain candy, snack foods and bottled water, reducing
revenues by about $300 million for a full fiscal year ($200 million
in 1992-93). The Governor's Budget proposal for 1993-94, released
on January 8, 1993 (the "January Governor's Budget"), confirmed
the earlier forecasts about the State's economy and the 1992-93
Budget Act. The January Governor's Budget projected that the
economy would not start meaningful recovery from the recession
until late 1993 or 1994. With the economy continuing in recession
throughout the 1992-93 fiscal year, revenues were projected about
$2.5 billion lower than anticipated when the 1992-93 Budget Act was
signed, leading to a projected $2.1 billion budget deficit at June 30,
1993 (compared to the Budget Act projection of a $28 million
balance). That deficit amount was projected if, by March 1993, the
Legislature adopted several actions proposed by the Governor to save
about $475 million in the 1992-93 fiscal year. The Legislature did
not adopt any of the Governor's proposals.
On May 20. 1993, the Department of Finance released its
May Revision to the January Governor's Budget (the "May
Revision"), updating revenue and expenditure projections and
proposals for the 1992-93 and 1993-94 fiscal years. The May
Revision projected that the General Fund will end the fiscal year on
June 30, 1993 with an accumulated budget deficit of about $2.8
billion, and a negative fund balance of about $2.2 billion ( the
difference being certain reserves for encumbrances and school
funding costs). The Governor projected revenues for 1992-93 of
$41.0 billion, $1.0 billion less than in the 1991-92 fiscal year. On
the expenditure side, the continued recession increased health and
welfare costs above the original Budget Act projections. Also,
<PAGE>
property tax receipts at the local level were less than projected, so
that the State will not get the full $1.3 billion benefit from the
property tax shift enacted in the 1992-93 Budget Act. Overall, the
May Revision projected total General Fund expenditures of $1.1
billion for the 1992-93 fiscal year, about $300 million higher than
the Budget Act and $2.2 billion less than fiscal year 1991-92.
The January Governor's Budget had projected that, because
of severely reduced revenues, the State would face a cash flow
shortfall in May 1993, necessitating additional external borrowing.
The State met this cash flow need by issuing $3.0 billion of revenue
anticipation notes on April 26, 1993, which matured on June 24,
1993. The State also issued the 1993 Revenue Participation
Warrants in the principal amount of $2.0 billion to meet cash flow
requirements for the end of the 1992-93 fiscal year and the start of
the 1993-94 fiscal year.
The 1993-94 fiscal year represents the third consecutive year
the Governor and the Legislature were faced with a very difficult
budget environment, requiring revenue actions and expenditure cuts
totalling multiple billions of dollars to produce a balanced budget.
The Governor's budget introduced on January 8, 1993
proposed General Fund Expenditures of $37.33 billion, with
projected revenues of $39.87 billion. It also proposed Special Fund
expenditures of $12.35 billion and Special Fund Revenues of $12.10
billion. To balance the budget in the face of declining revenues, the
Governor proposed a series of revenue shifts from local government,
reliance on increased federal aid and reductions in State spending.
The May Revision of the Governor's Budget, released on
May 20, 1993, indicated that the revenue projections of the January
Budget Proposal were tracking well, with full year 1992-93 about
$80 million higher than the January projection. Personal Income tax
revenue was higher than projected, sales tax was close to target, and
bank and corporation taxes were lagging behind projections. The
May Revision projected the State would have about $2.7 billion
accumulated deficit by June 30, 1993. The Governor proposed to
repay this deficit over an 18-month period. He also agreed to retain
the 0.5% sales tax scheduled to expire June 30 for a six-month
period, dedicated to local public safety purposes, with a November
election to determine a permanent extension. Unlike previous years,
the Governor's Budget and May Revision did not calculate a "gap"
to be closed, but rather set forth revenue and expenditure forecasts
and proposals designed to produce a balanced budget.
The 1993-94 Budget Act, signed by the Governor on June
30, 1993, is predicated on revenue and transfer estimates of $40.6
billion, about $700 million higher than the January Governor's
<PAGE>
Budget, but still about $400 million below 1992-93 (and the second
consecutive year of actual decline). The principal reasons for this
decline are the continued weak economy and the expiration (or
repeal) of three fiscal steps taken in 1991-a half cent temporary sales
tax (which generates about $1.5 billion annually), a deferral of
operating loss carry forwards ($440 million), and repeal by initiative
of a sales tax on candy and snack foods ($300 million). The
Governor also proposes a number of fiscal steps (tax credits and the
like) to stimulate job growth, which could result in short-term
revenue costs. The 1993-94 Budget Act assumes Special Fund
revenues of $11.8 billion, an increase of 5.0% over 1992-93.
The 1993-94 Budget Act includes General Fund expenditures
of $38.5 billion (a 6.5% reduction from projected 1992-93
expenditures of $41.2 billion), in order to keep a balanced budget
within the available revenues. The Budget also includes Special
Fund expenditures of $12.1 billion, a 4.2% increase. The Budget
Act reflects the following major adjustments:
1. Changes in local government
financing to shift about $2.6 billion
in property taxes from cities,
counties, special districts and
redevelopment agencies to school
and community districts.
2. The Budget keeps K-12
Proposition 98 funding on a cash
basis at the same per-pupil level as
1992-93 by providing schools a loan
payable from future years'
Proposition 98 funds.
3. Receipt in 1993-94 of about $550
million in aid from the federal
government to offset health and
welfare costs associated with foreign
immigrants living in the State,
which would reduce a like amount
of General Fund expenditures.
4. Reductions of $0.3 billion in
health and welfare programs.
5. Reductions of $400 million in
support for higher education.
6. A 2 year suspension of the
renters' tax credit ($390 million
<PAGE>
expenditure reduction in 1993-94).
7. Various miscellaneous cuts
(totalling approximately $150
million ) in Sate government
services in many agencies, up to
15%.
8. Miscellaneous one-time items,
including deferral of payment to the
Public Employees Retirement Fund
and a change in accounting for debt
service from accrual to cash basis,
saving $107 million.
A key feature of the 1993-94 Budget Act is a plan to retire
the projected $2.8 billion accumulated deficit over an 18 month
period by the use of external borrowing. The Budget Act estimates
that about $1.6 billion of the deficit elimination loan would be repaid
by December 23, 1993 from the proceeds of the $2.0 billion
Revenue Anticipation Warrants issued on June 23, 1993.
The 1993-94 Budget Act continues to predict that population
growth in the 1990's will keep upward pressure on major State
programs, such as K-14 education, health, welfare and corrections,
outstripping projected revenue growth in an economy only very
slowly emerging from a deep recession. The Governor's health,
welfare and local government reductions continue his efforts to keep
expenditures in line with resources in the long term. The Budget Act
also proposes significant restructuring of State government, with
elimination and consolidation of several agencies and numerous
smaller boards, and change to a "performance budgeting" concept
which would be more efficient and cost-effective (with a pilot project
to be implemented in 1994-95). The Governor also proposes
initiatives in the fields of information technology to increase
governmental productivity.
On June 2, 1993, the Commission on State Finance
("COSF") issued its Quarterly General Fund Forecast, which
assessed the Governor's May Revision. The COSF report projected
stagnant economic conditions through 1994, and agreed generally
with the Governor's economic projections, although the COSF
showed slightly lower growth than the Governor in some California
economic factors. The COSF projects lower revenues and higher
expenditures in 1993-94 than the May Revision, and notes that the
May Revision continues the uses of off-bookloans to schools and has
no built-in protection against downside risk.
The COSF projects about $700 million lower revenues in
<PAGE>
1993-94 than the May Revision, principally because COSF believes
most of the increase in personal income taxes seen late in 1992-93
came from a one-time income,e shift, rather than reflecting a
permanent base of greater tax revenues. COSF also knows other
major taxes (and local property taxes) a little weaker than the May
Revision, with a resulting increase in expenditures to make up the
property tax shortfall for school financing. Altogether, COSF
projects in its "primary forecast" that the fund balance at June
30,1994 would be over $800 million more negative than the May
Revision forecast, and the negative difference would grow to $1.9
billion by June 30, 1995.
The COSF report includes two alternative forecasts based on
either continued recession, or stronger recovery. The pessimistic
forecast is $3.8 billion worse at June 30, 1995 than the Primary
Forecast, and the optimistic forecast is about $3.8 billion better. The
COSF also expressed concern that the proposed $2.6 billion shift of
property taxes could materially impact local government's fiscal
stability.
THE FOREGOING DISCUSSION OF THE 1993-94
FISCAL YEAR BUDGET IS BASED IN LARGE PART ON
STATEMENTS MADE IN A RECENT "PRELIMINARY
OFFICIAL STATEMENT" DISTRIBUTED BY THE STATE OF
CALIFORNIA. IN THAT DOCUMENT, THE STATE
INDICATED THAT ITS DISCUSSION OF THE 1993-94
FISCAL YEAR BUDGET WAS BASED ON ESTIMATES AND
PROJECTIONS OF REVENUES AND EXPENDITURES FOR
THE CURRENT FISCAL YEAR AND MUST NOT BE
CONSTRUED AS STATEMENTS OF FACT. THE STATE
NOTED FURTHER THAT THE ESTIMATES AND
PROJECTIONS ARE BASED UPON VARIOUS ASSUMPTIONS
WHICH MAY BE AFFECTED BY NUMEROUS FACTORS,
INCLUDING FUTURE ECONOMIC CONDITIONS IN THE
STATE AND THE NATION, AND THAT THERE CAN BE NO
ASSURANCE THAT THE ESTIMATES WILL BE ACHIEVED.
The State is subject to an annual appropriations limit imposed
by Article XIIIB of the State Constitution (the "Appropriations
Limit"), and is prohibited from spending "appropriations subject to
limitation" in excess of the Appropriations Limit. Article XIIIB,
originally adopted in 1979, was modified substantially by
Propositions 98 and 111 in 1988 and 1990, respectively.
"Appropriations subject to limitation" are authorizations to spend
"proceeds of taxes", which consist of tax revenues and certain other
funds, including proceeds from regulatory licenses, user charges or
other fees to the extent that such proceeds exceed the reasonable cost
of providing the regulation, product or service. The Appropriations
<PAGE>
Limit is based on the limit for the prior year, adjusted annually for
certain changes, and is tested over consecutive two-year periods.
Any excess of the aggregate proceeds of taxes received over such
two-year period above the combined Appropriation Limits for those
two years is divided equally between transfers to K-14 districts and
refunds to taxpayers.
Exempted from the Appropriations Limit are debt service
costs of certain bonds, court or federally mandated costs, and,
pursuant to Proposition 111, qualified capital outlay projects and
appropriations or revenues derived from any increase in gasoline
taxes and motor vehicle weight fees above January 1, 1990 levels.
Some recent initiatives were structured to create new tax revenues
dedicated to specific uses and expressly exempted from the Article
XIIIB limits. The Appropriations Limit may also be exceeded in
cases of emergency arising from civil disturbance or natural disaster
declared by the Governor and approved by two-thirds of the
Legislature. If not so declared and approved, the Appropriations
Limit for the next three years must be reduced by the amount of the
excess.
Article XIIIB, as amended by Proposition 98 on November
8, 1988, also establishes a minimum level of state funding for school
and community college districts and requires that excess revenues up
to a certain limit be transferred to schools and community college
districts instead of returned to the taxpayers. Determination of the
minimum level of funding is based on several tests set forth in
Proposition 98. During fiscal year 1991-92 revenues were smaller
than expected, thus reducing the payment owed to schools in 1991-92
under alternate "test" provisions. In response to the changing
revenue situation, and to fully fund the Proposition 98 guarantee in
the 1991-92 and 1992-93 fiscal years without exceeding it, the
Legislature enacted legislation to reduce 1991-92 appropriations.
The amount budgeted to schools but which exceeded the reduced
appropriation was treated as a non-Proposition 98 short-term loan in
1991-92. As part of the 1992-93 Budget, $1.1 billion of the amount
budgeted to K-14 schools was designated to "repay" the prior year
loan, thereby reducing cash outlays in 1992-93 by that amount.
Because of the complexities of Article XIIIB, the ambiguities
and possible inconsistencies in its terms, the applicability of its
exceptions and exemptions and the impossibility of predicting future
appropriations, the Sponsor cannot predict the impact of this or
related legislation on the Bonds in the California Trust Portfolio.
Other Constitutional amendments affecting state and local taxes and
appropriations have been proposed from time to time. If any such
initiatives are adopted, the State could be pressured to provide
additional financial assistance to local governments or appropriate
revenues as mandated by such initiatives. Propositions such as
<PAGE>
Proposition 98 and others that may be adopted in the future, may
place increasing pressure on the State's budget over future years,
potentially reducing resources available for other State programs,
especially to the extent the Article XIIIB spending limit would
restrain the State's ability to fund such other programs by raising
taxes.
As of June 30, 1993, the State had over $17.64 billion
aggregate amount of its general obligation bonds outstanding.
General obligation bond authorizations in the aggregate amount of
approximately $7.24 billion remained unissued as of June 30, 1993.
The State also builds and acquires capital facilities through the use
of lease purchase borrowing. As of June 30, 1992, the State had
approximately $2.88 billion of outstanding Lease-Purchase Debt.
In addition to the general obligation bonds, State agencies
and authorities had approximately $21.87 billion aggregate principal
amount of revenue bonds and notes outstanding as of March 31,
1993. Revenue bonds represent both obligations payable from State
revenue-producing enterprises and projects, which are not payable
from the General Fund, and conduit obligations payable only from
revenues paid by private users of facilities financed by such revenue
bonds. Such enterprises and projects include transportation projects,
various public works and exposition projects, education facilities
(including the California State University and University of
California systems), housing health facilities and pollution control
facilities.
The State is a party to numerous legal proceedings, many of
which normally occur in governmental operations. In addition, the
State is involved in certain other legal proceedings that, if decided
against the State, might require the State to make significant future
expenditures or impair future revenue sources. Examples of such
cases include challenges to the State's method of taxation of certain
businesses, challenges to certain vehicle license fees, and challenges
to the State's use of Public Employee Retirement System funds to
offset future State and local pension contributions. Other cases
which could significantly impact revenue or expenditures involve
reimbursement to school districts for voluntary school desegregation
and state mandated costs, challenges to Medi-Cal eligibility, recovery
for flood damages, and liability for toxic waste cleanup. Because of
the prospective nature of these proceedings, it is not presently
possible to predict the outcome of such litigation or estimate the
potential impact on the ability of the State to pay debt service on its
obligations.
On November 1, 1993 the United States Supreme Court
agreed to review the California court decisions in Barclays Bank
International, Ltd. v. Franchise Tax Board and Colgate-Palmolive
<PAGE>
Company, Inc. v. Franchise Tax Board which upheld California's
worlwide combined reporting ("WWCR") method of taxing
corporations engaged in a unitary business operation against
challenges under the foreign commerce and due process clauses.
In1983, in Container Corporation v. Franchise Tax Board, the
Supreme Court held that the WWCR method did not violate the
foreign commerce clause in the case of a domestic-based unitary
business group with foreign-domiciled subsidiaries, but specifically
left open the of whether a different result would obtain for a foreign-
based multi-national unitary business. Barclays concerns a foreign-
based multinational and Colgate-Palmolive concerns a domestic-based
multinational in light of federal foreign policy developments since
1983. In a brief filed at the Supreme Court's request, the Clinton
Administration had argued that the Court should not hear the
Barclay's case, even though there are "serious questions" about the
California Supreme Court's analysis and holdings, because the recent
changes in the law noted below means the issue in Barclays "lacks
substantial recurring importance". The Clinton Administration had
previously decided not to become involved in the Barclays petition.
the United States Government under the Bush Administration, along
with various foreign Governmnets, had appeared as amicus on behalf
of Barclays before the California Courts. The Clinton Administration
has filed an amicus on behalf of Barclays before the California
Courts. The Clinton Administration has filed an amicus brief on the
merits supporting the California Franchise Tax Board, arguing that
the Court should judge WWCR by lookingat federal policies in effect
at the time the taxes werre collected and stating that the federal
government had not indicated to the States during the 1970s and
1980s that it objected to WWCR. The fiscal impact on the State of
Caliornia has not been reported as follows: the State would have a
refund $1.730 billion to taxpayers ($530 million due to Barclays;
$41.2 billion due to Colgate), and cancel anohter$2.35 billion of
pending assessments ($350 million due to Barclays; $1.9 billion due
to Colgate), if the Supreme Court ultimately strikes down the
WWCR method and rules its decision has retrospective effect.
As a result of the deterioration in the State's budget and cash
situation in fiscal year 1991-92, and the delay in adopting the 1992-
93 budget which resulted in issuance of registered warrants
(I.O.U.s), rating agencies reduced the State's credit rating. Between
November 1991 and September 30, 1992, the rating on the State's
general obligation bonds was reduced by Standard & Poor's
Corporation from "AAA" to "A+", by Moody's Investors Service,
Inc. from "Aaa" to "Aa", and by Fitch Investors Service, Inc. from
"AAA" to "AA". There can be no assurance that such ratings will
continue for any given period of time or that they will not in the
future be further revised or withdrawn.
The January 1994 Los Angeles earthquake may negatively
<PAGE>
impact the ability of certain issuers to make scheduled interest and
principal payments, for example, if the specific project for which
bonds were issued is damaged or if revenues backing certain bonds
decline. In addition, the impact on tourism and business spending
resulting from earthquake damaage and any delay in its repair could
negatively impact the ability of certain issuers to make timely debt
payments. Further, as with October 1989 Loma Prieta earthquake
that struck San Francisco, lawsuits may be filed against state
agencies. Both Moody's Investors Service and Standard & Poor's
Corporation have said that it is too soon to offer official assessments
of the damage and its effect on bondholders. However, Moody's has
also stated that because the pledge to make debt service payments for
general obligation bonds and essential purpose revenue bonds is
absolute and unconditional, it does not expect any rating adjustment
over the short-term for such bonds. The Sponsors are unable to
predict the effects of this earthquake or any other future natural
disaster on the bonds in the Portfolio of the California Trust.
Massachusetts Trust
Risk Factors The Commonwealth of Massachusetts and certain
of its cities and towns have at certain times in the recent past undergone
serious financial difficulties which have adversely affected and, to some
degree, continue to adversely affect their credit standing. These financial
difficulties could adversely affect the market values and marketability of, or
result in default in payment on, outstanding bonds issued by the
Commonwealth or its public authorities or municipalities, including the
Bonds deposited in the Trust. The following description highlights some of
the more significant financial problems of the Commonwealth and the steps
taken to strengthen its financial condition.
The effect of the factors discussed below upon the ability of
Massachusetts issuers to pay interest and principal on their obligations
remains unclear and in any event may depend on whether the obligation is
a general or revenue obligation bond (revenue obligation bonds being
payable from specific sources and therefore generally less affected by such
factors) and on what type of security is provided for the bond. In order to
constrain future debt service costs, the Executive Office for Administration
and Finance established in November, 1988 an annual fiscal year limit on
capital spending of $925 million, effective fiscal 1990. In January, 1990,
legislation was enacted to impose a limit on debt service in Commonwealth
budgets beginning in fiscal 1991. The law provides that no more than 10%
of the total appropriations in any fiscal year may be expended for payment
of interest and principal on general obligation debt of the Commonwealth
(excluding the Fiscal Recovery Bonds discussed below). It should also be
noted that Chapter 62F of the Massachusetts General Laws establishes a
state tax revenue growth limit and does not exclude principal and interest
due on Massachusetts debt obligations from the scope of the limit. It is
possible that other measures affecting the taxing or spending authority of
Massachusetts or its political subdivisions may be approved or enacted in
the future.
<PAGE>
The Commonwealth has waived its sovereign immunity and
consented to be sued under contractual obligations including bonds and notes
issued by it. However, the property of the Commonwealth is not subject
to attachment or levy to pay a judgment, and the satisfaction of any
judgment generally requires legislative appropriation. Enforcement of a
claim for payment of principal of or interest on bonds and notes of the
Commonwealth may also be subject to provisions of federal or
Commonwealth statutes, if any, hereafter enacted extending the time for
payment or imposing other constraints upon enforcement, insofar as the
same may be constitutionally applied. The United States Bankruptcy Code
is not applicable to states.
Cities and Towns. During recent years limitations were placed on
the taxing authority of certain Massachusetts governmental entities that may
impair the ability of the issuers of some of the Bonds in the Massachusetts
Trust to maintain debt service on their obligations. Proposition 2.5, passed
by the voters in 1980, led to large reductions in property taxes, the major
source of income for cities and towns. As a result, between fiscal 1981 and
fiscal 1989, the aggregate property tax levy declined in real terms by
15.6%.
Since Proposition 2.5 did not provide for any new state or local
taxes to replace the lost revenues, in lieu of substantial cuts in local
services, the Commonwealth began to increase local aid expenditures. In
1981 constant dollars, total direct local aid expenditures increased by 58.5%
between fiscal years 1981 and 1989, or 5.9% per year. During the same
period, the total of all other local revenue sources declined by 5.87% or
0.75% per year. Despite the substantial increases in local aid from fiscal
1981 to fiscal 1989, local spending increased at an average rate of 1% per
year in real terms. Direct local aid for fiscal 1987, 1988, and 1989 was
$2.601 billion, $2.769 billion, and $2.961 billion, respectively. Direct local
aid declined in the three subsequent years to $2.937 billion in fiscal 1990,
$2.608 billion in 1991 and $2.328 billion in 1992 and increased to $2.547
billion in 1993. It is estimated that fiscal 1994 expenditures for direct local
aid will be $2.737 billion, which is an increase of approximately 7.5%
above the fiscal 1993 level. The additional amount of indirect local aid
provided over and above the direct local aid is estimated to have been
$1.313 billion in fiscal 1991, $1.265 billion in fiscal 1992 and $1.717
billion in fiscal 1993 and is estimated to be approximately $1.717 billion in
fiscal 1994.
Many communities have responded to the limitations imposed by
Proposition 2.5 through statutorily permitted overrides and exclusions.
Override activity peaked in fiscal 1991, when 182 communities attempted
votes on one of the three types of referenda questions (override of levy
limit, exclusion of debt service, or exclusion of capital expenditures) and
100 passed at least one question, adding $58.5 million of their levy limits.
In fiscal 1992, 67 of 143 communities had successful votes totalling $31.0
million. In fiscal 1993, 83 communities attempted a vote; two-thirds of
them (56) passed questions aggregating $16.4 million.
<PAGE>
A statewide voter initiative petition which would effectively
mandate that, commencing with fiscal 1992, no less than 40% of receipts
from personal income taxes, sales and use taxes, corporate excise taxes and
lottery fund proceeds be distributed to certain cities and towns in local aid
was approved in the general election held November 6, 1990. Pursuant to
this petition, the local aid distribution to each city or town was to equal no
less than 100% of the total local aid received for fiscal 1989. Distributions
in excess of fiscal 1989 levels were to be based on new formulas that would
replace the current local aide distribution formulas. If implemented in
accordance with its terms (including appropriation of the necessary funds),
the petition as approved would shift several hundred million dollars to direct
local aid. However, local aid payments explicitly remain subject to annual
appropriation, and fiscal 1992 and fiscal 1993 appropriations for local aid
did not meet, and fiscal 1994 appropriations for local aid do not meet, the
levels set forth in the initiative law.
Pension Liabilities. The Commonwealth had funded its two
pension systems on essentially a pay-as-you-go basis. The funding schedule
is based on actuarial valuations of the two pension systems as of January 1.
1990, at which time the unfunded accrued liability for such systems
operated by the Commonwealth (and including provision for Boston
teachers) totalled $8.865 billion. The unfunded liability for the
Commonwealth related to cost of living increases for local retirement
systems was estimated to be an additional $2.004 billion as of January 1,
1990. An actuarial valuation as of January 1, 1992 shows that, as of such
date, the total unfunded actuarial liability for such systems, including cost-
of-living allowances, was approximately $8.485 billion representing a
reduction of approximately $2.383 billion from January 1, 1990.
The amount in the Commonwealth's pension reserve, established
to address the unfunded liabilities of the two state systems, has increased
significantly in recent years due to substantial appropriations and changes
in law relating to investment of retirement system assets. Total
appropriations and transfers to the reserve in fiscal years 1985, 1986, 1987
and 1988 amounted to approximately $680 million. Comprehensive pension
legislation approved in January 1988 committed the Commonwealth,
beginning in fiscal 1989, to normal cost funding of its pension obligations
and to a 40-year amortization schedule for its unfunded pension liabilities.
Total pension costs increased from $659.7 million in fiscal 1989 to $868.2
million in fiscal 1993. Pension funding is estimated to be $951.0 million
in fiscal year 1994. As of June 30, 1993, the Commonwealth's pension
reserves had grown to approximately $3.877 billion.
State Budget and Revenues. The Commonwealth's Constitution
requires, in effect, that its budget be balanced each year. The
Commonwealth's fiscal year ends June 30. The General Fund is the
Commonwealth's primary operating fund; it also functions as a residuary
fund to receive otherwise unallocated revenues and to provide monies for
transfers to other funds as required. The condition of the General Fund is
generally regarded as the principal indication of whether the
Commonwealth's operating revenues and expenses are in balance; the other
principal operating funds (the Local Aid Fund and the Highway Fund) are
<PAGE>
customarily funded to at least a zero balance.
Limitations on Commonwealth tax revenues have been established
by enacted legislation and by public approval of an initiative petition which
has become law. The two measures are inconsistent in several respects,
including the methods of calculating the limits and the exclusions from the
limits. The initiative petition does not exclude debt service on the
Commonwealth's notes and bonds from the limits. State tax revenues in
fiscal 1988 through fiscal 1993 were lower than the limits. The Executive
Office for Administration and Finance currently estimates that state tax
revenues will not reach the limit imposed by either the initiative petition or
the legislative enactment in fiscal 1994.
Budgeted expenditures for fiscal 1989 totalled approximately
$12.643 billion. Budgeted revenues totalled approximately $11.970 billion,
approximately $672.5 million less than total expenditures. Under the
budgetary basis of accounting, after taking account of certain fund balances,
fiscal 1989 ended with a deficit of $319.3 million. Under the GAAP basis
of accounting, excluding fiduciary accounts and enterprise funds, the
Commonwealth ended fiscal 1989 with a deficit of $946.2 million. This
deficit reflected an operating gain in the capital projects funds due to the
additional borrowings to reduce prior year deficits. If the capital project
funds are excluded, the Comptroller calculated a GAAP deficit of $1.002
billion in fiscal 1989.
Fiscal 1989 tax revenues were adversely affected by the economic
slowdown that began in mid-1988. In June, 1988, the fiscal 1989 tax
revenue estimate was for 10.9% growth over fiscal 1988. Fiscal 1989
ended with actual tax revenue growth of 6.5%.
The fiscal 1989 budgetary deficit caused a cash deficit in the
Commonwealth operating accounts on June 30, 1989 in the amount of
approximately $450 million. The State Treasurer was forced to defer until
early July certain fiscal 1989 expenditures including the payment of
approximately $305 million in local aid due June 30, and with legislative
authorization, issued temporary notes in July in the amount of $1.1 billion
to pay fiscal 1989 and fiscal 1990 costs.
Fiscal year 1990 resulted in total expenditures of approximately
$13.260 billion. Budgeted revenues and other services for fiscal 1990 were
approximately $12.008 billion. Tax revenues for fiscal 1990 were
approximately $8.517 billion, a decrease of approximately $314 million or
3.6% from fiscal 1989. The Commonwealth suffered an operating loss of
approximately $1.25 billion and ended fiscal 1990 with a budgetary deficit
of $1.104 billion. The Commonwealth had a cash surplus of $99.2 million
on June 30, 1990 as a result of deferring until fiscal 1991 the payment of
approximately $1.26 billion of local aid due June 30, 1990.
<PAGE>
<PAGE>
On July 28, 1990, the legislature enacted Chapter 151 which
provides, among other matters, for the Commonwealth Fiscal Recovery
Loan Act of 1990 and grants authorization for the Commonwealth to issue
bonds in an aggregate amount up to $1.42 billion for purposes of funding
the Commonwealth's fiscal 1990 deficit and certain prior year Medicaid
reimbursement payments. Chapter 151 also provides for the establishment
of the Commonwealth Fiscal Recovery Fund, deposits for which are derived
from a portion of the Commonwealth's personal income tax receipts, are
dedicated for this purpose and are to be deposited in trust and pledged to
pay the debt service on these bonds. Under Chapter 151, the
Commonwealth issued $1.363 billion of Dedicated Income Tax Bonds to
cover the anticipated fiscal 1990 deficit.
Total expenditures for fiscal 1991 are estimated to have been
$13.659 billion. Total revenues for fiscal 1991 are estimated to have been
$13.634 billion, resulting in an estimated $21.2 million operating loss.
Application of the adjusted fiscal 1990 fund balances of $258.3 million
resulted in a final fiscal 1991 budgetary surplus of $237.1 million. State
finance law required that approximately $59.2 million of the fiscal year
surplus be placed in the Stabilization Fund described above. Amounts
credited to the Stabilization Fund are not generally available to defray
current year expenses without subsequent specific legislative authorization.
After payment in full of the local aid distribution of $1.018 billion
due on June 28, 1991, retirement of all of the Commonwealth's outstanding
commercial paper and repayment of certain other short-term borrowings,
as of the period of fiscal 1991, the Commonwealth had a cash balance of
$182.3 million. The fiscal 1991 year-end cash position compared favorably
to the Commonwealth's cash position at the end of the prior fiscal year,
June 30, 1990, when the Commonwealth's cash shortfall would have
exceeded $1.1 billion had payment of local aid not been postponed.
Upon taking office in January 1991, the new Governor undertook
a comprehensive review of the Commonwealth's budget. Based on
projected spending of $14.105 billion, it was then estimated that $850
million in budget balancing measures would be needed prior to the close of
fiscal 1991. At that time, estimated tax revenues were revised to $8.845
billion, $903 million less than was estimated at the time the fiscal 1991
budget was adopted. The Governor proposed a series of legislative and
administrative actions, designed to eliminate the projected deficit. The
legislature adopted a number of the Governor's recommendations and the
Governor took certain other administrative actions, not requiring legislative
approval, including $65 million in savings from the adoption of a state
employee furlough program. It is estimated that spending reductions
achieved through savings incentives and withholding of allotments totalled
$484.3 million in the aggregate for fiscal 1991.
In addition to recommending spending reductions to close the
projected budget deficit, the administration, in May 1991, filed an
amendment to its Medicaid state plan that enabled it to claim 50% Federal
reimbursement on uncompensated care payments provided to certain
hospitals in the Commonwealth.
<PAGE>
In fiscal 1992, Medicaid accounted for more than half of the
Commonwealth's appropriations for health care. It is the largest item in the
Commonwealth's budget. It has also been one of the fastest growing budget
items. During fiscal years 1989, 1990 and 1991, Medicaid expenditures
were $1.83 billion, $2.12 billion and $2.77 billion, respectively. A
substantial amount of expenditures in recent years was provided through
supplemental appropriations, repeating the experience that Medicaid
expenditures have exceeded initial appropriation amounts. These annual
amounts, however, do not take account of the practice of retroactive
settlement of many provider payments after audit review and certification
by the Rate Setting Commission. In fiscal 1990, payments of approximately
$488 million were made to hospitals and nursing homes for rate settlements
dating back as far as 1980, through the Medical Assistance Liability Fund
established to fund certain Medicaid liabilities incurred, but not certified for
payment, in prior years. This amount is not factored into the annual totals
for Medicaid expenditures listed above. Including retroactive provider
settlements, Medicaid expenditures for fiscal 1992 were $2.818 billion and
for fiscal 1993 were $3.151 billion. The Executive Office for
Administration and Finance estimates that fiscal 1994 Medicaid expenditures
will be approximately $3.252 billion, an increase of 3.9% over fiscal 1993
expenditures. For fiscal 1994, no supplemental Medicaid appropriations are
currently expected to be necessary. The Governor had proposed a managed
care program to be implemented commencing in January, 1992 in order to
address the considerable annual cost increases in the Medicaid program.
Medicaid is presently 50% funded by federal reimbursements.
In fiscal 1992, total revenues and other sources of the budgeted
operating funds totalled $13.728 billion, an increase over fiscal 1991
revenues of .7%. (Actual fiscal 1992 tax revenues exceeded original
estimates and totalled $9.484 billion, an increase over fiscal 1991
collections of 5.4%). Fiscal 1992 expenditures and other uses of budgeted
operating funds totalled approximately $13.420 billion, a decrease from
fiscal 1991 expenditures by 1.7%. Fiscal year 1992 revenues and
expenditures resulted in an operating gain of $312.3 million. Through the
use of the prior year ending fund balances of $312.3 million, fiscal 1992
budgetary fund balances totalled $549.4 million. Total fiscal 1992 spending
authority continued into fiscal 1993 is $231.0 million.
After payment in full of the quarterly local aid distribution of $514
million due on June 30, 1992, retirement of the Commonwealth's
outstanding commercial paper (except for approximately $50 million of
bond anticipation notes) and certain other short-term borrowings, as of June
30, 1992, the Commonwealth showed a year-end cash position of
approximately $731 million for fiscal year 1992. The ending balance
compares favorably with the cash balance of $182.3 million at the end of
fiscal 1991. As of June 1993, the Commonwealth showed a year-end cash
position of $622.2 million for fiscal year 1993. As of January 19, 1994,
the Commonwealth estimates a 1994 year-end cash position of
approximately $725.4 million.
The budgeted operating funds of the Commonwealth ended fiscal
1993 with a surplus of revenues and other sources over expenditures and
other uses of $13.1 million and aggregate ending fund balances in the
<PAGE>
budgeted operating funds of the Commonwealth of approximately $562.5
million. Budgeted revenues and other sources for fiscal 1993 totalled
approximately $14.710 billion, including tax revenues of $9.930 billion.
Total revenues and other sources increased by approximately 6.9% from
fiscal 1992 to fiscal 1993, while tax revenues increased by 4.7% for the
same period. In July 1992, tax revenues had been estimated to be
approximately $9.685 billion for fiscal 1993. This amount was
subsequently revised during fiscal 1993 to $9.940 billion.
Commonwealth budgeted expenditures and other used in fiscal 1993
totalled approximately $14.696 billion, which is $1.280 billion or
approximately 9.6% higher than fiscal 1992 expenditures and other uses.
Fiscal 1993 budgeted expenditures were $23 million lower than the initial
July 1992 estimates of fiscal 1993 budget expenditures.
On July 19, 1993, the Governor signed into law the budget for
fiscal 1994, totalling $15.463 billion. This represented a $694 million
increase over the then estimated budgeted expenditures of $14.976 billion
for fiscal 1993. On January 14, 1994, the Governor signed into law
supplemental appropriations totalling approximately $157.9 million.
Including an additional $8.1 million in fiscal 1994 supplemental
appropriation recommendations that the Governor plans to file, and an
approximate $100 million contingency reserve in fiscal 1994 for possible
additional spending, fiscal 1994 budgeted expenditures are currently
estimated to be approximately $15.716 billion. Budgeted revenues and
other sources to be collected in fiscal 1994 are estimated to be
approximately $15.535 billion, which includes tax revenues of
approximately $10.694 billion (as compared to $9.930 billion in fiscal
1993). This budget includes $175 million as part of an education reform
bill passed by the legislature. The fiscal 1994 budget is based on numerous
spending and revenue estimates, the achievement of which cannot be
assured. As of January 10, 1994, the Legislature had overridden $21.0
million of the Governor's vetoes relating to the fiscal 1994 budget.
Commonwealth expenditures and other uses in fiscal 1994 are currently
estimated to be approximately $15.500 billion, which is $788 million or
approximately 5.36% higher than those of fiscal 1993. Based on currently
estimated revenues and expenditures, the Executive Office for
Administration and Finance projects a fiscal 1994 ending balance of
approximately $382.0 million, of which approximately $315.5 million will
be in the Stabilization Fund.
On July 19, 1993, a 60-day hiring freeze on all executive branch
agencies was instituted to help ensure that agency expenditures remain
within their fiscal 1994 budget authorizations. On August 16, 1993, the
Commonwealth announced that approximately 1,280 state employees would
be laid off in the near future, in addition to approximately 350 employees
already laid off in fiscal 1994.
On January 21, 1994, the Governor presented his Budget
Submission for fiscal year 1995 providing for expenditures of $16.14
billion, a $424 million, or 2.7%, increase over current fiscal year 1994
projections. These proposed expenditures for fiscal year 1995 include direct
local aid of $2.997 billion. This budget is based on total anticipated
<PAGE>
revenues of $16.144 billion, which represents a $609 million, or 3.9%,
increase over fiscal year 1994 estimates. The Governor's budget
recommendation is based on a tax revenue estimate of $11.226 billion, an
increase of approximately 5.0%, as compared to currently estimated fiscal
1994 tax revenues of $10.694 billion.
The liabilities of the Commonwealth with respect to outstanding
bonds and notes payable as of January 1, 1994 totalled $12.555 billion.
These liabilities consisted of $8.430 billion of general obligation debt,
$1.036 billion of dedicated income tax debt (the Fiscal Recovery Bonds),
$104 million of special obligation debt, $2.742 billion of supported debt,
and $243 million of guaranteed debt.
Capital spending by the Commonwealth was approximately $595
million in fiscal 1987, $632 million in fiscal 1988 and $971 million in fiscal
1989. In November 1988, the Executive Office for Administration and
Finance established an administrative limit on state financed capital spending
in the Capital Projects Funds of $925.0 million per fiscal year. Capital
expenditures decreased to $936 million, $847 million, $694.1 million and
$575.9 million in fiscal 1990, 1991, 1992 and 1993, respectively. Capital
expenditures are projected to increase to $886.0 million in fiscal 1994. The
growth in capital spending accounts for a significant rise in debt service
during the period. Payments for the debt service on Commonwealth general
obligation bonds and notes have risen at an average annual rate of 20.4%
from $649.8 million in fiscal 1989 to $942.3 million in fiscal 1991. Debt
Service payments in fiscal 1992 were $898.3 million, representing a 4.7%
decrease from fiscal 1991. This decrease resulted from a $261 million one-
time reduction achieved through the issuance of refunding bonds in
September and October of 1991. Debt service expenditures were $1.139
billion for fiscal 1993 and are projected to be $1.220 billion for fiscal 1994.
These amounts represent debt service payments on direct Commonwealth
debt and do not include debt service on notes issued to finance the fiscal
1989 deficit and certain Medicaid-related liabilities, which were paid in full
from non-budgeted funds. Also excluded are debt service contract
assistance to certain state agencies and the municipal school building
assistance program projected to total of $359.7 million in the aggregate in
fiscal 1994. In addition to debt service on bonds issued for capital
purposes, the Commonwealth is obligated to pay the principal of and
interest on the Fiscal Recovery Bonds described above. The estimated debt
service on such bonds currently outstanding (a portion of which were issued
as variable rate bonds) ranges from approximately $279 million (interest
only) in fiscal 1994 through fiscal 1997 and approximately $130 million in
fiscal 1998, at which time the entire amount of the Fiscal Recovery Bonds
will be retired.
In January 1990 legislation was enacted to impose a limit on debt
service in Commonwealth budgets beginning in fiscal 1991. The law
provides that no more than 10% of the total appropriations in any fiscal
year may be expended for payment of interest and principal on general
obligation debt (excluding the Fiscal Recovery Bonds) of the
Commonwealth. This law may be amended or appealed by the legislature
or may be superseded in the General Appropriation Act for any year. From
fiscal year 1987 through fiscal year 1994 estimated this percentage has been
<PAGE>
substantially below the limited established by this law.
Legislation enacted in December 1989 imposes a limit on the
amount of outstanding direct bonds of the Commonwealth. The limit for
fiscal 1994 is $7.872 billion. The law provides that the limit for each
subsequent fiscal year shall be 105% of the previous fiscal year's limit.
The Fiscal Recovery Bonds will not be included in computing the amount
of bonds subject to this limit.
In August 1991, the Governor announced a five-year capital
spending plan. The plan, which represents the Commonwealth's first
centralized multi-year capital plan, sets forth, by agency, specific projects
to receive capital spending allocations over the next five fiscal years and
annual capital spending limits. Capital spending by the Commonwealth,
which exceeded $900 million annually in fiscal 1989, 1990 and 1991,
declined to $694.1 million in fiscal 1992 and $575.9 in fiscal 1993. For
fiscal 1994 through 1998, the plan forecasts annual capital spending for the
Commonwealth of between $813 million and $886 million per year,
exclusive of spending by the Massachusetts Bay Transit Authority. Total
expenditures are forecast at $4.25 billion, an amount less than the total
amount of agency capital spending requests for the same period. Planned
spending is also significantly below legislatively authorized spending levels.
Unemployment. From 1980 to 1989, the Massachusetts
unemployment rate was significantly lower than the national average. The
Massachusetts unemployment rate averaged 9.0%, 8.5% and 6.9% in
calendar 1991, 1992 and 1993, respectively. The Massachusetts
unemployment rate in December, 1993 was 6.3% as compared to 6.6% for
November, 1993 and 8.6% for December of 1992, although the rate has
been volatile throughout this period. The Massachusetts unemployment rate
in January and February, 1994 was 7.2% and 6.4%, respectively; these
rates are not comparable to prior rates due to a new rate computation which
became effective in 1994.
The balance in the Massachusetts Unemployment Compensation
Trust Fund had been exhausted as of September 1991 due to the continued
high levels of unemployment. As of December 31, 1992, the Massachusetts
Unemployment Compensation Trust Fund balance was in deficit by $377
million. As of November 30, 1993, the Fund was in deficit by $163
million. The deficit is now expected to be approximately $120 million by
the end of calendar 1993. Benefit payments in excess of contributions are
being financed by use of repayable advances from the federal unemployment
loan account. Legislation enacted in May 1992 increased employer
contributions in order to reduce advances from the federal loan account.
The additional increases in contributions provided by the new legislation
should result in a positive balance in the Unemployment Compensation
Trust Fund by the end of December 1994 and rebuild reserves in the system
to over $1 billion by the end of 1996.
Litigation. The Attorney General of the Commonwealth is not
aware of any cases involving the Commonwealth which in his opinion
would affect materially its financial condition. However, certain cases exist
<PAGE>
containing substantial claims, among which are the following:
The United States has brought an action on behalf of the U.S.
Environmental Protection Agency alleging violations of the Clean Water Act
and seeking to enforce the clean-up of Boston Harbor. The Massachusetts
Water Resources Authority (the "MWRA") has assumed primary
responsibility for developing and implementing a court approved plan and
time table for the construction of the treatment facilities necessary to
achieve compliance with the federal requirements. The MWRA currently
projects that total cost of construction of the waste water facilities required
under the court's order as approximately $3.5 billion in current dollars.
Under the Clean Water Act, the Commonwealth may be liable for any costs
of complying with any judgment in this case to the extent that the MWRA
or a municipality is prevented by state law from raising revenues necessary
to comply with such a judgment.
In a recent suit filed against the Department of Public Welfare,
plaintiffs allege that the Department has unlawfully denied personal care
attendant services to severely disabled Medicaid recipients. The Court has
denied plaintiffs' motion for a preliminary injunction and has not yet acted
on plaintiffs' motion for reconsideration of that decision. If plaintiffs
prevail on their claims, the suit could cost the Commonwealth as much as
$200 million.
In a suit filed against the Commissioner of Revenue, plaintiffs
challenge the inclusion of income from tax exempt obligations in the
measure of the bank excise tax. The Appellate Tax Board issued a finding
of fact and report in favor of the Commissioner of Revenue on September
30, 1993. An appeal has been filed. Approximately $400 million is at
issue.
There are also several tax matters in litigation which may result in
an aggregate liability in excess of $195 million.
Ratings. Beginning on May 17, 1989, Standard & Poor's
downgraded its ratings on Massachusetts general obligation bonds and
certain agency issues from AA+ to AA. The ratings were downgraded
three additional times to a low of BBB on December 31, 1989. On July 14,
1989, Standard & Poor's also downgraded its rating on temporary general
obligation notes and various agency notes from SP-1 + to SP-1 and on
general obligation short-term notes and on short-term agency debt from SP-
1 to SP-2. Bonds rated BBB may have speculative characteristics. The
rating remained at BBB until September 9, 1992 when Standard & Poor's
raised its rating to A. At this same time, such bonds were removed from
CreditWatch. On October 14, 1993, Standard & Poor's raised its rating
from A to A+.
On June 21, 1989, Moody's Investors Service downgraded its
rating on Massachusetts general obligation bonds Aa to A. The ratings
were further reduced on two occasions to a low on March 19, 1990 of Baa
where it remained until September 10, 1992 when Moody's increased its
rating to A.
<PAGE>
Fitch Investors Service, Inc. lowered its rating on the
Commonwealth's bonds from AA to A on September 29, 1989. As of
December 5, 1991, its qualification of the bonds changed from Uncertain
Trends to Stabilizing Credit Trend. On October 13, 1993, Fitch Investors
raised its rating from A to A+.
Ratings may be changed at any time and no assurance can be given
that they will be not be revised or withdrawn by the rating agencies, if in
their respective judgments, circumstances should warrant such action. Any
downward revision or withdrawal of a rating could have an adverse effect
on market prices of the bonds.
The Sponsors are unable to predict what effect, if any, such
factors may have on the Bonds in the Massachusetts Trust.
Nevertheless, investors should be aware that if there should be a financial
crisis relating to Massachusetts, its public bodies or municipalities
(including the city of Boston), the market value and marketability of all
outstanding bonds issued by the Commonwealth and its public authorities
or municipalities, including the Bonds in the Massachusetts Trust, could
be adversely affected.
New York Trust
New York State
The State's current fiscal year commenced on April 1, 1994,
and ends in March 31, 1995, and is referred to herein as the State's
1994-95 fiscal year. The State's budget for the 1994-95 fiscal year was
enacted by the Legislature on June 7, 1994, more than two months after
the start of the fiscal year. Prior to adoption of the budget, the
Legislature enacted appropriations for disbursements considered to be
necessary for State operations and other purposes, including all necessary
appropriations for debt service. The State Financial Plan for the 1994-95
fiscal year was formulated on June 16, 1994 and is based on the State's
budget as enacted by the Legislature and signed into law by the
Governor.
The economic and financial condition of the State may be
affected by various financial, social, economic and political factors.
Those factors can be very complex, may vary from fiscal year to fiscal
year, and are frequently the result of actions taken not only by the State
and its agencies and instrumentalities, but also by entities, such as the
Federal government, that are not under the control of the State.
The State Financial Plan is based upon forecasts of national and
State economic activity. Economic forecasts have frequently failed to
predict accurately the timing and magnitude of changes in the national
and the State economies. Many uncertainties exist in forecasts of both
the national and State economies, including consumer attitudes toward
spending, Federal financial and monetary policies, the availability of
credit, and the condition of the world economy, which could have an
adverse effect on the State. There can be no assurance that the State
<PAGE>
economy will not experience results in the current fiscal year that are
worse than predicted, with corresponding material and adverse effects on
the State's projections of receipts and disbursements.
The State Division of the Budget ("DOB") believes that its
projections of receipts and disbursements relating to the current State
Financial Plan, and the assumptions on which they are based, are
reasonable. Actual results, however, could differ materially and
adversely from the projections set forth below, and those projections may
be changed materially and adversely from time to time.
As noted above, the financial condition of the State is affected
by several factors, including the strength of the State and regional
economy and actions of the Federal government, as well as State actions
affecting the level of receipts and disbursements. Owing to these and
other factors, the State may, in future years, face substantial potential
budget gaps resulting from a significant disparity between tax revenues
projected from a lower recurring receipts base and the future costs of
maintaining State programs at current levels. Any such recurring
imbalance would be exacerbated if the State were to use a significant
amount of nonrecurring resources to balance the budget in a particular
fiscal year. To address a potential imbalance for a given fiscal year, the
State would be required to take actions to increase receipts and/or reduce
disbursements as it enacts the budget for that year, and under the State
Constitution the Governor is required to propose a balanced budget each
year. To correct recurring budgetary imbalances, the State would need
to take significant actions to align recurring receipts and disbursements in
future fiscal years. There can be no assurance, however, that the State's
actions will be sufficient to preserve budgetary balance in a given fiscal
year or to align recurring receipts and disbursements in future fiscal
years.
The 1994-95 State Financial Plan contains actions that provide
nonrecurring resources or savings, as well as actions that impose
nonrecurring losses of receipts or costs. It is believed that the net
positive effect of nonrecurring actions represents considerably less than
one-half of one percent of the State's General Fund, an amount
significantly lower than the amount included in the State Financial Plans
in recent years; it is believed that those actions do not materially affect
the financial condition of the State. In addition to those nonrecurring
actions, the 1994-95 State Financial Plan reflects the use of $1.026
billion in the positive cash margin carried over from the prior fiscal year,
resources that are not expected to be available in the State's 1995-96
fiscal year.
The General Fund is the general operating fund of the State and
is used to account for all financial transactions, except those required to
be accounted for in another fund. It is the State's largest fund and
receives almost all State taxes and other resources not dedicated to
particular purposes. In the State's 1994-95 fiscal year, the General Fund
is expected to account for approximately 52 percent of total
governmental-fund receipts and 51 percent of total governmental-fund
disbursements. General Fund moneys are also transferred to other funds,
primarily to support certain capital projects and debt service payments in
other fund types.
New York State's financial operations have improved during
recent fiscal years. During the period 1989-90 through 1991-92, the
State incurred General Fund operating deficits that were closed with
<PAGE>
receipts from the issuance of tax and revenue anticipation notes
("TRANs"). First, the national recession, and then the lingering
economic slowdown in the New York and regional economy, resulted in
repeated shortfalls in receipts and three budget deficits. For its 1992-93
and 1993-94 fiscal years, the State recorded balanced budgets on a cash
basis, with substantial fund balances in each year as described below.
The State ended its 1993-94 fiscal year with a balance of $1.140
billion in the tax refund reserve account, $265 million in its Contingency
Reserve Fund ("CRF") and $134 million in its Tax Stabilization Reserve
Fund. These fund balances were primarily the result of an improving
national economy, State employment growth, tax collections that
exceeded earlier projections and disbursements that were below
expectations. Deposits to the personal income tax refund reserve have
the effect of reducing reported personal income tax receipts in the fiscal
year when made and withdrawals from such reserve increase receipts in
the fiscal year when made. The balance in the tax refund service
account will be used to pay taxpayer refunds, rather than drawing from
1994-95 receipts.
Of the $1.140 billion deposited in the tax refund reserve
account, $1.026 billion was available for budgetary planning purposes in
the 1994-95 fiscal year. The remaining $114 million will be redeposited
in the tax refund reserve account at the end of the State's 1994-95 fiscal
year to continue the process of restructuring the State's cash flow as part
of the Local Government Assistance Corporation ("LGAC") program.
The balance in the CRF will be used to meet the cost of litigation facing
the State. The Tax Stabilization Reserve Fund may be used only in the
event of an unanticipated General Fund cash-basis deficit during the
1994-95 fiscal year.
Before the deposit of $1.140 billion in the tax refund service
account, General Fund receipts in 1993-94 exceeded those originally
projected when the State Financial Plan for that year was formulated on
April 16, 1993 by $1.002 billion. Greater-than-expected receipts in the
personal income tax, the bank tax, the corporation franchise tax and the
estate tax accounted for most of this variance, and more than offset
weaker-than-projected collections from the sales and use tax and
miscellaneous receipts. Collections from individual taxes were affected
by various factors including changes in Federal business laws, sustained
profitability of banks, strong performance of securities firms, and higher-
than-expected consumption of tobacco products following price cuts.
Disbursements and transfers from the General Fund were $303
million below the level projected in April 1993, an amount that would
have been $423 million had the State not accelerated the payment of
Medicaid billings, which in the April 1993 State Financial Plan were
planned to be deferred into the 1994-95 fiscal year. Compared to the
estimates included in the State Financial Plan formulated in April 1993,
lower disbursements resulted from lower spending for Medicaid, capital
projects, and debt service (due to refundings) and $114 million used to
restructure the State's cash flow as part of the LGAC program.
Disbursements were higher-than-expected for general support for public
schools, the State share of income maintenance, overtime for prison
guards, and highway snow and ice removal.
In certain prior fiscal years, the State has failed to enact a
budget prior to the beginning of the State's fiscal year. A delay in the
adoption of the State's budget beyond the statutory April 1 deadline and
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the resultant delay in the State's Spring borrowing has in certain prior
years delayed the projected receipt by the City of State aid, and there can
be no assurance that State budgets in the future fiscal years will be
adopted by the April 1 statutory deadline.
The State has noted that its forecasts of tax receipts have been
subject to variance in recent fiscal years. As a result of these
uncertainties and other factors, actual results could differ materially and
adversely from the State's current projections and the State's projections
could be materially and adversely changed from time to time. There can
be no assurance that the State will not face substantial potential budget
gaps in future years resulting from a significant disparity between tax
revenues projected from a lower recurring receipts base and the spending
required to maintain State programs at current levels. To address any
potential budgetary imbalance, the State may need to take significant
actions to align recurring receipts and disbursements in future fiscal
years.
Ratings on general obligation bonds of the State of New York
were lowered by Standard & Poor's Corporation and Moody's Investors
Service during 1990 from AA- to A and Aa to A, respectively. On
January 6, 1992, Moody's Investors Service lowered its rating on certain
appropriations-backed debt of New York State to Baa1 from A. The
agency cited the failure of Governor Mario M. Cuomo and New York
State lawmakers to close New York's current year budget gap. Moody's
Investors Services also placed the general obligation, State guaranteed
and New York local Municipal Assistance Corporation Bonds under
review for possible downgrade in coming months. In addition, on
January 13, 1992, Standard & Poor's Corporation lowered its rating on
general obligation debt and guaranteed debt to A- from A. Standard &
Poor's Corporation also downgraded its rating on variously rated debt,
State moral obligations, contractual obligations, lease purchase
obligations and other State guarantees. Additional reductions in ratings
could result in a loss to Unit holders.
As of March 31, 1994, the State had approximately $5.370
billion in general obligation bonds, excluding refunding bonds and $294
million in bond anticipation notes outstanding. On May 24, 1993, the
State issued $850 million in tax and revenue anticipation notes, all of
which matured on December 31, 1993. Principal and interest due on
general obligation bonds and interest due on bond anticipation notes and
on tax and revenue anticipation notes were $782.5 million for the 1993-
94 fiscal year, and are estimated to be $786.3 million for the 1994-95
fiscal year. These figures do not include interest on refunding bonds
issued in July 1992, to the extent that such interest is to be paid from
escrowed funds.
State Authorities
The fiscal stability of the State is related to the fiscal stability of
its authorities, which generally have responsibility for financing,
constructing, and operating revenue-producing benefit facilities. Certain
authorities of the State, including the State Housing Finance Agency
("HFA"), the Urban Development Corporation ("UDC") and the
Metropolitan Transportation Authority ("MTA") have faced and continue
to experience substantial financial difficulties which could adversely
affect the ability of such authorities to make payments of interest on, and
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principal amounts of, their respective bonds. Should any of its
authorities default on their respective obligations, the State's access to
public credit markets could be impaired. The difficulties have in certain
instances caused the State (under its so-called "moral obligation") to
appropriate funds on behalf of the authorities. Moreover, it is expected
that the problems faced by these authorities will continue and will require
increasing amounts of State assistance in future years. Failure of the
State to appropriate necessary amounts or to take other action to permit
those authorities having financial difficulties to meet their obligations
(including HFA, UDC and MTA) could result in a default by one or
more of the authorities. Such default, if it were to occur, would be
likely to have a significant adverse effect on investor confidence in, and
therefore the market price of, obligations of the defaulting authority. In
addition, any default in payment of any general obligation of any
authority whose bonds contain a moral obligation provision could
constitute a failure of certain conditions that must be satisfied in
connection with Federal guarantees of City and MAC obligations and
could thus jeopardize the City's long-term financing plans.
The fiscal stability of the State is related to the fiscal stability of
its authorities, which generally have responsibility for financing,
constructing and operating revenue-producing public benefit facilities.
The authorities are not subject to the constitutional restrictions on the
incurrence of debt which apply to the State itself and may issue bonds
and notes within the amounts of, and as otherwise restricted by, their
legislative authorization. As of September 30, 1992, there were 18
authorities that had outstanding debt of $100 million or more. The
aggregate outstanding debt, including bonds, of these 18 authorities was
63.5 billion as of September 30, 1993. As of March 31, 1994, aggregate
public auhtority debt outstanding as State supported debt was $21.1
billion as State-related debt was $29.4 billion.
The authorities are generally supported by revenues generated by
the projects financed or operated, such as fares, user fees on bridges,
highway tolls and rentals for dormitory rooms and housing. In recent
years, however, the State has provided financial assistance through
appropriations, in some cases of a recurring nature, to certain of the 18
authorities for operating and other expenses and, in fulfillment of its
commitments on moral obligation indebtedness or otherwise for debt
service. This assistance is expected to continue to be required in future
years.
The MTA oversees the operation of New York City's subway
and bus lines by its affiliates, the New York City Transit Authority and
the Manhattan and Bronx Surface Transit operating (collectively, the
"Transit Authority" or the "TA"). Through MTA's subsidiaries, the
Long Island Railroad Company, the Metro-North Commuter Railroad
Company and the Metropolitan Suburban Bus Authority, the MTA
operates certain commuter rail and bus lines in the New York
metropolitan area. In addition, the Staten Island Rapid Transit Operating
Authority, an MTA subsidiary, operates a rapid transit line on Staten
Island. Through its affiliated agency, the Triborough Bridge and Tunnel
Authority (the "TBTA"), the MTA operates certain intrastate toll bridges
and tunnels. Because fare revenues are not sufficient to finance the mass
transit portion of these operations, the MTA has depended and will
continue to depend for operating support upon a system of Federal, State,
local government and TBTA support, including loans, grants and
operating subsidies. Over the past several years, the State has enacted
several taxes, including a surcharge on the profits of banks, insurance
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corporations and general business corporations doing business in the 12-
county region served by the MTA (the"Metropolitan Transportation
Region") and a special one-quarter of 1% regional sales and use tax,
that provide additional revenues for mass transit purposes including
assistance to the MTA, the surcharge, which expires in November 1995,
yielded $507 million in calendar year 1992, of which the MTA was
entitled to receive approximately 90 percent, or approximately $456
million. For the 1994-95 State fiscal year, total State assistance to the
MTA is estimated at approximately $1.3 billion.
In 1993, State legislation authorized the refunding of a five-year
$9.56 billion MTA capital plan for the five-year period, 1992 through
1996 (the "1992-96 Capital Program"). The MTA has received approval
of the 1992-96 Capital Program based on this legislation from the 1992-
96 Capital Program Review Board, as State law requires. This is the
third five-year plan since the Legislature authorized procedures for the
adoption, approval and amendment of a five-year plan in 1981 for a
capital program designed to upgrade the performance of the MTA's
transportation systems and to supplement, replace and rehabilitate
facilities and equipment. The MTA, the TBTA and the TA are
collectively authorized to issue an aggregate of $3.1 billion of bonds (net
of certain statutory exclusions) to finance a portion of the 1992-96
Capital Program. The 1992-96 Capital Program is expected to be
financed in significant part through the dedication of State petroleum
business taxes.
There can be no assurance that all the necessary governmental
actions for the Capital Program will be taken, that funding sources
currently identified will not be decreased or eliminated, or that the 1992-
96 Capital Program, or parts thereof, will not be delayed or reduced.
Furthermore, the power of the MTA to issue certain bonds expected to
be supported by the appropriation of State petroleum business taxes is
currently the subject of a court challenge. If the Capital Program is
delayed or reduced, ridership and fare revenues may decline, which
could, among other things, impair the MTA's ability to meet its
operating expenses without additional State assistance.
The State's experience has been that if an Authority suffers
serious financial difficulties, both the ability of the State and the
Authorities to obtain financing in the public credit markets and the
market price of the State's outstanding bonds and notes may be adversely
affected. The Housing Finance Agency ("HFA") and the Urban
Development Corporation ("UDC") have in the past required substantial
amounts of assistance from the State to meet debt service costs or to pay
operating expenses. Further assistance, possibly in increasing amounts,
may be required for these, or other, Authorities in the future. In
addition, certain statutory arrangements provide for State local assistance
payments otherwise payable to localities whose local assistance payments
otherwise payable to localities to be made under certain circumstances to
certain Authorities. The State has no obligation to provide additional
assistance to localities whose local assistance payments have been paid to
Authorities under these arrangements. However, in the event that such
local assistance payments are so diverted, the affected localities could
seek additional State funds.
New York City and Other Localities
The City, with a population of approximately 7.3 million, is an
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international center of business and culture. Its non-manufacturing
economy is broadly based, with the banking and securities, life
insurance, communications, publishing, fashion design, retailing and
construction industries accounting for a significant portion of the City's
total employment earnings. Additionally, the City is the nation's leading
tourist destination. The City's manufacturing activity is conducted
primarily in apparel and publishing.
The national economic recession which began in July 1990 has
adversely impacted the City harder than almost any other political
jurisdiction in the nation. As a result, the City, with approximately 3
percent of national employment, has lost approximately 20 percent of all
U.S. jobs during the recent economic downturn and, consequently, has
suffered erosion of its local tax base. In total, the City private sector
employment has plummeted by approximately 360,000 jobs since 1987.
But, after nearly five years of decline, the City appears to be on the
verge of a broad-based recovery which will lift many sectors of the local
economy. Most of the nascent local recovery can be attributed to the
continued improvement in the U.S. economy, but a great deal of the
strength expected in the City economy will be due to local factors, such
as the heavy concentration of the securities and banking industries in the
City. The current forecast calls for modest employment growth of about
20,000 a year (0.6 percent) on average through 1998 with some slowing
but still positive growth in employment in 1995-96 as U.S. growth slows
(local job gains slow from 25,000 to around 10,000 per year).
During the most recent economic downturn, the City has faced
recurring extraordinary budget gaps that have been addressed by
undertaking one-time, one-shot budgetary initiatives to close then
projected gaps in order to achieve a balanced budget as required by the
laws of the State. For example, in order to achieve a balanced budget
for the 1992 fiscal year, the City increased taxes and reduced services
during the 1991 fiscal year to close a then projected gap of $3.3 billion
in the 1992 fiscal year which resulted from, among other things, lower
than expected tax revenue of approximately $1.4 billion, reduced State
aid for the City of approximately $564 million and greater than projected
increases in legally mandated expenditures of approximately $400
million, including public assistance and Medicare expenditures. The gap-
closing measures for fiscal year 1992 included receipt of $605 million
from tax increases, approximately $1.5 billion of proposed service
reductions and proposed productivity savings of $545 million.
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Notwithstanding its recurring projected budget gaps, for fiscal
years 1981 through 1993 the City achieved balanced operating results
(the City's General Fund revenues and transfers reduced by expenditures
and transfers), as reported in accordance with Generally Accepted
Accounting Principles ("GAAP"), and the City's 1994 fiscal year results
are projected to be balanced in accordance with GAAP.
The City's ability to maintain balanced budgets in the future is
subject to numerous contingencies; therefore, even though the City has
managed to close substantial budget gaps in recent years in order to
maintain balanced operating results, there can be no assurance that the
City will continue to maintain a balanced budget as required by State law
without additional tax or other revenue increases or reduction in City
services, which could adversely affect the City's economic base.
Pursuant to the laws of the State, the City prepares an annual
four-year financial plan, which is reviewed and revised on a quarterly
basis and which includes the City's capital, revenue and expense
projections. The City is required to submit its financial plans to review
bodies, including the New York State Financial Control Board ("Control
Board"). If the City were to experience certain adverse financial
circumstances, including the occurrence or the substantial likelihood and
imminence of the occurrence of an annual operating deficit of more than
$100 million or the loss of access to the public credit markets to satisfy
the City's capital and seasonal financing requirements, the Control Board
would be required by State law to exercise powers, among others, of
prior approval of City financial plans, proposed borrowings and certain
contracts.
On November 23, 1993, the City submitted to the Control Board
the Financial Plan for the 1994 through 1997 fiscal years, which is a
modification to a financial plan submitted to the Control Board on August
30, 1993 and which relates to the City, the Board of Education ("BOE")
and the City University of New York ("CUNY"). The 1994-1997
Financial Plan projects revenues and expenditures for the 1994 fiscal
year balanced in accordance with GAAP. The 1994-1997 Financial Plan
sets forth actions to close a previously projected gap of approximately
$2.0 billion in the 1994 fiscal year. The gap-closing actions for the 1994
fiscal year included agency actions aggregating $666 million, including
productivity savings and savings from restructuring the delivery of City
services; service reduction aggregating $274 million; the sale of
delinquent real property tax receivables for $215 million; discretionary
transfers from the 1993 fiscal year of $110 million; reduced debt service
costs aggregating $187 million; resulting from refinancings and other
actions; $150 million in proposed increased Federal assistance; a
continuation of the personal income tax surcharge, resulting in revenues
of $143 million; $80 million in proposed increased State aid, which is
subject to approval by the Governor; and revenue actions aggregating
$173 million.
The Financial Plan also sets forth projections for the 1995
through 1997 fiscal years and outlines a proposed gap-closing program to
close projected budget gaps of $1.7 billion, $2.5 billion and $2.7 billion
for the 1995 through 1997 fiscal years, respectively. City gap-closing
actions total $640 million in the 1995 fiscal year, $814 million in the
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1996 fiscal year and $870 million in the 1997 fiscal year. These actions
include increased revenues and reduced expenditures from agency actions
aggregating $165 million, $439 million and $470 million in the 1995
through 1997 fiscal years, respectively, including productivity savings
and savings from restructuring the delivery of City services and service
reductions; possible BOE expenditure reductions aggregating $125
million in each of the 1995 through 1997 fiscal years; and reduced other
than personal service costs aggregating $50 million in each of the 1995
through 1997 fiscal years.
State actions proposed in the gap-program total $306 million,
$616 million in each of the 1995, 1996 and 1997 fiscal years,
respectively. These actions include savings from various proposed
mandate relief measures and the proposed reallocation of State education
aid among various localities totaling $175 million, $325 million and $475
million in each of the 1995, 1996 and 1997 fiscal years, respectively.
These actions also include $131 million in 1995 and $291 million in each
of 1996 and 1997 in anticipated State actions which could include savings
from the proposed State assumption of certain Medicaid costs or various
proposed mandate relief measures.
The Federal actions proposed in the gap-closing program are
$100 million and $200 million in increased Federal assistance in fiscal
years 1996 and 1997, respectively.
Other Actions proposed in the gap-closing program represent
Federal, State or City actions to be specified in the future.
Various actions proposed in the Financial Plan, including the
proposed continuation of the personal income tax surcharge beyond
December 31, 1995 and the proposed increase in State aid, are subject to
approval by the Governor and the State Legislature, and the proposed
increase in Federal aid is subject to approval by Congress and the
President. The State Legislature has in previous legislative sessions
failed to approve proposals for the State assumption of certain Medicaid
costs, mandate relief and reallocations of State education aid, thereby
increasing the uncertainty as to the receipt of the State assistance
included in the Financial Plan. 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 State
Legislature has approved the continuation of the personal income tax
surcharge through December 31, 1995, and the Governor is expected to
approve this continuation. The Financial Plan has been the subject of
extensive public comment and criticism particularly regarding the sale of
delinquent property tax receivables, the sale of the New York City Off-
Track Betting Corporation ("OTB"), the amount of State and Federal aid
included in the Financial Plan and the inclusions of non-recurring
actions.
Notwithstanding the proposed city, federal and state actions in
the gap-closing programs, the City Comptroller has warned in past
published reports that State and local tax increases in an economic
downturn or period of slow economic growth can have adverse effects on
the local economy and can slow down an economic recovery. The City
Comptroller has also previously expressed concerns about the effect on
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the City's economy and budgets of rapidly increasing water and sewer
rates, decreasing rental payments in future years from the Port Authority
under leases for LaGuardia and Kennedy airports, the dependence on
increased aid from the State and Federal Governments for gap-closing
programs, the escalation cost of judgments and claims, federal deficit
reduction measures and the increasing percentages of future years'
revenues projected to be consumed by debt service, even after reductions
in the capital program.
Although the City has maintained balanced budgets in each of its
last thirteen years, and is projected to achieve balanced operating results
for the 1993 fiscal year, there can be no assurance that the gap-closing
actions proposed in the Financial Plan can be successfully implemented
or that the City will maintain a balanced budget in future years without
additional State aid, revenue increases or expenditure reductions.
Additional tax increases and reductions in essential City services could
adversely affect the City's economic base.
In November 1993, Rudolph W. Giuliani was elected mayor of
the City, replacing the previous administration on January 1, 1994.
Mayor Giuliani's Modification No. 94-2 to the Financial Plan for the
City and Covered Organizations for fiscal years 1994-1998 (the
"Modification"), issued February 10, 1994, reports that for 1995 fiscal
year, the budget gap is estimated at $2.26 billion, or nearly a 12 percent
shortfall of existing tax revenues over baseline expenditures. Absent gap
closing initiatives, the Modification reports that the projected budget gap
will grow to nearly $3.4 billion by 1998 fiscal year. According to the
Modification, the 1995 fiscal year budget gap is the largest that the City
has faced since 1981, when the City converted to GAAP. The
Modification attributes the projected budget gaps to the lingering national
recession, to a sharp growth in expenditures during the boom years of
the 1980s and the failure of the City to reduce the City's municipal
workforce. The Modification reports that at the same time that City
employment has declined as a percentage of U.S. employment, local
government employment in the City, which exceeds the state government
employment of the five largest states, is on the verge of an historic high.
According to the Modification, at the end of December 1993, the City's
full-time municipal workforce stood at more than 362,000 employees,
and absent reductions, will reach an all-time high at the end of fiscal year
1994.
The Modification states that in order to strengthen the City's
long-term fiscal position the City's gap-closing initiatives must be
accomplished without resorting to one-shot gap-closing measures, such as
tax increases; instead, it must balance its budgets by reducing City
spending, reducing the size of the City's municipal workforce and
reducing certain City taxes to encourage economic growth. Under the
Modification, fiscal year 1995 spending declines by $516 million over
the current fiscal year, the lowest projected spending rate since 1975.
The Modification plans to reduce the City's municipal workforce by
15,000 positions, as compared to the current headcount, by the end of
fiscal year 1995. The workforce reduction will be achieved through an
aggressive severance package, and, if necessary, layoffs. It is
anticipated that these workforce reduction initiatives will save $117
million, $144 million, $311 million, $415 million and $539 million in
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fiscal years 1994 through 1998, respectively, after taking into account an
estimated $200 million in costs related to instituting the propose
severance programs which are anticipated to be financed with surplus
Municipal Assistance Corporation funds (see below for discussion of the
Municipal Assistance Corporation). The Modification also contemplates
the loss of $35 million, $186 million, $534 million and $783 million in
tax revenues in 1995 through 1998, respectively, as a result of the
reduction in certain City taxes, such as the reduction of the hotel tax
from 6 percent to 5 percent, commercial rent tax reductions and the
elimination of the 12.5 percent personal income tax surcharge.
The 1994-97 Financial Plan is based on numerous assumptions,
including the recovery of the City's and the region's economy early in
the calendar year 1993. The 1994-97 Financial Plan is subject to various
other uncertainties and contingencies relating to, among other factors, the
extent, if any, to which wage increases for City employees exceed the
annual increases assumed for the 1994 through 1997 fiscal years;
continuation of the 9% interest earnings assumptions for pension fund
assets affecting the City's required pension fund contributions; the
willingness and the ability of the State to provide the aid contemplated by
the Financial Plan and to take various other actions to assist the City,
including the proposed State takeover of certain Medicaid costs and State
mandate relief, the ability of HHC, BOE and other agencies to maintain
budget balance; the willingness of the Federal government to provide
Federal aid; approval of the proposed continuation of the personal
income tax surcharge and the State budgets; adoption of the City's
budgets by the City Council; the ability of the City to implement
contemplated productivity and service and personnel reduction programs
and the success with which the City controls expenditures; additional
expenditures that may be incurred due to the requirements of certain
legislation requiring minimum levels of funding for education; the City's
ability to market its securities successfully in the public credit markets;
the level of funding required to comply with the Americans with
Disabilities Act of 1990; and additional expenditures that may be
incurred as a result of deterioration in the condition of the City's
infrastructure. Certain of these assumptions have been questioned by the
City Comptroller and other public officials.
Estimates of the City's revenues and expenditures are based on
numerous assumptions and the subject to various uncertainties. If
expected Federal or State aid is not forthcoming, if unforeseen
developments in the economy significantly reduce revenues derived from
economically sensitive taxes or necessitate increased expenditures for
public assistance, if the City provided for in the City's Financial Plan of
if other uncertainties materialize that reduce expected revenues or
increase projected expenditures then, to avoid operating deficits, the City
may be required to implement additional actions, including increases in
taxes and reductions in essential City services. The City might also seek
additional assistance from the State.
The City depends on the State for State aid both to enable the
City to balance its budget and to meet its cash requirements. For its
1993 fiscal year, the State, before taking any remedial action, reported a
potential budget deficit of $4.8 billion (before providing for repayment of
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the deficit notes as described below). If the State experiences revenue
shortfalls or spending increases beyond its projections during its 1993
fiscal year or subsequent years, such developments could 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.
Implementation of the Financial Plan 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 1994-97
contemplates issuance of $10.8 billion of general obligation bonds
primarily to reconstruct and rehabilitate the City's infrastructure and
physical assets and to make 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 success of projected public sales of City bonds and
notes will be subject to prevailing market conditions at the time of the
sale, and no assurance can be given that such sales will be completed. 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.
Substantially all of the City's full-time employees are members
of labor unions. The Financial Emergency Act requires that all
collective bargaining agreements entered into by the City and the
Covered Organizations be consistent with the City's current financial
plan, except under certain circumstances, such as awards arrived at
through impasse procedures.
On January 11, 1993, the City announced a settlement with a
coalition of municipal unions, including Local 237 of the International
Brotherhood of Teamsters ("Local 237"), District 37 of the American
Federation of State, County and Municipal Employees ("District Council
37") and other unions covering approximately 44% of the City's
workforce. The settlement, which has been ratified by the unions,
includes a total net expenditure increase of 8.25% over a 39-month
period, ending March 31, 1995 for most of these employees. On April 9,
1993 the City announced an agreement with the Uniformed Fire Officers
Association (the"UFOA") which is consistent with the coalition
agreement. The agreement has been ratified. The Financial Plan reflects
the costs associated with these settlements and provides for similar
increases for all other City-funded employees.
The Financial Plan provides no additional wage increases for
City employees after their contracts expire in the 1995 fiscal year. Each
1% wage increase for all employees commencing in the 1995 fiscal year
would cost the City an additional $56 million for the 1995 fiscal year and
$152 million for the 1996 fiscal year and each year thereafter above the
amounts provided for in the Financial Plan.
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The terms of eventual wage settlements could be determined
through the impasse procedure in the New York City Collective
Bargaining Law, which can impose a binding settlement.
A substantial portion of the capital improvement in the City are
financed by indebtedness issued by the Municipal Assistance Corporation
of the City of New York ("MAC"). MAC was organized in 1975 to
provide financing assistance for the City and also to exercise certain
review functions with respect to the City's finances. MAC bonds are
payable out of certain State sales and compensating use taxes imposed
within the City, State stock transfer taxes and per capita State aid to the
City. Any balance from these sources after meeting MAC debt service
and reserve fund requirements and paying MAC's operating expenses is
remitted to the City or, in the case of stock transfer taxes, rebated to the
taxpayers. The State is not, however, obligated to continue the
imposition of such taxes or to continue appropriation of the revenues
therefrom to MAC, nor is the State obligated to continue to appropriate
the State per capita aid to the City which would be required to pay the
debt service on certain MAC obligations. MAC has not taxing power
and MAC bonds do not create an enforceable obligation of either the
State or the City. As of March 31, 1993, MAC had outstanding an
aggregate of approximately $5.463 billion of its bonds.
On February 11, 1991, Moody's Investors Service lowered its
rating on the City's general obligation bonds from A to Baa1. On July 2,
1993, Standard & Poor's reconfirmed its A- rating of City bonds,
continued its negative rating outlook assessment and stated that
maintenance of such ratings depended upon the City's making further
progress towards reducing budget gaps in the outlying years.
Litigation
The State is the subject of numerous legal proceedings relating
to State finances, State programs and miscellaneous tort, real property
and contract claims in which the State is a defendant and where monetary
damages sought are substantial. These proceedings could adversely
affect the financial condition of the State in the 1994-95 fiscal years or
thereafter.
Among the more significant of these litigations, which are at
various procedural stages, are those that challenge: (i) the validity of
agreements and treaties by which various Indian tribes transferred title to
the State of certain land in central New York; (ii) certain aspects of the
State's Medicaid rates and regulations, including reimbursements to
providers of mandatory and optional Medicaid services; (iii)
contamination in the Love Canal area of Niagara Falls; (iv) an action
against State and New York City officials alleging that the present level
of shelter allowance for public assistance recipients is inadequate under
statutory standards to maintain proper housing; (v) challenges to the
practice of reimbursing certain Office of Mental Health patient care
expenses from the client's Social Security benefits; (vi) a challenge to the
methods by which the State reimburses localities for the administrative
costs of food stamp programs; (vii) a challenge to the State's possession
of certain funds taken pursuant to the State's Abandoned Property Law;
(viii) alleged responsibility of State officials to assist in remedying racial
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segregation in the City of Yonkers; (ix) an action in which the State is a
third party defendant, for injunctive or other appropriate relief
concerning liability for the maintenance of stone groins constructed along
certain areas of Long Island's shoreline; (x) actions challenging the
constitutionality of legislation enacted during the 1990 legislative session
which changed the actuarial funding methods for determining
contributions to State employee retirement systems; (xi) challenges to the
constitutionality of financial programs of the Thruway Authority
authorized by Chapters 166 and 410 of the Laws of 1991, and to the
sufficiency of the fiscal year 1991-92 judiciary budget; (xii) challenges to
the delay by the State Department of Social Services in making two one-
week Medicaid payments to the service providers; (xiii) challenges to
provisions of Section 2808-C of the Public Health Law, which imposes a
13% surcharge on inpatient hospital bills paid by commercial insurers
and employee welfare benefit plans and to portions of Chapter 55 of the
laws of 1992 requiring hospitals to impose and remit to the State an 11%
surcharge on hospital bills paid by commercial insurers; (xiv) challenges
promulgated by the State Department of Social Services of a home
assessment resource review instrument used to determine eligibility for
and nature of home care services for Medicaid recipients; and (xv)
challenges to programs implemented under Section 62 of Chapter 41 of
the Laws of 1992 to reduce Medicaid benefits to certain home-relief
Medicaid recipients.
Economy
A national recession commenced in mid-1990. The State has
suffered a more severe economic downturn. The national recession has
been exacerbated in the State by a significant retrenchment in the
financial services industry, cutbacks in defense spending, and an
overbuilt real estate market.
Over the long term, serious potential economic problems may
continue to aggravate State and local financial conditions. For decades,
the State economy has grown more slowly than the nation as a whole,
resulting in the gradual erosion of the State's relative economic affluence
and tax base, and the relocation of certain manufacturing operations and
executive offices outside the State. The causes of this relative decline
are varied and complex, in many cases involving national and
international developments beyond the State's control. Part of the reason
for the long-term relative decline in the State economy has been
attributed to the combined state and local tax burden, which is among the
highest in the nation. The existence of this tax burden limits the State's
ability to impose higher taxes in the event of future financial difficulties.
If during the existence of the New York Trust, the City of
New York, the State, or any of its agencies or municipalities, because
of its or their own financial difficulties, become unable to meet
regular commitments or if there should be a default, moratorium or
other interruption of payments of interest or principal on any
obligation issued by New York City, the State, or a municipality or
other authority in the State, the market value and marketability of
Bonds in the New York Trust, the asset value of Units of the New
York Trust, and the interest income to the New York Trust, could be
<PAGE>
adversely affected.
Pennsylvania Trust
Potential purchasers of Units of the Trust should consider the
fact that the Trust's portfolio consists primarily of securities issued by
the Commonwealth of Pennsylvania (the "Commonwealth"), its
municipalities and authorities and should realize the substantial risks
associated with an investment in such securities. Although the
Commonwealth had a positive budgetary balance at the end of each fiscal
year from fiscal 1984 to fiscal 1989, the positive balance in the General
Fund of the Commonwealth (the principal operating fund of the
Commonwealth) declined to a zero balance at the close of fiscal 1989,
and a negative balance was experienced in 1990 and 1991, tax increases
and spending decreases helped return the General Fund balance to a
surplus at June 30, 1992 of $87.5 million. The deficit in the
Commonwealth's unreserved/undesignated funds was also reduced, from
$1.1462 million at June 30, 1991 to $138.6 million at June 30, 1992.
Pennsylvania's economy historically has been dependent upon
heavy industry, but has diversified recently into various services,
particularly into medical and health services, education and financial
services. Agricultural industries continue to be an important part of the
economy, including not only the production of diversified food and
livestock products, but substantial economic activity in agribusiness and
food-related industries. Service industries currently employ the greatest
share of non-agricultural workers, followed by the categories of trade
and manufacturing. Future economic difficulties in any of these
industries could have an adverse impact on the finances of the
Commonwealth or its municipalities, and could adversely affect the
market value of the Bonds in the Pennsylvania Trust or the ability of the
respective obligors to make payments of interest and principal due on
such Bonds.
Certain litigation is pending against the Commonwealth that
could adversely affect the ability of the Commonwealth to pay debt
service on its obligations, including suits relating to the following
matters: (i) the ACLU has filed suit in federal court demanding
additional funding for child welfare services; the Commonwealth settled a
similar suit in the Commonwealth Court of Pennsylvania and is seeking
the dismissal of the federal suit, inter alia, because of that settlement; in
April 1993, the federal court granted in part and denied in part the
Commonwealth's motion for summary judgment (no available estimates
of potential liability); (ii) in 1987, the Supreme Court of Pennsylvania
held that the statutory scheme for county funding of the judicial system to
be in conflict with the Constitution of the Commonwealth but stayed
judgment pending enactment by the legislature of funding consistent with
the opinion and the legislature has yet to consider legislation
implementing the judgment; (iii) several banks have filed suit against the
Commonwealth contesting the constitutionality of a law enacted in 1989
imposing a bank shares tax (potential liability estimated at $1.023 billion
through June 1993 plus interest); (iv) litigation has been filed in both
state and federal court by an association of rural and small schools and
several individual school districts and parents challenging the
<PAGE>
constitutionality of the Commonwealth's system for funding local school
districts--the federal case has been stayed pending resolution of the state
case and the state case is in the pre-trial state (no available estimate of
potential liability); (v) litigation has been filed in state court by a variety
of plaintiffs challenging the validity of a number of provisions in the
1991 tax legislation, including the tax on leased vehicles the sales tax on
periodicals, and the repeal of the deduction for net operating loss
carryforwards (no available estimate of potential liability for refund of
taxes collected or amount of tax revenue at risk); (vi) the ACLU has
brought a class action on behalf of inmates challenging the conditions of
confinement in thirteen of the Commonwealth's correctional institutions
(no available estimate of potential cost of complying with the injunction
sought but capital and personnel costs might cost millions of dollars) and
(vii) a consortium of public interest law firms has filed a class action suit
alleging that the Commonwealth has not complied with a federal mandate
to provide screening, diagnostic and treatment services for all Medicaid-
eligible children under 21 (potentially liability estimated at $98 million).
The Commonwealth's general obligation bonds have been rated AA-
by Standard & Poor's and A1 by Moody's for more than the last five
years.
The City of Philadelphia (the "City") has been experiencing
severe financial difficulties which has impaired its access to public credit
markets and a long-term solution to the City's financial crisis is still
being sought. The City experienced a series of General Fund deficits for
fiscal years 1988 through 1991.
Additional deficits are expected for the 1992 and 1993 fiscal
years. The City has no legal authority to issue deficit reduction bonds on
its own behalf, but state legislation has been enacted to create an
Intergovernmental Cooperation Authority to provide fiscal oversight for
Pennsylvania cities (primarily Philadelphia) suffering recurring financial
difficulties. The Authority is broadly empowered to assist cities in
avoiding defaults and eliminating deficits by encouraging the adoption of
sound budgetary practices and issuing bonds. In order for the Authority
to issue bonds on behalf of the City, the City and the Authority entered
into an intergovernmental cooperative agreement providing the Authority
with certain oversight powers with respect to the fiscal affairs of the
City, and the Authority approved a five-year financial plan prepared by
the City. On June 16, 1992, the Authority issued a $474,555,000 bond
issue on behalf of the City. A five year plan that projects a balanced
General Fund budget in Fiscal Year 1994 without a grant from the
Authority was approved by the Authority on April 6, 1992. Full
implementation of the five year plan was delayed due to labor
negotiations that were not completed until October 1992, three months
after the expiration of the old labor contracts. In March 1993,
Philadelphia filed an amended five year plan with the Authority, which
projects a $6.6 million deficit in the General Fund for the fiscal year
ending June 30, 1993. The City Council and the Authority have
approved a fiscal 1994 budget that projects no deficit for the fiscal year
ending June 30, 1994. In July 1993, the Authority issued $643,430,000
of bonds to refund certain general obligation bonds of the City and to
fund additional capital projects. In September 1993, the Authority issued
$178,675,000 of bonds to advance refund certain of the bonds issued in
<PAGE>
June 1992.
The Sponsors believe the information summarized above
describes some of the more significant aspects relating to the State
Trusts. The sources of such information are the official statements of
issuers located in each of the respective States as well as other publicly
available documents. While the Sponsors have not independently verified
this information, they have no reason to believe that such information is
not correct in all material respects.
The Units
On the date of this Prospectus, each Unit in a Trust
represented a fractional undivided interest in the principal and net income
of the Trust as set forth in the "Summary of Essential Information" in
Part A. If any Units are redeemed by the Trustee, the principal amount
of the Bonds in the affected Trust will be reduced by an amount allocable
to redeemed Units and the fractional undivided interest in the affected
Trust represented by each unredeemed Unit will be increased. Units will
remain outstanding until redeemed upon tender to
the Trustee by any Unit holder, which may include the Sponsors, or until
the termination of the Trust Agreement. (See "Amendment and
Termination of the Trust Agreement-Termination".) References in this
Prospectus to "Units" are to Units which represented the fractional
undivided interest indicated in the "Summary of Essential Information"
of Part A.
Estimated Current Return and Estimated Long-Term Return
Under accepted bond practice, tax-exempt bonds are
customarily offered to investors on a "yield price" basis (as contrasted
to a "dollar price" basis) at the lesser of the yield as computed to
maturity of the bonds or to an earlier redemption date and which takes
into account not only the interest payable on the bonds but also the
amortization or accretion to a specified date
of any premium over or discount from the par (maturity) value in the
bond's purchase price. Since Units of the Trust are offered on a dollar
price basis, the rate of return on an investment in Units of the Trust is
stated in terms of "Estimated Current Return", computed by dividing the
Net Annual Income per Unit by the Public Offering Price per Unit. Any
change in either the Net Annual Income per Unit or the Public Offering
Price per Unit will result in a change in the Estimated Current Return.
The Net Annual Income per Unit of a Trust is determined by dividing
the total annual interest income of such Trust, less estimated annual fees
and expenses of the Trustee, the Sponsor and the
Evaluator, by the number of Units of such Trust outstanding. The Net
Annual Income per Unit of a Trust will change as the income or
expenses of such Trust changes and as Bonds are redeemed, paid, sold
or exchanged. For a statement of the Net Annual Income per Unit and
the Estimated Current Return Based on Public Offering Price, see Part
A, "Summary of Essential Information".
<PAGE>
The Estimated Long-Term Return for a Trust is a measure of
the return to the investor over the estimated life of a Trust. The
Estimated Long-Term Return represents an average of the yields to
maturity (or call) of the Bonds in a Trust's portfolio calculated in
accordance with accepted bond practice and adjusted to reflect expenses
and sales charges. In calculating Estimated Long-Term Return, the
average yield for a Trust's portfolio is derived
by weighing each Bond's yield by the market value of the Bond and by
the amount of time remaining to the date to which the Bond is priced.
Once the average portfolio yield is computed, this figure is then reduced
to reflect estimated expenses and the effect of the maximum sales charge
paid by investors. The Estimated Long-Term Return calculation does not
take into account the difference in the timing of payments to Unitholders
who choose the quarterly or semi-annual plan of distribution which will
reduce the economic return compared to those who choose the monthly
plan of distribution.
A Trust may experience expenses and portfolio charges
different from those assumed in the calculation of Estimated Long-Term
Return. There thus can be no assurance that the Estimated Current
Returns or Estimated Long-Term Returns quoted for a Trust will be
realized in the future. Since both Estimated Current Return and
Estimated Long-Term Return quoted on a given
business day are based on the market value of the underlying Bonds on
that day, subsequent calculations of these performance measures will
reflect the then-current market value of the underlying Bonds and may
be higher or lower.
Taxes
The following discussion addresses only the tax
consequences of Units held as capital assets and does not
address the tax consequences of Units held by dealers, financial
institutions or insurance companies.
In the opinion of Davis Polk & Wardwell, special counsel
for the Sponsors, under existing law:
The Trust is not an association taxable as a corporation
for Federal income tax purposes, and income received by the
Trust will be treated as the income of the Unit holders
("Holders") in the manner set forth below.
Each Holder will be considered the owner of a pro rata
portion of each Bond in the State Trust under the grantor trust
rules of Sections 671-679 of the Internal Revenue Code of
1986, as amended (the "Code"). In order to determine the face
amount of a Holder's pro rata portion of each Bond on the Date
of Deposit, see "Aggregate Principal" under "Portfolio of
Securities". The total cost to a Holder of his Units, including
sales charges, is allocated to his pro rata portion of each Bond,
in proportion to the fair market values thereof on the date the
Holder purchases his Units, in order to determine his tax basis
for his pro rata portion of each Bond. In order for a Holder who
<PAGE>
purchases his Units on the Date of Deposit to determine the fair
market value of his pro rata portion of each Bond on such date,
see "Cost of Securities to Trust" under "Portfolio of Securities".
Each Holder will be considered to have received the
interest on his pro rata portion of each Bond when interest on
the Bond is received by the State Trust. In the opinion of bond
counsel (delivered on the date of issuance of each Bond), such
interest will be excludable from gross income for regular Federal
income tax purposes (except in certain limited circumstances
referred to below). Amounts received by the State Trust
pursuant to a bank letter of credit, guarantee or insurance policy
with respect to payments of principal, premium or interest on a
Bond in the State Trust will be treated for Federal income tax
purposes in the same manner as if such amounts were paid by
the issuer of the Bond.
The State Trust may contain Bonds which were originally
issued at a discount ("original issue discount"). The following
principles will apply to each Holder's pro rata portion of any
Bond originally issued at a discount. In general, original issue
discount is defined as the difference between the price at which
a debt obligation was issued and its stated redemption price at
maturity. Original issue discount on a tax-exempt obligation
issued after September 3, 1982, is deemed to accrue as
tax-exempt interest over the life of the obligation under a
formula based on the compounding of interest. Original issue
discount on a tax-exempt obligation issued before July 2, 1982
is deemed to accrue as tax-exempt interest ratably over the life
of the obligation. Original issue discount on any tax-exempt
obligation issued during the period beginning July 2, 1982 and
ending September 3, 1982 is also deemed to accrue as
tax-exempt interest over the life of the obligation, although it is
not clear whether such accrual is ratable or is determined under
a formula based on the compounding of interest. If a Holder's
tax basis for his pro rata portion of a Bond issued with original
issue discount is greater than its "adjusted issue price" but less
than its stated redemption price at maturity (as may be adjusted
for certain payments), the Holder will be considered to have
purchased his pro rata portion of the Bond at an "acquisition
premium." A Holder's adjusted tax basis for his pro rata portion
of a Bond issued with original issue discount will include original
issue discount accrued during the period such Holder held his
Units. Such increases to the Holder's tax basis in his pro rata
portion of the Bond resulting from the accrual of original issue
discount, however, will be reduced by the amount of any such
acquisition premium.
If a Holder's tax basis for his pro rata portion of a Bond
exceeds the redemption price at maturity thereof (subject to
certain adjustments), the Holder will be considered to have
purchased his pro rata portion of the Bond with "amortizable
bond premium". The Holder is required to amortize such bond
premium over the term of the Bond. Such amortization is only a
reduction of basis for his pro rata portion of the Bond and does
<PAGE>
not result in any deduction against the Holder's income.
Therefore, under some circumstances, a Holder may recognize
taxable gain when his pro rata portion of a Bond is disposed of
for an amount equal to or less than his original tax basis
therefor.
A Holder will recognize taxable gain or loss when all or
part of his pro rata portion of a Bond is disposed of by the State
Trust for an amount greater or less than his adjusted tax basis.
Any such taxable gain or loss will be capital gain or loss, except
that any gain from the disposition of a Holder's pro rata portion
of a Bond acquired by the Holder at a "market discount" (i.e.,
where the Holder's original tax basis for his pro rata portion of
the Bond (plus any original issue discount which will accrue
thereon until its maturity) is less than its stated redemption price
at maturity) would be treated as ordinary income to the extent
the gain does not exceed the accrued market discount. Capital
gains are generally taxed at the same rate as ordinary income.
However, the excess of net long-term capital gains over net
short-term capital losses may be taxed at a lower rate than
ordinary income for certain noncorporate taxpayers. A capital
gain or loss is long-term if the asset is held for more than one
year and short-term if held for one year or less. The deduction of
capital losses is subject to limitations. A Holder will also be
considered to have disposed of all or part of his pro rata portion
of each Bond when he sells or redeems all or some of his Units.
Under the income tax laws of the State and City of New
York, the State Trust is not an association taxable as a
corporation and income received by the State Trust will be
treated as the income of the Holders in the same manner as for
Federal income tax purposes, but will not necessarily be
tax-exempt.
Under Section 265 of the Code, a Holder (except a
corporate Holder) is not entitled to a deduction for his pro rata
share of fees and expenses of the State Trust because the fees
and expenses are incurred in connection with the production of
tax-exempt income. Further, if borrowed funds are used by a
Holder to purchase or carry Units of the State Trust, interest on
such indebtedness will not be deductible for Federal income tax
purposes. In addition, under rules used by the Internal Revenue
Service, the purchase of Units may be considered to have been
made with borrowed funds even though the borrowed funds are
not directly traceable to the purchase of Units. Similar rules may
be applicable for state tax purposes.
From time to time proposals are introduced in Congress
and state legislatures which, if enacted into law, could have an
adverse impact on the tax-exempt status of the Bonds. It is
impossible to predict whether any legislation in respect of the
tax status of interest on such obligations may be proposed and
eventually enacted at the Federal or state level.
<PAGE>
The foregoing discussion relates only to Federal and
certain aspects of New York State and City income taxes.
Depending on their state of residence, Holders may be subject to
state and local taxation and should consult their own tax
advisers in this regard.
* * * * *
Interest on certain tax-exempt bonds issued after August
7, 1986 will be a preference item for purposes of the alternative
minimum tax ("AMT"). The Sponsors believe that interest
(including any original issue discount) on the Bonds should not
be subject to the AMT for individuals or corporations under this
rule. A corporate Holder should be aware, however, that the
accrual or receipt of tax-exempt interest not subject to the AMT
may give rise to an alternative minimum tax liability (or increase
an existing liability) because the interest income will be included
in the corporation's "adjusted current earnings" for purposes of
the adjustment to alternative minimum taxable income required
by Section 56(g) of the Code and will be taken into account for
purposes of the environmental tax on corporations under Section
59A of the Code, which is based on an alternative minimum
taxable income.
In addition, interest on the Bonds must be taken into
consideration in computing the portion, if any, of social security
benefits that will be included in an individual's gross income and
subject to Federal income tax. Holders are urged to consult their
own tax advisers concerning an investment in Units.
At the time of issuance of each Bond, an opinion relating
to the validity of the Bond and to the exemption of interest
thereon from regular Federal income taxes was or will be
rendered by bond counsel. Neither the Sponsors nor Davis Polk
& Wardwell nor any of the special counsel for state tax matters
have made or will make any review of the proceedings relating
to the issuance of the Bonds or the basis for these opinions. The
tax exemption is dependent upon the issuer's (and other users')
compliance with certain ongoing requirements, and the opinion
of bond counsel assumes that these requirements will be
complied with. However, there can be no assurance that the
issuer (and other users) will comply with these requirements, in
which event the interest on the Bond could be determined to be
taxable retroactively from the date of issuance.
In the case of certain of the Bonds, the opinions of bond
counsel indicate that interest on such Bonds received by a
"substantial user" of the facilities being financed with the
proceeds of such Bonds, or persons related thereto, for periods
while such Bonds are held by such a user or related person, will
not be exempt from regular Federal income taxes, although
interest on such Bonds received by others would be exempt from
regular Federal income taxes. "Substantial user" is defined under
U.S. Treasury Regulations to include only a person whose gross
revenue derived with respect to the facilities financed by the
<PAGE>
issuance of bonds is more than 5% of the total revenue derived
by all users of such facilities, or who occupies more than 5% of
the usable area of such facilities or for whom such facilities or a
part thereof were specifically constructed, reconstructed or
acquired. "Related persons" are defined to include certain related
natural persons, affiliated corporations, partners and
partnerships. Similar rules may be applicable for state tax
purposes.
After the end of each calendar year, the Trustee will
furnish to each Holder an annual statement containing
information relating to the interest received by the State Trust on
the Bonds, the gross proceeds received by the Trust from the
disposition of any Bond (resulting from redemption or payment at
maturity of any Bond or the sale by the State Trust of any
Bond), and the fees and expenses paid by the State Trust. The
Trustee will also furnish annual information returns to each
Holder and to the Internal Revenue Service. Holders are required
to report to the Internal Revenue Service the amount of
tax-exempt interest received during the year.
Investors should consult their tax counsel for advice with
respect to the effect, if any, of the foregoing tax considerations
as they relate to their particular tax situation and as respects to
state and local tax consequences of an investment in Units.
The description of Federal tax consequences under
"Tax Exempt Securities Trust- Taxes " applies separately for
each Trust. Below, arranged alphabetically by state, is a
description of certain state and local tax consequences for
residents of the state and locality for which such Trust's
portfolio of investments contains bonds of such states.
California Trust
Messrs. Morgan, Lewis & Bockius acted as special
California counsel to Insured Trust 9 and all prior Insured Trusts.
Messrs. Adams, Duque and Hazeltine, special California counsel to
Insured Trust 21 and New York 14. At the time of the Closing for
each Insured Trust, the respective counsel to the Trusts rendered an
opinion under the existing law substantially to the effect that:
The Insured California Trust is not an association taxable as a
corporation under the income tax laws of the State of California;
The income, deductions and credits against tax of the Insured
California Trust will be treated as the income, deductions and credits
against tax of the holders of Units in the Insured California Trust
under the income tax laws of the State of California;
Interest on the bonds held by the Insured California Trust, and
any interest income received by the Insured California Trust from its
investments in units of previously formed California trusts included
within a Multistate Series OR Insured Series of Tax Exempt
Securities Trust (the "Previously Formed Trusts"), to the extent that
<PAGE>
such interest is exempt from taxation under California law will not
lose its character as tax-exempt income merely because that income
is passed through to the holders of Units; however, a corporation
subject to the California franchise tax is required to include that
interest income in its gross income for purposes of determining its
franchise tax liability;
Each holder of a Unit in the Insured California Trust will have a
taxable event when the Insured California Trust disposes of a bond
(whether by sale, exchange, redemption, or payment at maturity) or
when the Unit holder redeems or sells his Units. The total tax cost
of each Unit to a holder of a Unit in the Insured California Trust is
allocated among each of the bond issues held in the
Insured California Trust (in accordance with the proportion of the
Insured California Trust comprised by each bond issue) in order to
determine the holder's per Unit tax cost for each bond issue, and the
tax cost reduction requirements relating to amortization of bond
premium will apply separately to the per Unit tax cost of each bond
issue. Therefore, under some circumstances, a holder of a Unit may
realize a taxable gain when the Insured California Trust which issued
such Unit disposes of a bond or the holder's Units are sold or
redeemed for an amount equal to or less than his original cost of the
bond or Unit. Similarly, each Unit holder will have a taxable event (i)
when a Previously Formed Trust disposes of a bond, and (ii) when
the Insured California Trust disposes of any of its ownership
interests in a Previously Formed Trust;
Each holder of a Unit in the Insured California Trust is deemed to
be the owner of a pro rata portion of the Insured California Trust
under the personal property tax laws of the State of California; and
The pro rata ownership of the bonds held by the Insured
California Trust, as well as the interest income therefrom, are
exempt from California personal property taxes.
Massachusetts Trust
At the time of the closing for each Massachusetts Trust,
Messrs. Palmer & Dodge, special Massachusetts counsel on
Massachusetts tax matters, rendered an opinion under then existing
Massachusetts law substantially to the effect that:
Tax-exempt interest for federal income tax purposes
(including insurance payments to the extent they are treated as
tax-exempt interest for federal income tax purposes) received by or
through the Massachusetts Trust, or by or through a Previous Trust
in which the Massachusetts Trusts owns an interest, on obligations
issued by Massachusetts its counties, municipalities, authorities,
political subdivisions, or instrumentalities, by the government of
Puerto Rico or by its authority or by the government of Guam or by
its authority, will not result in a Massachusetts income tax liability
for the Massachusetts Trust or for Unitholders who are subject to
Massachusetts income taxation under Massachusetts General Laws,
Chapter 62.
<PAGE>
Capital gain and capital loss realized by the Massachusetts
Trust and included in the Federal gross income of Unitholders who
are subject to Massachusetts income taxation under General Laws,
Chapter 62 will be included as capital gains and losses in the Unit
holder's Massachusetts gross income, except where capital gain is
specifically exempted from income taxation under the Massachusetts
statute authorizing issuance of the obligations held by the
Massachusetts Trust or held by the Previous Trusts in which the
Massachusetts Trust owns an interest, and will not result in a
Massachusetts income tax liability for the Massachusetts Trust.
Gains and losses realized upon sale or redemption of Units
by Unitholders who are subject to Massachusetts income taxation
under Massachusetts General Law, Chapter 62 will be includible in
their Massachusetts gross income.
Pennsylvania Trust
At the time of the closing for each Pennsylvania Trust,
Messrs. Drinker Biddle & Reath, special Pennsylvania counsel on
Pennsylvania tax matters, rendered an opinion under then existing
Pennsylvania law substantially to the effect that:
Units evidencing fractional undivided interests in the
Pennsylvania Trust are not subject to any of the personal property
taxes presently in effect in Pennsylvania to the extent that the Trust
is comprised of bonds issued by the Commonwealth of
Pennsylvania, any public authority, commission, board or other
agency created by the Commonwealth of Pennsylvania, any political
subdivision of the Commonwealth of Pennsylvania or any public
authority created by any
such political subdivision ("Pennsylvania Bonds"). The taxes
referred to include the County Personal Property Tax imposed on
residents of Pennsylvania by the Act of June 17, 1913, P.L. 507,
as amended, and the additional personal property taxes imposed on
Pittsburgh residents by the School District of Pittsburgh under the
Act of June 20, 1947, P.L. 733, as amended, and by the City of
Pittsburgh under Ordinance No. 599 of December 28, 1967. The
portion, if any, representing Pennsylvania Bonds held by Units in a
Prior Trust are also not subject to such taxes. The portion, if any, of
such Units representing
bonds or other obligations issued by the Government of Guam or by
its authority and bonds issued by the Government of Puerto Rico or
by its authority and bonds issued by the Government of the Virgin
Islands or by a municipality thereof (collectively, "Possession
Bonds") is not expressly exempt from taxation under the foregoing
Acts, but because such bonds are expressly relieved from state
taxation by United States statutes, the Commonwealth of
Pennsylvania and its political
subdivisions are precluded from imposing any direct tax on
Possession Bonds, and, therefore, such bonds are not subject to
Personal Property Tax.
<PAGE>
Pennsylvania Trust Units may be subject to tax in the
estate of a resident decedent under the Pennsylvania inheritance and
estate tax.
Income received by a Unit holder attributable to interest
realized by the Pennsylvania Trust from Pennsylvania Bonds,
Possession Bonds and Prior Trust Units or attributable to insurance
proceeds on account of such interest, is not taxable to individuals,
estates or trusts under the Personal Income Tax imposed by Article
III of the Tax Reform Code of 1971. Neither is such income taxable
to corporations under the Corporate Net Income Tax imposed by
Article IV of the Tax Reform Code of 1971 (in the case of insurance
proceeds to the extent that they are exempt for Federal Income Tax
purposes); nor to individuals under the Pennsylvania School District
Net Income Tax ("School District Tax") imposed on Philadelphia
resident individuals under authority of the Act of August 9, 1963,
P.L. 640.
Income received by a Unit Holder attributable to gain on
the sale or other disposition by the Pennsylvania Trust of
Pennsylvania Bonds, Possession Bonds and Prior Trust Units is not
taxable to individuals, estates or trusts under the Personal Income
Tax. Such gain is also not taxable under the Corporate Net Income
Tax or under the School District Tax, except that gain on the sale or
other disposition of Possession Bonds and that portion of Prior Trust
Units attributable to such bonds held for six months or less may be
taxable under the School District Tax.
To the extent that gain on the disposition of a Unit
represents gain realized on Pennsylvania or Possession Bonds held
by the Pennsylvania Trust or held by Prior Trust Units, such gain
may be subject to the Personal Income Tax and Corporate Net
Income Tax. Such gain may also be subject to the School District
Tax, except the gain realized with respect to a Unit held for more
than six months is not subject to the School District Tax.
No opinion is expressed regarding the extent, if any, to
which Units, or interest and gain thereon, is subject to, or included
in the measure of, the special taxes imposed by the Commonwealth
of Pennsylvania on banks and other financial institutions or any
privilege, excise, franchise or other tax imposed on business entities
not discussed herein (including the Corporate Capital Stock/Foreign
Franchise Tax).
Insurance on the Bonds in the Portfolio of a Trust
Insurance guaranteeing the scheduled payment to
maturity of all principal and interest ("Insurance to Maturity") has
been obtained for some or all of the Bonds in each Trust at the
cost of the issuer of the Bond, a previous holder or the Sponsors
as of the first business day after the Date of Deposit. Insurance
to Maturity was obtained from the Municipal Bond Insurance
Association ("MBIA"), as of the Date of Deposit, for all the
Bonds in the Portfolios of Insured Series 1-4, Insurance to
Maturity was obtained for all the Bonds in the Portfolios of
<PAGE>
Insured Series 5-9 from one or more of the following insurers;
MBIA, AMBAC Indemnity Corporation ("AMBAC"), Municipal
Bond Investors Assurance Corporation ("MBIAC"), Capital
Guaranty Insurance Company ("CGIC") or Financial Guaranty
Insurance Company ("Financial Guaranty") (collectively, the
"Insurance Companies".) For Insured Series 5 and subsequent
Insured Series, the description of the Bonds under "Portfolio of
Securities" in Part A indicates which Insurance Company has
issued Insurance to Maturity with respect to each Bond.
The insurance policies are non-cancelable and will
continue in force so long as Bonds are outstanding and the
insurers remain in business. The respective insurance policies
guarantee the scheduled payment of principal and interest on but
do not guarantee the market value of the Bonds covered by each
policy or the value of the Units. In the event the issuer of an
insured Bond defaults in payment of interest or principal the
insurance company insuring the Bond will be required to pay to
the trustee any interest or principal payments due. Payment
under each of the insurance policies is to be made in respect of
principal of and interest on Bonds covered thereby which
becomes due for payment but is unpaid. Each such policy
provides for payment of the defaulted principal or interest due to
a trustee or paying agent. In turn, such trustee or paying agent
will make payment to the bondholder (in this case, the Trustee)
upon presentation of satisfactory evidence of such bondholder's
rights to receive such payment.
As a result of the insurance on the Bonds of each Trust,
the Units thereof received a rating of AAA by Standard & Poor's
Corporation as of the Date of Deposit for each such Trust.
There can be no assurance that Units of a Trust will retain this
AAA rating. Insurance is not a substitute for the basic credit of
an issuer, but supplements the issuer's existing credit and
provides additional security therefor. No representation is made
as to the Insurance Companies' abilities to meet their
commitments.
A description of each of the insurers follows:
AMBAC Indemnity Corporation
AMBAC Indemnity Corporation ("AMBAC-Indemnity") is a
Wisconsin-domiciled stock insurance company, regulated by the
Insurance Department of Wisconsin. Such regulation, however, is no
guarantee that AMBAC Indemnity would be able to perform on its
contracts in the event a claim should be made thereunder at some time in
the future. AMBAC Indemnity is a wholly-owned subsidiary of
AMBAC Inc., a 100% publicly-held company.
AMBAC Indemnity is licensed to do business in 50 states, the
District of Columbia and the Commonwealth of Puerto Rico, with
admitted assets (unaudited) of approximately $936,000,000 and statutory
capital (unaudited) of approximately $1,096,000,000 as of September 30,
<PAGE>
1993. Statutory capital consists of statutory contingency reserve and
AMBAC Indemnity's policyholders' surplus.
CGIC
CGIC, a California-domiciled insurance company, is a wholly-
owned subsidiary of Capital Guaranty Corporation and commenced its
operations in November 1986. Capital Guaranty Corporation is owned
by Constellation Investments Inc. (an affiliate of Baltimore Gas &
Electric Company), Fleet/Norstar Financial Group Inc., Safeco Corp.,
Sibag Finance Corp., an affiliate of Siemens A.G., and United States
Fidelity and Guaranty Company ("USF&G"). Other than their capital
commitment to Capital Guaranty Corporation the investors of Capital
Guaranty Corporation are not obligated to pay the debts of, or claim
against, CGIC. CGIC, a Maryland corporation headquartered in San
Francisco, is a monoline financial guaranty insurer engaged in the
underwriting and development of financial guaranty insurance. CGIC
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. As of December 31, 1993, CGIC had
total admitted assets of $284,503,855 (unaudited), and policyholder
surplus of $190,986,527. Standard & Poor's Corporation has rated the
claims-paying ability of CGIC "AAA".
Financial Guaranty
Financial Guaranty is a wholly-owned subsidiary of FGIC
Corporation (the "Corporation"), a Delaware holding company.
Financial Guaranty, domiciled in the State of New York and located at
175 Water Street, New York, New York, 10038, commenced its
business of providing insurance and financial guaranties for a variety of
investment instruments in January, 1984. The Corporation is a wholly-
owned subsidiary of General Electric Capital Corporation. The
Corporation and General Electric Capital Corporation are not obligated to
pay the debts of Financial Guaranty or the claims against Financial
Guaranty. Neither the National Insured Trust nor the Units nor the
portfolio is insured directly or indirectly by the Corporation.
Financial Guaranty, in addition to providing insurance for the
payment of interest and principal of municipal bonds and notes held in
unit investment trust portfolios, provides insurance for all or a portion
of new issues of municipal bonds and notes and for municipal bonds and
notes held by mutual funds. Financial Guaranty expects to provide other
forms of financial guaranties in the future. It is also authorized to write
fire, property damage liability, workman's compensation and employers'
liability and fidelity and surety insurance. As of December 31, 1993, the
total capital and surplus of Financial Guaranty was approximately
$777,000,000. Although the Sponsors have not undertaken an
independent investigation of Financial Guaranty, the Sponsors are not
aware that the information herein is inaccurate or incomplete. Standard
& Poor's Corporation and Moody's Investors Service have rated the
claims-paying ability of Financial Guaranty "AAA" and "Aaa",
respectively.
<PAGE>
Financial Guaranty is currently licensed to provide insurance in
all 50 states and the District of Columbia, files reports with state
insurance regulatory agencies and is subject to audit and review by such
authorities. Financial Guaranty is also subject to regulation by the State
of New York Insurance Department. Such regulation, however, is no
guarantee that Financial Guaranty will be able to perform on its contracts
of insurance in the event a claim should be made thereunder.
The information relating to Financial Guaranty contained above
has been furnished by Financial Guaranty. The financial information
contained herein with respect to Financial Guaranty is unaudited but
appears in reports filed with state insurance regulatory authorities and is
subject to audit and review by such authorities. No representation is
made herein as to the accuracy or adequacy of such information or as to
the absence of material adverse changes in such information subsequent
to the dates thereof.
MBIA
The insurance companies comprising MBIA and their respective
percentage liabilities are as follows: The Aetna Casualty and Surety
Company, thirty-three percent (33%); The Fund American Companies,
Inc., thirty percent (30%); The Travelers Indemnity Company, fifteen
percent (15%); Cigna Property and Casualty Company, twelve percent
(12%); and The Continental Insurance Company, ten percent (10%).
Each insurance company comprising MBIA is licensed to do business in
various states. Such state regulation, however, is no guarantee that any
of the insurance companies comprising MBIA will be able to perform on
its contract of insurance in the event a claim should be made thereunder.
All policies are individual obligations of the participating insurance
companies and their obligations thereunder cannot be increased beyond
their percentage commitment; therefore, each company will not be
obligated to pay any unpaid obligation of any other member of MBIA.
However, each insurance company is a multiline insurer involved in
several lines of insurance other than municipal bond insurance, and the
assets of each insurance company also secure all of its other insurance
policy and surety bond obligations. The MBIA companies listed above
or their parent organizations have been in the insurance business from
seventy to well over a hundred years. Standard & Poor's Corporation
rates all new issues insured by MBIA, "AAA" and Moody's Investors
Service rates all bond issues insured by MBIA, "Aaa".
MBIAC
MBIAC is the principal operating subsidiary of MBIA, Inc. The
principal shareholders of MBIA, Inc. are The Aetna Casualty and Surety
Company, The Fund American Companies, Inc., subsidiaries of CIGNA
Corporation and Credit Local de France, CAECL S.A., and they own
approximately 35% of the outstanding common stock of MBIA Inc.
Neither MBIA, Inc. nor its shareholders are obligated to pay the debts of
or claims against MBIAC. MBIAC, is a limited liability corporation
rather than a several liability association. MBIAC is domiciled in the
State of New York and licensed to do business in all 50 states, the
<PAGE>
District of Columbia and the Commonwealth of Puerto Rico. As of
December 31, 1993, MBIAC had admitted assets of $3.1 billion
(audited), total liabilities of $2.1 billion (audited), and total capital and
surplus of $978 million (unaudited), in accordance with statutory
accounting practices prescribed or permitted by insurance regulatory
authorities. Standard & Poor's Corporation rates all new issues insured
by MBIAC and Moody's Investors Service rates all bond issues insured
by MBIAC, "AAA" and "Aaa", respectively.
The financial information relating to AMBAC, CGIC, MBIA
and MBIAC has been obtained from publicly available sources. No
representation is made herein as to the accuracy or adequacy of such
information or as to the absence of material adverse changes in such
information subsequent to the dates thereof, but the Sponsor is not aware
that the information herein is inaccurate or incomplete.
Insurance Premiums
The cost of the insurance (the "Insurance Premiums") for
Insurance to Maturity has been paid by the issuers at the time of
issuance, by a previous holder of a Bond or by the Sponsors on the first
business day after the Date of Deposit. The Insurance Premiums paid by
the Sponsors were paid from the acquisition profit of the Sponsors (see
"Public Offering--Sponsors' and Underwriters' Profits"), and, if such
profit was not sufficient to cover the cost of said Insurance Premiums,
from the sales charge imposed on the purchasers of Units or from other
general funds of the Sponsors.
Expenses and Charges
At no cost to the Trusts, the Sponsors have borne all the
expenses of creating and establishing the Trusts, including the cost of the
initial preparation and execution of the Trust Agreements, initial
preparation and printing of the certificates for Units, the fees of the
Evaluator, legal expenses, advertising and selling expenses and other out-
of-pocket expenses. The cost of maintaining the secondary market, such
as printing, legal and accounting, will be borne by the Sponsors except
as otherwise provided in the Trust Agreements.
Trustee's, Sponsor's and Evaluator's Fees -- The Trustee will
receive for its ordinary recurring services to the Trusts an annual fee in
the amount set forth in Part A -- "Summary of Essential Information".
For a discussion of the services performed by the Trustee pursuant to its
obligation under the Trust Agreements, see "Rights of Unit Holders".
The Trustee will receive the benefit of any reasonable cash balances in
the Interest and Principal Accounts.
The Portfolio supervision fee (the "Supervision Fee"), which is
earned for Portfolio supervisory services is based upon the greatest face
amount of Bonds in the Trust at any time during the calendar year with
respect to which the fee is being computed. The Supervision Fee has
been incurred by Portfolios which have come into existence after August
<PAGE>
14, 1991, beginning with Series 345 initially, and each series, in
existence, thereafter.
The Supervision Fee, which is not to exceed the amount set
forth in Part A--"Summary of Essential Information," may exceed the
actual costs of providing Portfolio supervisory services for such Trust,
but at no time will the total amount the Sponsors receive for Portfolio
supervisory services rendered to all series of Tax Exempt Securities
Trust in any calendar year exceed the aggregate cost to them of
supplying such services in such year. In addition, the Sponsors may also
be reimbursed for bookkeeping and other administrative services
provided to the Trust in amounts not exceeding their costs of providing
these services.
The Evaluator determines the aggregate bid price of the
underlying securities in the Trusts on a daily basis at a fee in the amount
set forth under Part A, "Summary of Essential Information", for each
evaluation of the Bonds in a Trust. For a discussion of the services
performed by the Evaluator pursuant to its obligations under the Trust
Agreements, see "Evaluator--Responsibility" and "Public Offering--
Offering Price".
Any of such fees may be increased without approval of the Unit
holders by amounts not exceeding proportionate increases in consumer
prices for services as measured by the United States Department of
Labor's Consumer Price Index entitled "All Services Less Rent" or, if
such Index in no longer published, in a similar Index to be determined by
the Trustee and the Sponsors. In addition, at the time of any such
increase, the Trustee shall also be entitled to charge thereafter an
additional fee at a rate or amount to be determined by the Trustee and
the Sponsors based upon the face amount of Deposited Units in a Trust,
for the Trustee's services in maintaining such Deposited Units. The
approval of Unit holders shall not be required for charging of such
additional fee.
Other Charges -- The following additional charges are or may be
incurred by a Trust: all expenses (including counsel fees and expenses of
counsel and auditors) of the Trustee incurred in connection with its
activities under the Trust Agreements, including reports and
communications to Unit holders; the expenses and costs of any action
undertaken by the Trustee to protect the Trusts and the rights and
interests of the Unit holders; fees of the Trustee for any extraordinary
services performed under the Trust Agreements, indemnification of a
Trustee for any loss or liability accruing to it without gross negligence,
bad faith or willful misconduct on its part, arising out of or in connection
with its acceptance or administration of a Trust; in the case of certain
Trusts, to the extent lawful, expenses (including legal, accounting and
printing expenses) of maintaining registration or qualification of the Units
and/or the Trust under Federal or state securities laws subsequent to
initial registration so long as the Sponsors are maintaining a market for
the Units; and all taxes and other governmental charges imposed upon
the Securities or any part of the Trusts (no such taxes or charges are
being levied or made or, to the knowledge of the Sponsors,
contemplated). The above expenses, including the Trustee's fee, when
paid by or owing to the Trustee, are secured by a lien on the Trust. In
<PAGE>
addition, the Trustee is empowered to sell Bonds in order to make funds
available to pay all expenses.
PUBLIC OFFERING
Offering Price
The Public Offering Price of the Units of the Trusts is
determined by adding to the Evaluator's determination of the aggregate
bid price of the Bonds per Unit a sales charge equal to the percentage of
the Public Offering Price indicated for the Trust in Part A, "Summary of
Essential Information". The aggregate bid price of the underlying Bonds
may be expected to be less than the aggregate offering price of the
Bonds. (See "Method of Evaluation".) A proportionate share of accrued
and undistributed interest on the Bonds in a Trust at the date of delivery
of the Units of such Trust to the purchaser is also added to the Public
Offering Price.
Pursuant to employee benefit plans, Units of the Trusts are
available to employees of the Sponsors, at a Public Offering Price equal
to the Evaluator's determination of the aggregate bid price of Bonds of a
Trust per Unit plus a sales charge of 1.25% of the Public Offering Price
and after the Initial Public Offering period, at a Public Offering Price
equal to the Evaluator's determination of the aggregate bid price of the
Bonds of a Trust per Unit plus a sales charge of 1.25% of the Public
Offering Price. Sales through such plans to employees of the Sponsors
result in less selling effort and selling expenses than sales to the general
public.
Method of Evaluation
The aggregate bid price of the Bonds (which is used to calculate
the price at which the Sponsors repurchase and sell Units in the
secondary market and the Redemption Price at which Units may be
redeemed) will be determined by the Evaluator (1) on the basis of the
current bid prices for the Bonds, (2) if bid prices are not available for
any bonds, on the basis of current bid prices of comparable securities,
(3) by appraisal, or (4) by any combination of the above. Such
determinations will be made each business day as of the Evaluation Time
set forth in the "Summary of Essential Information" in Part A, effective
for all sales made subsequent to the last preceding determination. The
term "business day" as used herein shall exclude Saturdays, Sundays and
any other day on which the New York Stock Exchange is closed. The
difference between the bid and offering prices of the Bonds may be
expected to average approximately 1.5% of principal amount. In the
case of actively traded securities, the difference may be as little as 0.5 of
1%, and in the case of inactively traded securities such difference will
usually not exceed 3%. The price at which Units may be repurchased by
the Sponsors in the secondary market could be less than the price paid by
the Unit holder. For information relating to the calculation of the
Redemption Price per Unit, which is also based upon the aggregate bid
price of the underlying Bonds and which may be expected to be less than
the Public Offering Price per Unit, see "Rights of Unit Holders--
<PAGE>
Redemption of Units".
In determining the bid prices of Bonds covered by Insurance of
Maturity, the evaluator took into account the insurance issued in respect
of those Bonds and the AAA rating assigned to certain of those Bonds as
a result of the insurance. In making its evaluation, the Evaluator first
determined the quality of the insurance issued by the Insurance
Companies and then compared the Bonds to other securities which had
comparable insurance and which were of comparable quality. In
addition, the Evaluator, in accordance with its practice, obtained from
dealers and brokers two sets of bid prices for the Bonds: one based on
actual bid prices for such Bonds (without insurance) and the other based
on said dealer's or broker's estimation of such bid prices as if such
Bonds were insured.
Distribution of Units
Units acquired in the secondary market (see "Public Offering--
Market for Units") may be offered by this Prospectus at the Public
Offering Price determined in the manner provided above (see "Public
Offering--Offering Price"). The Sponsors will allow a discount on Units
sold to members of the National Association of Securities Dealers, Inc.
Such discount is subject to change from time to time.
Sales will be made only with respect to whole Units, and the
Sponsors reserve the right to reject, in whole or in part, any order for
the purchase of Units. A purchaser does not become a Unit holder
(Certificate holder) or become entitled to exercise the rights of a Unit
holder (including the right to redeem his Units) until he has paid for his
Units. Generally, such payment must be made within five business days
after an order for the purchase of Units has been placed. The price paid
by a Unit holder is the Public Offering Price in effect at the time his
order is received, plus accrued interest (see "Public Offering-Method of
Evaluation"). This price may be different from the Public Offering price
in effect on any other day, including the day on which the Unit holder
made payment for the Units.
Market for Units
Although not obligated to do so, the Sponsors presently intend to
maintain a market for the Units of the respective Trusts and to
continuously offer to purchase such Units at prices based upon the
aggregate bid price of the underlying Bonds which may be less than the
price paid by the Unit holder. For information relating to the method
and frequency of the Evaluator's determination of the aggregate bid
price of the underlying Bonds. (See "Public Offering-Method of
Evaluation".) The costs of maintaining the secondary market, such as
printing, legal and accounting, will be borne by the Sponsors except as
otherwise provided in the Trust Agreements. The Sponsors may cease to
maintain such a market at any time and from time to time, without notice
if the supply of Units of any of the respective Trusts exceeds demand, or
for any other reason. In this event the Sponsors may nonetheless
purchase Units, as a service to Unit holders, at prices based on the
current Redemption Price of those Units. In the event that a market is
<PAGE>
not maintained for the Units of any of the Trusts, a Unit holder of such a
Trust desiring to dispose of his Units may be able to do so only by
tendering such Units to the Trustee for redemption at the Redemption
Price, which is also based upon the aggregate bid price of the underlying
Bonds. (See "Rights of Unit Holders--Redemption of Units".)
Exchange Option
Unit holders may elect to exchange any or all of their Units in
this series of a Trust for units of one or more of any series of Tax
Exempt Securities Trust (the "Exchange Trust") available for sale in the
state in which the Unit holder resides at a Public Offering Price for the
units of the Exchange Trust to be acquired based on a fixed sales charge
of $25 per unit. The Sponsors reserve the right to modify, suspend or
terminate this plan at any time without further notice to Unit holders.
Therefore, there is no assurance that a market for units will in fact exist
on any given date on which a Unit holder wishes to sell his Units of this
series and thus there is no assurance that the Exchange Option will be
available to a Unit holder. Exchanges will be effected in whole units
only. Any excess proceeds from Unit holders' Units being surrendered
will be returned and Unit holders will not be permitted to advance any
new money in order to complete an exchange.
An exchange of Units pursuant to the Exchange Option for units
of an Exchange Trust will generally constitute a "taxable event" under
the Code i.e. a Unit holder will recognize gain or loss at the time of
exchange. However, an exchange of Units of this Trust for units of any
other similar series of the Tax Exempt Securities Trust which are grantor
trusts for U.S. Federal income tax purposes will not constitute a taxable
event to the extent that the underlying securities in each trust do not
differ materially either in kind or in extent. Unit holders are urged to
consult their own tax advisors as to the tax consequences to them of
exchanging Units in particular cases.
Units of the Exchange Trust will be sold under the Exchange
Option at the bid prices of the underlying securities in the particular
portfolio involved per unit plus a fixed charge of $25 per unit. As an
example, assume that a Unit holder, who has three units of a trust with a
current price of $1,020 per unit based on the bid prices of the underlying
securities, desires to exchange his units for units of a series of an
Exchange Trust with a current price of $880 per unit based on the bid
prices of the underlying securities. In this example, the proceeds from
the Unit holder's units will aggregate $3,060. Since only whole units of
an Exchange Trust may be purchased under the Exchange Option, the
Unit holder would be able to acquire three units in the Exchange Trust
for a total cost of $2,715 ($2,640 for the units and $75 for the sales
charge). The remaining $345 would be returned to the Unit holder in
cash.
Reinvestment Programs
Distributions of interest and principal, if any, are made to Unit
holders monthly. The Unit holder will have the option of either
receiving his monthly income check from the Trustee or participating in
<PAGE>
one of the reinvestment programs offered by certain of the Sponsors
provided such Unit holder meets the minimum qualifications of the
reinvestment program and such program lawfully qualifies for sale in the
jurisdiction in which the Unit holder resides. Upon enrollment in a
reinvestment program, the Trustee will direct monthly interest
distributions and principal distributions, if any, to the reinvestment
program selected by the Unit holder. Since each Sponsor has arranged
for different reinvestment alternatives, Unit holders should contact the
Sponsors for more complete information, including charges and
expenses. The appropriate prospectus will be sent to the Unit holder.
The unit holder should read the prospectus for a reinvestment program
carefully before deciding to participate. Participation in the reinvestment
program will apply to all Units of a Trust owned by the Unit holder and
may be terminated at any time by the Unit holder, or the program may
be modified or terminated by the Trustee or the program's Sponsor.
Sponsors' Profits
For their services, the Sponsors receive a gross commission
equal to a percentage of the Public Offering Price of the Units. In
maintaining a market for the Units of the respective Trusts (see "Public
Offering--Market for Units"), the Sponsors also realize profits or sustain
losses in the amount of any difference between the price at which they
buy such Units and the price at which they resell or redeem such Units
(see "Public Offering--Offering Price").
RIGHTS OF UNIT HOLDERS
Certificates
Ownership of Units of the respective Trusts is evidenced by
registered certificates executed by the Trustee and the Sponsors.
Certificates are transferable by presentation and surrender to the Trustee
of the certificate properly endorsed or accompanied by a written
instrument or instruments of transfer.
Certificates may be issued in denominations of one Unit or any
multiple thereof. A Unit holder may be required to pay $2.00 per
certificate reissued or transferred, and to pay any governmental charge
that may be imposed in connection with each such transfer or
interchange. For new certificates issued to replace destroyed, stolen or
lost certificates, the Unit holder must furnish indemnity satisfactory to
the Trustee and must pay such expenses as the Trustee may incur.
Mutilated certificates must be surrendered to the Trustee for replacement.
Distribution of Interest and Principal
Interest and principal received by each Trust will be distributed
on each monthly Distribution Date on a pro rata basis to Unit holders in
such Trust of record as of the preceding Record Date. All distributions
will be net of applicable expenses and funds required for the redemption
of Units and, if applicable, reimbursements to the Trustee for interest
<PAGE>
payments advanced to Unit holders on previous Monthly Distribution
Dates. (See Part A, "Summary of Essential Information" and "Tax
Exempt Securities Trust--Expenses and Charges" and "Rights of Unit
Holders--Redemption of Units" in this section.)
The Trustee will credit to the Interest Account of each respective
Trust all interest received by such Trust, including that part of the
proceeds of any disposition of Bonds of such Trust which represents
accrued interest and including all moneys paid pursuant to any insurance
contract representing interest on any Bond in the Trusts. Other receipts
will be credited to the Principal Account of the affected Trust. The pro
rata share of the Interest Account and the pro rata share of cash in the
Principal Account represented by each Unit of a Trust will be computed
by the Trustee each month as of the Record Date. (See Part A,
"Summary of Essential Information".) Proceeds received from the
disposition of any of the Bonds subsequent to a Record Date and prior to
the next succeeding Distribution Date will be held in the Principal
Account and will not be distributed until the following Distribution Date.
The distribution to the Unit holders as of each Record Date will be made
on the following Distribution Date or shortly thereafter and shall consist
of an amount substantially equal to one-twelfth of such holder's pro rata
share of the estimated annual income to the Interest Account after
deducting estimated expenses (the "Monthly Interest Distribution") plus
such holder's pro rata share of the cash balance in the Principal Account
computed as of the close of business on the preceding Record Date.
Persons who purchase Units between a Record Date and a Distribution
Date will receive their first distribution on the second Distribution Date
following their purchase of Units. No distribution need be made from
the Principal Account if the balance therein is less than an amount
sufficient to distribute $1.00 per Unit. The Monthly Interest Distribution
per Unit as of the date of this Prospectus is shown in the "Summary of
Essential Information" in Part A for the particular Trust and will change
as the income and expenses of the respective Trusts change and as Bonds
are exchanged, redeemed, paid or sold.
Normally, interest on the Bonds in the Portfolio of each Trust is
paid on a semi-annual basis. Because Bond interest is not received by
the Trusts at a constant rate throughout the year, any Monthly Interest
Distribution may be more or less than the amount credited to the Interest
Account as of the Record Date. In order to eliminate fluctuations in
Monthly Interest Distributions resulting from such variances, the Trustee
is required by the Trust Agreement to advance such amounts as may be
necessary to provide Monthly Interest Distributions of approximately
equal amounts. The Trustee will be reimbursed, without interest, for any
such advances from funds available from the Interest Account on the next
ensuing Record Date or Record Dates, as the case may be. If all or a
portion of the Bonds for which advances have been made subsequently
fail to pay interest when due and if one or more of the insurers of such
Bonds fails to meet its obligation under its policy of insurance, the
Trustee may recoup advances made by it in anticipation of receipt of
interest payments on such Bonds by reducing the amount distributed per
Unit in one or more Monthly Interest Distributions. If units are
redeemed subsequent to such advances by the Trustee, but prior to
receipt by the Trustee of actual notice of the failure of the issuer to pay
the interest due on the underlying Bond and the concurrent failure of the
<PAGE>
respective insurance company to meet its obligation under its insurance
policy, each remaining Unit holder will be subject to a greater pro rata
reduction in his Monthly Interest Distribution than would have occurred
absent such redemptions. Funds which are available for future
distributions, payments of expenses and redemptions are in accounts
which are non-interest bearing to Unit holders and are available for use
by United States Trust Company of New York, pursuant to normal
banking procedures. The Trustee is entitled to the benefit of holding any
reasonable cash balances in the Interest and Principal Accounts. The
Trustee anticipates that the average cash balance in the Interest Account
will be approximately 2% in excess of the amounts anticipated to be
required for Monthly Distributions to Unit holders. In addition, because
of the varying interest payment dates of the Bonds comprising each Trust
Portfolio, accrued interest at any point in time will be greater than the
amount of interest actually received by a particular Trust and distributed
to Unit holders. Therefore, there will always remain an item of accrued
interest that is added to the value of the Units. This excess accrued but
undistributed interest amount is known as the accrued interest carryover.
If a Unit holder sells all or redeems a portion of his Units, a portion of
his sale proceeds will be allocable to his proportionate share of the
accrued interest carryover. Similarly, if a Unit holder sells or redeems
all or a portion of his Units, the Redemption Price per Unit which he is
entitled to receive from the Trustee will include accrued interest
carryover on the Bonds. (See "Rights of Unit Holders --Redemption of
Units--Computation of Redemption Price per Unit".)
As of the first day of each month the Trustee will deduct from
the Interest Account of each Trust and, to the extent funds are not
sufficient therein, from the Principal Account of such Trust, amounts
necessary to pay the expenses of such Trust. (See "Tax Exempt
Securities Trust--Expenses and Charges".) The Trustee also may
withdraw from said account such amounts, if any, as it deems necessary
to establish a reserve for any governmental charges payable out of the
Trust. Amounts so withdrawn shall not be considered a part of the
Trust's assets until such time as the Trustee shall return all or any part of
such amounts to the appropriate account. In addition, the Trustee may
withdraw from the Interest Account and the Principal Account such
amounts as may be necessary to cover redemption of Units by the
Trustee. (See "Rights of Unit Holders--Redemption of Units".) The
Trustee is also entitled to withdraw from the Interest Account, and, to
the extent funds are not sufficient therein, from the Principal Account, on
one or more Record Dates as may be appropriate, amounts sufficient to
recoup advances which it has made in anticipation of the receipt by a
Trust of interest in respect of Bonds which subsequently fail to pay
interest when due.
<PAGE>
Reports and Records
The Trustee shall furnish Unit holders in connection with each
distribution a statement of the amount of interest, if any, and the amount
of other receipts, if any, which are being distributed, expressed in each
case as a dollar amount per Unit. In the event that the issuer of any of
the Bonds fails to make payment when due of any interest or principal
and such failure results in a change in the amount that would otherwise
be distributed as a monthly distribution, the Trustee will, with the first
such distribution following such failure, set forth in an accompanying
statement, the issuer and the Bonds, the amount of the reduction in the
distribution per Unit resulting from such failure, the percentage of the
aggregate principal amount of Bonds which such Bond represents and, to
the extent then determined, information regarding any disposition or legal
action with respect to such Bond. Within a reasonable time after the end
of each calendar year, the Trustee will furnish to each person who at any
time during the calendar year was a Unit holder of record, a statement
(1) as to the Interest Account: interest received (including amounts
representing interest received upon any disposition of Bonds), deductions
for payment of applicable taxes and for fees and expenses of the Trust,
redemption of Units and the balance remaining after such distributions
and deductions, expressed both as a total dollar amount and as a dollar
amount representing the pro rata share of each Unit outstanding on the
last business day of such calendar year; (2) as to the Principal Account:
the dates of disposition of any Bonds and the net proceeds received
therefrom (excluding any portion representing interest), deductions for
payments of applicable taxes and for fees and expenses of the Trust,
redemptions of Units, and the balance remaining after such distributions
and deductions, expressed both as a total dollar amount and as a dollar
amount representing the pro rata share of each Unit outstanding on the
last business day of such calendar year; (3) a list of Bonds held and the
number of Units outstanding on the last business day of such calendar
year; (4) the Redemption Price per Unit based upon the last computation
thereof made during such calendar year; and (5) amounts actually
distributed during such calendar year from the Interest Account and from
the Principal Account, separately stated, expressed both as total dollar
amounts and as dollar amounts representing the pro rata share of each
Unit outstanding. The accounts of Trusts will be audited not less
frequently than annually by independent auditors designated by the
Sponsors, and the report of such auditors shall be furnished by the
Trustee to Unit holders of such Trusts upon request.
The Trustee shall keep available for inspection by Unit holders
at all reasonable times during the usual business hours, books of record
and account of its transactions as Trustee including records of the names
and addresses of Unit holders, certificates issued or held, a current list of
Bonds in the Portfolio and a copy of the Trust Agreement.
Redemption of Units
Units may be tendered to the Trustee for redemption at its unit
investment trust office at 770 Broadway, New York, New York 10003,
upon payment of any relevant tax. At the present time there are no
specific taxes related to the redemption of the Units. No redemption fee
<PAGE>
will be charged by the Sponsors or the Trustee. Units redeemed by the
Trustee will be cancelled.
Certificates for Units to be redeemed must be properly endorsed
or accompanied by a written instrument of transfer. Unit holders must
sign exactly as their name appears on the face of the certificate with the
signature guaranteed by an officer of a national bank or trust company or
by a member of either the New York, Midwest or Pacific Stock
Exchange. In certain instances the Trustee may require additional
documents such as, but not limited to, trust instruments, certificates of
death, appointments as executor or administrator or certificates of
corporate authority.
Within seven calendar days following such tender, the Unit
holder will be entitled to receive in cash an amount for each Unit
tendered equal to the Redemption Price per Unit computed as of the
Evaluation Time set forth in the "Summary of Essential Information" of
Part A on the date of tender. (See "Redemption of Units--Computation
of Redemption Price per Unit".) The "date of tender" is deemed to be
the date on which Units are received by the Trustee, except as regards
Units received after the close of trading on the New York Stock
Exchange, the date of tender is the next day on which such Exchange is
open for trading, and such Units will be deemed to have been tendered to
the Trustee on such day for redemption at the Redemption Price
computed on that day. For information relating to the purchase by the
Sponsors of Units tendered to the Trustee for redemption at prices which
may, in certain circumstances, be in excess of the Redemption Price, see
"Redemption of Units--Purchase by the Sponsors of Units Tendered for
Redemption."
Accrued interest paid on redemption shall be withdrawn from
the Interest Account, or, if the balance therein is insufficient, from the
Principal Account. All other amounts paid on redemption shall be
withdrawn from the Principal Account. The Trustee is empowered to
sell Bonds in order to make funds available for redemption. Such sales,
if required, could result in a sale of Bonds by the Trustee at a loss. To
the extent Bonds are sold, the size and diversity of each Trust will be
reduced.
The Trustee reserves the right to suspend the right of
redemption and to postpone the date of payment of the Redemption Price
per Unit for any period during which the New York Stock Exchange is
closed, other than weekend and holiday closings, or trading on that
Exchange is restricted or during which (as determined by the Securities
and Exchange Commission) an emergency exists as a result of which
disposal or evaluation of the underlying Bonds is not reasonably
practicable, or for such other periods as the Securities and Exchange
Commission has by order permitted.
Computation of Redemption Price per Unit - The Redemption
Price per Unit of a Trust is determined by the Trustee on the basis of the
bid prices of the Bonds in such Trust as of the Evaluation Time on the
date any such determination is made. The Redemption Price per Unit of
a Trust is each Unit's pro rata share, determined by the Trustee, of: (1)
the aggregate value of the Bonds in such Trust on the bid side of the
<PAGE>
market (determined by the Evaluator as set forth under "Public Offering
Prices--Method of Evaluation"), (2) cash on hand in such Trust, and
accrued and unpaid interest on the Bonds as of the date of computation,
less (a) amounts representing taxes or governmental charges payable out
of such Trust, (b) the accrued expenses of such Trust, and (c) cash held
for distribution to Unit holders of such Trust of record as of a date prior
to the evaluation.
Purchase by the Sponsors of Units Tendered for Redemption--
The Trust Agreement requires that the Trustee notify the Sponsors of any
tender of Units for redemption. So long as the Sponsors are maintaining
a bid in the secondary market, the Sponsors, prior to the close of
business on the second succeeding business day, will purchase any Units
tendered to the Trustee for redemption at the price so bid by making
payment therefore to the Unit holder in an amount not less than the
Redemption Price not later than the day on which the Units would
otherwise have been redeemed by the Trustee. (See "Public Offering--
Market for Units".) Units held by the Sponsors may be tendered to the
Trustee for redemption as any other Units, provided that the Sponsors
shall not receive for Units purchased as set forth above a higher price
than it paid, plus accrued interest.
The offering price of any Units resold by the Sponsors will be
the Public Offering Price determined in the manner provided in this
Prospectus. (See "Public Offering--Offering Price".) Any profit
resulting from the resale of such Units will belong to the Sponsors which
likewise will bear any loss resulting from a lower offering or redemption
price subsequent to their acquisition of such Units. (See "Public
Offering--Sponsors' Profits".)
SPONSORS
Smith Barney Inc. and Kidder, Peabody & Co. Incorporated are
sponsors for Insured Series 1-9, 21 and New York 14. Smith Barney
Inc. is the sole sponsor for Insured Series 10-20.
Smith Barney Inc., 1345 Avenue of the Americas, New York,
New York 10105 ("Smith Barney"), was incorporated in Delaware in
1960 and traces its history through predecessor partnerships to 1873.
Smith Barney, an investment banking and securities broker-dealer firm,
is a member of the New York Stock Exchange, Inc. and other major
securities and commodities exchanges, the National Association of
Securities Dealers, Inc. and the Securities Industry Association. Smith
Barney is an indirect, wholly-owned subsidiary of The Travelers Inc.
(formerly, Primerica Corporation).
Kidder, Peabody & Co. Incorporated, 10 Hanover Square, New
York, New York 10005 ("Kidder, Peabody"), was incorporated in
Delaware in 1956 and traces its history through predecessor partnerships
to 1865. Kidder, Peabody, an investment banking and securities broker-
dealer firm, is a member of the New York Stock Exchange, Inc. and
other major securities and option exchanges, the National Association of
Securities Dealers, Inc. and the Securities Industry Association.
<PAGE>
On May 26, 1989 the Commission granted Kidder, Peabody a
permanent exemption from certain provisions of the Investment Company
Act of 1940 which otherwise would have rendered Kidder, Peabody
ineligible to serve as sponsor, depositor or underwriter of the Trust, as a
result of an injunction entered against Kidder, Peabody. The injunction
arose out of certain alleged activities of Kidder, Peabody not involving
the Trust or any other investment company and which are described
below. In order to obtain the permanent exemption, Kidder, Peabody
retained a consultant (at its own expense) to review the policies and
procedures utilized by it to prevent violations of the federal securities
laws in connection with its investment company business, and to
recommend, where appropriate, changes in policies, procedures and
staffing necessary to assure ongoing compliance. The Commission
considered the application of Kidder, Peabody for a permanent exemption
after the Commission had received a copy of the consultant's report and
recommendations and reports from Kidder, Peabody setting forth the
actions it had taken or proposed to take in respect of the implementation
of the consultant's recommendations.
On June 4, 1987 the Commission filed a complaint (the
"Complaint") in the United States District Court for the Southern District
of New York, in a civil action entitled Securities and Exchange
Commission v. Kidder, Peabody & Co. Incorporated, 87 Civ. 3869 (RO)
(the "SEC Action"). On the same day, Kidder, Peabody entered into,
and the parties filed in the SEC Action, a related Consent and
Undertakings, in which Kidder, Peabody neither admitted nor denied any
of the allegations in the Complaint except as to jurisdiction, and pursuant
to which Consent and Undertakings the District Court entered a Final
Judgment of Permanent Injunction and other relief as to Kidder,
Peabody, (the "Final Judgment"). The exemption from the Act was
requested by Kidder, Peabody as a result of the Final Judgment.
The Complaint in the injunctive action brought by the
Commission alleges that Kidder, Peabody violated sections 10(b) and
14(e) of the Securities Exchange Act of 1934 (the "Exchange Act") and
rules promulgated thereunder by engaging, for its own account, in
purchases or sales of the securities of six named companies while in the
possession of material, non-public information concerning tender offers
or other extraordinary corporate transactions concerning such companies.
The Complaint asserts that such information was obtained by a former
executive of Kidder, Peabody as part of a scheme for the exchange of
non-public information with a partner at another investment banking
firm. These allegations are directed to events in 1984 and 1985; the
executive ceased employment with Kidder, Peabody in February, 1986.
Other allegations of the Complaint allege violations by Kidder, Peabody
of sections 7(c) and 17(a)(1) of the Exchange Act and various rules
promulgated thereunder and aiding and abetting in violations by another
entity of sections 15(c)(3) and 17(a)(1) of the Exchange Act and various
rules promulgated thereunder. These provisions relate to the
maintenance and preservation of accurate books and records, adherence
to margin requirements prescribed by the Federal Reserve Board and
compliance with net capital requirements applicable to broker-dealers.
The violations alleged in the Complaint with respect to all of these
provisions stem from several transactions in 1984 and 1985 involving
another broker-dealer. According to the Complaint, oral understandings
<PAGE>
between Kidder, Peabody and the other broker-dealer enabled the other
broker-dealer to avoid adherence to the net capital requirements and
constituted an impermissible extension of credit to such entity by Kidder,
Peabody.
Among other provisions, the Final Judgment enjoins Kidder,
Peabody from engaging in certain transactions, acts, practices or courses
of business which constitute or would constituted violations of Sections
7(c), 10(b), 14(e) and 17(a)(1), or constitute or would constitute aiding
an abetting violations of Sections 15(c)(3) and 17(a)(1), of the Exchange
Act and various rules promulgated thereunder. The Final Judgment also
requires that Kidder, Peabody pay a penalty of approximately $11.6
million to the U.S. Treasury under the Insider Trading Sanctions Act of
1984, and establish a fund of approximately $13.7 million which would
be available to compensate anyone with valid claims of injury from the
conduct alleged.
Also, on June 4, 1987, the Commission instituted administrative
proceedings against Kidder, Peabody pursuant to Section 15(b)(4) of the
Exchange Act, entitled In the Matter of Kidder, Peabody & Co.
Incorporated. Administrative Proceeding File No. 3-6855 (the "SEC
Order"). On the same day, Kidder, Peabody filed an Offer of Settlement
(the "Offer") with respect to the SEC Order, which was accepted by the
Commission and incorporated into the SEC Order. The Final Judgment
was the basis for the SEC Order. In the SEC Order, the Commission
censured Kidder, Peabody and ordered that Kidder, Peabody comply with
its undertakings (consisting of certain remedial measures to be taken by
Kidder, Peabody designed to prevent future occurrence of the conduct
alleged in the Complaint and to ensure Kidder, Peabody's compliance on
an ongoing basis with the federal securities laws and the rules and
regulations of self-regulatory organizations) set forth in the Order.
None of the allegations in the Complaint related to any of
Kidder, Peabody's activities in connection with any unit investment trust,
or any other investment company.
Smith Barney sponsors numerous open-end investment
companies and closed-end investment companies. Smith Barney also
sponsors all Series of Corporate Securities Trust, Government Securities
Trust and Harris, Upham Tax-Exempt Fund and acts as co-sponsor of
certain trusts of The Equity Income Fund, Concept Series. Kidder,
Peabody sponsors Target Corporate High Yield Series Unit Trust and
family of open-end investment companies; Kidder, Peabody Government
Money Fund, Inc., Kidder, Peabody Premium Account Fund, Kidder,
Peabody Tax Exempt Money Fund, Inc., Kidder, Peabody Cash Reserve
Fund, Inc., Kidder, Peabody Exchange Money Fund, Kidder, Peabody
Equity Income Fund, Inc., Kidder, Peabody Government Income Fund,
Inc., Liquid Institutional Reserves, Kidder, Peabody Global Equity Fund,
Kidder, Peabody Intermediate Term Fixed Income Fund Kidder, Peabody
Asset Allocation Fund and Kidder, Peabody California Tax Exempt
Money Fund, Inc. Kidder, Peabody Asset Management Inc., a
subsidiary of Kidder, Peabody, is the investment adviser and
administrator of each of the twelve open-end investment companies. The
Sponsors have acted previously as managing underwriters of other
investment companies. In addition to participating as a member of
<PAGE>
various underwriting and selling groups or as agent of other investment
companies, the Sponsors also execute orders for the purchase and sale of
securities of investment companies and sell securities to such companies
in their capacities as brokers or dealers in securities.
Limitations on Liability
The Sponsors are jointly and severally liable for the performance
of their obligations arising from their responsibilities under the Trust
Agreement, but will be under no liability to Unit holders for taking any
action of refraining from any action in good faith or for errors in
judgment or responsible in any way for depreciation or loss incurred by
reason of the sale of any Bonds, except in cases of willful misfeasance,
bad faith, gross negligence or reckless disregard of their obligations and
duties. (See "Tax Exempt, Securities Trust--Portfolio" and "Sponsors --
Responsibility".)
Responsibility
The Sponsors are empowered to direct the Trustee to dispose of
Bonds or deposited Units of other Trusts when certain events occur that
adversely affect the value of the Bonds, if the Sponsors determine that
any insurance that may be applicable to the Bonds cannot be relied upon
to maintain the interests of the Trusts to at least as great an extent as
such disposition, including default in payment of interest or principal,
default in payment of interest or principal on other obligations of the
same issuer, institution of legal proceedings, default under other
documents adversely affecting debt service, decline in price or the
occurrence of other market or credit factors, or decline in projected
income pledged for debt service on revenue Bonds and advanced
refunding that, in the opinion of the Sponsors, may be detrimental to the
interests of the Unit Holders.
The Sponsors intend to provide portfolio services for each Trust
in order to determine whether the Trustee should be directed to dispose
of any such Bonds.
It is the responsibility of the Sponsors to instruct the Trustee to
reject any offer made by an issuer of any of the Bonds to issue new
obligations in exchange and substitution for any Bonds pursuant to a
refunding or refinancing plan, except that the Sponsors may instruct the
Trustee to accept such an offer or to take any other action with respect
thereto as the Sponsors may deem proper if the issuer is in default with
respect to such Bonds or in the judgment of the Sponsors the issuer will
probably default in respect to such Bonds in the foreseeable future. Any
obligations so received in exchange or substitution will be held by the
Trustee subject to the terms and conditions of the Trust Agreement to the
same extent as Bonds originally deposited thereunder. Within five days
after the deposit of obligations in exchange or substitution for underlying
Bonds, the Trustee is required to give notice thereof to each Unit holder,
identifying the Bonds eliminated and the Bonds substituted therefor.
Except as stated in this paragraph, the acquisition by the Trust of any
securities other than the Bonds initially deposited in each respective Trust
<PAGE>
is prohibited.
Smith Barney Inc. has been appointed by Kidder, Peabody &
Co. Incorporated as agent for purposes of taking any action required or
permitted to be taken by the Sponsors under the Trust Agreement. If the
Sponsors are unable to agree with respect to action to be taken jointly by
them under the Trust Agreement and they cannot agree as to which
Sponsor shall act as sole Sponsor, then Smith Barney Inc. shall act as
sole Sponsor. If one of the Sponsors fails to perform its duties under the
Trust Agreement or becomes incapable of acting or becomes bankrupt or
its affairs are taken over by public authorities, that Sponsor is
automatically discharged under the Trust Agreement and the remaining
Sponsor acts as Sponsor.
Resignation
Any Sponsor may resign provided that at the time of such
resignation each remaining Sponsor maintains a net worth of $1,000,000
and is agreeable to such resignation. Concurrently with or subsequent to
such resignation a new Sponsor may be appointed by the remaining
Sponsor and the Trustee to assume the duties of the resigning Sponsor.
If all Sponsors resign or otherwise fail or become unable to perform their
duties under the Trust Agreement, and no express provision is made for
action by the Trustee in such event, the Trustee may appoint a successor
sponsor or terminate the Trust Agreement and liquidate the affected
Trusts.
TRUSTEE
The Trustee is the United States Trust Company of New York,
with its principal place of business at 114 West 47th Street, New York,
New York 10036. United States Trust Company of New York has, since
its establishment in 1853, engaged primarily in the management of trust
and agency accounts for individuals and corporations. The Trustee is a
member of the New York Clearing House Association and is the subject
to supervision and examination by the Superintendent of Banks of the
State of New York, the Federal Deposit Insurance Corporation and the
Board of Governors of the Federal Reserve System. In connection with
the storage and handling of certain Bonds deposited in the Trust, the
Trustee may use the services of The Depository Trust Company. These
services may include safekeeping of the Bonds and coupon-clipping,
computer book-entry transfer and institutional delivery services. The
Depository Trust Company is a limited purpose trust company organized
under the Banking Law of the State of New York, a member of the
Federal Reserve System and a clearing agency registered under the
Securities Exchange Act of 1934.
Limitations on Liability
The Trustee shall not be liable or responsible in any way for
depreciation or loss incurred by reason of the disposition of any moneys,
securities or certificates or in respect of any evaluation or for any action
<PAGE>
taken in good faith reliance on prima facie properly executed documents
except in cases of willful misfeasance, bad faith, gross negligence or
reckless disregard for its obligations and duties. In addition, the Trustee
shall not be personally liable for any taxes or other governmental charges
imposed upon or in respect of a Trust which the Trustee may be required
to pay under current or future law of the United States or any other
taxing authority having jurisdiction. (See "Tax Exempt Securities Trust -
- - Portfolio".) For information relating to the responsibilities and
indemnification of the Trustee under the Trust Agreement, reference is
made to the material set forth under "Rights of Unit Holders", "Sponsors
- -- Resignation" and "Other Charges".
Resignation
By executing an instrument in writing and filing the same with
the Sponsors, the Trustee and any successor may resign. In such an
event the Sponsors are obligated to appoint a successor trustee as soon as
possible. If the Trustee becomes incapable of acting or becomes
bankrupt or its affairs are taken over by public authorities, the Sponsors
may remove the Trustee and appoint a successor as provided in the Trust
Agreement. Such resignation or removal shall become effective upon the
acceptance of appointment by the successor trustee. If no successor has
accepted the appointment within thirty days after notice of resignation,
the retiring trustee may apply to a court of competent jurisdiction for the
appointment of a successor. The resignation or removal of a trustee
becomes effective only when the successor trustee accepts its
appointment as such or when a court of competent jurisdiction appoints a
successor trustee.
EVALUATOR
The Evaluator is Kenny S&P Evaluation Services, a division of
Kenny Information, Systems, Inc., with main offices located at 65
Broadway, New York, New York 10006.
Limitations on Liability
The Trustee, Sponsors and Unit holders may rely on any
evaluation furnished by the Evaluator and shall have no responsibility for
the accuracy thereof. Determinations by the Evaluator under the Trust
Agreement shall be made in good faith upon the basis of the best
information available to it; provided, however, that the Evaluator shall be
under no liability to the Trustee, the Sponsors, or Unit holders for errors
in judgment. But this provision shall not protect the Evaluator in cases
of willful misfeasance, bad faith, gross negligence or reckless disregard
of its obligations and duties.
Responsibility
The Trust Agreement requires the Evaluator to evaluate the
Bonds of a Trust on the basis of their bid prices on the last business day
<PAGE>
of June and December in each year, on the day on which any Unit of
such Trust is tendered for redemption and on any other day such
evaluation is desired by the Trustee or is requested by the Sponsors. For
information relating to the responsibility of the Evaluator to evaluate the
Bonds on the basis of their bid prices see "Public Offering -- Offering
Price".
Resignation
The Evaluator may resign or may be removed by the joint action
of the Sponsors and the Trustee, and in such event, the Sponsors and the
Trustee are to use their best efforts to appoint a satisfactory successor.
Such resignation or removal shall become effective upon the acceptance
of appointment by a successor evaluator. If upon resignation of the
Evaluator no successor has accepted appointment within thirty days after
notice of resignation, the Evaluator may apply to a court of competent
jurisdiction for the appointment of a successor.
AMENDMENT AND TERMINATION OF THE TRUST AGREEMENT
Amendment
The Sponsors and the Trustees have the power to amend the
Trust Agreement without the consent of any of the Unit holders when
such an amendment is (1) to cure any ambiguity or to correct or
supplement any provision of the Trust Agreement which may be
defective or inconsistent with any other provision contained therein, or
(2) to make such other provisions as shall not adversely affect the
interests of the Unit holders; provided, that the Trust Agreement is not
amended to increase the number of Units issuable thereunder or to permit
the deposit or acquisition of securities either in addition to or in
substitution for any of the Bonds initially deposited in the respective
Trusts, except for the substitution of certain refunding securities for such
Bonds or to permit the Trustee to engage in business or in investment
activities not specifically authorized in the Trust Agreement as originally
adopted. In the event of any amendment, the Trustee is obligated to
notify promptly all Unit holders of the substance of such amendment.
Termination
The Trust Agreement provides that if the principal amount of
Bonds is less than 50% of the principal amount of the Bonds originally
deposited in such Trust, the Trustee may in its discretion and will, when
directed by the Sponsors, terminate such Trust. Each Trust may be
terminated at any time by 100% of the Unit holders. See Part A for
additional mandatory and optional termination provisions. However, in
no event may any trust continue beyond the Mandatory Termination Date
set forth in Part A of this Prospectus under "Summary of Essential
Information". In the event of termination, written notice thereof will be
sent by the Trustee to all Unit holders. Within a reasonable period after
termination, the Trustee will sell any Bonds remaining in the affected
Trust, and, after paying all expenses and charges incurred by such Trust,
<PAGE>
will distribute to each Unit holder, upon surrender for cancellation of his
certificate for Units, his pro rata share of the balances remaining in the
Interest Account and Principal Account of such Trust.
LEGAL OPINIONS
Certain legal matters in connection with the Units offered
hereby have been passed upon by Messrs. Davis Polk &
Wardwell, 450 Lexington Avenue, New York, New York 10017,
as special counsel for the Sponsors. Messrs. Carter, Ledyard &
Milburn, 2 Wall Street, New York, New York 10005, act as
counsel for the Trustee.
AUDITORS
The Statements of Financial Condition and Portfolio of
Securities of each Trust included in this Prospectus have been audited by
KPMG Peat Marwick, independent auditors, as indicated in their report
with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said report.
RATINGS
Standard & Poor's
A Standard & Poor's corporate or municipal bond rating is a
current assessment of the creditworthiness of an obligor with respect to a
specific debt obligation. This assessment of creditworthiness may take
into consideration obligors such as guarantors, insurers, or lessees.
The bond rating is not a recommendation to purchase or sell a
security, inasmuch as it does not comment as to market price or
suitability for a particular investor.
The ratings are based on current information furnished to
Standard & Poor's by the issuer and obtained by Standard & Poor's from
other sources it considers reliable. Standard & Poor's does not perform
any audit in connection with any rating and may, on occasion, rely on
unaudited financial information. The ratings may be changed, suspended
or withdrawn as a result of changes in, or unavailability of, such
information.
The ratings are based, in varying degrees, on the following
considerations:
I. Likelihood of default-capacity and willingness of the
obligor as to the timely payment of interest and
repayment of principal in accordance with the terms of
the obligation;
<PAGE>
II. Nature of and provisions of the obligation; and
III. Protection afforded by, and relative position of, the
obligation in the event of bankruptcy, reorganization or
other arrangement under the laws of bankruptcy and
other laws affecting creditors' rights.
A summary of the meaning of the applicable rating symbols as
published by Standard & Poor's follows:
AAA--Debt rated AAA has the highest rating assigned by
Standard & Poor's. Capacity to pay interest and repay principal is
extremely strong.
AA--Debt rated AA has a very strong capacity to pay interest
and repay principal and differs from the higher rated issues only in small
degree.
A--Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than debt in higher
rated categories.
BBB--Bonds rated BBB are regarded as having an adequate
capacity to pay interest and repay principal. Whereas they normally
exhibit adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to weakened capacity to
pay interest and repay principal for bonds in this category than for bonds
in higher-rated categories.
BB,B,CCC,CC,C--Debt rated BB,B,CCC,CC and C is
regarded, on balance, as predominantly speculative with respect to
capacity to pay interest and repay principal in accordance with the terms
of the obligation. BB indicates the lowest degree of speculation and C
the highest degree of speculation. While such debt will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
D--Debt rated D is in default, and payment of interest and/or
repayment of principal is in arrears.
Plus (+) or Minus (-): To provide more detailed indications of
credit quality, the ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the
major rating categories.
Provisional Ratings: The letter "p" following a rating indicates
that the rating is provisional. A provisional rating assumes the successful
completion of the project being financed by the debt being rated and
indicates that payment of debt service requirements is largely or entirely
dependent upon the successful and timely completion of the project. This
rating, however, while addressing credit quality subsequent to completion
of the project, makes no comment on the likelihood of, or the risk of,
default upon failure of such completion. Accordingly, the investor
should exercise his own judgment with respect to such likelihood and
<PAGE>
risk.
Conditional rating(s), indicated by "Con" are given to bonds for
which the continuance of the security rating is contingent upon Standard
& Poor's receipt of an executed copy or closing documentation
confirming investments and cash flows and/or the security rating is
conditional upon the issuance of insurance by the respective insurance
company.
Moody's Investors Service
A summary of the meaning of the applicable Moody's Investors Service's
rating symbols and their meanings is as follows:
Aaa--Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and are
generally referred to as "gilt edge". Interest payments are protected by a
large or an exceptionally stable margin and principal is secure. While
the various protective elements are likely to change, such changes as can
be visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa--Bonds which are rated Aa are judged to be of a high quality
by all standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. Aa bonds are rated lower than the
best bonds because margins of protection may not be as large as in Aaa
securities or fluctuations of protective elements may be of greater
amplitude or there may be other elements present which make the long-
term risks appear somewhat larger than in Aaa securities.
A--Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations.
Factors giving security to principal and interest are considered adequate,
but elements may be present which suggest a susceptibility to impairment
sometime in the future.
Baa--Bonds which are rated Baa are considered s medium grade
obligations; i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present
but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds
lack outstanding investment characteristics and in fact have speculative
characteristics as well.
Ba--Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and
thereby not well safeguarded during both good and bad times over the
future. Uncertainty of position characterizes bonds in this class.
B--Bonds which are rated B generally lack the characteristics of
the desirable investment. Assurance of interest and principal payments
or of maintenance of other terms of the contract over any long period of
time may be small.
<PAGE>
Caa--Bonds which are rated Caa are of poor standing. Such
issues may be in default or there may be present elements of danger with
respect to principal or interest.
Ca--Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have
other marked shortcomings.
C--Bonds which are rated C are the lowest rated class of bonds
and issues so rated can be regarded as having extremely poor prospects
of ever attaining any real investment standing.
Note: Those municipal bonds in the Aa, A, Baa, Ba and B
groups which Moody's believes possess the strongest investment
attributes are designated by the symbols Aa1, A1, Baa1, Ba1 and B1,
respectively. In addition, Moody's applies numerical modifiers, 1, 2,
and 3 in each generic rating classification from Aa through B in its
corporate bond rating system. The modifier 1 indicates that the security
ranks in the higher end of its generic rating category; the modifier 2
indicates a mid-range ranking; and the modifier 3 indicates that the issue
ranks in the lower end of its generic rating category. Although Industrial
Revenue Bonds and Environmental Control Revenue Bonds are tax-
exempt issues, they are included in the corporate bond rating system.
Conditional ratings, indicated by "Con" are given to bonds for
which the security depends upon the completion of some act or the
fulfillment of some condition. These are bonds secured by (a) earnings
of projects under construction, (b) earnings of projects unseasoned in
operating experience, (c) rentals which begin when facilities are
completed, or (d) payments to which some other limiting condition
attaches. A parenthetical rating denotes probable credit stature upon
completion of construction or elimination of basis of condition.
Note: NR indicates, among other things, that no rating has
been requested, that there is insufficient information on which to base a
rating, or that Standard & Poor's Corporation and Moody's Investors
Service do not rate a particular type of obligation as a matter of policy.
Subsequent to the Date of Deposit the credit characteristics of the Issuers
of Securities may have changed. Currently, certain of the Securities in
the portfolio of a Trust may be unrated and have credit characteristics
comparable to securities rated below the minimum requirements of such
Trust for acquisition of a Security. See Part A-"Portfolio of Securities"
herein to ascertain the ratings on the Securities, if any, on the date of the
Portfolio of Securities.
Fitch Investors Service, Inc.
A brief description of the applicable Fitch Investors Service,
Inc. rating symbols and their meanings is as follows:
AAA--Bonds which are considered to be investment grade and
of the highest credit quality. The obligor has an exceptionally strong
ability to pay interest and repay principal, which is unlikely to be
affected by reasonably foreseeable events.
<PAGE>
AA--Bonds which are considered to be investment grade and of
very high credit quality. The obligor's ability to pay interest and repay
principal is very strong although not quite as strong as bonds rated AAA.
A--Bonds which are considered to be investment grade and of
high credit quality. The obligor's ability to pay interest and repay
principal is considered to be strong, but may be more vulnerable to
adverse changes in economic conditions and circumstances than bonds
with higher ratings.
BBB-Bonds which are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic
conditions and circumstances, however, are more likely to have adverse
impact on these bonds, and therefore impair timely payment. The
likelihood that these bonds will fall below investment grade is higher than
for bonds with higher ratings.
Plus (+) Minus (-)--Plus and minus signs are used with a rating
symbol to indicate the relative position of a credit within the rating
category. Plus and minus signs, however, are not used in the 'AAA',
'DDD', 'DD' or 'D' categories.
Conditional--A conditional rating is promised on the successful
completion of a project of the occurrence of a specific event.
Duff & Phelps Credit Rating Co.
A brief description of the applicable Duff & Phelps Credit Rating Co.
rating symbols and their meanings is as follows:
AAA-Highest credit quality. The risk factors are negligible,
being only slightly more than for risk-free U.S. Treasury debt.
AA-High credit quality. Protection factors are strong. Risk is
modest but may vary slightly from time to time because of economic
conditions.
A-Protection factors are average but adequate. However, risk
factors are more variable and greater in periods of economic stress.
BBB-Below average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.
NR-Not rated (credit characteristics comparable to A or better
on the Date of Deposit).
[/TEXT]
<PAGE> PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
CONTENTS OF REGISTRATION STATEMENT
This Post-Effective Amendment to the Registration Statement
on Form S-6 comprises the following papers and documents:
The facing Sheet on Form S-6.
The cross-reference sheet.
The Prospectus consisting of pages A-1 - A- , and 1- , back cover.
Signatures.
Written consents of the following persons:
KPMG Peat Marwick
Kenny S&P Evaluation Services,
a division of Kenny Information Systems, Inc.
(included in Exhibit 4.6A)
The following exhibits:
*4.6A - Consent of Kenny S&P Evaluation Services, a division
of Kenny Information Systems, Inc. as Evaluator.
* Filed herewith.
II-1
<PAGE>
KENNY S&P EVALUATION SERVICES
A Division of Kenny Information Systems, Inc.
65 Broadway
New York, New York, 10006-2511
Telephone 212/770-4000
Smith Barney Incorporated
1345 Avenue of the Americas
New York, NY 10105
RE:Tax Exempt Securities Trust
Insured Series 14
Gentlemen:
We have examined the post-effective Amendment to the
Registration Statement File No. 33-7632 for the above-captioned
trust. We hereby acknowledge that Kenny S&P Evaluation Services,
a division of Kenny Information Systems, Inc. is currently acting
as the evaluator for the trust. We hereby consent to the use in
the Amendment of the reference to Kenny S&P Evaluation Services,
a division of Kenny Information Systems, Inc. as evaluator.
In addition, we hereby confirm that the ratings
indicated in the above-referenced Amendment to the Registration
Statement for the respective bonds comprising the trust portfolio
are the ratings currently indicated in our KENNYBASE database.
You are hereby authorized to file a copy of this letter
with the Securities and Exchange Commission.
Sincerely,
John R. Fitzgerald
Vice President
tru:l-31
<PAGE>
CONSENT OF COUNSEL
The consent of counsel to
the use of their name in the Prospectus included in this Post-
Effective Amendment to the Registration Statement ("Post-
Effective Amendment") is contained in their opinion filed as
Exhibit 3.1 to the Registration Statement.
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of
our report dated June 23, 1994 included herein and to the
reference to our firm under the heading "AUDITORS" in the
prospectus.
KPMG PEAT MARWICK
New York, New York
June 24, 1994
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933,
the registrant, Tax Exempt Securities Trust, Insured Series 14,
certifies that it meets all the requirements for
effectiveness of this Post-Effective Amendment pursuant to Rule
485(b) under the Securities Act of 1933 and has duly caused this
Post-Effective Amendment to be signed on its behalf by the
undersigned thereunto duly authorized, in the City of New York,
and State of New York on the 24th day of June, 1994.
Signatures appear on pages II-3 and II-4.
A majority of the members of the Board of Directors of Smith
Barney Incorporated have signed this Post-Effective Amendment
pursuant to Powers of Attorney authorizing the person signing
this Post-Effective Amendment to do so on behalf of such members.
These Powers of Attorney were filed with the Securities
and Exchange Commission under the Securities Act of 1933 with the
Registration Statement of Tax Exempt Securities Trust,
Appreciation Series 7, Registration No. 2-78499 and with the
Registration Statement of Tax Exempt Securities Trust, Series
110, Intermediate Term Series 15 and Short-Intermediate Term
Series 13, Registration Nos. 2-97179, 2-95591 and 2-96184,
respectively, with the Registration Statement of Tax Exempt
Securities Trust, Series 284, Amendment No. 2, Registration No.
33-22777, with the Registration Statement of Tax Exempt
Securities Trust, Series 295, Amendment No. 1, Registration No.
33-26376, and with the Registration Statement of Tax Exempt
Securities Trust, Series 335, Amendment No. 1, Registration No.
33-37952.
<PAGE>
TAX EXEMPT SECURITIES TRUST
BY SMITH BARNEY INC.
By
(George S. Michinard, Jr.)
By the following persons,* who constitute a majority of
the directors of Smith Barney Inc. :
Steven D. Black
James S. Boshart III
Robert A. Case
James Dimon
Robert Druskin
Robert F. Greenhill
Jeffrey B. Lane
Robert H. Lessin
John F. Lyness
Jack L. Rivkin
By
(George S. Michinard, Jr.
Attorney-in-Fact)
* Pursuant to Powers of Attorney previously filed.
II-3
