<PAGE>
Registration No. 33-8688
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,
SERIES 255
B.
Names of Depositors:
SMITH BARNEY SHEARSON INCORPORATED
KIDDER, PEABODY & CO. INCORPORATED
<TABLE>
<S> <C>
C. Complete addresses of depositors' principal executive
offices:
SMITH BARNEY SHEARSON KIDDER,
PEABODY & CO.
SHEARSON INC. INCORPORATED
1345 Avenue of the Americas 60 Broad Street
New York, New York 10105 New York, New York 10005
D. Names and complete addresses of agents for service:
STEPHEN J. TREADWAY GILBERT R. OTT, JR.
Smith Barney Kidder, Peabody & Co.
Shearson Inc. Incorporated
1345 Avenue of the Americas 10 Hanover Square
New York, New York 10105 New York, New York 10005
</TABLE>
It is proposed that this filing will become effective February 25,
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>
CALIFORNIA TRUST 75
NEW YORK TRUST 77
MASSACHUSETTS TRUST 70
PENNSYLVANIA TRUST 75
MINNESOTA TRUST 75
[S] [C] [C]
In the opinion of counsel, under existing law interest income to the
Trusts and, with certain exceptions, to Unit holders is exempt from
all Federal income tax. In addition, in the opinion of counsel, the
interest income of each State Trust is similarly exempt from state
income taxes in the state for which such Trust is named. 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 TRUSTS
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".
THE TAX EXEMPT SECURITIES TRUST, SERIES 255 consists of
5 underlying separate unit investment trusts (the "Trusts") designated as
California Trust 75, Massachusetts Trust 70, Minnesota Trust 75, New
York Trust 77 and Pennsylvania Trust 75 (the California, Massachusetts,
Minnesota, New York and Pennsylvania Trusts being herein called
collectively the "State Trusts") each formed for the purpose of obtaining
for its Unit holders tax-exempt interest income and conservation of
capital through investment in a fixed portfolio of municipal bonds rated
at the time of deposit A or better by Standard & Poor's Corporation or
Moody's Investors Service, with certain ratings being provisional or
conditional. (See "Portfolio of Securities".) Each State Trust is
comprised of a fixed portfolio of interest-bearing obligations issued
primarily by or on behalf of the State for which such Trust is named and
counties, municipalities, authorities and political subdivisions thereof.
The interest on all bonds in each State Trust is, in the opinion of
recognized bond counsel to the issuers of the obligations, (i) exempt
under existing law (except in certain instances depending upon the Unit
holders) from all Federal income tax, (ii) exempt from state income taxes
in the State for which such Trust is named (see Part C, "Tax Exempt
Securities Trust - Taxes") and (iii) subject to the alternative minimum tax
under the Tax Reform Act of 1986 as respects the required inclusion in
the alternative minimum tax base of one-half of adjusted net book income
of corporate Unit holders. (See Part B, "Tax Exempt Securities Trust -
Tax Status.")
THE OBJECTIVES of the Trusts are tax-exempt income and
conservation of capital through an investment in a diversified portfolio
consisting primarily of municipal bonds. There is, of course, no
guarantee that the Trusts' objectives will be achieved since the payment
of interest and preservation of principal are dependent upon the continued
ability of the issuers of the bonds to meet such obligations.
THE PUBLIC OFFERING PRICE of the Units of each Trust is equal
to the aggregate bid price of the underlying securities in each Trust's
portfolio divided by the number of Units outstanding in such Trust, plus
a sales charge. This charge will be equal to 5% of the Public Offering
Price (5.263% of the aggregate bid price of the securities per Unit) for
the State Trusts. 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 SPONSORS, although not obligated to do so, intend to maintain
a market for the Units of the Trusts, 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.
MONTHLY DISTRIBUTIONS of principal and interest received by
each Trust will be made on or shortly after the fifteenth day of each
month to holders of record on the first day of that month. For further
information regarding the distributions by each Trust, see the "Summary
of Essential Information".
THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION,
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
Prospectus Part A dated February 25, 1994
Note: Part A of this Prospectus may not be distributed unless
accompanied by Part B.
<PAGE>
<TABLE>
TAX EXEMPT SECURITIES TRUST, SERIES 255
SUMMARY OF ESSENTIAL INFORMATION AS OF DECEMBER
6, 1993+
Sponsors: SMITH BARNEY SHEARSON INC. and
KIDDER, PEABODY & CO. INCORPORATED
Trustee: UNITED STATES TRUST COMPANY OF NEW YORK
Evaluator: KENNY S&P EVALUATION SERVICES
California
Massachusetts
MinnesotaNew York
Pennsylvania
Trust 75
Trust 70
Trust 75
Trust 77
Trust 75
<S> <C> <C> <C> <C> <C>
Principal Amount of Securities in Trust . . . . . . . . . . . . . . . . . . . . . . .
$3,435,000
$2,105,000
$2,430,000
$4,155,000
$2,290,000
Number of Units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,906
2,754
2,753
4,370
2,366
Fractional Undivided Interest in Trust per Unit . . . . . . . . . . . . . . . . . . .
1/3,906
1/2,754
1/2,753
1/4,370
1/2,366
Minimum Value of Trust:
Trust may be terminated if Principal Amount is less than. . . . . . . . . . . . .
$2,500,000
$1,500,000
$1,500,000
$2,250,000
$1,500,000
Trust must be terminated if Principal Amount is less than . . . . . . . . . . . .
$1,250,000
$750,000
$750,000
$1,125,000
$750,000
Principal Amount of Securities in Trust per Unit. . . . . . . . . . . . . . . . . . .
$ 879.41
$764.34
$ 882.67
$ 950.80
$ 967.87
Public Offering Price per Unit#*. . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1,020.88 $
873.86
$958.53
$ 1,031.40
$ 1,119.85
Sales Charge (3.25%, 5%, 3.25%, 3.25% and 5%, respectively,
of Public Offering Price)# . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
33.17
43.69
31.15
33.52
55.99
Approximate Redemption and Sponsors' Repurchase Price per Unit
(per Unit Bid Price of Securities)#**. . . . . . . . . . . . . . . . . . . . . . . .
$ 987.71
$ 830.17
$ 927.38
$ 997.88
$ 1,063.86
Calculation of Estimated Net Annual Income per Unit:
Estimated Annual Income per Unit. . . . . . . . . . . . . . . . . . . . . . . . .
$ 64.21
$ 53.81
$ 63.08
$ 70.64
$ 69.80
Less Estimated Annual Expenses per Unit . . . . . . . . . . . . . . . . . . . . .
1.69
1.75
1.89
1.82
2.24
Estimated Net Annual Income per Unit. . . . . . . . . . . . . . . . . . . . . . .
$ 62.52 $
52.06 $
61.19 $
68.82 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$
67.56
Monthly Income Distribution per Unit. . . . . . . . . . . . . . . . . . . . . . . . .
$ 5.21 $
4.33 $. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.09
$ 5.73 $
5.63
Daily Rate (360-day basis) of Income Accrual per Unit . . . . . . . . . . . . . . . .
$ .1736 $
.1446 $
.1699 $
.1911 $
.1876
Estimated Current Return Based on Public Offering Price#. . . . . . . . . . . . . . .
6.12%
5.95%
6.38%
6.67%
6.03%
Estimated Long-Term Return# . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.04% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.76% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.53% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.56% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.66%
<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 $12.27, $13.06, $12.14, $13.66 and $12.64 per Unit,
representing accrued interest and the net of cash on hand, accrued
expenses and amounts distributable to Unit holders, attributable to
the Units of California Trust, Massachusetts Trust, Minnesota Trust,
New York Trust and Pennsylvania Trust, respectively, through the
expected date of settlement (five business days after December 6,
1993).
The sales charge of the California Trust, Minnesota Trust and New
York Trust has been reduced effective as of the date of this
prospectus because prerefundings of Portfolio securities have
shortened the average life of the Trust.
** Plus $11.06, $12.05, $10.95, $12.31 and $11.33 per Unit,
representing accrued interest and the net of cash on hand, accrued
expenses and amounts distributable to Unit holders, attributable to
the Units of California Trust, Massachusetts Trust, Minnesota Trust,
New York Trust and Pennsylvania Trust, respectively, as of December
6, 1993, on a pro rata basis. (See "Redemption of Units-Computation
of Redemption Price per Unit".)
</TABLE>
<PAGE>TAX EXEMPT SECURITIES TRUST, SERIES 255
Record Dates: The 1st day of each month
Distribution Dates: The 15th 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: November 5, 1986
Mandatory Termination Date: January 1, 2035
Trustee's
Annual Fee:$1.26 per $1,000 principal
amount of bonds ($18,162 per year on the
basis of bonds in the principal amount of
$14,415,000) plus expenses.
Evaluator's Fee:$.30 per bond per evaluation
As of December 6, 1993, 5 (50%) of the Bonds in the California
Trust were rated by Standard & Poor's Corporation (22% being rated
AAA, 21% being rated AA and 7% being rated A) and 7 (50%) were
rated by Moody's Investors Service (10% being rated Aa and 40%
being rated A); 7 (67%) of the Bonds in the Massachusetts Trust
were rated by Standard & Poor's (41% being rated AAA, 11% being
rated AA and 15% being rated A) and 2 (33%) were rated by
Moody's (23% being rated A and 10% being rated Baa); 6 (64%) of
the Bonds in the Minnesota Trust were rated by Standard & Poor's
(30% being rated AAA, 4% being rated AA and 30% being rated A)
and 2 (36%) were rated by Moody's (17% being rated Aaa and 19%
being rated Aa); 12 (70%) of the Bonds in the New York Trust were
rated by Standard & Poor's (24% being rated AAA, 6% being rated
AA, 32% being rated A and 8% being rated BBB) and 7 (30%) were
rated by Moody's (2% being rated Aaa, 9% being rated Aa and 19%
being rated A); 8 (64%) of the Bonds in the Pennsylvania Trust were
rated by Standard & Poor's (53% being rated AAA and 11% being
rated A), 5 (32%) were rated by Moody's Investors Service (18%
being rated Aaa, 1% being rated Aa, 2% being rated A and 11%
being rated Baa) and 1 (4%) was not rated by either service. Ratings
assigned by rating services are subject to change from time to time.
Additional Considerations - Investment in any Trust should be
made with an understanding that the value of the underlying Portfolio
may decline with increases in interest rates. Approximately 2% and
18% of the Bonds in the New York Trust and Pennsylvania Trust,
respectively, consist of general obligation bonds. Approximately 69%,
27% and 6% of the Bonds in the Massachusetts Trust, New York
Trust and Pennsylvania Trust, respectively, consist of hospital revenue
bonds (including obligations of health care facilities). Approximately
6%, 42% and 6% of the Bonds in the Massachusetts Trust,
Minnesota Trust, New York Trust and Pennsylvania Trust,
respectively, consist of obligations of municipal housing authorities.
Approximately 45%, 32% and 32% of the Bonds in the California
Trust, Minnesota Trust and New York Trust, respectively, consist of
bonds in the power facilities category. Approximately 21% and 15%
of the Bonds in the California Trust and New York Trust,
respectively, consist of bonds issued for the financing of nuclear
power plants. Obligations of issuers located in the Commonwealth
of Puerto Rico represent approximately 8 and 10% of the Bonds in
the Massachusetts Trust and New York Trust, respectively. (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 December
6, 1993.
PAGE
<PAGE>
<TABLE>
TAX EXEMPT SECURITIES TRUST, SERIES 255
FINANCIAL AND STATISTICAL INFORMATION
Selected data for each Unit outstanding
<C> <S> <C> <C> <C>
<C>
Income Principal
Units Net Asset
Distributions
Distributions
Period Ended Outstanding Value Per Unit
Per Unit Per
Unit
October 31, 1991 California 4,106 $
1,039.63 $ 70.92 $ -
Massachusetts 2,754
1,014.33 70.50 -
Minnesota 2,832
1,015.56 69.32 1.76
New York 4,500
968.41 72.33 46.22
Pennsylvania 2,457
1,044.60 69.99 1.24
October 31, 1992 California 4,052 $
991.95 $ 68.56 $ 42.14
Massachusettts 2,754
1,028.30 70.32 -
Minnesota 2,827
931.05 68.38 92.88
New York 4,370
978.93 69.13 -
Pennsylvania 2,367
1,047.79 69.21 1.52
October 31, 1993 California 3,906 $
1,021.57 $ 65.86 $ 33.05
Massachusetts 2,754
848.58 60.70 243.55
Minnesota 2,753
946.21 62.32 11.23
New York 4,370
1,022.02 69.09 -
Pennsylvania 2,366
1,086.72 68.68 16.73
<PAGE>
TAX EXEMPT SECURITIES TRUST, SERIES 255
BALANCE SHEETS
October 31, 1993
ASSETS
California Massachusetts
Minnesota
New York
Pennsylvania
Trust 75
Trust 70
Trust 75
Trust 77
Trust 75
<S> <C> <C>
<C> <C> <C>
Investments in tax exempt bonds, at market value
(Cost $3,548,898, $2,087,837, $2,389,807, $4,170,823
and $2,319,766, respectively)
(Note 3 to Portfolio of Securities) . . . . . . . . . . . . . . . . . . . . $3,930,096
$2,293,669
$2,561,682
$4,391,174
$2,533,842
Accrued interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97,390
47,864
48,017
104,576
54,249
Total Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,027,486
$ 2,341,533
$ 2,609,699
$ 4,495,750
$ 2,588,091
LIABILITIES AND NET ASSETS
Overdraft payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $36,583
$ 4,109
$ 4,313
$ 28,755
$ 16,378
Accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 630
424
469
765
511
Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 37,213
4,533
4,782
29,520
16,889
Net Assets (Units of fractional undivided
interest outstanding - 3,906, 2,754, 2,753
4,370 and 2,366, respectively):
Original cost to investors (Note 1) . . . . . . . . . . . . . . . . .5,250,154
3,157,449
3,087,434
4,723,478
3,173,269
Less initial underwriting commission (sales charge)
(Note 1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 223,131
134,192
131,216
200,748
134,864
5,027,023
3,023,257
2,956,218
4,522,730
3,038,405
Cost of bonds sold or redeemed since date of deposit
(November 5, 1986). . . . . . . . . . . . . . . . . . . . . . . . .
(1,478,125 )
(935,420)
(566,411)
(351,907)
(718,639)
Net unrealized market appreciation. . . . . . . . . . . . . . . . . . 381,198
205,832
171,875
220,351
214,076
3,930,096
2,293,669
2,561,682
4,391,174 2,533,842
Undistributed net investment income . . . . . . . . . . . . . . . . .60,061
43,304
41,971
73,805
37,344
Undistributed proceeds from bonds sold or redeemed 116
27
1,264
1,251
16
Net Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,990,273
2,337,000
2,604,917
4,466,230
2,571,202
Total Liabilities and Net Assets. . . . . . . . . . . . . . . . . . . $4,027,486
$2,341,533
$2,609,699
$4,495,750
$2,588,091
Net asset value per unit. . . . . . . . . . . . . . . . . . . . . . . . . . $1,021.57
$848.58
$ 946.21
$1,022.02
$1,086.72
The accompanying Notes to Financial Statements are an integral part
of these statements.
<PAGE>
TAX EXEMPT SECURITIES TRUST, SERIES 255
CALIFORNIA TRUST 75
STATEMENTS OF OPERATIONS
For the years ended October 31, 1993, 1992 and 1991
1993
1992
1991
<S> <C> <C>
<C>
Investment Income-interest (Note 2) . . . . . . . . . . . . . . . . . . . $ 268,787$
284,991 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 298,787
Less expenses:
Trustee's fees and expenses. . . . . . . . . . . . . . . . . . . . . .5,5065,5955,137
Evaluator's fees . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,201
1,168 . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,010
Total expenses. . . . . . . . . . . . . . . . . . . . . . . . . . 6,707
6,763 . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,147
Net investment income. . . . . . . . . . . . . . . . . . . . . . . . . 262,080
278,228 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 292,640
Realized and unrealized gain (loss) on investments:
Net realized loss on securities transactions (Note 5). . . . . . . . .(22,585
) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(2,123) (3,800
)
Net increase (decrease) in unrealized market
appreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 276,462
(19,431 )
208,898
Net gain (loss) on investments . . . . . . . . . . . . . . . . . . . . 253,877
(21,554 )
205,098
Net increase in net assets resulting from operations . . . . . . . . . $515,957$256,674
$ 497,738
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended October 31, 1993, 1992 and 1991
1993
1992 1991
Operations:
Net investment income. . . . . . . . . . . . . . . . . . . . . . . . . $262,080$278,228
$ 292,640
Net realized loss on securities transactions (Note 5). . . . . . . . .(22,585
) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(2,123) (3,800
)
Net increase (decrease) in unrealized market
appreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 276,462
(19,431 ) 208,898
Net increase in net assets resulting from operations . . . . . . . . . 515,957
256,674 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 497,738
Distributions to Unit Holders:
Net investment income (Note 4) . . . . . . . . . . . . . . . . . . . .(263,439
) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(279,058) (294,176
)
Proceeds from securities sold or redeemed. . . . . . . . . . . . . . . (133,918
) . . . . . . . . . . . . . . . . . . . . . . . . . . . (171,596) -
Total Distributions . . . . . . . . . . . . . . . . . . . . . . . (397,357
) . . . . . . . . . . . . . . . . . . . . . . . . . . . (450,654)
(294,176)
Unit Redemptions by Unit Holders (Note 3):
Accrued interest at date of redemption . . . . . . . . . . . . . . . .(2,205
) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(660) (947
)
Value of Units at date of redemption . . . . . . . . . . . . . . . . . (145,512
) . . . . . . . . . . . . . . . . . . . . . . . . . . . (54,708) (82,767
)
Total Redemptions . . . . . . . . . . . . . . . . . . . . . . . . (147,717
) . . . . . . . . . . . . . . . . . . . . . . . . . . . (55,368) (83,714
)
Increase (decrease) in net assets. . . . . . . . . . . . . . . . . . .(29,117
) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(249,348) 119,848
Net Assets:
Beginning of year. . . . . . . . . . . . . . . . . . . . . . . . . . . 4,019,390
4,268,738 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,148,890
End of year (including undistributed net
investment income of $60,061, $63,625
and $65,115, respectively) . . . . . . . . . . . . . . . . . . . . . $3,990,273$
4,019,390 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,268,738
The accompanying Notes to Financial Statements are an integral part
of these statements.<PAGE>
<PAGE>
TAX EXEMPT SECURITIES TRUST, SERIES 255
MASSACHUSETTS TRUST 70
STATEMENTS OF OPERATIONS
For the years ended October 31, 1993, 1992 and 1991
1993
1992 1991
Investment Income-interest (Note 2) . . . . . . . . . . . . . . . . . . . $ 169,201$
198,929 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 198,929
Less expenses:
Trustee's fees and expenses. . . . . . . . . . . . . . . . . . . . . .3,9814,3563,381
Evaluator's fees . . . . . . . . . . . . . . . . . . . . . . . . . . . 963
1,016 . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,010
Total expenses. . . . . . . . . . . . . . . . . . . . . . . . . . 4,944
5,372 . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,391
Net investment income. . . . . . . . . . . . . . . . . . . . . . . . . 164,257
193,557 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 194,538
Realized and unrealized gain (loss) on investments:
Net realized loss on securities transactions (Note 5). . . . . . . . .(7,615
) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .- -
Net increase in unrealized market appreciation . . . . . . . . . . . . 186,317
38,577. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 211,363
Net gain on investments. . . . . . . . . . . . . . . . . . . . . . . . 178,702
38,577. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 211,363
Net increase in net assets resulting from operations . . . . . . . . . $342,959$232,134
$ 405,901
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended October 31, 1993, 1992 and 1991
1993
1992
1991
Operations:
Net investment income. . . . . . . . . . . . . . . . . . . . . . . . . $164,257$193,557
$ 194,538
Net realized loss on securities transactions (Note 5). . . . . . . . .(7,615
) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .- -
Net increase in unrealized market appreciation . . . . . . . . . . . . 186,317
38,577. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 211,363
Net increase in net assets resulting from operations . . . . . . . . . 342,959
232,134 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 405,901
Distributions to Unit Holders:
Net investment income (Note 4) . . . . . . . . . . . . . . . . . . . .(167,168
) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(193,661) (194,157
)
Proceeds from securities sold or redeemed. . . . . . . . . . . . . . . (670,737
) . . . . . . . . . . . . . . . . . . . . . . . . . . - -
Total Distributions . . . . . . . . . . . . . . . . . . . . . . .
(837,905 )
(193,661
) (194,157)
Increase (decrease) in net assets. . . . . . . . . . . . . . . . . . .(494,946
) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .38,473 211,744
Net Assets:
Beginning of year. . . . . . . . . . . . . . . . . . . . . . . . . . . 2,831,946
2,793,473 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,581,729
End of year (including undistributed net
investment income of $43,304, $46,215
and $46,319, respectively) . . . . . . . . . . . . . . . . . . . . . $2,337,000$
2,831,946 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,793,473
The accompanying Notes to Financial Statements are an integral part
of these statements.<PAGE>
<PAGE>
TAX EXEMPT SECURITIES TRUST, SERIES 255
MINNESOTA 75
STATEMENTS OF OPERATIONS
For the years ended October 31, 1993, 1992 and 1991
1993
1992 1991
Investment Income-interest (Note 2) . . . . . . . . . . . . . . . . . . . $ 181,394$
197,503 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 200,897
Less expenses:
Trustee's fees and expenses. . . . . . . . . . . . . . . . . . . . . .4,3384,5143,972
Evaluator's fees . . . . . . . . . . . . . . . . . . . . . . . . . . . 827
710 . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,010
Total expenses. . . . . . . . . . . . . . . . . . . . . . . . . . 5,165
5,224 . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,982
Net investment income. . . . . . . . . . . . . . . . . . . . . . . . . 176,229
192,279 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195,915
Realized and unrealized gain (loss) on investments:
Net realized gain (loss) on securities transactions
(Note 5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(3,269
) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,462 57
Net increase in unrealized market appreciation . . . . . . . . . . . . 77,847
20,673. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133,442
Net gain on investments. . . . . . . . . . . . . . . . . . . . . . . . 74,578
25,135. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133,499
Net increase in net assets resulting from operations . . . . . . . . . $250,807$217,414
$ 329,414
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended October 31, 1993, 1992 and 1991
1993
1992 1991
Operations:
Net investment income. . . . . . . . . . . . . . . . . . . . . . . . . $176,229$192,279
$ 195,915
Net realized gain (loss) on securities transactions
(Note 5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(3,269
) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,462 57
Net increase in unrealized market appreciation . . . . . . . . . . . . 77,847
20,673. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133,442
Net increase in net assets resulting from operations . . . . . . . . . 250,807
217,414 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 329,414
Distributions to Unit Holders:
Net investment income (Note 4) . . . . . . . . . . . . . . . . . . . .(176,137
) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(193,626) (196,314
)
Proceeds from securities sold or redeemed. . . . . . . . . . . . . . . (31,716
) . . . . . . . . . . . . . . . . . . . . . . . . . . . (262,607)
(4,985)
Total Distributions . . . . . . . . . . . . . . . . . . . . . . . (207,853
) . . . . . . . . . . . . . . . . . . . . . . . . . . . (456,233)
(201,299)
Unit Redemptions by Unit Holders (Note 3):
Accrued interest at date of redemption . . . . . . . . . . . . . . . .(1,073
) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (66) -
Value of Units at date of redemption . . . . . . . . . . . . . . . . . (69,060
) . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,112) -
Total Redemptions . . . . . . . . . . . . . . . . . . . . . . . . (70,133
) . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,178) -
Increase (decrease) in net assets. . . . . . . . . . . . . . . . . . .(27,179
) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 243,997 128,115
Net Assets:
Beginning of year. . . . . . . . . . . . . . . . . . . . . . . . . . . 2,632,096
2,876,093 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,747,978
End of year (including undistributed net
investment income of $41,971, $42,952
and $44,365, respectively) . . . . . . . . . . . . . . . . . . . . . $2,604,917$
2,632,096 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,876,093
The accompanying Notes to Financial Statements are an integral part
of these statements.<PAGE>
<PAGE>
TAX EXEMPT SECURITIES TRUST, SERIES 255
NEW YORK TRUST 77
STATEMENTS OF OPERATIONS
For the years ended October 31, 1993, 1992 and 1991
1993
1992 1991
Investment Income-interest (Note 2) . . . . . . . . . . . . . . . . . . . $
309,080 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
310,158 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 329,625
Less expenses:
Trustee's fees and expenses. . . . . . . . . . . . . . . . . . . . . . 6,041
5,917 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,435
Evaluator's fees . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,690 . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,574 1,010
Total expenses. . . . . . . . . . . . . . . . . . . . . . . . . .
7,731 . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,491 6,445
Net investment income. . . . . . . . . . . . . . . . . . . . . . . . .
301,349 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
302,667 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 323,180
Realized and unrealized gain (loss) on investments:
Net realized loss on securities transactions (Note 5). . . . . . . . . (941
) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(3,784) (15,000
)
Net increase in unrealized market appreciation . . . . . . . . . . . .
189,780 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49,487
237,634
Net gain on investments. . . . . . . . . . . . . . . . . . . . . . . .
188,839 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,703 222,634
Net increase in net assets resulting from operations . . . . . . . . . $ 490,188 $
348,370 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 545,814
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended October 31, 1993, 1992 and 1991
1993
1992 1991
Operations:
Net investment income. . . . . . . . . . . . . . . . . . . . . . . . . $301,349$302,667
$ 323,180
Net realized loss on securities transactions (Note 5). . . . . . . . .(941
) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(3,784) (15,000
)
Net increase in unrealized market appreciation . . . . . . . . . . . . 189,780
49,487. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 237,634
Net increase in net assets resulting from operations . . . . . . . . . 490,188
348,370 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 545,814
Distributions to Unit Holders:
Net investment income (Note 4) . . . . . . . . . . . . . . . . . . . .(301,923
) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(303,682) (325,485
)
Proceeds from securities sold or redeemed. . . . . . . . . . . . . . . -
- . . . . . . . . . . . . . . . . . . . . . . . . . .
(207,990 )
Total Distributions . . . . . . . . . . . . . . . . . . . . . . . (301,923
) . . . . . . . . . . . . . . . . . . . . . . . . . . . (303,682)
(533,475)
Unit Redemptions by Unit Holders (Note 3):
Accrued interest at date of redemption . . . . . . . . . . . . . . . . -
(1,647 ) -
Value of Units at date of redemption . . . . . . . . . . . . . . . . . -
(122,941 ) -
Total Redemptions . . . . . . . . . . . . . . . . . . . . . . . . -
(124,588 ) -
Increase (decrease) in net assets. . . . . . . . . . . . . . . . . . .188,265(79,900
) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12,339
Net Assets:
Beginning of year. . . . . . . . . . . . . . . . . . . . . . . . . . . 4,277,965
4,357,865 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,345,526
End of year (including undistributed net
investment income of $73,805, $74,379
and $77,041, respectively) . . . . . . . . . . . . . . . . . . . . . $4,466,230$
4,277,965 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,357,865
The accompanying Notes to Financial Statements are an integral part
of these statements.<PAGE>
<PAGE>
TAX EXEMPT SECURITIES TRUST, SERIES 255
PENNSYLVANIA TRUST 75
STATEMENTS OF OPERATIONS
For the years ended October 31, 1993, 1992 and 1991
1993
1992 1991
Investment Income-interest (Note 2) . . . . . . . . . . . . . . . . . . . $ 167,330$
170,080 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 176,031
Less expenses:
Trustee's fees and expenses. . . . . . . . . . . . . . . . . . . . . .4,0043,9483,563
Evaluator's fees . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,331
1,214 . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,010
Total expenses. . . . . . . . . . . . . . . . . . . . . . . . . . 5,335
5,162 . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,573
Net investment income. . . . . . . . . . . . . . . . . . . . . . . . .
161,995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
164,918 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171,458
Realized and unrealized gain (loss) on investments:
Net realized gain (loss) on securities transactions
(Note 5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .478(2,951
) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 375
Net increase in unrealized market appreciation . . . . . . . . . . . . 131,832
16,043. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159,636
Net gain on investments. . . . . . . . . . . . . . . . . . . . . . . . 132,310
13,092. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160,011
Net increase in net assets resulting from operations . . . . . . . . . $294,305$178,010
$ 331,469
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended October 31, 1993, 1992 and 1991
1993
1992 1991
Operations:
Net investment income. . . . . . . . . . . . . . . . . . . . . . . . . $161,995$164,918
$ 171,458
Net realized gain (loss) on securities transactions
(Note 5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .478(2,951
) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 375
Net increase in unrealized market appreciation . . . . . . . . . . . . 131,832
16,043. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159,636
Net increase in net assets resulting from operations . . . . . . . . .
294,305 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
178,010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 331,469
Distributions to Unit Holders:
Net investment income (Note 4) . . . . . . . . . . . . . . . . . . . .(162,554
) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(165,389) (171,965
)
Proceeds from securities sold or redeemed. . . . . . . . . . . . . . . (39,588
) . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,598)
(3,047)
Total Distributions . . . . . . . . . . . . . . . . . . . . . . . (202,142
) . . . . . . . . . . . . . . . . . . . . . . . . . . . (168,987)
(175,012)
Unit Redemptions by Unit Holders (Note 3):
Accrued interest at date of redemption . . . . . . . . . . . . . . . .(14
) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(1,348) -
Value of Units at date of redemption . . . . . . . . . . . . . . . . . (1,076
) . . . . . . . . . . . . . . . . . . . . . . . . . . . (94,136) -
Total Redemptions . . . . . . . . . . . . . . . . . . . . . . . . (1,090
) . . . . . . . . . . . . . . . . . . . . . . . . . . . (95,484) -
Increase (decrease) in net assets. . . . . . . . . . . . . . . . . . .(91,073
) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (86,461) 156,457
Net Assets:
Beginning of year. . . . . . . . . . . . . . . . . . . . . . . . . . .
2,480,129 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,566,590 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,410,133
End of year (including undistributed net
investment income of $37,344, $37,917
and $39,736, respectively) . . . . . . . . . . . . . . . . . . . . . $2,571,202$
2,480,129 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,566,590
The accompanying Notes to Financial Statements are an integral part
of these statements.<PAGE>
<PAGE>
</TABLE>
TAX EXEMPT SECURITIES TRUST, SERIES 255
October 31, 1993
NOTES TO FINANCIAL STATEMENTS
(1) The original cost to the investors represents the aggregate initial
public offering price as of the date of deposit (November 5, 1986),
exclusive of accrued interest, computed on the basis of the aggregate
offering price of the securities. The initial underwriting commission
(sales charge) was 4.25% of the aggregate public offering price
(4.439% 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) 284 Units, 79 Units, 130 Units and 91 Units in the California Trust,
Minnesota Trust, New York Trust and Pennsylvania Trust,
respectively, were redeemed by the Trustee during the three years
ended October 31, 1993 (146 Units, 74 Units, 1 Unit in the
California Trust, Minnesota Trust and Pennsylvania Trust being
redeemed in 1993. 54 Units, 5 Units, 130 Units and 90 Units in the
California Trust, Minnesota Trust, New York Trust and
Pennsylvania Trust, respectively, being redeemed in 1992. 84 Units
in the California Trust being redeemed in 1991).
(4) Interest received by the Trust is distributed to Unit holders on the
fifteenth day of each month, after deducting applicable expenses.
(5) The gain (loss) from the sale or redemption of securities is
computed on the basis of 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
Sponsors are deemed to be issuers of each Trust's Units. As such,
the Sponsors have the responsibility of issuers under the Act with
respect to financial statements of each Trust included in the
Registration Statement.
INDEPENDENT AUDITORS' REPORT
To the Unit Holders, Sponsors and Trustee of
Tax Exempt Securities Trust, Series 255:
We have audited the accompanying balance sheets of Tax Exempt
Securities Trust, Series 255 (comprising, respectively, California Trust 75,
Massachusetts Trust 70, Minnesota Trust 75, New York Trust 77 and
Pennsylvania Trust 75), including the portfolios of securities, as of
October 31, 1993, and the related statements of operations and changes
in net assets for each of the years in the three-year period ended
October 31, 1993. These financial statements are the responsibility of
the Trustee (see Note 6). Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included
confirmation of securities owned as of October 31, 1993 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 each of the
respective Trusts constituting Tax Exempt Securities Trust, Series 255 as
of October 31, 1993, and the results of their operations and changes in
their net assets for each of the years in the three-year period ended
October 31, 1993, in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK
New York, New York
January 21, 1994
<PAGE>
<TABLE>
TAX EXEMPT SECURITIES TRUST, SERIES 255
CALIFORNIA TRUST 75 - PORTFOLIO OF SECURITIES -
October 31, 1993
<S> <C> <C> <C>
<C>
Ratings Redemption
Principal
Market
Security Description (1)
Provisions (2) Amount
Value (3)
California State University Revenue
Bonds, San Jose State University A* 11/1/96 @
103 $ 275,000$306,840
Student Union, 7.50% due 11/1/2015
City of Anaheim, Electric Revenue Aa* 4/1/96 @
100 20,00020,581
Bonds, 5.75% due 10/1/2007 S.F.
10/1/05 @ 100
The Regents of The University of
California, Parking System Revenue
Bonds, Los Angeles Campus,
7.75% due 11/1/2016 (p) A* 11/1/96 @
102 175,000198,496
7.60% due 11/1/2005 (p) A* 11/1/96 @
102 250,000282,430
Los Angeles Convention and Exhibition
Center Authority, Certificates of AAA 12/1/05 @
100 500,000694,290
Participation, 9.00% due 12/1/2020 (p)
Northern California Power Agency,
Geothermal Project Number 3 Revenue
Refunding Bonds, 7.00% due 7/1/2010 A* 7/1/95 @
100 320,000334,845
S.F. 7/1/09
@ 100
9.75% due 7/1/2008 (p) AAA 7/1/95 @
102 150,000168,204
Sacramento Municipal Utility District,
Electric Revenue Refunding Bonds,
9.00% due 11/15/2009 (p) AAA 11/15/93
@ 102 60,00061,363
6.00% due 7/1/2015 A* 7/1/95 @
100 395,000404,484
S.F. 7/1/11
@ 100
Santa Clara Valley Water District,
Water Revenue Refunding Bonds, Aa* 6/1/96 @
100 350,000362,824
5.75% due 6/1/2004 S.F. 6/1/02
@ 100
Southern California Public Power
Authority, Transmission Project
Revenue Bonds, 7.875% due 7/1/2018 (p) AA 7/1/96 @
103 500,000567,775
6.00% due 7/1/2020 AA 7/1/96 @
100 250,000253,977
S.F. 7/1/19
@ 100
City of San Jose, Certificates of
Participation, Convention Center A+p 9/1/96 @
102 250,000 273,987
Project, 6.50% due 9/1/2011 (p)
$3,495,000$3,930,096
The accompanying Notes are an integral part of this Portfolio.
<PAGE>
A-12<PAGE>
TAX EXEMPT SECURITIES TRUST, SERIES 255
MASSACHUSETTS TRUST 70 - PORTFOLIO OF SECURITIES -
October 31, 1993
(Continued)
Ratings Redemption
Principal
Market
Security Description (1)
Provisions (2) Amount
Value (3)
Massachusetts Bay Transportation
Authority, General Transportation A+ 3/1/98 @
100 $ 140,000$150,207
System Bonds, 6.50% due 3/1/2008 S.F. 3/1/99
@ 100
Massachusetts Health and Educational
Facilities Authority Revenue Bonds, Baa* -
- - 200,000227,096
Norwood Hospital, 7.00% due 7/1/2014 S.F. 7/1/12
@ 100
Massachusetts Health and Educational
Facilities Authority Revenue Bonds,
Dana-Farber Cancer Institute Issue,
7.20% due 12/1/2015 (p) AAA 11/3/96 @
102 250,000279,192
7.20% due 12/1/2015 (p) AAA 11/3/96 @
102 100,000111,677
Massachusetts Health and Educational
Facilities Authority Revenue Bonds,
New England Medical Center Hospital A+ 7/1/96 @
102 500,000540,725
Issue, 7.10% due 7/1/2005 S.F. 7/1/03
@ 100
Massachusetts Housing Finance
Agency, Housing Project Revenue AAA --
105,000126,652
Bonds, 7.00% due 4/1/2021 S.F. 4/1/00
@ 100
Massachusetts Port Authority,
Refunding Revenue Bonds, AA 11/28/93
@ 101 1/2 250,000254,613
7.125% due 7/1/2012 S.F. 7/1/98
@ 100
City of Quincy, Massachusetts,
Revenue Bonds, Quincy City
Hospital Issue, FHA Insured AAA 7/15/96 @
102 375,000416,089
Project, 7.75% due 1/15/2006
University of Puerto Rico Revenue A 12/1/93 @
101 185,000 187,418
Bonds, 5.50% due 6/1/2012
$2,105,000$2,293,669
The accompanying Notes are an integral part of this Portfolio.
A-13
PAGE
<PAGE>
TAX EXEMPT SECURITIES TRUST, SERIES 255
MINNESOTA TRUST 75 - PORTFOLIO OF SECURITIES - October
31, 1993
(Continued)
Ratings Redemption
Principal
Market
Security Description (1)
Provisions (2) Amount
Value (3)
Minnesota Housing Finance
Agency, Housing Development
Bonds, 7.00% due 2/1/2022 A+ 2/1/94 @
102 $ 165,000$169,993
S.F. 2/1/02
@ 100
6.25% due 2/1/2020 A+ 2/1/94 @
102 425,000436,845
S.F. 2/1/98
@ 100
Minnesota Housing Finance
Agency, Home Mortgage Bonds, Aa* 11/29/93
@ 102 260,000265,514
6.25% due 1/1/2008 S.F. 1/1/98
@ 100
Village of Cohasset, Pollution Control
Revenue Bonds, Minnesota Power & A- 12/1/93 @
100 165,000165,370
Light Company, 5.50% due 12/1/2002
Minneapolis Housing and Redevelopment
Authority, Home Ownership
Program Mortgage Revenue Bonds, Aa* 12/1/93 @
100 1/2 210,000212,476
7.10% due 12/1/2010 S.F.
12/1/99 @ 100
Minneapolis Community Development
Agency, Economic Development AA- 6/1/94 @
102 100,000106,548
Revenue Bonds, 10.50% due 6/1/2004 S.F. 6/1/00
@ 100
City of Minneapolis, Convention
Center Sales Tax Revenue Bonds, AAA 4/1/96 @
102 500,000555,880
7.75% due 4/1/2011 (p)
Northern Municipal Power Agency,
Electric System Revenue Refunding AAA 1/1/94 @
102 210,000216,632
Bonds, 9.25% due 1/1/2014 (p)
Southern Minnesota Municipal Power
Agency, Power Supply System Revenue A+ 1/1/96 @
102 400,000 432,424
Bonds, 6.75% due 1/1/2013 (p)
$2,435,000$2,561,682
The accompanying Notes are an integral part of the Portfolio.
A-14
PAGE
<PAGE>
TAX EXEMPT SECURITIES TRUST, SERIES 255
NEW YORK TRUST 77 - PORTFOLIO OF SECURITIES - October
31, 1993
(Continued)
Ratings Redemption
Principal
Market
Security Description (1)
Provisions (2) Amount
Value (3)
State of New York, General Obligation A* --
$ 100,000$85,863
Bonds, 3.00% due 3/15/2004
New York State Energy Research and
Development Authority, Pollution
Control Revenue Bonds, Orange and
Rockland Utilities, Inc. Project, A+ 10/1/94 @
102 350,000379,292
10.25% due 10/1/2014
New York State Energy Research and
Development Authority, Gas
Facilities Refunding Revenue Bonds,
The Brooklyn Union Gas Company A1* 5/15/95 @
102 320,000352,285
Project, 9.00% due 5/15/2015
New York City Housing Development
Corporation, General Housing A 5/1/94 @
101 250,000252,163
Bonds, 5.80% due 5/1/2007
New York State Housing Finance
Agency, Hospital and Nursing Home
Project Bonds, 5.50% due 11/1/2005 A* 11/28/93
@ 103 110,000113,575
5.90% due 11/1/2007 A* 11/28/93
@ 102 250,000255,000
New York State Medical Care Facilities
Finance Agency, Insured Hospital
Mortgage Revenue Bonds, Mt. Sinai AAA 1/15/96 @
102 100,000112,450
Hospital, 8.625% due 1/15/2006 (p)
New York State Medical Care Facilities
Finance Agency, Insured Hospital Mortgage
Revenue Bonds, Long Beach Memorial Aaa* 1/15/95 @
102 95,000104,064
Hospital, 9.875% due 1/15/2005 (p)
New York State Medical Care Facilities
Finance Agency, Insured Hospital and
Nursing Home Mortgage Revenue Bonds, AAA 1/15/96 @
102 250,000280,465
8.375% due 1/15/2006 (p)
New York State Medical Care Finance
Agency, Nursing Home Insured Mortgage A- 1/15/94 @
102 300,000311,607
Revenue Bonds, 10.50% due 1/15/2024 S.F.
1/15/03 @ 100
Power Authority of the State of
New York, General Purpose Bonds,
5.00% due 1/1/2019 Aa* 1/1/96 @
102 130,000126,184
7.00% due 1/1/2016 (p) Aa* 1/1/96 @
102 250,000271,558
5.75% due 1/1/2018 Aa* 1/1/96 @
100 250,000258,347
S.F. 1/1/17
@ 100
Battery Park City Authority,
Special Obligation Revenue AAA 11/1/94 @
103 285,000304,118
Bonds, 7.25% due 11/1/2016 S.F.
11/1/06 @ 100
<PAGE>
A-15
TAX EXEMPT SECURITIES TRUST, SERIES 255
NEW YORK TRUST 77 - PORTFOLIO OF SECURITIES - October
31, 1993
(Continued)
Ratings Redemption
Principal
Market
Security Description (1)
Provisions (2) Amount
Value (3)
Metropolitan Transportation Authority,
Transit Facilities Service Contract BBB+ 7/1/96 @
102 $ 345,000$351,603
Bonds, 6.00% due 7/1/2014 S.F. 7/1/12
@ 100
Suffolk County Water Authority,
Water Works Revenue Refunding A+ --
200,000220,396
Bonds, 5.90% due 6/1/2006
Triborough Bridge and Tunnel
Authority, Convention Center AAA (c) 7/1/95 @
102 170,000188,353
Project Bonds, 8.875% due 1/1/2005 (p)
Puerto Rico Electric Authority Power AAA 7/1/95 @
103 150,000168,111
Revenue Bonds, 9.125% due 7/1/2015 (p)
Puerto Rico Water Resources
Authority Power Revenue Bonds, A- 11/28/93
@ 102 250,000 255,740
6.00% due 7/1/2014
$4,155,000$4,391,174
The accompanying Notes are an integral part of this Portfolio.
A-16
PAGE
<PAGE>
TAX EXEMPT SECURITIES TRUST, SERIES 255
PENNSYLVANIA TRUST 75 - PORTFOLIO OF SECURITIES -
October 31, 1993
(Continued)
Ratings Redemption
Principal
Market
Security Description (1)
Provisions (2) Amount
Value (3)
Philadelphia Parking Authority,
Airport Parking Revenue Bonds, A* 11/28/93
@ 100 $ 55,000$55,241
7.40% due 9/1/2012 S.F.
Currently @ 100
Pennsylvania Turnpike Commission,
Turnpike Revenue Bonds, AAA 12/1/96 @
102 250,000284,812
7.875% due 12/1/2015 (p)
Allegheny County General Obligation Aaa* -
- - 310,000337,664
Bonds, 5.75% due 12/1/2002
Carlisle Borough Municipal Authority,
College Revenue Bonds, Dickinson College, A- 11/1/95 @
102 190,000214,869
9.50% due 11/1/2010 S.F.
11/1/01 @ 100
Delaware River Port Authority, Refunding AAA --
205,000214,756
Revenue Bonds, 6.00% due 1/15/2010
Delaware County Industrial Development
Authority Bonds, Sun Oil Company, Inc., Baa1* 12/1/93 @
100 280,000280,725
5.90% due 12/1/2006 S.F.
12/1/97 @ 100
Lower Moreland Township Authority,
Montgomery County, Guaranteed Sewer AAA 8/1/96 @
100 355,000390,351
Revenue Bonds, 7.80% due 8/1/2016 S.F. 8/1/07
@ 100
Montgomery County General Obligation Aaa* -
- - 100,000122,408
Bonds, 9.00% due 8/15/2004
Neshaminy Water Resources Authority
of Pennsylvania, Water Revenue Aa* 11/28/93
@ 100 30,00030,022
Bonds, 5.75% due 3/1/2011
City of Philadelphia, Water and Sewer
Revenue Bonds, 6.00% due 7/1/2016 (p) AAA 7/1/96 @
100 40,00042,318
9.10% due 12/1/2004 (p) AAA 12/1/95 @
102 30,00033,827
The Pittsburgh Water and Sewer Authority,
Water and Sewer System Revenue Refunding AAA
-- 305,000374,522
Bonds, 7.625% due 9/1/2004 S.F. 9/1/97
@ 100
Scranton-Lackawanna Health and
Welfare Authority, Hospital Revenue
Bonds, The Moses Taylor Hospital, NR --
85,00091,056
6.625% due 7/1/2009 S.F.
Currently @ 100
Scranton-Lackawanna Health and
Welfare Authority, Hospital Revenue
Bonds, St. Joseph Hospital, A+ 12/15/96
@ 101 55,000 61,271
7.75% due 12/15/2015 S.F.
12/15/07 @ 100
$2,290,000$2,533,842
The accompanying Notes are an integral part of this portfolio.
<PAGE> A-17
TAX EXEMPT SECURITIES TRUST, SERIES 255
PORTFOLIO OF SECURITIES - October 31, 1993
(Continued)
At October 31, 1993 the net unrealized market appreciation of all tax
exempt bonds was comprised of the following:
<S> <C> <C> <C>
<C> <C>
California Massachusetts
Minnesota New York
Pennsylvania
Trust 75 Trust 70
Trust 75 Trust 77 Trust 75
Gross unrealized market appreciation $ 395,577 $ 205,832 $
205,429 $ 343,152 $ 223,996
Gross unrealized market depreciation (14,379) -
(33,554) (122,801
) (9,920
)
Net unrealized market appreciation $ 381,198 $ 205,832 $
171,875 $ 220,351 $ 214,076
</TABLE>
NOTES TO PORTFOLIO OF SECURITIES:
(1) All Ratings are by Standard & Poor's Corporation, except those
identified by an asterisk (*) which are by Moody's Investors
Service. The meaning of the applicable rating symbols is set
forth in Part B, "Ratings".
(2) There is shown under this heading the year in which each issue
of bonds initially or currently is redeemable and the redemption
price for that year; unless otherwise indicated, each issue
continues to be redeemable at declining prices thereafter, but not
below par. "S.F." indicates a sinking fund has been or will be
established with respect to an issue of bonds. The prices at
which bonds may be redeemed or called prior to maturity may or
may not include a premium and, in certain cases, may be less
than the cost of the bonds to the Trust. Certain bonds in the
portfolio, including bonds not listed as being subject to
redemption provisions, may be redeemed in whole or in part
other than by operation of the stated redemption or sinking fund
provisions under certain unusual or extraordinary circumstances
specified in the instruments setting forth the terms and provisions
of such bonds. For example, see discussion of obligations of
municipal housing authorities under "Tax Exempt Securities
Trust-Portfolio" in Part B.
(3) The market value of securities as of October 31, 1993 was
determined by the Evaluator on the basis of bid prices for the
securities at such date.
(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-18
<PAGE>
[TEXT]
Note: Part B of this Prospectus may not be distributed
unless accompanied by Part A
TAX EXEMPT SECURITIES TRUST
Each State 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
(collectively, the "Trust Agreement"), dated the Date of Deposit, among
the sponsors, United States Trust Company of New York, as trustee (the
"Trustee"), and Kenny Information Systems, Inc., as evaluator (the
"Evaluator"). As of the date of this Prospectus, the sponsors include
Smith Barney Shearson Inc. and Kidder, Peabody & Co. Incorporated
(the "Sponsors" or "Co-Sponsors"). Each trust contains Bonds of a State
for which such Trust is named herein (a "State Trust"). On the Date of
Deposit the Sponsors deposited with the Trustee interest-bearing
obligations (the "Bonds"), including contracts for the purchase
of certain such obligations and, in the case of some State Trusts, Units
of previously issued series of Tax Exempt Securities Trust, Multistate
Series or Umbrella Series (the "Deposited Units") (such Bonds and
Deposited Units being referred to herein collectively 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 State Trust. The initial public
offering of Units in each State 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. References
to multiple Trusts in Part B herein should be read as references to a
single Trust if Part A indicates the creation of only one Trust. See
<PAGE>
"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 each State Trust are tax-exempt income and
conservation of capital through an investment in a diversified portfolio
of municipal bonds. There is, of course, no guarantee that a Multistate
Trust's or Umbrella Series' objectives will be achieved since the payment
of interest and the preservation of principal are dependent upon the
continued ability of the issuers of the Bonds to meet such obligations.
Portfolio
The following factors, among others, were considered in
selecting the Bonds for each State Trust: (1) all the Bonds deposited in
a State Trust are obligations of the State for which such State Trust is
named or of the counties or municipalities of such State, territories or
possessions 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 given on the date of the original delivery of the Bonds, be
exempt from Federal income tax under existing law and from state
income taxes in the state for which such Trust is named in each case to
the extent indicated in "Tax Exempt Securities Trust - Tax Status", (2)
the Bonds are diversified as to purpose of issue, and (3) in the opinion
of the Sponsors, the Bonds are fairly valued relative
to other bonds of comparable quality and maturity. The rating of each
issue is also set forth in Part A, "Portfolio of Securities." For a
description of the meaning of the applicable rating symbols as published
by Standard & Poor's and Moody's, see "Ratings." It should be
emphasized, however, that the ratings of Standard & Poor's and
Moody's represent their opinions as to the quality of the
Bonds which they undertake to rate, and that these ratings are general
and are not absolute standards of quality.
The Bonds in the Portfolio of a State Trust were chosen in
part on the basis of their respective maturity dates. The Bonds in each
State Trust will have a dollar-weighted average portfolio maturity as
designated in Part A. For the actual maturity date of each of the Bonds
contained in a State Trust, which date may be earlier or later than the
dollar-weighted average portfolio maturity
of the State Trust. A sale or other disposition of a Bond by the Trust
prior to the maturity of such Bond may be at a price which results in a
loss to the State 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
State Trust.
<PAGE>
Additional Considerations Regarding the Trusts
The portfolio of a State Trust may contain Bonds that are
general obligations of governmental entities and/or bonds that are
guaranteed by governmental entities. (See Part A, the "Summary of
Essential Information" of this Prospectus for information relating to the
particular State Trust described therein.) General obligation bonds are
general obligations of a state or local government, which are secured by
the power of such issuer to levy taxes, and
are backed by the pledge of such governmental entity. The ability of the
issuer of a general obligation bond to meet its obligation depends largely
upon its economic condition. Many issuers rely upon ad valorem real
property taxes as a source of revenue. Proposals in the form of state
legislative or voter initiatives to limit ad valorem real property taxes have
been introduced in various states. It is not presently possible to predict
the impact of these or future proposals, if adopted, on states, local
governments or school districts or
on their abilities to make future payments on their outstanding debt
obligations. The remaining issues contained in a State Trust's portfolio
are payable from the income of specific projects or authorities and are
not supported by the issuer's power to levy taxes. The portfolio of a
State Trust may also contain Bonds that are supported by the moral
obligations of governmental entities. In the event of
a deficiency in the debt service reserve funds of moral obligation bonds,
the governmental entity having the moral commitment may (but is not
legally obligated to) satisfy such deficiency. However, in the event of
a deficiency in the debt service reserve funds of bonds not backed by
such moral obligations, no such moral commitment exists.
The portfolio of a State Trust may also contain Deposited
Units from preceding Series of the respective State Trust of Tax Exempt
Securities Trust. The objectives of the various preceding Series which
are represented by Deposited Units included in the portfolio of any Series
of Tax Exempt Securities Trust offered hereby are similar to the
objectives of the Series offered hereby,
and the Sponsors, Trustee and Evaluator of the various previous Series
represented by the Deposited Units have responsibilities and authority
and receive fees substantially identical to those described in this
Prospectus. On the respective dates of deposit of said preceding Series,
the underlying debt obligations in their portfolios were rated in the
category of A or better by Standard & Poor's Corporation or by
Moody's Investors Service. While certain
of such debt obligations included in the portfolios of said preceding
Series may not presently meet such criteria, the Deposited Units of such
previous Series did not represent more than 5% of the face amount of the
total Securities in the Portfolio of any Series of Tax Exempt Securities
Trust offered hereby as of the Date of Deposit. All of the underlying
debt obligations of these Series have
stated maturities in excess of 10 years from the Date of Deposit.
<PAGE>
The portfolio of the State Trust may contain other Bonds
which are "private activity bonds" (often called Industrial Revenue Bonds
("IRBs") if issued prior to 1987) which would be primarily of two
activity types: (1) Bonds for a publicly owned facility which a private
entity may have a right to use or manage to some degree, such as an
airport, seaport facility or water system and
(2) facilities deemed owned or beneficially owned by a private entity but
which were financed with tax-exempt bonds of a public issuer, such as
a manufacturing facility or a pollution control facility. In the case of the
first type, bonds are generally payable from a designated source of
revenues derived from the facility and may further receive the benefit of
the legal or moral obligation of one or
more political subdivisions or taxing jurisdictions. In most cases of
project financing of the first type, issuers are obligated to pay the
principal of, any premium then due, or interest on the private activity
bonds only to the extent that funds are available from receipts or
revenues of the issuer derived from the
project or the operator or from the unexpended proceeds of the bonds.
Such revenues include user fees, service charges, rental and lease
payments, and mortgage and other loan payments.
The second type of issue will generally finance projects which
are owned by or for the benefit of, and are operated by, corporate
entities. Ordinarily, such private activity bonds are not general
obligations of governmental entities and are not backed by the taxing
power of such entities, and are solely dependent upon the
creditworthiness of the corporate user of the project or corporate
guarantor.
The private activity bonds in the State Trust have generally
been issued under bond resolutions, agreements or trust indentures
pursuant to which the revenues and receipts payable under the issuer's
arrangements with the users or the corporate operator of a particular
project have been assigned and pledged to the holders of the private
activity bonds. In certain cases a mortgage on the
underlying project has been assigned to the holders of the private activity
bonds or a trustee as additional security. In addition, private activity
bonds are frequently directly guaranteed by the corporate operator of the
project or by another affiliated company. See "Description of Portfolio"
in Part A for the amount of private activity bonds contained therein.
Most of the Bonds in the Portfolio of a State Trust are subject
to redemption prior to their maturity date pursuant to sinking fund or call
provisions. 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. The Bonds may also be subject to other calls which
may be permitted or required by events which cannot be predicted (such
<PAGE>
as destruction, condemnation, termination of
a contract, or receipt of excess or unanticipated revenues). To the extent
that a Bond was deposited in a State Trust 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 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 a State Trust may consist of some Bonds
whose current market values were below face value on the Date of
Deposit. A primary reason for the market value of such Bonds being
less than face value at maturity is that the interest coupons of such Bonds
are at lower rates than the current market interest rate for comparably
rated Bonds, even though at the time of the issuance of such Bonds the
interest coupons thereon represented then prevailing
interest rates on comparably rated Bonds then newly issued. Bonds
selling at market discounts tend to increase in market value as they
approach maturity when the principal amount is payable. A market
discount tax-exempt Bond held to maturity will have a larger portion of
its total return in the form of taxable
ordinary income and less in the form of tax-exempt income than a
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 be realized until maturity, redemption or sale of the
Bonds or Units. Gain on the disposition of
a Bond purchased at a market discount generally will be treated as
ordinary income rather than capital gain, to the extent of accrued market
discount.
The Portfolio of a State Trust may contain Bonds in the
hospital facilities category that are payable from revenues derived from
hospitals and health care facilities which, generally, were constructed or
are being constructed from the proceeds of such Bonds. The ability of
the issuers of such bonds to meet their obligations is dependent, among
<PAGE>
other things, upon the revenues, costs and occupancy levels of the
subject facilities. Revenues and expenses of
hospitals and health care facilities will be affected by future events and
conditions relating generally to, among other things, demand for health
care services at the particular type of facility, increasing costs of medical
technology, utilization practices of physicians, the ability of the facilities
to provide the services required by patients, employee strikes and other
adverse labor actions, economic developments in the service area,
demographic changes, greater longevity and the higher medical expenses
of treating the elderly, increased
competition from other health care providers and rates that can be
charged for the services provided. Additionally, a major portion of
hospital revenues typically is derived from Federal or state programs
such as Medicare and Medicaid and from Blue Cross and other insurers.
The future solvency of the Medicare trust fund is periodically subject to
question. Changes in the compensation and reimbursement formulas of
these government programs or in
the rates of insurers may reduce revenues available for the payment of
principal of or interest on hospital revenue bonds. Governmental
legislation or regulations and other factors, such as the inability to obtain
sufficient malpractice insurance, may also adversely impact on the
revenues or costs of hospitals. Future actions by the federal government
with respect to Medicare and by the federal and state governments with
respect to Medicaid, reducing the total amount of funds available for
either or both of these programs or changing the reimbursement
regulations or their interpretation, could adversely affect the
amount of reimbursement available to hospital facilities. A number of
additional legislative proposals concerning health care are typically under
review by the United States Congress at any given time. These
proposals span a wide range of topics, including cost controls, national
health insurance, incentives for competition in the provision of health
care services, tax incentives and penalties
related to health care insurance premiums, and promotion of prepaid
health care plans. The Sponsors are unable to predict the effect of any
of these proposals, if enacted, on any of the Bonds in the Portfolio of a
State Trust.
The Portfolio of a State Trust may contain Bonds of housing
authorities that are payable from revenues derived by state housing
finance agencies or municipal housing authorities from repayments on
mortgage and home improvement loans made by such agencies. Since
housing authority obligations, which are not general obligations of a
particular state, are generally supported to a large extent by Federal
housing subsidy programs, the failure of a housing authority to meet the
qualifications required for coverage under the
Federal programs, or any legal or administrative determination that the
coverage of such Federal programs is not available to a housing
authority, could result in a decrease or elimination of subsidies available
for payment of principal and interest on such housing authority's
<PAGE>
obligations. It is unclear whether legislation
extending the authority to issue mortgage revenue bonds will continue to
be enacted. If any portion of the Bonds proceeds are not committed for
this purpose, Bonds in such amount could be subject to earlier mandatory
redemption at par. Weaknesses in Federal housing subsidy programs and
their administration may result in a decrease of subsidies available for
payment of principal and interest on housing authority bonds.
Repayment of housing loans and home improvement loans in a timely
manner is dependent upon factors affecting the housing market generally
and upon the underwriting and management ability of the individual
agencies (i.e., the initial soundness of the
loan and the effective use of available remedies should there be default
in loan payments). Economic developments including fluctuations in
interest rates and increasing construction and operating costs may also
adversely impact upon revenues of housing authorities. In the case of
some housing authorities, inability to obtain additional financing could
also reduce revenues available to pay existing obligations.
The Portfolio of a State Trust may contain Bonds of housing
authorities which require the issuer to retire such obligation at par from
unused proceeds of the issue within a stated period. Moreover, housing
authority obligations may contain provisions which require the issuer to
redeem such obligations at par prior to any optional or mandatory
redemption dates or maturity under certain unusual or extraordinary
circumstances, including among others, if the project is condemned or
sold or if the project is destroyed and
insurance proceeds are used to redeem the bonds. In the case of certain
of the obligations which were deposited in a State Trust at a price higher
than their par value such a retirement at par would result in a loss of
capital to a purchaser of Units at their original public offering price.
Also, monthly distributions from a State Trust would be reduced by the
amount of the income that would otherwise have been paid with respect
to retired bonds. The Estimated Current Return and Estimated
Long-Term Return of the Units might be adversely
affected if the return on retired bonds is greater than the average return
on the Bonds in the relevant State Trust. In recent periods of declining
interest rates there have been increased redemptions of housing securities
according to such redemption provisions for two reasons: (i) conventional
mortgage loans have become available at interest rates equal to or less
than the interest rates charged on the mortgage loans which back such
housing securities and (ii) mortgage loans made with the housing
securities may be prepaid earlier than their maturity
dates. Therefore, issuers of such housing securities have experienced
insufficient demand to complete mortgage loan originations for all of the
money made available from such securities. The Sponsors are unable to
predict at this time whether such redemptions will continue to be made
at the same rate, or what effect, if any, such redemptions will have on
the Bonds in the Portfolio of
a State Trust. To the extent such obligations are evaluated at a price
<PAGE>
higher than their value at the time a Unit holder purchases a Unit, such
a retirement at par would result in a loss of capital to such a purchaser.
Also, monthly distributions would be reduced by the amount of income
that otherwise would have been paid with respect to retired bonds.
The Portfolio of a State Trust may contain Bonds which are
subject to the requirement of Section 103A of the Internal Revenue Code
of 1954, as amended (the "1954 Code") or Section 143 of the Internal
Revenue Code of 1986 (the "Code" or the "1986 Code"). Sections 103A
and 143 provide that obligations issued to provide single family housing
will be exempt from Federal income taxation if all of the proceeds of the
issue (exclusive of issuance costs and a reasonable required reserve) are
used to make or acquire loans which meet requirements including certain
requirements which must be satisfied after issuance. If proceeds of the
issue are not used to acquire such loans, the issuer
may be required to redeem all or a portion of such issue from such
uncommitted proceeds to maintain the issue's tax exemption. Bond
counsel to each such issuer has issued an opinion that the interest on such
Bonds was exempt from Federal income tax at the time the Bonds were
issued. The failure of the issuers of such Bonds to meet certain ongoing
compliance requirements imposed by Sections 103A or 143 could render
the interest on such Bonds subject to Federal
income taxation, possibly from the date of their issuance. If interest on
such Bonds in a State Trust is deemed to be subject to Federal income
taxation, the loss of tax-exempt status can be expected to adversely affect
the market value of such Bonds. In this event and under the terms of the
Trust Agreement the Sponsors may direct the sale of such Bonds. The
sale of such Bonds in such circumstances is likely to result in a loss to
such Trust.
The tax exemption for certain housing authority bonds
depends on qualification under Section 103(b)(4)(A) of the 1954 Code or
Section 142 of the 1986 Code and appropriate Treasury Regulations.
Both Sections require that specified minimum percentages of the units in
each rental housing project financed by the tax-exempt debt are to be
continuously occupied by low or moderate income tenants for specified
periods. Department of the Treasury regulations issued under Section
103(b)(4)(A) of the 1954 Code provide that in
order to prevent possible retroactive Federal income taxation of interest
on such Bonds certain conditions must be met. The regulations provide,
however, that such retroactive taxation will not occur if the issuer
corrects any non-compliance occurring after the issuance of the Bonds
within a reasonable period after such
non-compliance is first discovered or should have been discovered by the
issuer. Similar rules are expected to be issued under 1986 Code Section
142. If the interest on any of the Bonds in a State Trust that are housing
securities should ultimately be deemed to be taxable, the Sponsors may
<PAGE>
instruct the Trustee to sell such Bonds and, since they would be sold as
taxable securities, it is expected that such Bonds would have to be sold
at a substantial discount from the current market price of a comparable
tax-exempt security.
The Portfolio of a State Trust may contain Bonds of issuers
in the power facilities category which are generally payable from
revenues derived from the sale of electricity generated and distributed by
power agencies using hydroelectric, nuclear, fossil or other power
sources. The ability of the issuers of such Bonds to make payments of
principal of, or, interest on, such obligations is dependent, among other
things, upon the continuing ability of such
issuers to derive sufficient revenues from their operations to meet debt
service requirements. General problems of the power and electric utility
industry include difficulty in financing large construction projects during
inflationary periods, restrictions on operations and increased costs and
delays attributable to applicable environmental considerations, uncertain
technical and cost factors relating to the construction and operation of
nuclear power generating facilities, the difficulty of the capital markets
in absorbing utility debt and equity securities, the availability of fuel for
electric generation at reasonable prices, the
steady rise in fuel costs and the costs associated with conversion to
alternate fuel sources such as coal, the difficulty in obtaining natural gas
for resale, and the effects of present or proposed energy or natural
resource conservation programs. Current and future environmental
legislation, regulations or other governmental
actions may increase the cost of utility service. The Sponsor is unable to
predict the ultimate form that any such future legislation, regulations or
other governmental action may take or the resulting impact on the
Securities.
The Portfolio of a State Trust may contain Bonds issued for
the financing of nuclear power plants. Federal, state or municipal
governmental authorities may from time to time impose additional
regulations or take other governmental action which might cause delays
in the licensing, construction or operation of nuclear power plants. Any
delays in the licensing, construction or
operation of nuclear power plants, or the suspension of operations of
such plants which have been or are being financed by proceeds of such
Bonds. Such delays, suspensions, or other action may affect the payment
of interest on, or the repayment of the principal amount of, such Bonds.
The Sponsors are unable to predict the ultimate form any such
regulations or other governmental action may
take or their impact on the Bonds in the Portfolio of a State Trust.
The Portfolio of a State Trust may contain Bonds of issuers
which are in the water and sewer facilities category. Bonds in the water
and sewer facilities category include securities issued to finance public
water and sewer projects for water management and supply and sewer
<PAGE>
control and securities issued by public issuers on behalf of private
corporations for such projects. These Bonds are payable from the income
of specific facilities or from payments
made by such private corporations to the state authorities issuing such
Bonds. The income of such facilities is generated from the payment of
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, the difficulty of
obtaining or discovering new supplies of fresh water, the effect of
conservation programs and the impact of "no growth" zoning ordinances.
The Portfolio of a State Trust may contain Bonds of issuers
which are revenue obligations of universities and schools. The ability of
universities and schools to meet their obligations is dependent upon
various factors, including the revenues, costs and enrollment levels of the
institutions. In addition, their ability may be affected by declines in
enrollment and tuition revenue, the availability of Federal, state and
alumni financial support, the method and validity, under state
constitutions, of present systems of financing
public education, fluctuations in interest rates and construction costs,
increased maintenance and energy costs, failure or inability to raise
tuition or room charges and adverse results of endowment fund
investments. Studies undertaken by public and private groups differ with
respect to statistics and projections for
postsecondary enrollment at educational institutions during the 1990s.
The Portfolio of a State Trust may contain Bonds of issuers
in the pollution control facilities category. Bonds in the pollution control
facilities category include securities issued to finance public water,
sewage or solid waste treatment facilities and securities issued by a
public issuer on behalf of a private corporation to provide facilities for
the treatment of air, water and solid waste
pollution. These Bonds are payable from the income of specific
facilities, state authorities or from payments made by such private
corporations.
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.
<PAGE>
The Portfolio of a State Trust may contain Bonds in the
resource recovery category. The issuers of such Bonds are
municipalities or agencies or authorities thereof that have allocated the
proceeds of the issue towards the construction and operation of a
resource recovery facility operated by a corporate operator. Payments
on the bonds are dependent upon the creditworthiness of the corporate
operator of the particular project. The operation of such facilities
typically depends upon the delivery thereto of specified quantities of solid
waste from which refuse-derived fuel can be extracted and in turn
converted into electricity or steam by the facility. The
operation of the facility may be limited or totally curtailed from
operating because of failure to comply with governmental regulations
concerning the environment, failure to obtain necessary environmental
permits, zoning permits and other municipal ordinances or inability to
maintain or renew such permits because of an inability to comply with
changes in government environmental regulations. If the resource
recovery facility is unable to operate or cannot
operate at full capacity, the corporate operator of such facility will be
unable to generate revenues necessary to cover payments on the resource
recovery bonds. Furthermore, the corporate operator's revenue is
typically derived from the sale of the power generated by the facility to
a power agency or company under a power purchase agreement. The
continued flow and level of payments made by the corporate operator
might therefore depend upon the financial condition of the
purchaser under such a power agreement and the operator's continued
ability to generate the minimum amount of power required to be
delivered thereunder. Such purchaser may be subject to the various
general problems and risks associated with the power industry and the
regulatory environment in which it operates. A decline in price of the
extracted materials or the electricity or steam
created by the facility may also result in insufficient revenues generated
by the corporate operator as will an increase in its operating costs.
Finally, there may be technological risks that become apparent in the
long run that are not presently apparent because of the relatively short
history of these facilities, which risks may involve the successful
construction or operation of such facilities.
The Portfolio of a State Trust may contain Bonds secured in
whole or in part by governmental payments, pursuant to a lease
agreement, service contract, installment sale or other agreement. A
governmental entity that enters into such agreement can not obligate
future governments to make payments thereunder, but generally has
covenanted to take such action as is necessary to
include all such payments due under such agreement in its annual budgets
and to make the appropriations therefor. However, a budgetary
imbalance in future fiscal years could effect the ability and willingness
of the governing legislative body to appropriate, and the availability of
monies to make, the payments provided for under such agreement. The
failure of a governmental entity to meet its obligations under such an
<PAGE>
agreement could result in an insufficient amount of funds to cover debt
service on the 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.
The Portfolio of a State Trust may contain Bonds of issuers
located in the Commonwealth of Puerto Rico. (See Part A-"Portfolio of
Securities.") The ability of the issuers of such Bonds to meet their
obligations may be affected by the economic and social problems facing
Puerto Rico. Unemployment in Puerto Rico remains high by United
States standards. The island's personal income has been lower than in
any state in the United States. Transfer payments from the United States
government under various social welfare programs (such as food stamps,
social security and veterans' benefits) contribute significantly to personal
income.
The economy of Puerto Rico is closely integrated with that of
the mainland United States, and is largely dependent for its development
upon U.S. policies and programs that could be eliminated by the U.S.
Congress. Aid for Puerto Rico's economy has traditionally depended
heavily on federal programs which may not always be available. 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. During fiscal 1991, approximately 87% of
Puerto Rico's exports were to the United States mainland, which was
also the source of 68% of Puerto Rico's imports.
The Puerto Rican economy consists principally of
manufacturing (pharmaceuticals, scientific instruments, computers,
microprocessors, medical products, textiles and petrochemicals),
agriculture (largely sugar), tourism and the service sector (including
finance, insurance, and real estate). Since Puerto
Rico is an island and is heavily dependent upon imports and exports,
maritime and air transportation are of basic importance to its economy.
The manufacturing and service sectors generate the largest portion of
gross product. Most of the island's manufacturing output is shipped to
the mainland United States, which is also the chief source of
semi-finished manufactured articles on which further manufacturing
operations are performed in Puerto Rico. The finance, insurance and
<PAGE>
real estate components of this sector have recently experienced the most
growth. The level of tourism is affected by various
factors, including the strength of the U.S. dollar. During periods when
the dollar is strong, tourism in foreign countries becomes relatively more
attractive.
The government sector of the Commonwealth plays an
important role in the economy of the island. Since World War II the
economic importance of agriculture for Puerto Rico, particularly in the
dominance of sugar production, has declined. Nevertheless, the
Commonwealth-controlled sugar monopoly remains an important
economic factor and is largely dependent upon
Federal maintenance of sugar prices, the discontinuation of which could
severely affect Puerto Rican sugar production.
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 generally provides
deferral of Federal income taxes for U.S. companies operating on the
island until profits are repatriated. No assessment can be made as to
whether or not Section 936 and other incentive programs will be
continued. It is expected that the elimination
of Section 936, if it occurred, would have a strongly negative impact on
Puerto Rico's economy.
For many years there have been two major viewpoints in
Puerto Rico with respect to the Island's relationship to the United States,
one essentially favoring the existing commonwealth status (but with
modifications providing for greater local autonomy), and the other
favoring statehood. A third viewpoint
favors independence from the United States. The Sponsors cannot
predict what effect, if any, a change in the relationship between Puerto
Rico and the United States would have on the issuers' ability to meet
their obligations.
Currently, growth in the Puerto Rico economy depends on
several factors, including the state of the United States economy and the
relative stability in the price of oil imports, the exchange value of the
U.S. dollar and the cost of borrowing.
To the best knowledge of the Sponsors, and except as
otherwise may be indicated in this Prospectus, there was no litigation
pending as of the date of this Prospectus in respect of any Bonds which
might have reasonably been expected to have a material adverse effect
upon a State Trust. At any time after the date of this Prospectus,
litigation may be initiated on a variety of
grounds with respect to Bonds in a State Trust. Such litigation, as, for
example, suits challenging the issuance of pollution control revenue
bonds under recently enacted environmental protection statutes, may, if
<PAGE>
successful, affect the validity of such Bonds or the tax-free nature of the
interest thereon. While the outcome of litigation of such nature can
never be entirely predicted, the Multistate Trust or Umbrella Series has
received opinions of bond counsel to the issuing authority of each Bond
on the date of issuance to the effect that such Bonds have
been validly issued and that interest thereof 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 meet obligations
undertaken with respect to the
Bonds. The Sponsors are unable to predict whether any such litigation
may be instituted, or if instituted, whether it will have a material adverse
effect on a State Trust.
Under the Federal Bankruptcy Code, political subdivisions,
public agencies or other instrumentalities of any state (including
municipalities) which are insolvent or unable to meet their debts as they
mature may file a petition in Federal bankruptcy court. Generally, the
filing of such a petition operates as a stay of any proceeding to enforce
a claim against the debtor. The Federal Bankruptcy Code also requires
the debtor to file a plan for the adjustment of its
debt which may modify or alter the rights of creditors and would
authorize the Federal bankruptcy court to permit the debtor to incur
additional debt which could have priority over existing creditors and
which could be secured. Any plan of reorganization confirmed by the
court must be approved by the requisite number of creditors.
Amendments made to the federal bankruptcy laws ease the
requirements that must be met before a municipality may seek federal
court protection to assist in reorganizing its debts. This easing of
requirements may encourage financially troubled municipalities to seek
court assistance in reorganizing their debts. If confirmed by the
bankruptcy court, the plan would
be binding upon all creditors affected by it. The Sponsors are unable to
predict the effect these bankruptcy provisions may have on the Trust.
Moreover, the California Trust, the Connecticut Trust, the
Florida Trust, the Maryland Trust, the Massachusetts Trust, the
Minnesota Trust, the Missouri Trust, the New Jersey Trust, the New
York Trust, the North Carolina Trust, the Ohio Trust, the Pennsylvania
Trust and the Texas Trust are subject to certain additional state 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.
<PAGE>
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
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 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.
<PAGE>
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 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.
<PAGE>
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.
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
<PAGE>
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, 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
<PAGE>
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 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
<PAGE>
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 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
<PAGE>
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
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, 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
<PAGE>
1990, respectively. "Appropriations subject to limitation" are
authorizations to spend "proceeds of taxes", which consist of tax
revenues and certain other funds, including proceeds
from regulatory licenses, user charges or other fees to the extent that
such proceeds exceed the reasonable cost of providing the regulation,
product or service. The Appropriations Limit is based on the limit for
the prior year, adjusted annually for certain changes, and is tested over
consecutive two-year periods. Any excess of the aggregate proceeds of
taxes received over such two- year period above the combined
Appropriation Limits for those two years is
divided equally between transfers to K-14 districts and refunds to
taxpayers.
Exempted from the Appropriations Limit are debt service
costs of certain bonds, court or federally mandated costs, and, pursuant
to Proposition 111, qualified capital outlay projects and appropriations
or revenues derived from any increase in gasoline taxes and motor
vehicle weight fees above January 1, 1990 levels. Some recent initiatives
were structured to create new tax revenues dedicated to specific uses and
expressly exempted from the Article XIIIB limits. The Appropriations
Limit may also be exceeded in cases of
emergency arising from civil disturbance or natural disaster declared by
the Governor and approved by two-thirds of the Legislature. If not so
declared and approved, the Appropriations Limit for the next three years
must be reduced by the amount of the excess.
Article XIIIB, as amended by Proposition 98 on November
8, 1988, also establishes a minimum level of state funding for school and
community college districts and requires that excess revenues up to a
certain limit be transferred to schools and community college districts
instead of returned to the taxpayers. Determination of the minimum
level of funding is based on several tests set forth in Proposition 98.
During fiscal year 1991-92 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
<PAGE>
Constitutional amendments affecting state and
local taxes and appropriations have been proposed from time to time. If
any such initiatives are adopted, the State could be pressured to provide
additional financial assistance to local governments or appropriate
revenues as mandated by such initiatives. Propositions such as
Proposition 98 and others that may be adopted in the future, may place
increasing pressure on the State's budget over
future years, potentially reducing resources available for other State
programs, especially to the extent 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.
<PAGE>
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.
Connecticut Trust
Potential purchasers of the Units of the Connecticut Trust
should consider the fact that the Trust's Portfolio consists primarily of
Bonds issued by the State of Connecticut (the "State") or its
municipalities or authorities, and realize the substantial risks associated
with an investment in such Bonds.
Connecticut's manufacturing industry has historically been of
prime economic importance to Connecticut. The manufacturing industry
is diversified, with transportation equipment (primarily aircraft engines,
helicopters and submarines) dominant followed by fabricated metal
products, non-electrical machinery and electrical machinery. From 1970
to 1992, however, there was a rise in employment in service-related
industries. During this period, manufacturing employment declined
30.8%, while employment in non-agricultural establishments (including
government) increased 60.8%, particularly
in the service, trade and finance categories. In 1992, manufacturing
accounted for only 20.1% of total non-agricultural employment in
Connecticut. Defense-related business plays an important role in the
Connecticut economy. On a per capita basis, defense awards to
Connecticut have traditionally been among the
highest in the nation. Reductions in defense spending have had a
substantial adverse impact on Connecticut's economy. Moreover, the
State's largest defense contractors have announced substantial labor force
reductions scheduled to occur over the next four years.
The annual average unemployment rate (seasonally adjusted)
in Connecticut decreased from 6.9% in 1982 to a low of 3.0% in 1988
but rose to 7.2% in 1992. While these rates were lower than those
recorded for the U.S. as a whole for the same periods, as of May, 1993,
the estimated rate of unemployment in Connecticut in connection on a
seasonally adjusted basis was 7.4%, compared to only 6.9 % for the
United States as a whole, and pockets of
significant unemployment and poverty exist in some of Connecticut's
cities and towns. Moreover, Connecticut is now in a recession the depth
<PAGE>
and duration of which is uncertain.
The State derives over seventy percent of its revenues from
taxes imposed by the State. The two major taxes have been the sales and
use taxes and the corporation business tax, each of which is sensitive to
changes in the level of economic activity in the State, but the Connecticut
income tax on individuals, trusts and estates enacted in 1991 is expected
to supersede each of them in importance.
The State's General Fund budget for fiscal year 1986-87
(ending June 30) anticipated appropriations and revenues of
approximately $4,300,000,000. The General Fund ended fiscal year
1986-87 with a surplus of $365,200,000. The General Fund budget for
fiscal year 1987-88 anticipated appropriations and revenues of
approximately $4,915,800,000. However, the
General Fund ended fiscal year 1987-88 with a deficit of approximately
$115.6 million. The General Fund budget for fiscal year 1988-89
anticipated that General Fund expenditures of $5,551,000,000 and certain
educational expenses of $206,700,000 not previously paid through the
General Fund would be financed in part from surpluses of prior years
and in part from higher tax revenues projected to result from tax laws in
effect for fiscal year 1987-88 and stricter enforcement thereof; a
substantial deficit was projected during the third
quarter of fiscal year 1988-89, but, largely because of tax law changes
that took effect before the end of the fiscal year, the deficit was kept to
$28,000,000. The General Fund budget for fiscal year 1989-90
anticipated appropriations of approximately $6,224,500,000 and, by
virtue of tax increases enacted to take
effect generally at the beginning of the fiscal year, revenues slightly
exceeded such amount. However, largely because of tax revenue
shortfalls, the General Fund ended fiscal year 1989-90 with a deficit for
the year of $259,000,000, wiping out reserves for such events built up
in prior years. The General Fund ended fiscal year 1990-91 with a
deficit of $809,000,000, primarily because of
significant declines in tax revenues and unanticipated expenditures
reflective of economic adversity.
A General Fund was not enacted for fiscal year 1991-92 until
August 22, 1991. This budget anticipated General Fund expenditures of
$ 7,007,861,328 and revenues of $ 7,426,390,000. Anticipated
decreases in revenues resulting from a 25% reduction in the sales tax rate
effective October 1, 1991, the repeal of the taxes on the capital gains and
interest and dividend income of resident individuals for years starting
after 1991, and the phase-out of the corporation business tax surcharge
over two years commencing with years starting after 1991 were expected
to be more than offset by a new general income tax imposed at effective
rates not to exceed 4.5% on the Connecticut taxable income of resident
and non-resident individuals, trusts and estates. The
Comptroller's annual report for fiscal year 1991-92 reflected a General
<PAGE>
Fund operating surplus of $110,000,000. A General Fund budget for
fiscal year 1992-93 anticipated General Fund expenditures of
$7,372,062,859 and revenues of $7,372,210,000 and the General Fund
ended fiscal year 1992-93 with an operating surplus of $113,500,000.
Balanced General Fund budgets for the biennium ending June 30, 1995,
have been adopted appropriating expenditures
of $7,828,900,000 for fiscal year 1993-94 and $8,266,000,000 for fiscal
year 1994-95.
The primary method for financing capital projects by the State
is through the sale of the general obligation bonds of the State. These
bonds are backed by the full faith and credit of the State. As of October
1, 1993, there was a total legislatively authorized bond indebtedness of
$9,140,275,363, of which $7,384,654,455 had been approved for
issuance by the State Bond Commission and $6,355,937,037 had been
issued.
To fund operating cash requirements, prior to fiscal year
1991-92 the State borrowed up to $750,000,000 pursuant to authorization
to issue commercial paper, and on July 29, 1991, it issued $200,000,000
General Obligation Temporary Notes, none of which temporary
borrowings were outstanding as of July 1, 1993. To fund the cumulative
General Fund deficit for fiscal years 1989-90 and 1990-91, the legislation
enacted August 22, 1991, authorized the State Treasurer to issue
Economic Recovery Notes up to the aggregate amount of such deficit,
which must be payable no later than June 30,
1996; at least $50,000,000 of such Notes, but no more than a cap
amount, is to be retired each fiscal year commencing with fiscal year
1991-92, and any unappropriated surplus up to $205,000,000 in the
General Fund at the end of each of the three fiscal years commencing
with fiscal year 1991-92 must be applied to retire such Notes as may
remain outstanding at those times. On
September 25, 1991 and October 24, 1991, the State issued
$640,710,000 and $325,002,000, respectively, of such Economic
Recovery Notes, of which $705,610,000 were outstanding as of October
1, 1993, and are shown in the outstanding state general obligation bond
indebtedness shown above.
To meet the need for reconstructing, repairing, rehabilitating,
and improving the State transportation system (except Bradley
International Airport), the State adopted legislation which provides for,
among other things, the issuance of special tax obligation ("STO") bonds
the proceeds of which will be used to pay for improvements to the
State's transportation system. The STO bonds are special tax obligations
of the State payable solely from specified motor
fuel taxes, motor vehicle receipts and licenses, permit and fee revenues
pledged therefor and deposited in the special transportation fund. The
ten-year cost of the infrastructure program which began in 1984, to be
met from federal, state and local funds, is currently estimated at $9.5
<PAGE>
billion. To finance a portion of the State's share of such cost, the State
expects to issue $3.7 billion of STO bonds over the ten-year period.
As of October 1, 1993, the General Assembly has authorized
STO bonds for the program in the aggregate amount of $3,604,363,104,
of which $2,794,650,752 had been issued. It is anticipated that
additional STO bonds will be authorized by the General Assembly
annually in an amount necessary to finance and to complete the
infrastructure program. Such additional bonds may
have equal rank with the outstanding bonds provided certain pledged
coverage requirements of the STO indenture controlling the issuance of
such bonds are met. The State expects to continue to offer bonds for this
program.
The State, its officers and employees are defendants in
numerous lawsuits. According to the Attorney General's Office, an
adverse decision in any of the cases which are summarized herein could
materially affect the State's financial position: (i) an action in which eight
retarded persons claim denial of equal protection rights on behalf of all
retarded persons between ages 19 and 61 who require daily care but are
ineligible for admission to a group home; (ii)
litigation on behalf of black and hispanic school children in the City of
Hartford seeking "integrated education" within the greater Hartford
metropolitan area; (iii) litigation involving claims by Indian tribes to less
than 1/10 of 1% of the State's land area; (iv) litigation challenging the
State's method of financing elementary and secondary public schools on
the ground that it denies equal access to education; (v) an action in which
two retarded persons seek placement outside a State hospital, new
programs and damages on behalf of themselves and
all mentally retarded patients at the hospital; (vi) litigation involving
claims for refunds of taxes by several cable television companies; (vii)
an action on behalf of all persons with retardation or traumatic brain
injury, claiming that their constitutional rights are violated by placement
in State hospitals alleged not to provide adequate treatment and training,
and seeking placement in community residential settings with appropriate
support services; (viii) an action by the
Connecticut Hospital Association and 33 hospitals seeking to require the
State to reimburse hospitals for in-patient medical services on a basis
more favorable to them; (ix) a class action by the Connecticut Criminal
Defense Lawyers Association claiming a campaign of illegal surveillance
activity and seeking damages and injunctive relief; (x) two actions for
monetary damages brought by a former patient at a state mental hospital
stemming from an attempted suicide
that left her brain-damaged; (xi) an action challenging the validity of the
State's imposition of surcharges on hospital charges to finance certain
uncompensated care costs incurred by hospitals and (xii) an action to
enforce the spending cap provision of the State's constitution by seeking
to require that the General Assembly define certain terms used therein
and to enjoin certain increases in "general budget expenditures" until this
<PAGE>
is done.
As a result of the State's budget problems, the ratings of its
general obligation bonds were reduced by Standard & Poor's from AA+
to AA on March 29, 1990, and by Moody's from Aa1 to Aa on April 9,
1990. Moreover, because of these problems, on February 5, 1991,
Standard & Poor's placed the State's general obligation bonds and certain
other obligations that depend in part on the creditworthiness of the State
on CreditWatch with negative implications. On March 7, 1991,
Moody's downgraded its ratings of the
revenue bonds of four Connecticut hospitals because of the effects of the
State's restrictive controlled reimbursement environment under which
they have been operating. On September 13, 1991 the ratings of the
State's general obligation bonds and certain other obligations were
lowered by Standard & Poor's from AA to AA- and removed from
CreditWatch.
General obligation bonds issued by Connecticut municipalities
are payable primarily only from ad valorem taxes on property subject to
taxation by the municipality. Certain Connecticut municipalities have
experienced severe fiscal difficulties and have reported operating and
accumulated deficits in recent years. The most notable of these is the
City of Bridgeport, which filed a bankruptcy petition on June 7, 1991;
the State opposed the petition. The United States Bankruptcy Court for
the District of Connecticut has held that Bridgeport
had authority to file such a petition but that its petition should be
dismissed on the grounds that Bridgeport was not insolvent when the
petition was filed. Regional economic difficulties, reductions in revenues,
and increased expenses could lead to further fiscal problems for the State
and its political subdivisions, authorities, and agencies. This could result
in declines in the value of their outstanding obligations, increases in their
future borrowing costs, and impairment of their ability to pay debt
service on their obligations.
Florida Trust
The State's economy in the past has been highly dependent on
the construction industry and construction-related manufacturing. This
dependency has declined in recent years and continues to do so as a
result of continued diversification of the State's economy. For example,
in 1980 total contract construction employment as a share of total
non-farm employment was just over
seven percent, and in 1990 the share had edged downward to six percent.
This trend is expected to continue as the State's economy continues to
diversify. Florida nevertheless has a dynamic construction industry, with
single and multi-family housing starts accounting for 9.48% of total U.S.
housing starts in 1991 while the State's population is 5.3% of the U.S.
total population.
<PAGE>
A driving force behind the State's construction industry has
been the State's rapid rate of population growth. Although Florida
currently is the fourth most populous state, its population growth is now
projected to decline as the number of people moving into the State is
expected to hover near the mid-200,000 range annually well into the
1990s. This population trend should provide plenty of fuel for business
and home builders to keep construction
activity lively in Florida for some time to come. However, some factors
that have adversely affected the construction industry's performance
include:
(i) Federal tax reform legislation that has eliminated tax
deductions for owners of three or more residential real
estate properties and the lengthening of depreciation
schedules on
investment and commercial properties;
(ii) Costs of financing that have been relatively high in recent
years; and
(iii)Economic growth and existing supplies of commercial
buildings and homes also contribute to the level of
construction activities in the State.
Since 1980, the State's job creation rate is well over twice the
rate for the nation as a whole, and its growth rate in new non-agricultural
jobs is the fastest of the 11 most populous states and second only to
California in the absolute number of new jobs created. Contributing to
the State's rapid rate of growth in employment and income is
international trade. In addition, since
1980, the State's unemployment rate has generally tracked below that of
the Nation's unemployment rate. However, in the last two years, the
State's jobless rate moved ahead of the national average of approximately
7.2%. According to Florida's Office of Planning & Budgeting Revenue
and Economic Analysis Unit ("Office of Planning & Budget"), the State's
unemployment rate was 5.9% during 1990. The State's unemployment
rate had increased to 7.3% for 1991. The State forecasts that the
unemployment rate will be 8.2% in 1992.
Unemployment is projected to be 7.3% of the labor force in 1992-93 and
6.8% in 1993-94. The State's non-farm job growth rate is expected to
mirror the path of employment growth of the nation (decline 1.3% in
1992-93 and rise 4.3% in 1993-94). The State's two largest and fastest
growing private employment categories are the service and trade sectors.
Employment in these sectors is expected to decline 3.6% for trade and
growth and 1.5% for services in 1991-92
and are expected to grow 0.7% and 3.7% in 1992-93, respectively.
Together, they account for more than half of the total non-farm
employment growth over the next two years. The service sector has
overtaken the trade sector and is now the State's largest employment
<PAGE>
category.
The number of tourists coming to the State has stabilized. The
State's tourist industry over the years has become more sophisticated,
attracting visitors year-round, thus, to a degree, reducing its seasonality.
Approximately 40.9 million people visited the State in 1992. During
1992-93, tourist arrivals are expected to be approximately 42 million.
The State's per capita personal income in 1992 of $19,397
was slightly below the national average of $19,841 and significantly
ahead of that for the southeast United States, which was $17,661.
Growth in real personal income in the State follows a course similar to
that of the nation. Real personal income is estimated to increase 0.7%
in 1992-93 and increasing 5.1% in 1993-94. The decrease in the
1992-93 level is due to property loses resulting from Hurricane Andrew.
Compared to other states, Florida has a proportionately
greater retirement age population, which comprises 18.3% of the State's
population, and is forecast to grow at over 1.96% through the 1990s.
Thus, property income (dividends, interest, and rent) and transfer
payments (Social Security and pension benefits, among other sources of
income) are relatively more important sources of income. For example,
Florida's total wages and salaries and other
labor income in 1990 and 1991 was 54.9% and 54.8%, respectively of
total income, while a similar figure for the nation for 1990 and 1991 was
64.8% and 64.4%, respectively. Transfer payments are typically less
sensitive to the business cycle than employment income and, therefore,
act as stabilizing forces in weak economic periods; however, these
payments, which have increased approximately 8.6% annually from
1985-90, may also be subject to greater risks
from inflation.
In fiscal year 1990-91, approximately 64% of the State's total
direct revenue to its four operating funds were derived from state taxes,
with federal grants and other special revenue accounting for the balance.
State sales and use tax, corporate income tax, and beverage tax amounted
to 66%, 7%, and 5%, respectively, of total receipts by the General
Revenue Fund during fiscal 1990-91. In that same year, expenditures for
education, health and welfare, and
public safety amounted to 55%, 27%, and 8%, respectively, of total
expenditures from the General Revenue Fund. At the end of fiscal year
1991, approximately $4.45 billion in principal amount of debt secured
by the full faith and credit of the State was outstanding. Since July 1,
1991 through August 1992, the State has issued $965 million in principal
amount of full faith and credit bonds.
Fiscal year 1991-92 General Revenue plus Working Capital
funds available total $11,253.1 million. Compared to 1991-92 General
Revenue effective appropriations of $11,066.1 million.
<PAGE>
Estimated fiscal year 1992-93 General Revenue plus Working
Capital funds available total $12,255.9 million, a 9.1% increase over
1991-92. The amount reflects a transfer of $228.8 million, out of an
estimated $233.5 million in non-recurring revenue due to Hurricane
Andrew, to a hurricane relief trust fund. The $12,004.1 million
Estimated Revenues (excluding the Hurricane Andrew impacts) represent
an increase of 10.1% over the previous year's
Estimated Revenues. With effective General Revenue plus Working
Capital Fund appropriations at $11,804.5 million, unencumbered reserves
at the end of the fiscal year are estimated at $441.4 million.
The State Constitution and statutes mandate that the State
budget, as a whole, and each separate fund within the State budget, be
kept in balance from currently available revenues each fiscal year. If the
Governor or Comptroller believes a deficit will occur in any State fund,
by statute, he must certify his opinion to the Administrative Commission,
which then is authorized to reduce all State agency budgets and releases
by a sufficient amount to prevent a deficit in any fund. In response to
the deficits projected for fiscal 1990-91, the State established mandatory
budget holdbacks of $479.9 million and $270 million. To effectuate the
holdbacks, and thus prevent a deficit, the State has
undertaken significant budget reducing and revenue increasing measures,
including, but not limited to, layoffs of State employees and curtailments
of State services. While there can be no assurance that such measures
will eliminate the State budget deficit, as of early January 1991, the
1990-91 revenue shortfall was reported to be forecast at approximately
$270 million, and the State has indicated since such forecast that, based
on projected revenues and further budget reductions, there will be no
shortfall.
The State's sales and use tax (6%) currently accounts for the
State's single largest source of tax receipts. Slightly less than 10% of
the State's sales and use tax is designated for local governments and is
distributed to the respective counties in which collected for such use by
such counties and municipalities. In addition to this distribution, local
governments may (by referendum) assess a 0.5% or a 1.0% discretionary
sales surtax within their county. Proceeds from this local option sales
tax are earmarked for funding local infrastructure programs and
acquiring land for public recreation or
conservation or protection of natural resources as provided under Florida
law. Certain charter counties have other taxing powers in addition. For
the fiscal year ended June 30, 1992, estimated sales and use tax receipts
(exclusive of the tax on gasoline and special fuels) totalled $8,375.5
million, an increase of 2.7% over fiscal year 1990-91.
The State imposes an alcoholic beverage wholesale tax (excise
tax) on beer, wine, and liquor. This tax is one of the State's major tax
sources, with revenues totalling $435.2 million in fiscal year ending June
30, 1992. Alcoholic beverage tax receipts declined over the previous
<PAGE>
year. The revenues collected from this tax are deposited into the State's
General Revenue Fund.
The second largest source of State tax receipts is the tax on
motor fuels. However, these revenues are almost entirely dedicated trust
funds for specific purposes and are not included in the State's General
Fund.
The State imposes a corporate income tax. All receipts of the
corporate income tax are credited to the General Revenue Fund. For the
fiscal year ended June 30, 1992, receipts from this source were $801.3
million, a increase of 14.2% from fiscal year 1990-91.
The State also imposes a stamp tax on deeds and other
documents relating to realty, corporate shares, bonds, certificates of
indebtedness, promissory notes, wage assignments, and retail charge
accounts. The documentary stamp tax collections totaled $472.4 million
during fiscal year 1991-92, a 0.5% increase from the previous fiscal
year. For the fiscal year
1991-92, 76.21% of the documentary stamp tax revenues were deposited
to the General Revenue Fund. Beginning in fiscal year 1992-93, 71.29%
of these taxes are to be deposited to the General Revenue Fund.
On January 12, 1988, the State began its own lottery. State
law requires that lottery revenues be distributed 50% to the public in
prizes, 37.5% for use in enhancing education, and the balance, 12.5%,
to retailers as commissions for their services and for administration of
the lottery. Additionally, the 1990 State Legislature decreased the
allocation for administrative costs to 12.0% for fiscal year 1990-91.
Lottery ticket sales totalled $2.19 billion in fiscal 1991-92, providing
education with $835.4 million.
Currently under litigation are several issues relating to State
actions or State taxes that put at risk substantial amounts of General
Revenue Fund monies. Accordingly, there is no assurance that any of
such matters, individually or in the aggregate, will not have a material
adverse effect on the State's financial position.
In the wake of the U.S. Supreme Court decision holding that
a Hawaii law unfairly discriminated against out-of-state liquor producers,
suits have been filed in the State's courts contesting a similar State law
(in effect prior to 1985), that seek $384 million in tax refunds. A trial
court, in a ruling that was subsequently upheld by the State's Supreme
Court, found the State law in question to be unconstitutional but made its
ruling operate prospectively, thereby
denying any tax refunds. The issue of whether the unconstitutionality of
the tax should be applied retroactively was recently decided by the
United States Supreme Court. The Supreme Court found in favor of the
taxpayers. On remand from the U.S. Supreme Court, the Florida
<PAGE>
Supreme Court, on January 15, 1991, mandated further proceedings to
fashion a "clear and certain remedy" consistent with constitutional
restrictions and the opinion of the U.S. Supreme
Court. The Florida Department of Revenue has proposed to the Florida
Supreme Court that the Department be allowed to collect back tax from
those who received a tax preference under the prior law. If the
Department's proposal is rejected and tax refunds are ordered to all
potential claimants, a liability of approximately $298 million could result.
The case is now before the Florida Circuit Court, 2nd Judicial District.
That court will hear affected parties response to the Department's
proposed collection of the tax at the higher rate
charged to out-of-staters.
Florida law provides preferential tax treatment to insurers
who maintain a home office in the State. Certain insurers challenged the
constitutionality of this tax preference and sought a refund of taxes paid.
Recently, the State Supreme Court ruled in favor of the State. Similar
issues have been raised in other cases where insurers have challenged
taxes imposed on premiums received for certain motor vehicle service
agreements. These four cases and pending refund claims total about
$200 million.
On August 24, 1992, the State was hit with a major
hurricane, Hurricane Andrew. Published speculation estimates total
damage to the southern portion of the State to be $20-30 billion. The
actual economic impact to the State is unknown at this time, but, in
published reports, the director of economic
and demographic research for the Joint Legislative Management
Committee of the State's Legislature estimates that the State's revenues
from sales tax collection will exceed the estimates prior to Andrew. It
is estimated that about $15.0 billion of these losses are insured. In
addition, a major funding package
totalling $10.6 billion from the federal government will provide
additional funding to help offset these losses. However, the Revenue
Estimating Conference has estimated additional non-recurring General
Revenues totalling $645.8 million during fiscal years 1992-93, 1993-94
and 1994-95 as a result of increased economic activity. In a December
1992 special session, the Legislature enacted a law that sets aside an
estimated $630.4 million of the $645.8 million hurricane revenue
windfall to be used by State and local
government agencies to defray a wide array of expenditures related to
Hurricane Andrew.
Florida maintains a bond rating of Aa and AA from Moody's
Investors Service and Standard & Poor's Corporation, respectively, on
the majority of its general obligation bonds, although the rating of a
particular series of revenue bonds relates primarily to the project,
facility, or other revenue source from which such series derives funds for
repayment. While these ratings and some of the information presented
above may indicate that Florida is in satisfactory economic health, there
can be no assurance that there will not be a
decline in economic conditions or that particular Bonds in the portfolio
of the Florida Trust will not be adversely affected by any such changes.
The sources for the information above include official statements and
financial statements of the State of Florida. While the sponsor has not
independently verified this information, the Sponsor has no reason to
believe that the information is not correct in all material respects.
Maryland Trust
State Debt. The Public indebtedness of the State of Maryland
and its instrumentalities is divided into three general types. The State
issues general obligation bonds for capital improvements and for various
State projects, to the payment of which the State ad valorem property tax
is exclusively pledged. In addition, the Maryland Department of
Transportation issues for transportation
purposes its limited, special obligation bonds payable primarily from
specific, fixed-rate excise taxes and other revenues related mainly to
highway use. Certain authorities issue obligations payable solely from
specific non-tax, enterprise fund revenues and for which the State has no
liability and has given no moral obligation assurance.
General obligation bonds of the State are authorized and
issued primarily to provide funds for State-owned capital improvements,
including institutions of higher learning, and the construction of locally
owned public schools. Bonds have also been issued for local government
improvements, including grants and loans for water quality improvement
projects and correctional facilities, to provide funds for repayable loans
or outright grants to private, non-profit cultural or educational
institutions, and to fund certain loan
and grant programs.
The Maryland Constitution prohibits the contracting of State
debt unless it is authorized by a law levying an annual tax or taxes
sufficient to pay the debt service within 15 years and prohibiting the
repeal of the tax or taxes or their use for another purpose until the debt
is paid. As a uniform practice, each separate enabling act which
authorizes the issuance of general obligation bonds
for a given object or purpose has specifically levied and directed the
collection of an ad valorem property tax on all taxable property in the
State. The Board of Public Works is directed by law to fix by May 1 of
each year the precise rate of such tax necessary to produce revenue
sufficient for debt service requirements
of the next fiscal year, which begins July 1. However, the taxes levied
need not be collected if or to the extent that funds sufficient for debt
service requirements in the next fiscal year have been appropriated in the
annual State budget. Accordingly, the Board, in annually fixing the rate
<PAGE>
of property tax after the end
of the regular legislative session in April, takes account of appropriations
of general funds for debt service.
In the opinion of counsel, the courts of Maryland have
jurisdiction to entertain proceedings and power to grant mandatory
injunctive relief to (i) require the Governor to include in the annual
budget a sufficient appropriation to pay all general obligation bond debt
service for the ensuing fiscal year; (ii) prohibit the General Assembly
from taking action to reduce any such appropriation below the level
required for that debt service; (iii) require the Board of Public Works to
fix and collect a tax on all property in the State subject to assessment for
State tax purposes at a rate and in an amount sufficient
to make such payments to the extent that adequate funds are not provided
in the annual budget; and (iv) provide such other relief as might be
necessary to enforce the collection of such taxes and payment of the
proceeds of the tax collection to the holders of general obligation bonds,
pari passu, subject to the inherent constitutional limitations referred to
below.
It is also the opinion of counsel that, while the mandatory
injunctive remedies would be available and while the general obligation
bonds of the State are entitled to constitutional protection against the
impairment of the obligation of contracts, such constitutional protection
and the enforcement of such remedies
would not be absolute. Enforcement of a claim for payment of the
principal of or interest on the bonds could be subject to the provisions of
any statutes that may be constitutionally enacted by the United States
Congress or the Maryland General Assembly extending the time for
payment or imposing other constraints upon enforcement.
There is no general debt limit imposed by the Maryland
Constitution or public general laws, but a special committee created by
statute annually submits to the Governor an estimate of the maximum
amount of new general obligation debt that prudently may be authorized.
Although the committee's responsibilities are advisory only, the
Governor is required to give due consideration to the committee's
findings in preparing a preliminary allocation of new general debt
authorization for the next ensuing fiscal year.
Consolidated Transportation Bonds are limited obligations
issued by the Maryland Department of Transportation, the principal of
which must be paid within 15 years from the date of issue, for highway,
port, transit, rail or aviation facilities or any combination of such
facilities. Debt service on Consolidated Transportation Bonds is payable
from those portions of the excise tax on each gallon of motor vehicle fuel
and the motor vehicle titling tax, all mandatory motor vehicle registration
fees, motor carrier fees, and the corporate
income tax as are credited to the Maryland Department of
<PAGE>
Transportation, plus all departmental operating revenues and receipts.
Holders of such bonds are not entitled to look to other sources for
payment.
The Maryland Department of Transportation also issues its
bonds to provide financing of local road construction and various other
county transportation projects and facilities. Debt service on these bonds
is payable from the subdivisions' share of highway user revenues held to
their credit in a special State fund.
The Maryland Transportation Authority operates certain
highway, bridge and tunnel toll facilities in the State. The tolls and other
revenues received from these facilities are pledged as security for
revenue bonds of the Authority issued under and secured by a trust
agreement between the Authority and a corporate trustee.
Certain other instrumentalities of the State government are
authorized to borrow money under legislation which expressly provides
that the loan obligations shall not be deemed to constitute a debt or a
pledge of the faith and credit of the State. The Community Development
Administration of the Department of Housing and Community
Development, the Board of Trustees of St. Mary's College of Maryland,
the Maryland Environmental Service, the Board of Regents of the
University of Maryland System, the Board of Regents
of Morgan State University, and the Maryland Food Center Authority
have issued and have outstanding bonds of this type. The principal of
and interest on bonds issued by these bodies are payable solely from
various sources, principally
fees generated from use of the facilities or enterprises financed by the
bonds.
Under a Comprehensive Plan of Financing, as amended, of
the Maryland Stadium Authority, the Authority is authorized to finance
the acquisition and construction of sports facilities at a site within the
City of Baltimore. Under the Plan of Financing, the Authority proposes
to engage in a series of borrowings, together with certain equity
contributions, to finance acquisitions of the site, construction of a
baseball stadium and ancillary facilities,
and if a lease agreement is executed between the Authority and a
professional football franchise, a football stadium.
The Authority's financings as well as any future financings
for a football stadium are leased-backed revenue obligations, payment of
which is secured by among other things, an assignment of revenues to be
received under a lease of the sports facilities from the Authority to the
State of Maryland; rental payments due from the State under that lease
will be subject to annual appropriation by the Maryland General
Assembly. The State anticipates that revenues to fund the lease payments
will be generated from a variety of sources,
<PAGE>
including in each year sports lottery revenues, the net operating revenues
of the Authority and funds from the City of Baltimore.
The Water Quality Revolving Loan Fund is administered by
the Water Quality Financing Administration in the Department of the
Environment. The Fund may be used to provide loans, subsidies and
other forms of financial assistance to local government units for
wastewater treatment projects as contemplated by the 1987 amendments
to the Federal Water Pollution Control Act. The Administration is
authorized to issue bonds secured by revenues of the
Fund, including loan repayments, federal capitalization grants, and
matching State grants.
The University of Maryland System, Morgan State
University, and St. Mary's College of Maryland are authorized to issue
revenue bonds for the purpose of financing academic and auxiliary
facilities. Auxiliary facilities are any facilities that furnish a service to
students, faculty, or staff, and that
generate income. Auxiliary facilities include housing, eating,
recreational, campus, infirmary, parking, athletic, student union or
activity, research laboratory, testing, and any related facilities.
On August 7, 1989, the Governor issued an Executive Order
assigning to the Department of Budget and Fiscal Planning responsibility
to review certain proposed issuances of revenue and enterprise debt other
than private activity bonds. The Executive Order also provides that the
Governor may establish a ceiling of such debt to be issued during the
fiscal year, which ceiling may be amended by the Governor.
Although the State has authority to make short-term
borrowings in anticipation of taxes and other receipts up to a maximum
of $100 million, in the past it has not issued short-term tax anticipation
and bond anticipation notes or made any other similar short-term
borrowings. However, the State has recently issued certain obligations
in the nature of bond anticipation notes for the purpose
of assisting several savings and loan associations in qualifying for
Federal insurance and in connection with the assumption by a bank of the
deposit liabilities of an insolvent savings and loan association.
The State has financed the construction and acquisition of
various facilities through unconditional purchase, sale-leaseback, and
similar transactions. By statute, all of the lease payments under these
arrangements are subject to an annual appropriation by the Maryland
General Assembly. In the event that appropriations are not made, the
State may not be held contractually liable for the payments.
Savings and Loan matters. During the first half of calendar
year 1985, several State-chartered savings and loans associations, the
savings accounts of which were privately insured, experienced unusually
<PAGE>
heavy withdrawals of funds by depositors. The resulting decline in the
associations' liquid assets led to the appointment of receivers for the
assets of six associations and the creation of an agency of the State to
succeed, by statutory merger, the private insurer. The savings accounts
of all savings and loan associations operating in the State of Maryland
must be insured by either the State agency or the Federal Savings and
Loan Insurance Corporation. The State agency assumed
the insurance liabilities of the private insurance agency with respect to
deposits made prior to May 18, 1985, and insures amounts deposited
after that date up to the amount insured by the Federal Savings and Loan
Insurance Corporation.
The legislation establishing the insurance agency provides that "It is the
policy of this State that funds will be appropriated to the (insurance
agency) to the extent necessary to protect holders of savings accounts in
member associations". As of December 31, 1989, depositors of all
insured accounts at associations in
receivership have been paid in full. Because the amount of the losses
incurred by the State Insurance Agency are estimated and because
numerous lawsuits involving the Agency are pending, the ultimate
outcome of the savings and loan situation is uncertain.
Local Subdivision Debt. The counties and incorporated
municipalities in Maryland issue general obligation debt for general
governmental purposes. The general obligation debt of the counties and
incorporated municipalities is generally supported by ad valorem taxes
on real estate, tangible personal property and intangible personal property
subject to taxation. The issuer typically pledges its full faith and credit
and unlimited taxing power to the prompt payment of the maturing
principal and interest on the general obligation debt and to the levy and
collection of the ad valorem taxes as and when such taxes become
necessary in order to provide sufficient funds
to meet the debt service requirements. The amount of debt which may
be authorized may in some cases be limited by the requirement that it not
exceed a stated percentage of the assessable base upon which such taxes
are levied.
In the opinion of counsel, the issuer may be sued in the event
that it fails to perform its obligations under the general obligation debt
to the holders of the debt, and any judgments resulting from such suits
would be enforceable against the issuer. Nevertheless, a holder of the
debt who has obtained any such judgment may be required to seek
additional relief to compel the issuer to levy and collect such taxes as
may be necessary to provide the funds from which a
judgment may be paid. Although there is no Maryland law on this point,
it is the opinion of counsel that the appropriate courts of Maryland have
jurisdiction to entertain proceedings and power to grant additional relief,
such as mandatory injunction, if necessary, to enforce the levy and
collection of such taxes and payment of the proceeds of the collection of
the taxes to the holders of general obligation debt, pari passu, subject to
the same constitutional limitations on enforcement, as described above,
as apply to the enforcement of judgments against the State.
Local subdivisions, including counties and municipal
corporations, are also authorized by law to issue special and limited
obligation debt for certain purposes other than general governmental
purposes. The source of payment of that debt is limited to certain
revenues of the issuer derived from commercial
activities operated by the issuer, payments made with respect to certain
facilities or loans, and any funds pledged for the benefit of the holders
of the debt. That special and limited obligation debt does not constitute
a debt of the State, the issuer or any other political subdivision of either
within the meaning of any constitutional or statutory limitation. Neither
the State nor the issuer or any
other political subdivision of either is obligated to pay the debt or interest
on the debt except from the revenues of the issuer specifically pledged
to the payment of the debt. Neither the faith and credit nor the taxing
power of the State, the issuer or any other political subdivision of either
is pledged to the payment of the debt. The issuance of the debt is not
directly or indirectly or contingently an obligation, moral or other, of the
State, the issuer or any other political subdivision of either to levy any
tax for its payment.
Washington Suburban Sanitary District Debt. The
Washington Suburban Sanitary District operates as a public corporation
of the State to provide, as authorized, water, sewerage and drainage
systems, including water supply, sewage disposal, and storm water
drainage facilities for Montgomery
County, Maryland and Prince George's County, Maryland. For the
purpose of paying the principal of and interest on bonds of the District,
Maryland law provides for the levy, annually, against all the assessable
property within the District by the County Council of Montgomery
County and the County Council of Prince Georges County of ad valorem
taxes sufficient to pay such principal and interest when due and payable.
Storm water drainage bonds for specific projects are payable
from ad valorem tax upon all of the property assessed for county tax
purposes within the portion of the District situated in the county in which
the storm water project was, or is to be, constructed. Storm water
drainage bonds of the District are also guaranteed by such county, which
guaranty operates as a pledge of the full faith and credit of the county to
the payment of the bonds and obligates the county council to the extent
that the tax revenues referred to above and any other money available or
to become available are inadequate to provide the
funds necessary to pay the principal of and the interest on the bonds, to
levy upon all property subject to taxation within the county ad valorem
taxes in rate and in amount sufficient to make up any such deficiency.
Substantially all of the debt service on the bonds, except
storm water drainage bonds, is being paid from revenues derived by the
<PAGE>
District from water consumption charges, from foot benefit charges, and
sewage usage charges. Notwithstanding the payment of principal of and
interest on those bonds from those charges, the underlying security of all
bonds of the District is the levy of ad valorem taxes on the assessable
property as stated above.
Special Authority Debt. The State and local governments
have created several special authorities with the power to issue debt on
behalf or the State of local government for specific purposes, such as
providing facilities for non-profit health care and higher educational
institutions, facilities for the disposal of solid waste, funds to finance
single family and low-to-moderate income housing, and similar purposes.
The Maryland Health and Higher Educational Facilities Authority, the
Northeast Maryland Waste Disposal Authority, the Housing
Opportunities Commission of Montgomery County, and
the Housing Authority of Prince Georges County are some of the special
authorities which have issued and have outstanding debt of this type.
The debts of the authorities issuing debt on behalf of the State
and the local governments are limited obligations of the authorities
payable solely from and secured by a pledge of the revenues derived
from the facilities or loans
financed with the proceeds of the debt and from any other funds and
receipts pledged under an indenture with a corporate trustee. The debt
does not constitute a debt, liability or pledge of the faith and credit of the
State or of any political subdivision or of the authorities. Neither the
State nor any political subdivision thereof nor the authorities shall be
obligated to pay the debt or the interest on the debt except from such
revenues, funds and receipts. Neither the faith and credit nor the taxing
power of the State or of any political subdivision
of the State or the authorities is pledged to the payment of the principal
of or the interest on such debt. The issuance of the debt is not directly
or indirectly an obligation, moral or other, of the State or of any political
subdivision of the State or of the authority to levy or to pledge any form
of taxation whatsoever, or to make any appropriation, for their payment.
The authorities have no taxing power.
Hospital Bonds. The rates charged by non-governmental
Maryland hospitals are subject to review and approval by the Maryland
Health Services Cost Review Commission. Maryland hospitals subject
to regulation by the Commission are not permitted to charge for services
at rates other than those established by the Commission. In addition, the
Commission is required to permit any nonprofit institution subject to its
jurisdiction to charge reasonable rates which will permit the institution
to provide, on a solvent basis, effective and efficient service in the public
interest.
Under an agreement between Medicare and the Commission,
Medicare agrees to pay Maryland hospitals on the basis of Commission-
<PAGE>
approved rates, less a 6% differential. Under this so-called "Medicare
Waiver", Maryland hospitals are exempt from the Medicare Prospective
Payment System which pays hospitals fixed amounts for specific services
based upon patient diagnosis. No assurance can be given that Maryland
will continue to meet any current or future tests for the continuation of
the Medicare Waiver.
In setting hospital rates, the Commission takes into account
each hospital's budgeted volume of services and cash financial
requirements for the succeeding year. It then establishes the rates of the
hospital for the succeeding year based upon the projected volume and
those financial requirements of the institution which the Commission has
deemed to be reasonable. Financial requirements allowable for inclusion
in rates generally include budgeted operating costs, a "capital facilities
allowance", other financial considerations (such as charity care and bad
debts) and discounts allowed certain payers for
prompt payment. Variations from projected volumes of services are
reflected in the rates for the succeeding year. The Commission, on a
selective basis by the application of established review criteria, grants
Maryland hospitals increases in rates to compensate for inflation
experienced by hospitals and for other factors beyond the hospitals'
control.
Regulations of the Commission provide that overcharges will
in certain circumstances be deducted from prospective rates. Similarly,
undercharges will in certain circumstances not be recoverable through
prospective rates.
The Commission has entered into agreements with certain
hospitals to adjust rates in accordance with a prospectively approved,
guaranteed inpatient revenue per admission program. Those agreements
are in addition to the rate adjustment methodology discussed above.
Under the program, a hospital's revenue per admission is compared to
the revenue per admission, as adjusted, for a base year. Variations from
the adjusted base year revenues per admission are added or deducted, as
the case may be, from the hospital's gross revenue
and rates for the following year.
There can be no assurance that the Commission will continue
to utilize its present rate-setting methodology or approve rates which will
be sufficient to ensure payment on an individual hospital's obligations.
Future actions by the Commissions or the loss of the Medicare Waiver
may adversely affect the operations of individual hospitals.
Changes in economic conditions in or governmental policies
of the state of Maryland could have a significant impact on the
performance of the Maryland Trust. For example, services (including
mining), wholesale and retail trade, government, and manufacturing
(primarily printing and publishing, food and kindred products,
<PAGE>
instruments and related products, electronic equipment,
industrial machinery and transportation equipment), are the leading areas
of employment in the State of Maryland. In contrast to the nation as a
whole, more people in Maryland are employed in government than in
manufacturing. The relatively high concentration of governmental
employment in Maryland makes the state potentially vulnerable spending.
Recent Maryland executive branch projections show a budgetary deficit
for the fiscal year ending June 30, 1991. The Governor of Maryland has
recently acted to curtail spending in response to the projected deficit for
that fiscal year.
In recent years, finance, insurance, and real estate were large
contributors to the gross state product. The continued strength in those
sectors is subject to question given recent disclosures indicating financial
weakness in major banking and insurance companies having their
corporate headquarters in Maryland and the general regional decline in
real estate activity and values.
The State is the subject of numerous legal proceedings
relating to normally recurring governmental operations 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 for the present or any future fiscal year.
Massachusetts Trust
In the past, the Commonwealth of Massachusetts, and certain
of its public bodies and municipalities, including the City of Boston,
have faced serious financial difficulties which have adversely affected the
credit standing and borrowing abilities of Massachusetts and the
respective entities.
The recurrence of such financial difficulties could result in
declines in the market values of, or default on, existing obligations,
including Bonds deposited in the Massachusetts Trust. The following
constitutes only a brief summary of the most significant financial
problems of the Commonwealth of Massachusetts and issues related to
its financial condition and does not purport to be complete.
On June 30, 1991 the legislature approved a fiscal 1992
budget of $12.994 billion. The budget as passed represents a substantial
reduction in levels of spending for a variety of programs, including a
reduction in local aid of approximately $328 million. As signed by the
Governor on July 10, 1991, the budget for fiscal 1992 was based on
estimated total revenues of $13.032 billion (including estimated tax
revenues of $8.292 billion, which was $703 million less than tax
revenues for fiscal 1991) and total estimated expenditures
of $13.177 billion (including, at that time, approximately $537 million
<PAGE>
in anticipated supplemental appropriations). The fiscal 1992 budget was
projected to end the year with a small positive balance through the use
of $145 million in estimated positive balances from fiscal 1991.
With regard to revenues, the fiscal 1992 budget as signed
depended on non-tax and one-time revenue sources, such as the sale of
certain assets, the availability of which was subject to certain
contingencies. The fiscal 1992 budget as signed assumed continued
federal reimbursements related to
uncompensated care payments. The federal Health Care Financing
Administration has published regulations to become effective October 1,
1992 that are not expected to materially affect these reimbursements in
fiscal 1992 and it is currently expected that the amount of such federal
reimbursements in fiscal 1992 will be $195 million.
With regard to spending, the budget made large reductions in
appropriations for certain programs such as Medicaid, General Relief,
and Group Health Insurance, where spending has been difficult to control
in the past.
Budgeted revenues and other sources for fiscal 1992 were
$13.728 billion, including projected tax revenues of $9.484 billion.
Budgeted revenues and other sources increased by approximately 0.7%
from fiscal 1991 to fiscal 1992, while tax revenues increased by 5.4%
for the same period.
Budgeted expenditures were approximately $13.420 billion in
fiscal 1992, which is $238.7 million, or 1.7%, lower than fiscal 1991
budgeted expenditures. Final fiscal 1992 budgeted expenditures were
approximately $300 million higher than the initial July 1991 estimates of
budgeted expenditures. While certain expenditures were less than
originally estimated, spending for certain human services programs, in
particular, was higher than initially estimated, including an increase of
$268.7 million for the Medicaid program and $50.0 million for mental
retardation consent decree requirements. Fiscal 1992
budgeted expenditures for Medicaid were $2.818 billion, or 1.9% higher
than fiscal 1991. This increase compares favorably with the 19.0%
average annual growth rate of Medicaid expenditures for fiscal years
1988 and 1991.
Overall, the budgeted operating funds ended 1992 with an
excess of revenues and other sources over expenditures and other uses
of $312.3 million and with positive fund balances of $549.4 million,
when such excess is added to the fund balances of $237.1 million carried
forward from fiscal 1991. Total fiscal 1992 spending authority continued
into fiscal 1993 is $231.0 million.
After payment in full of the quarterly Local Aid distribution
of $514.0 million due on June 30, 1992, retirement of the
<PAGE>
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 $731.0 million. The fiscal 1992 ending balance compares
favorably with the cash balance of $182.3 million at the end of fiscal
1991.
On January 22, 1992, the Governor submitted his fiscal 1993
budget recommendation of $13.992 billion. The Governor's budget
recommendation is based on a tax revenue estimate of $9.150 billion, a
decrease of approximately $75 million, or less than 1%, from estimated
fiscal 1992 tax revenues of $9.225 billion. The reduction in estimated
tax revenues in fiscal 1993 is attributable in part to reduction in the
Commonwealth's personal income
tax rate on earned income and certain other income from 6.25% to
5.95%, which took effect on January 1, 1992, and on the assumption
that a proposed further reduction in that rate to 5.75% will be adopted
retroactive to the same date; the rate reductions are estimated to decrease
fiscal 1993 tax revenues by $210 million and $140 million, respectively.
The fiscal 1993 reduction in estimated tax revenues is also attributable
in part to proposed new tax credits which are estimated to reduce tax
revenues by approximately $52 million in fiscal 1993.
On November 17, 1992, the Legislature authorized the partial
funding of certain collective bargaining agreements between the
Commonwealth and its employees. These agreements, which were
originally scheduled to take effect in January 1991, included a three year
increase in wage levels for Commonwealth employees of approximately
13.7%. The legislative authorization effectively increases wage levels by
6% during the remainder of fiscal 1993, and by approximately an
additional 7% for fiscal 1994. This action
increases the Commonwealth's compensation obligations by
approximately $39.8 million for fiscal 1993 and $173.8 million for fiscal
1994. The Governor vetoed the legislation authorizing such funding due
to then current fiscal conditions. However, the veto was overridden by
the Legislature and the pay raise was implemented effective December
21, 1992.
The fiscal 1993 budget is based on estimated budgeted
revenue and other sources of $14.641 billion (including the current tax
revenue estimate of $9.940 billion). Concurrently with signing the fiscal
1993 budget, the Governor vetoed or reduced approximately $315.0
million in line-item appropriations. In
addition, the Governor vetoed certain legislative riders to the fiscal 1993
budget which affected the ability of the Commonwealth to collect an
estimated $69.0 million of non-tax revenues otherwise available for fiscal
1993. The Legislature has overridden the Governor's veto of
approximately $200.3 million of fiscal 1993 budgetary spending
<PAGE>
authority. In addition, the Legislature has extended
certain fiscal 1992 spending authority to fiscal 1993. These actions will
increase fiscal 1993 spending by $231.0 million. The fiscal 1993
budget, as signed by the Governor and including the additional spending
authority noted above, is based upon budgeted expenditures of $14.976
billion, which is $1.556 billion or
11.6% higher than fiscal 1992 budgeted expenditures. The fiscal 1993
budget presently anticipates that the difference between estimated
revenues and other sources and expenditures and other uses be provided
for by application of $319.4 million of the estimated $549.4 million
beginning fund balance for fiscal 1993 to produce an estimated ending
fund balance for fiscal 1993 of approximately $230.0 million.
In September 1992, the Governor submitted legislation
proposing various tax and other incentives for businesses to locate or
remain in the Commonwealth. The legislation included a phase-out of
the capital gains tax and up to $50 million of indirect loan guarantees.
The legislation was not enacted during the 1992 legislative session.
However, portions of the legislation
were refiled in January 1993, and the Legislature is now considering a
different version of the original legislation, including provisions for
increasing the investment tax credit for businesses, establishing a fund to
assist biotechnology firms and various tax incentives to business.
On January 27, 1993, the Governor submitted his fiscal 1994
budget recommendation which called for budgeted expenditures of
approximately $15.208 billion. This recommended spending level is
approximately $232.2 million, or 1.6%, over estimated budgeted
expenditures for fiscal 1993 of $14.976 billion. Proposed budgeted
revenues for fiscal 1994 would exceed proposed budgeted expenditures
by approximately $20.5 million. The Governor's recommendation
projects a fiscal 1994 ending fund balance of
$250.7 million, of which $198.8 million will be in the Stabilization
Fund. The Governor's budget recommendation is based on a tax revenue
estimate of $10.460 billion, an increase of approximately $520 million,
or approximately 5.2%, as compared to currently estimated fiscal 1993
tax revenues of $9.940 billion. This increase from fiscal 1993 to fiscal
1994 is based on estimates of real economic growth of approximately
1.75% and inflation of 2.75%, as well as additional fiscal 1994 revenues
from the newly increased cigarette tax. The
Governor's fiscal 1994 budget submission also proposes tax reductions
aggregating $30 million, including a tax credit for credit for certain
college tuition payments and a tax credit for health insurance premiums
paid by the elderly.
Unemployment has been decreasing since January 1993 and,
as of July, 1993 was 6.3%, as compared to 6.0% for June, 1993 and
8.4% for July, 1992. The United States unemployment rate in July,
1993 was 6.8%, as compared to 7.0% for June, 1993 and 7.6% for July,
<PAGE>
1992. In addition, per capita personal income is currently growing at a
rate lower than the national average.
Prior to 1980, property taxes on residential property were
substantially higher in Massachusetts than in most states. In 1979, the
property tax was virtually the only source of tax revenues available for
use by Massachusetts cities and towns to meet local costs and represented
46% of all state and local taxes in Massachusetts. The pressures to
reduce the levels of taxation in Massachusetts, particularly the property
tax, culminated in the adoption on November 4, 1980 by the voters of
an initiative petition, known as Proposition 2 .5, designed to cut
property taxes sharply and to reduce governmental spending. The
reduction in local revenues caused by Proposition
2.5 varied considerably among the cities and towns. Proposed
reductions in personnel and services created strong demand from the
cities and towns for substantial increases in local aid from State
government. These demands lead to significant increases in local aid
from fiscal 1981 to fiscal 1989. Because of
decreased Commonwealth revenues, local aid declined slightly in fiscal
1990, decreased by approximately $330 million more in fiscal 1991 and
decreased by $240 million more in fiscal 1992. Accordingly, substantial
reductions in personnel and services may be required in certain localities
and local capital expenditures may have to be further deferred.
Limitations on state tax revenues have been established by
legislation approved by the Governor on October 25, 1986 and by an
initiative petition approved by the voters on November 4, 1986. The
two measures are inconsistent in several respects, including the methods
of calculating the limits and the exclusions from the limits. The initiative
petition, unlike its legislative counterpart, contains no exclusion for debt
service on Commonwealth bonds and notes. Under both measures,
excess revenues are returned to taxpayers in the
form of lower taxes. It is not yet clear how differences between the two
measures will be resolved. State tax revenues in fiscal 1988 through
fiscal 1992 did not exceed the limit imposed either by the initiative
petition or the legislative enactment. The Executive Office for
Administration and Finance currently estimates that state tax revenues in
fiscal 1993 will not reach the limit imposed by either of these statutes.
The Commonwealth's two retirement systems historically
have been operated on a pay-as-you-go basis, resulting in a significant
unfunded pension liability. In January 1988, comprehensive pension
reform legislation was approved which will require the Commonwealth
to fund future pension liabilities on a current basis and to amortize over
a 40-year period its existing unfunded liabilities for the two state
retirement systems and for the cost-of-living
adjustments for local systems. The new legislation also provides for
state aid to local pension systems which also commit to eliminating their
unfunded liabilities over a 40-year period. Total pension expenditures
<PAGE>
increased at an average annual rate of 5.8% from $600.2 million in fiscal
1988 to $751.5 million in 1992. In November 1992, the Legislature
overrode the Governor's veto of approximately $14.9 million of spending
authority passed by the Legislature to fund 5% cost of living adjustments
for certain Commonwealth, county and municipal retirees for the period
January 1, 1992 through June 30, 1992, which spending authority is
included within fiscal 1992 pension expenditures. The estimated pension
expenditures (inclusive of current benefits and pension reserves) for fiscal
1993 are $873.8 million, representing an increase of 16.2% over fiscal
1992 expenditures.
Capital spending by the State in the State bond funds was
approximately $595 million in fiscal 1987, $632 million in fiscal 1988,
$971 million in fiscal 1989, $936 million in fiscal 1990, $847.1 million
in fiscal 1991 and $694 million in fiscal 1992. Capital expenditures are
projected to increase to $821 million in fiscal 1993.
The Commonwealth maintains financial information on a
budgetary basis. Since fiscal year 1986, the Comptroller also has
prepared annual financial statements in accordance with generally
accepted accounting principles (GAAP) as defined by the Government
Accounting Standards Board. On a GAAP basis all budgeted operating
funds of the Commonwealth had deficits of $51.6 million, $946.2
million, $1.896 billion, $761.2 million and $381.6 million
at the end of fiscal years 1988, 1989, 1990, 1991 and 1992, respectively.
Many factors affect the financial condition of the
Commonwealth, including many social, environmental and economic
conditions which are beyond the control of the Commonwealth. As with
most urban states, the continuation of many of the Commonwealth's
programs, particularly its human services programs, is in significant part
dependent upon continuing federal reimbursements which have been
declining. Recent federal legislation has effected substantial reductions
in direct federal payments and in grants to states
and municipalities for programs in social service, water pollution control
and other areas. The loss of grants to the state and the cities and towns
could slow economic development and cause programs to be curtailed or
cause the recipients of such funding to find other revenue sources.
Reductions in state revenues, reductions in federal aid, the rehabilitation
of public facilities and meeting environmental requirements for clean
water and clean air and solid and hazardous waste disposal are expected
to be the principal challenges for the Commonwealth and its local
governments in the near future.
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.
Minnesota Trust
In the early 1980s, the State of Minnesota experienced
financial difficulties due to a downturn in the State's economy resulting
from the national recession. As a consequence, the State's revenues
were significantly lower than anticipated in the July 1, 1979 to June 30,
1981 biennium and the July 1, 1981 to June 30, 1983 biennium. In
response to revenue shortfalls, the legislature
broadened and increased the State sales tax, increased income taxes (by
increasing rates and eliminating deductions) and reduced appropriations
and deferred payments of State aid, including appropriations for and aids
to local governmental units. The State's fiscal problems affected other
governmental units within the State, such as local government, school
districts and state agencies, which, in varying degrees, also faced cash
flow difficulties. In certain cases, revenues of local governmental units
and agencies were reduced by the recession. Because of the State's fiscal
problems, Standard & Poor's Corporation reduced its rating of the
State's outstanding general obligation bonds
from AAA to AA+ in August 1981 and to AA in March 1982.
Moody's Investors Service, Inc. lowered its rating on the State's
outstanding general
obligation bonds from Aaa to Aa in April 1982.
The State's economy recovered in the July 1, 1983 to June
30, 1985 biennium, and substantial reductions in the individual income
tax were enacted in 1984 and 1985. Standard & Poor's raised its rating
on the State's outstanding general obligation bonds to AA+ in January
1985. In 1986, 1987 and 1991, legislation was required to eliminate
projected budget deficits by raising additional revenue and reducing
expenditures, including aid to political subdivisions and higher education
and making other budgetary adjustments. A budget forecast released by
the Department of Finance on February 27, 1992 projected a $569
million budget shortfall, primarily attributable to reduced
income tax receipts, for the biennium ending June 30, 1993. Planning
estimates for the 1994-95 biennium project a budget shortfall of $1.75
billion (less a $400 million reserve). The State responded by enacting
legislation that made substantial accounting changes, reduced the budget
reserve (cash flow account) by $160 million to $240 million, reduced
appropriations for state agencies and
higher education, imposed a sales tax on purchases by local
governmental units, and adopted other tax and spending changes. A
revised forecast released by the
Department of Finance on November 24, 1992 reflects these legislative
changes and projects a $217 million General Fund surplus at the end of
<PAGE>
the current biennium, June 30, 1993, plus a $240 million cash flow
account, against a total budget for the biennium of approximately $14.6
billion, and planning estimates for the 1994-95 biennium project a budget
shortfall of $986 million (less the $217 million balance carried forward
and the $240 million cash flow account).
Although Standard & Poor's has affirmed its rating on the State's general
obligation bonds in connection with a July, 1992 issue, it has revised its
outlook for the rating to "negative." The projections generally do not
include increases for inflation or operating costs, except where Minnesota
law requires them.
Tax refund actions for 1979-83 have been filed by over 170
Minnesota banks, alleging that the Minnesota bank excise tax was invalid
because the State of Minnesota excluded interest on certain obligations
of the State and its political subdivisions from the computation of the tax
while including interest on federal obligations. The Ramsey County
District Court tried this issue on a test case basis, and found in favor of
plaintiffs. The court held the Minnesota bank excise tax unlawful on the
grounds that it discriminated against federal obligations and that the tax
is an income tax rather than a franchise tax. The District Court
judgments have been reversed by the Minnesota Supreme Court on the
grounds that (1) the bank excise tax is a
franchise tax, (2) the banks should be estopped from asserting their
challenge to the tax, since they accepted the benefits of the exemption for
interest on State of Minnesota obligations, and (3) the invalid provisions
should be severed from the statute. On June 28, 1993, however, the
United States Supreme Court vacated the judgment of the Minnesota
Supreme Court and remanded the case for further consideration in light
of the recent decision in HARPER V. VIRGINIA DEPARTMENT OF
TAXATION. The taxes and interest in suit are estimated to be in excess
of $188 million for the tax at issue, 1979-1983.
Another District Court decision has held that the State may not tax the
portion of certain federal retirement annuities that is attributable to
interest earned by the retirement fund from investments in federal
obligations. This judgment has been reversed by the Minnesota Supreme
Court, but plaintiffs have indicated that they
plan to seek review of this case by the United States Supreme Court.
The amount at issue is approximately $8 million, plus per tax year. The
State of Minnesota is also a party to a variety of other civil actions which
could adversely affect the State's general fund. A Minnesota District
Court has held certain elements of the State's financing system for public
education unconstitutional under the State equal protection clause and has
ordered the development of appropriate changes to such financing
system. It is not possible to predict what effect this decision will have
on the budgetary situations of the State and local school districts.
State grants and aids represent a large percentage of the total
revenues of cities, towns, counties and school districts in Minnesota.
Even with respect to Bonds that are revenue obligations of the issuer and
<PAGE>
not general obligations of the State, there can be no assurance that the
fiscal problems referred to above will not adversely affect the market
value or marketability of the Bonds or the ability of the respective
obligors to pay interest on and principal of the Bonds.
Missouri Trust
The following discussion regarding constitutional limitations
and the economy of the State of Missouri is included for the purpose of
providing general information that may or may not affect issuers of the
Bonds in Missouri.
In November 1981, the voters of Missouri adopted a tax
limitation amendment to the constitution of the State of Missouri (the
"Amendment"). The Amendment prohibits increases in local taxes,
licenses, or fees by political
subdivisions without approval of the voters of such political subdivision.
The Amendment also limits the growth in revenues and expenditures of
the State to the rate of growth in the total personal income of the citizens
of Missouri. The limitation may be exceeded if the General Assembly
declares an emergency by a two-thirds vote. The Amendment did not
limit revenue growth at the state level in fiscal 1982 through 1991 with
exception of fiscal 1984. Management Report No. 85-20, which was
issued on March 5, 1985 by State Auditor Margaret Kelly, indicates that
state revenues exceeded the allowable increase by
$30.52 million in fiscal 1984.
The economy of Missouri is diverse and includes
manufacturing, retail and wholesale trade, services, agriculture, tourism,
and mining. According to the Business and Public Administration
Research Center of the College of Business and Public Administration,
University of Missouri at Columbia, real per capita personal income in
Missouri, adjusted for inflation, is projected to increase 5.9% during
1993. As a result of the State's weak economic outlook, Missouri
General Fund Revenues are currently projected to
increase by only 3.1% for the 1992-1993 fiscal year. According to the
Missouri Department of Labor and Industrial Relations, the
unemployment rate in Missouri for December 1992 was 5.3 percent,
compared to 6.0 percent in December 1991, and 4.8 percent in
November 1992. There can be no assurance that the general economic
conditions or the financial circumstances of Missouri
or its political subdivisions will not adversely affect the market value of
the Bonds or the ability of the obligor to pay debt service on such Bonds.
Currently, Moody's Investors Service rates Missouri general
obligation bonds "Aaa" and Standard & Poor's Corporation rates
Missouri general obligation bonds "AAA". Although these ratings
indicate that the State of Missouri is in relatively good economic health,
<PAGE>
there can be, of course, no assurance that this will continue or that
particular bond issues may not be
adversely affected by changes in the State or local economic or political
conditions.
The foregoing information constitutes only a brief summary
of some of the general factors which may impact certain issuers of Bonds
and does not purport to be a complete or exhaustive description of all
adverse conditions to which the issuers of obligations held by the
Missouri Trust are subject. Additionally, many factors including national
economic, social and environmental policies and conditions, which are
not within the control of the issuers of the Bonds, could affect or could
have an adverse impact on the financial condition of the State and various
agencies and political subdivisions
located in the State. It is not possible to predict whether or to what
extent such factors or other factors may affect the issuers of the Bonds,
the market value or marketability of the Bonds or the ability of the
respective issuers of the Bonds acquired by the Missouri Trust to pay
interest on or principal of the Bonds.
New Jersey Trust
Risk Factors: Prospective investors should consider the
recent financial difficulties and pressures which the State of New Jersey
(the "State") and certain of its public authorities have undergone.
The State's 1994 fiscal year budget became law on June 30,
1993.
The economic recovery is likely to be slow and uneven in
both New Jersey and the nation. Some sectors, like commercial and
industrial construction, will undoubtedly lag because of continued excess
capacity. Also, employers in rebounding sectors can be expected to
remain cautious about hiring until they become convinced that improved
business will be sustained. Other firms will continue to merge or
downsize to increase profitability. As a result,
job gains will probably come grudgingly and unemployment will recede
at a corresponding slow pace.
Pursuant to the State Constitution, no money may be drawn
from the State Treasury except for appropriations made by law. In
addition, all monies for the support of State purposes must be provided
for in one general appropriation law covering one and the same fiscal
year.
In addition to the Constitutional provisions, the New Jersey
statutes contain provisions concerning the budget and appropriation
system. Under these provisions, each unit of the State requests an
appropriation from the Director of Division of Budget and Accounting,
<PAGE>
who reviews the budget requests and forwards them with his
recommendation to the Governor. The Governor then
transmits his recommended expenditures and sources of anticipated
revenue to the legislature, which reviews the Governor's Budget Message
and submits an appropriations bill to the Governor for his signing by July
1 of each year. At the time of signing the bill, the Governor may revise
appropriations or anticipated revenues. That action can be reversed by
a two-thirds vote of each House. No supplemental appropriation may be
enacted after adoption of the act, except where there are sufficient
revenues on hand or anticipated, as certified
by the Governor, to meet the appropriation. Finally, the Governor may,
during the course of the year, prevent the expenditure of various
appropriations when revenues are below those anticipated or when he
determines that such expenditure is not in the best interest of the State.
State Aid to Local Governments is the largest portion of fiscal
year 1994 appropriations. In fiscal year 1994, $6,562.0 million of the
State's appropriations consisted of funds which are distributed to
municipalities, counties and school districts. The largest State Aid
appropriation, in the amount of $4,824.1 million, was provided for local
elementary and secondary education
programs. Of this amount, $2,538.2 million is provided as foundation
aid to school districts by formula based upon the number of students and
the ability of a school district to raise taxes from its own base. In
addition, the State provided
$582.5 million for special education programs for children with
disabilities. A $293 million program was also funded for pupils at risk
of educational failure, including basic skills improvement. The State
appropriated $767.2 million on behalf of school districts as the employer
share of the teachers' pension and
benefits programs, $263.8 million to pay for the cost of pupil
transportation and $57.4 million for transition aid, which guaranteed
school districts a 6.5% increase over the aid received in fiscal year 1991
and is being phased out over four years.
Appropriations to the Department of Community Affairs total
$650.4 million in State Aid monies for fiscal year 1994. The principal
programs funded were the Supplemental Municipal Property Tax Act
($365.7 million); the Municipal Revitalization Program ($165.0 million);
municipal aid to urban communities to maintain and upgrade municipal
services ($40.4 million); and the Safe and Clean Neighborhoods Program
($58.9 million). Appropriations to the State Department of the Treasury
total $312.5 million in State Aid monies for fiscal year 1994. The
principal programs funded by these appropriations were payments under
the Business Personal Property Tax Replacement Programs ($158.7
million); the cost of senior citizens, disabled and
veterans property tax deductions and exemptions ($41.7 million); aid to
densely populated municipalities ($33.0 million); Municipal Purposes Tax
Assistance ($30.0 million); and payments to municipalities for services
<PAGE>
to state owned property ($34.9 million).
Other appropriations of State aid in fiscal year 1994 include:
welfare programs ($477.4 million); aid to county colleges ($114.6
million); and aid to county mental hospitals ($88.0 million).
The second largest portion of appropriations in fiscal 1994 is
applied to Direct State Services: the operation of State government's 19
departments, the Executive Office, several commissions, the State
Legislature and the Judiciary. In fiscal 1994, appropriations for Direct
State Services aggregate $4,574.6 million. Some of the major
appropriations for Direct State Services during fiscal 1994 are detailed
below.
$602.3 million was appropriated for programs administered
by the Department of Human Services. The Department of Labor is
appropriated $51.4 million for the administration of programs for
workers' compensation, unemployment and disability insurance,
manpower development, and health safety inspection.
The Department of Health was appropriated $37.6 million for
the prevention and treatment of diseases, alcohol and drug abuse
programs, regulation of health care facilities, and the uncompensated
care program.
$673.0 million was appropriated to the Department of Higher
Education for the support of eight State colleges, Rutgers University, the
New Jersey Institute of Technology, and the University of Medicine and
Dentistry of New Jersey.
$932.6 million was appropriated to the Department of Law
and Public Safety and the Department of Corrections.
$99.8 million was appropriated to the Department of
Transportation for the various programs it administers, such as the
maintenance and improvement of the State highway systems and
subsidies for railroads and bus companies.
$156.4 million was appropriated to the Department of
Environmental Protection for the protection of air, land, water, forest,
wildlife and shellfish resources and for the provision of outdoor
recreational facilities.
The primary method for State financing of capital projects is
through the sale of the general obligation bonds of the State. These
bonds are backed by the full faith and credit of the State. State tax
revenues and certain other fees are pledged to meet the principal and
interest payments required to pay the debt fully. No general obligation
debt can be issued by the State without prior voter approval, except that
<PAGE>
no voter approval is required for any law authorizing the creation of a
debt for the purpose of refinancing all or a portion
of outstanding debt of the State, so long as such law requires that the
refinancing provide a debt service savings.
All appropriations for capital projects and all proposals for
State bond authorizations are subject to the review and recommendation
of the New Jersey Commission on Capital Budgeting and Planning. This
permanent commission was established in November, 1975, and is
charged with the preparation of the State Capital Improvement Plan,
which contains proposals for State spending for capital projects.
The aggregate outstanding general obligation bonded
indebtedness of the State as of June 30, 1993 was $3.549.7 billion. The
debt service obligation for outstanding indebtedness is $119.9 million for
fiscal year 1994.
Aside from its general obligation bonds, the State's "moral
obligation" backs certain obligations issued by the New Jersey Housing
and Mortgage Finance Agency, the South Jersey Port Corporation (the
"Corporation") and the Higher Education Assistance Authority. As of
June 30, 1992, there was outstanding in excess of $1 billion of moral
obligation bonded indebtedness issued by such entities, for which the
maximum annual debt service was over $101 million as of such date.
The State provides the Corporation with funds to cover debt service and
property tax requirements when earned revenues
are anticipated to be insufficient to cover these obligations. For the
calendar years 1986 through 1992, the State has appropriated
$12,237,565.00 to cover property tax shortfalls of the Corporation.
At any given time, there are various numbers of claims and
cases pending against the State, State Agencies and employees, seeking
recovery of monetary damages that are primarily paid out of the fund
created pursuant to the Tort Claims Act, N.J.S.A. 59:1-1 et seq. In
addition, at any given time there are various contract claims against the
State and State agencies seeking recovery of monetary damages. The
State is unable to estimate its exposure for these
claims and cases. An independent study estimated an aggregate potential
exposure of $50 million for claims pending, as of January 1, 1982. It
is estimated that were a similar study made of claims currently pending,
the amount of such estimated exposure would be somewhat higher. New
Jersey is involved in a number of lawsuits in which adverse decisions
could materially affect revenues or expenditures. Such cases include
challenges to its system of educational funding, the methods by which the
State Department of Human Services shares with county governments the
maintenance recoveries and costs for residents in State psychiatric
hospitals and residential facilities for the
developmentally disabled.
<PAGE>
Other lawsuits that could materially affect revenue or
expenditures include a suit by a number of taxpayers seeking refunds of
taxes paid to the Spill Compensation Fund pursuant to N.J.S.A.
58:10-23.11; a suit alleging that unreasonably low Medicaid payment
rates have been implemented for long-term
care facilities in New Jersey; a suit alleging unfair taxation on interstate
commerce; a suit by Essex County seeking to invalidate the State's
method of funding the medical system and a suit seeking return of
moneys paid by various counties for maintenance of Medicaid or
Medicare eligible residents of institutions and facilities for the
developmentally disabled, and a suit challenging
the imposition of premium tax surcharges on insurers doing business in
New Jersey, and assessments upon property and casualty liability insurers
pursuant to the Fair Automobile Insurance Reform Act.
Legislation approved June 30, 1992, effective immediately,
called for revaluation of several public employee pension funds,
authorized an adjustment to the assumed rate of return on investment and
refunds $773 million in public employer contributions to the State from
various pension funds, to be reflected as a revenue source for Fiscal
Year 1992 and $226 million in Fiscal Year 1993 and each fiscal year
thereafter. Several labor unions filed suit
seeking a judgment directing the State Treasurer to refund all monies
transferred from the pension funds and paid into the General Fund. An
adverse determination would have a significant impact on Fiscal Years
1992 and 1993 revenue estimates.
Bond Ratings: Citing a developing pattern of reliance on
non-recurring measures to achieve budgetary balance, four years of
financial operations marked by revenue shortfalls and operating deficits,
and the likelihood that financial pressures will persist, on August 24,
1992 Moody's lowered from Aaa to Aa1 the rating assigned to New
Jersey general obligation bonds. Currently, Standard & Poor's rates
New Jersey general obligation bonds
AA+. On July 6, 1992, Standard & Poor's affirmed its AA+ ratings
on New Jersey's general obligation and various lease and appropriation
backed debt, but its ratings outlook was revised to negative for the longer
term horizon (beyond four months) for resolution of two items: (i) the
Federal Health Care Facilities Administration ruling concerning
retroactive Medicaid hospital reimbursements
and (ii) the State's uncompensated health care funding system, which is
under review in the U.S. Supreme Court.
<PAGE>
New York Trust
New York State
The national and regional economic recession has caused a
substantial reduction in State tax receipts. This reduction is the principal
cause of the imbalance between recurring receipts and disbursements that
faced the Governor and Legislature in the adoption of the budget for the
1992-1993 fiscal
year.
Consequently, the State took various actions for its 1992
fiscal year, which included increases in certain State taxes and fees,
substantial decreases in certain expenditures from previously projected
levels, including cuts in State
operations and reductions in State aid to localities, and the sale of $531
million of short-term deficit notes prior to the end of the State's 1992
fiscal year. The State's 1992-93 budget was passed on time, closing an
estimated $4.8 billion imbalance resulting primarily from the national
and regional economic recession.
Major budgetary actions included a freeze in the scheduled reduction in
the personal income tax and business tax surcharge, adoption of
significant Medicaid cost containment or revenue initiatives, and
reductions in both agency operations
and grants to local governments from previously anticipated levels. the
State completed its 1993 fiscal year with a positive margin of $671
million in the General Fund which was adopted into a tax refund reserve
account.
The Governor released the recommended Governor's
Executive Budget for the 1993-94 fiscal year on January 19, 1993. The
recommended 1993-94 State Financial Plan projected a balanced General
Fund. General Fund receipts and transfers from other funds were
projected at $31.6 billion, including
$184 million carried over from the State's 1993 fiscal year.
Disbursements and transfers from other funds were projected at $31.5
billion, not including a $67 million repayment to the State's Tax
Stabilization Reserve Fund. To achieve
General Fund budgetary balance in the 1994 State fiscal year, the
Governor recommended various actions. These included proposed
spending reductions and other actions that would reduce General Fund
spending ($1.6 billion); continuing
the freeze on personal income and corporate tax reductions and on
hospital assessments (41.3 billion); retaining moneys in the General Fund
that would otherwise have been deposited in dedicated highway and
transportation funds ($516 million); a 21-cent increase in the cigarette tax
($180 million); and new revenues from miscellaneous sources ($91
million). The recommended Governor's 1993-94 Executive Budget
included reductions in anticipated aid to all levels of local government.
<PAGE>
In comparison to the recommended 1993-94 Executive
Budget, the 1993-94 State budget, as enacted, reflects increases in both
receipts and disbursements in the general Fund of $811 million.
The $811 million increase in projected receipts reflects (i) an
increase of $487 million, from $184 million to $671 million, in the
positive year-end margin at March 31, 1993, which resulted primarily
from improving economic conditions and higher-than-expected tax
collections, (ii) an increase of $269 million in projected receipts, $211
million resulting from the improved 1992-93 results and the expectation
of an improving economy and the balance from improved auditing and
enforcement measures and other miscellaneous items, (iii) additional
payments of $200 million from the Federal government to
reimburse the State for the cost of providing indigent medical care, and
(iv) the payment of an additional $50 million of personal income tax
refunds in the 1993-94; offset by (v) $195 million of revenue raising
recommendations in the Executive Budget that were not enacted in the
budget and thus are not included in the 1993-94 State Financial Plan.
The $811 million increase in projected disbursements reflects
(i) an increase of $252 million in projected school-aid payments, after
applying estimated receipts from the State Lottery allocated to school aid,
(ii) an increase of $194 million in projected payments for Medicaid
assistance and other social service programs, (iii) additional spending on
the judiciary ($56 million) and criminal justice ($48 million), (iv) a net
increase in projected disbursements for all other programs and purposes,
including mental hygiene and capital projects,
of $161 million, after reflecting certain re-estimates in spending, and (v)
the transfer of $100 million to a newly established contingency reserve.
The 1993-94 State budget, as enacted, included $400 million
less in State actions that the City had anticipated. Reform of education
aid formulas was achieved which brought an additional 145 million
education dollars to New York City. However, the State legislature
failed to enact a takeover of local Medicaid cost containment items
proposed by the Governor, which would have
provided the City with savings. The adopted State budget cut aid for
probation services, increased sanctions on social service programs,
eliminated the pass-through of a State surcharge on parking tickets, cut
reimbursement for CHIPS transportation operating dollars, and required
a large contribution in City funds to hold the MTA fare at the current
level. In the event of any significant
reduction in projected State revenues or increases in projected State
expenditures from the amounts currently projected by the State, there
could be an adverse impact on the timing and amounts of State aid
payments to the City in the future.
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
<PAGE>
adoption of the State's budget beyond the statutory April 1 deadline and
the resultant delay in the State's Spring borrowing has in certain prior
years delayed the projected receipt by the City of State aid, and there can
be no assurance that 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.
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
<PAGE>
which could adversely affect the ability of such authorities to make
payments of interest on, and principal amounts of, their respective bonds.
Should any of its authorities default on their respective obligations, the
State's access to public credit markets could be impaired. The
difficulties have in certain instances caused the State (under its so-called
"moral obligation") to appropriate funds on
behalf of the authorities. Moreover, it is expected that the problems
faced by these authorities will continue and will require increasing
amounts of State assistance in future years. Failure of the State to
appropriate necessary amounts or to take other action to permit those
authorities having financial difficulties to
meet their obligations (including HFA, UDC and MTA) could result in
a default by one or more of the authorities. Such default, if it were to
occur, would be likely to have a significant adverse effect on investor
confidence in, and therefore the market price of, obligations of the
defaulting authority. In addition, any default in payment of any general
obligation of any authority whose bonds contain a moral obligation
provision could constitute a failure of
certain conditions that must be satisfied in connection with Federal
guarantees of City and MAC obligations and could thus jeopardize the
City's long-term financing plans.
The MTA oversees the operation of New York City's subway
and bus lines by its affiliates, the New York City Transit Authority and
the Manhattan and Bronx Surface Transit operating (collectively, the
"Transit Authority" or the "TA"). Through MTA's subsidiaries, the
Long Island Railroad Company, the Metro-North Commuter Railroad
Company and the Metropolitan Suburban Bus Authority, the MTA
operates certain commuter rail and bus lines in the New York
metropolitan area. In addition, the Staten Island
Rapid Transit Operating Authority, an MTA subsidiary, operates a rapid
transit line on Staten Island. Through its affiliated agency, the
Triborough Bridge and Tunnel Authority (the "TBTA"), the MTA
operates certain intrastate toll bridges
and tunnels. Because fare revenues are not sufficient to finance the mass
transit portion of these operations, the MTA has depended and will
continue to depend for operating support upon a system of Federal,
State, local government and TBTA support, including loans, grants and
operating subsidies. Over the past several years, the State has enacted
several taxes, including a surcharge on the
profits of banks, insurance corporations and general business
corporations doing business in the 12-county region served by the MTA
(the"Metropolitan Transportation Region") and a special one-quarter of
1% regional sales and use tax, that provide additional revenues for mass
transit purposes including assistance to the MTA, the surcharge, which
expires in November 1995, yielded $507 million in calendar year 1992,
of which the MTA was entitled to receive approximately 90 percent, or
approximately $456 million.
<PAGE>
For 1993, the TA is currently projecting a budget gap of
about $266 million. The MTA Board approved an increase in TBTA
tolls which took effect January 31, 1993. Since the TBTA operating
surplus helps subsidize TA operations, the January toll increase on TBTA
facilities, and other developments, reduced the projected gap to
approximately $241 million. Legislation passed in April 1993 relating to
the MTA's 1992-1996 Capital Program reflected a plan for closing this
gap without raising fares. A major element of the plan provides that the
TA receive a significant share of the petroleum business tax which will
be paid directly to MTA for its agencies. The
plan also relies on certain City actions that have not yet been taken. The
plan also relies on certain City resources projected to be available to help
close the gap. If any of the assumptions used in making these
projections prove incorrect, the TA's gap could grow, and the TA would
be required to seek additional State assistance, raise fares or take other
actions.
A subway fire on December 28, 1990, which caused fatalities
and many injuries, has given rise to substantial claims for damages
against both the TA and the City. A subway derailment on August 28,
1991, which caused fatalities and many injuries, may give rise to
additional claims.
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 fiscal health of the State is closely related to the fiscal
health of its localities, particularly The City of New York (the "City"),
which has required and continues to require significant financial
<PAGE>
assistance from the State. The City's independently audited operating
results for each of its 1981 through 1992 fiscal years show a General
Fund surplus reported in accordance with GAAP. The City has
eliminated the cumulative deficit in its net General Fund
position. In addition, the City's financial statements for the 1992 fiscal
year received an unqualified opinion from the City's independent
auditors, the tenth consecutive year the City has received such an
opinion.
In response to the City's fiscal crisis in 1975, the State took
a number of steps to assist the City in returning to fiscal stability.
Among these actions, the State created the Municipal Assistance
Corporation for The City of New York ("MAC") to provide financing
assistance to the City. The State also enacted the New York State
Financial Emergency Act for The City of New York (the "Financial
Emergency Act") which, among other things, established
the New York State Financial Control Board (the "Control Board") to
oversee the City's financial affairs. The State also established the Office
of the State Deputy Comptroller for The City of New York ("OSDC")
to assist the Control Board in exercising its powers and responsibilities.
On June 30, 1986, the Control Board's powers of approval over the
City's Financial Plan were suspended pursuant to the Financial
Emergency Act. However, the Control Board, MAC and OSDC
continue to exercise various monitoring functions
relating to the City's financial position. The City operates under a
four-year financial plan which is prepared annually and is periodically
updated. The City submits its financial plans as well as the periodic
updates to the Control Board for its review.
The City's economy, whose rate of growth slowed
substantially over the past three years, is currently in recession. During
the 1990 and 1991 fiscal years, as a result of the slowing economy, the
City has experienced significant shortfalls in almost all of its major tax
sources and increases in social
services costs, and has been required to take actions to close substantial
budget gaps in order to maintain balanced budgets in accordance with the
Financial Plan.
Beginning in 1992, the improvement in the national economy
helped stabilize conditions in the City. The City now projects, and its
current four-year financial plan assumes, that the City's economy will
continue to improve during calendar year 1993 and that a modest
economic recovery will begin during the second half of this calendar
year.
On July 6, 1993, the City prepared the Financial Plan for the
1994 through 1997 fiscal years, which relates to the City, the Board of
Education ("BOE") and the City University of New York ("CUNY").
The City is in the process of preparing a more detailed financial plan,
<PAGE>
which will conform to the Financial Plan, and which the City expects to
submit to the Control Board in August 1993.
The 1994-97 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 reductions 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 proposed
continuation of the personal income tax surcharge, resulting in revenues
of $143 million; $80 million in proposed increased State aid, of which
approximately $35 million may be subject to approval by the Governor
and State Legislature; and revenue actions aggregating
!173 million. The projected expenditures, for the 1994 fiscal year reflect
the $131 million of expenditure reductions announced subsequent to the
adoption of the budget on June 14, 1993, including a $50 million
reduction in BOE expenditures, a $30 million reduction in personal
service costs and a $25 million reduction in other than personal services.
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 $1.3 billion, $1.8 billion and $2.0
billion for the 1995 through 1997 fiscal years, respectively. The
projections include $150 million of increased Federal assistance in each
of the 1995 through 1997 fiscal years and
$131 million, $291 million and $291 million of increased State assistance
in the 1995, 1996 and 1997 fiscal years, respectively, which could
include savings from the proposed State assumption of certain Medicaid
costs or various proposed mandate relief measures and include the
continuation of the personal income tax surcharge, resulting in revenues
of $420, $446 and$471 million in the 1995, 1996 and 1997 fiscal years,
respectively. The proposed gap-closing actions include City actions
aggregating $287 million,$564 million and $645
million in the 1995 through 1997 fiscal years respectively; $100 million
and $200 million in proposed additional Federal assistance in the 1996
and 1997 fiscal years, respectively; savings from various proposed
mandate relief measures and the proposed reallocation of State education
aid among various localities, aggregating $175 million, $325 million and
$475 million in the 1995 through 1997 fiscal years, respectively; and
other unspecified Federal, State or City actions of $800 million, $800
million and $700 million in the 1995 through 1997 fiscal years,
respectively.
<PAGE>
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 reallocation of State education aid, thereby increasing
the uncertainty as to the receipt of the State
assistance included in the Financial Plan. If these actions can not be
implemented, the City will be required to take other actions to decrease
expenditures or increase revenues to maintain a balance 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, the amount of State and Federal aid
included in the Financial Plan and the inclusion of non-recurring actions.
The City Comptroller issued a statement on June 14, 1993
that identified problems totalling $476 million in the fiscal year 1994
budget. The problems included the uncertainty of (1) receiving all the
Federal aid anticipated, (ii) completing the sale or reorganization of OTB
in fiscal year 1994 and (iii) winning approval to eliminate preparation
time of certain teachers. The City Comptroller is expected to issue
reports on the Financial Plan in the near future.
Although the City has maintained balanced budgets in each of
its last twelve fiscal 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.
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
<PAGE>
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 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
<PAGE>
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.
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.
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
<PAGE>
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.
Certain localities in addition to New York City could also
have financial problems leading to requests for additional State assistance
during the State's 1992-93 fiscal year and thereafter. The 1992-93 State
Financial Plan includes a significant reduction in State aid to localities in
such programs as revenue sharing and aid to education from projected
base-line growth in such programs. It is expected that such reductions
will result in the need for localities to reduce their spending or increase
their revenues. Fiscal difficulties
experienced by the City of Yonkers ("Yonkers") resulted in the creation
of the Financial Control Board for the City of Yonkers (the "Yonkers
Board") by the State in 1984. The Yonkers Board is charged with
oversight of the fiscal affairs of Yonkers. Future actions taken by the
Governor or the State Legislature to
assist Yonkers could result in allocation of State resources in amounts
that cannot yet be determined.
Municipalities and school districts have engaged in substantial
short-term and long-term borrowings. In 1991, the total indebtedness of
all localities in the State was approximately $31.6 billion, of which $16.8
billion was debt of New York City (excluding $6.7 billion in MAC
debt); a small portion (approximately $39 million) of the $31.6 billion
of indebtedness represented borrowing to finance budgetary deficits and
was issued pursuant to enabling State legislation. In 1992, an unusually
large number of local government units
requested authorization for deficit financings. Although the comptroller
has indicated that the level of deficit financing requests is unprecedented,
such developments are not expected to have a material adverse effect on
the financial conditions of the State. Certain proposed Federal
expenditure reductions would reduce, or in some cases affected localities.
If the State, New York City or any of the Authorities were to suffer
<PAGE>
serious financial difficulties jeopardizing their
respective access to the public credit markets, the marketability of notes
and bonds issued by localities within the State could be adversely
affected. Localities also face anticipated and potential problems resulting
from certain pending litigation, judicial decisions, and long-range
economic trends. The longer-range problems of declining urban
population, increasing expenditures, and other economic trends could
adversely affect localities and require increasing State assistance in the
future.
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 1991-92 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)
alleged employment discrimination by the State and its agencies; (vii)
challenges to the practice of reimbursing certain Office of Mental Health
patient care expenses from the
client's Social Security benefits; (vii) a challenge to the methods by
which the State reimburses localities for the administrative costs of food
stamp programs; (viii) a challenge to the State's possession of certain
funds taken pursuant to the State's Abandoned Property Law; (ix) alleged
responsibility of State officials to assist in remedying racial segregation
in the City of Yonkers; (x) 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; (xi) 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; (xii) actions
challenging legislation enacted in
1990 which requires the withholding of certain amounts of pay from
State employees until their separation from State employment; (xiii) a
challenge to the constitutionality of specified financial programs
authorized by Chapter 190 of the laws of 1990 and which seeks the recall
<PAGE>
and refunding of obligations of certain public authorities issued pursuant
to such legislation; (xiv) 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; (xv) challenges
to the constitutionality of sections 1, 2, 3 and 10 of Chapter 220 of the
Laws of 1990 which relate to the creation and operation of the New
York Local Governmental Assistance Corporation ("LGAC") and of the
issuance of bonds by LGAC; (xvi) challenges
to the constitutionality of the State's statutory scheme relating to excess
medical malpractice insurance; (xvii) an action challenging the
constitutionality of a proposal by the Governor for a multi-year fiscal
plan for the State's 1991-92 and 1992-93 fiscal years and the "continuous
issuance, retirement and reissuance of the temporary revenue anticipation
notes (TRANS)"; (xviii) challenges to the
delay by the State Department of Social Services in making two
one-week Medicaid payments to the service providers; (xxi) challenges
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; (xx) 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 (xxi)
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.
<PAGE>
If during the existence of the New York Trust, the City of
New York, the State, or any of its agencies or municipalities, because of
its or their own financial difficulties, become unable to meet regular
commitments or if there should be a default, moratorium or other
interruption of payments of interest or principal on any obligation issued
by New York City, the State, or a municipality or other authority in the
State, the market value and marketability of Bonds in the New York
Trust, the asset value of Units of the New York Trust, and the interest
income to the New York Trust, could be adversely affected.
North Carolina Trust
The Sponsors believe the information summarized below
describes some of the more significant developments relating to
Securities of (i) municipalities or other political subdivisions or
instrumentalities of the State of North Carolina (the "State") which rely,
in whole or in part, on ad valorem real property taxes and other general
funds of such municipalities or political
subdivisions or (ii) the State of North Carolina, which are general
obligations of the State payable from appropriations from the State's
General Fund. The sources of such information include official reports
from the Department of the Treasurer, as well as other publicly available
documents. The Sponsors have not independently verified any of the
information contained in such official
reports, but are not aware of any facts which would render such
information inaccurate.
State Economic Profile. North Carolina is basically a rural
state, having only five municipalities with populations in excess of
100,000. The economic profile of North Carolina consists of a
combination of industry, agriculture, and tourism. Nonagricultural wage
and salary employment accounted for approximately 3,203,500 jobs as
of August 1993. The largest nonagricultural segment of jobs was the
approximately 733,600 persons employed in trade, with textiles as the
largest manufacturing segment employing
approximately 204,900 people. The United States Department of Labor
estimates that as of June, 1993, North Carolina ranked tenth among the
states in nonagricultural employment, eighth in manufacturing
employment, and eleventh in trade. During the period 1980 through
1992, per capita income in North Carolina grew from $7,999 to
$17,667, an increase of approximately 121%. The North Carolina
Employment Security Commission estimated the
unadjusted unemployment rate in September 1993, to be 3.7% of the
labor force, as compared with an unemployment rate of 6.4%
nationwide. Gross agricultural income (excluding farm forest products)
in 1992 was $5.182 billion.
This places North Carolina tenth in the nation in gross agricultural
income. Tobacco production is the leading source of agricultural crop
<PAGE>
income in the State, accounting for approximately 20.3% of gross
agricultural income in 1992.
State Financial Condition. The State's two principal operating
accounts are the General Fund and the Highway Fund. The principal
sources of General Fund tax revenues are the income tax and the sales
and use tax. The State Constitution limits the income tax to a rate of
10% of total net income; the State actually imposed a maximum rate of
7.75% during the 1992 calendar year.
The State had (audited) General Fund balances at the June
30th year-end of approximately $541 million, $254 million, $124
million, $112 million (deficit balance), and $235 million for,
respectively, the 1988, 1989, 1990, 1991 and 1992 fiscal years. For the
year ended June 30, 1992, the State had total budgeted appropriations
from the General Fund of approximately $9.980 billion.
The State Highway Fund had an ending credit balance of
approximately $348 million as of June 30, 1992, with total expenditures
of approximately $1.252 billion.
State Debt. As of June 30, 1992, approximately $549 million
aggregate principal amount of the State's general obligation bonds and
$119 million of its highway fund general obligation bonds were
outstanding. The highway fund bonds are payable from the Highway
Fund.
In addition, 16 constituent institutions of the University of
North Carolina and 9 agencies or public authorities of the State had
approximately $8.947 billion principal amount of revenue bonds
outstanding as of June 30, 1992. There are no bonds of the State
outstanding, and no State statutes which
would authorize the issuance of any bonds, which contemplate the
appropriation by the General Assembly of such amount as would be
necessary to make up any deficiency in a debt service reserve fund.
Local governmental units in the State had approximately
$4.323 billion principal amount of general obligation bonds and $1.331
billion of revenue bonds (excluding industrial revenue bonds of county
authorities) outstanding as of June 30, 1992. The State has no financial
responsibility with respect to this debt.
Ohio Trust
The Ohio Trust will invest substantially all of its net assets in
Ohio Obligations. The Ohio Trust is therefore susceptible to political,
economic and regulatory factors that may affect issuers of Ohio
<PAGE>
Obligations. The following information constitutes only a brief summary
of some of the complex factors that
may affect the financial situation of issuers in Ohio, and is not applicable
to "conduit" obligations on which the public issue itself has no financial
responsibility.
The creditworthiness of obligations issued by local Ohio
issuers may be unrelated to the creditworthiness of obligations issued by
the State, and generally there is no responsibility on the part of the State
to make payments on those local obligations. There may be specific
factors that are applicable in connection with investment in particular
Ohio Obligations or in the obligations
of particular Ohio issuers, and it is possible the investment will be in
Ohio Obligations or in obligations of particular issuers as to which such
specific factors are applicable. However, the information set forth below
is intended only as a general summary and not a discussion of any such
specific factors that may affect any particular issuer or issue of Ohio
Obligations.
Ohio is the seventh most populous state, with a 1990 Census
Count of 10,847,000 indicating a 0.5% population increase from 1980.
The economy of Ohio, while diversifying more into the
service and other non-manufacturing areas, continues to rely in part on
durable goods manufacturing, which is largely concentrated in motor
vehicles and equipment, steel, rubber products and household appliances.
As a result, general economic activity in Ohio, as in many other
industrially-developed states, tends to be more
cyclical than in some other states and in the nation as a whole.
Agriculture also is an important segment of the economy in the State,
and the State has instituted several programs to provide financial
assistance to farmers. The State's economy, has had varying effects on
different geographic areas of the State and the political subdivisions
located within those geographic areas.
In prior years, the State's overall unemployment rate is
commonly somewhat higher than the national average. In January 1993
and February 1993, the unemployment rate was 8.2 and 7.8,
respectively, compared to the national
rates 7.9 and 7.7 respectively. However, for both 1991 and 1992 the
State rate was below the national rate; the State rates were 6.4% and
7.2%, and the national rates 6.7% and 7.4% respectively. The
unemployment rate, and its effects, vary among particular geographic
areas of the State.
There can be no assurance that future state-wide or regional
economic difficulties, and the resulting impact on State or local
government finances generally, will not adversely affect the market value
of Ohio Obligations held in the portfolio of the Ohio Trust or the ability
<PAGE>
of the particular obligors to make timely payments of debt service on (or
lease payments relating to) those obligations.
The State operates on the basis of a fiscal biennium for its
appropriations and expenditures, and is precluded by law from ending a
fiscal year or biennium in a deficit position. Most operations are
financed through the General Reserve Fund (GRF), with personal income
and sales-use taxes being the major GRF sources.
Growth and depletion of GRF ending fund balances show a
consistent pattern related to national economic conditions, with the June
30 (end of fiscal year) balance reduced during less favorable national
economic periods and increased during more favorable economic times.
Key end of biennium fund balances at June 30, 1991 were
$135,365,000 (unaudited) (GRF) and approximately $300,000,000
(Budget Stabilization Fund (BSF), a cash and budgetary management
fund). Necessary corrective steps were taken in fiscal year 1991 to
respond to lower than estimated receipts and higher expenditures in
certain categories. Those steps included the transfer of $64,000,000
from the BSF to the GRF. The State
reported biennium ending fund balances of $135.3 million (GRF) and
$300 million (BSF).
The State has established procedures for, and has timely
taken, necessary actions to ensure a resource/expenditures balance during
less favorable economic periods. These include general and selected
reductions in appropriations spending; none have been applied to
appropriations needed for debt service or lease rentals on any State
obligations.
To allow time to complete the resolution of certain Senate and
House differences in the budget and appropriations for the current
biennium (beginning July 1, 1991), an interim appropriations act was
enacted, effective July 1; it included debt service and lease rental
appropriations for the entire 1992-93 biennium, while continuing most
other appropriations for 31 days at 97% of fiscal year 1991 monthly
levels. The general appropriations act for the
entire biennium was passed on July 11, 1991 and signed by the
Governor. It authorized the transfer, which has been made, of $200
million from the BSF to the GRF and provided for transfers in fiscal
year 1993 back to the BSF if revenues are sufficient for the purpose
(which the State Office of Budget and Management, OBM, at present
thinks unlikely).
Based on updated fiscal year financial results and economic
forecast for the State, in light of the continuing uncertain nationwide
economic situation, OBM projected, and was timely addressed, a fiscal
year 1992 imbalance in GRF resources and expenditures. GRF receipts
<PAGE>
were significantly below original forecasts, a shortfall resulting primarily
from lower collections of certain taxes, particularly sales and use taxes.
Higher than earlier projected expenditure levels
totalling approximately $143,000,000 resulted from higher spending in
certain areas, particularly human services, including Medicaid. As an
initial action, the Governor ordered most State agencies to reduce GRF
appropriations spending in the final six months of fiscal year 1992 by a
total of approximately $184 million (debt service and lease rental
obligations were not affected). The General Assembly authorized,and
OBM made in June 1992, the transfer to the
GRF of the $100.4 million BSF balance and additional amounts from
certain other funds. Other administrative revenue and spending actions
resolved the remaining GRF imbalance, resulting in positive GRF fiscal
year 1992 ending fund and cash balances.
A significant GRF shortfall, approximately $520 million, was
then projected for fiscal year 1993. It had been addressed by appropriate
legislative and administrative actions. As a first step the Governor
ordered, effectively July 1, 1992, $300 million in selected GRF spending
reductions. Executive and legislative action in December 1992 (a
combination of tax revisions and additional appropriations spending
reductions) is projected by OBM to balance GRF resources and
expenditures in this biennium and provide a better base for
the appropriations for the next biennium. Those actions included tax
revisions estimated to produce an additional $194,500,000 this fiscal
year, and additional appropriations spending reductions totalling
approximately $50,000,000 are provided for in that legislation and
subsequent action by the Governor.
Litigation filed on February 1, 1993 seeks to have a new tax
on soft drinks, included in those tax revisions, declared invalid and its
collection enjoined. The trial court's preliminary injunction has been
stayed by the Ohio Supreme Court on procedural grounds, and that tax
is for now being collected. OBM had estimated approximately
$18,500,000 being collected from that tax this fiscal year, representing
less than 10% of the projected additional tax
revenues. Several bases for invalidity were asserted, including a claim
that the bill in which this and other elements of the tax package ( as well
as certain capital appropriations and financing authorizations ) were
included did not comply with a constitutional "one-subject" procedural
requirement.
Supplementing the general authorization for the Governor's
spending reduction orders described above and exercised several times
in this biennium, the biennial appropriations act authorizes the OBM
Director to implement up to 1% fiscal year reduction in GRF amounts
appropriated if on March 1 of either fiscal year of the biennium receipts
for that fiscal year are for
any reason more than $150,000,000 under estimates and the then
<PAGE>
estimated GRF ending fund balance is less than $50,000,000. Expressly,
excerpted from this cutback authorization are debt service and lease
rental appropriations. In light of the other corrective actions described
above, this supplemental spending reduction authorization was not
implemented in fiscal year 1992 and is not expected to be implemented
in fiscal year 1993.
The general appropriations process for the next biennium (beginning July
1, 1993) has commenced with the Governor's presentation of a proposed
GRF budget to the General Assembly. That budget document and the
related appropriations bill as introduced and passed by the House include
all necessary GRF appropriations for biennial State debt service and lease
rental payments.
The incurrence or assumption of debt by the State without a
popular vote is, with limited exceptions, prohibited by current
provisions of the State Constitution. The State may incur debt to cover
casual deficits or failures in revenues or to meet expenses not otherwise
provided for, but limited in amount to $750,000. The State is expressly
precluded from assuming the debts of any local government or
corporation. (An exception in both cases is made for any
debt incurred to repel invasion, suppress insurrection, or defend the State
in war.)
By twelve constitutional amendments (the last adopted in
1987), Ohio voters have authorized the incurrence of State debt to which
taxes or excesses were pledged for payment; $514 million of this debt
was outstanding at February 23, 1993. The only such State debt still
authorized to be incurred at February 23, 1993 are portions of the
highway obligations bonds, and portions of the following bonds: (a) up
to $100,000,000 of State full faith and credit obligations for coal
research and development may be outstanding at any one time (with
$36,000,000 outstanding); and (b) $1.2 billion of State full faith
and credit obligations are authorized for local infrastructure
improvements, with no more than $120,000,000 to be issued in any
calendar year ($432,000,000 outstanding, and $720,000,000 remain to
be issued).
The Constitution also authorized the issuance, for certain
purposes, of State obligations, the owners of which are not given the
right to have excises or taxes levied to pay debt service. Those special
obligations include bonds and notes issued by, among others, the Ohio
Public Facilities Commission and the Ohio Building Authority. A total
of $3.91 billion of those obligations were outstanding at February 23,
1993.
A 1990 constitutional amendment authorized greater State and
political subdivision participation in the provision of individual and
family housing, including borrowing for this purpose. The General
Assembly may authorize the issuance of State obligations secured by a
pledge of all or such portion as it authorizes of State revenues or
receipts, although the obligations
may not be supported by the State's full faith and credit.
State and local agencies issue revenue obligations that are
payable from revenues of revenue-producing facilities or categories of
facilities, which obligations are not "debt" within constitutional
provisions or payable from taxes. In general, lease payment obligations
under lease-purchase agreements of Ohio issuers (in connection with
which certificates of participation may be issued) are
limited in duration to the issuer's fiscal period, and are renewable only
upon appropriations being made available for the subsequent fiscal
periods.
Local school districts in Ohio receive a major portion (on a
statewide basis, historically approximately 46%) of their operating
moneys from State subsidies ( known as the Foundation Program ), but
are dependent on local ad valorem property taxes and in, 88 districts,
income taxes for significant portions of their budgets. Litigation has
recently been filed, similar to that in other states, questioning the
constitutionality of Ohio's system of school funding.
A small number of the State's 612 local school districts have in any year
required special assistance to avoid year-end deficits. A current program
( Emergency School Advancement Fund ) provides for school district
cash-need borrowing directly from commercial lenders, with State
diversion of subsidy distributions to repayment if needed; 26 districts
borrowed a total of $41.8 million in fiscal year 1991 under this program,
in fiscal year 1992, borrowings totalled $61.9 million (including over
$46.6 million by one district) and in fiscal year 1993 26 districts
borrowed approximately $94.3 million (including $75
million for one district).
Ohio's 943 incorporated cities and villages rely primarily on
property and municipal income taxes for their operations, and, with other
local governments, receive local government support and property tax
relief monies distributed by the State. Procedures have been established
for those few municipalities that have on occasion faced significant
financial problems, which include establishment of a joint State/local
commission to monitor the municipality's fiscal affairs, with a financial
plan developed to eliminate deficits
and cure any defaults. Since inception in 1979, these procedures have
been applied to 22 cities and villages, in 16 of which the fiscal situation
has been resolved and the procedures terminated.
At present the State itself does not levy any ad valorem taxes
on real or tangible personal property. Those taxes are levied by political
subdivisions and other local taxing districts. The Constitution has since
1934 limited the amount of the aggregate levy of ad valorem property
taxes, without a vote of the electors or municipal charter provision, to
<PAGE>
1% of true value in money, and statutes limit the amount of the
aggregate levy without a vote or
charter provision to 10 mills per $1 of assessed valuation (commonly
referred to as the "ten-mill limitation"). Voted general obligations of
subdivisions are payable from property taxes unlimited as to amount or
rate.
Although revenue obligations of the State or its political
subdivisions may be payable from a specific project or source, including
lease rentals, there can be no assurance that future economic difficulties
and the resulting impact on State and local government finances will not
adversely affect the market value of Ohio obligations held in the portfolio
of the Trust or the ability of the respective obligors to make timely
payments of principal and interest on such obligations.
The outstanding Bonds issued by the Sinking Fund are rated
Aa by Moody's Investors Service ("Moody's") and AAA by Standard &
Poor's Corporation ("S&P"). In January 1982, S&P adjusted its rating
on certain of the State's general obligation bonds from AA+ to AA.
Previously, in November 1979, the ratings on general obligation debt of
the State were changed by Moody's and S&P from Aaa and AAA to Aa
and AA+, respectively. S&P did not at either time change its AAA
ratings on the Bonds. The outstanding State Bonds issued by the Ohio
Public Facilities Commission and the Ohio Building Authority are rated
A+ by S&P and A by Moody's.
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
<PAGE>
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
plus interest); (iv) in January 1992, the
Pennsylvania Commonwealth Court held that dividends received by a
corporate taxpayer and accounted for under the equity method of
accounting are not included in the tax base for purposes of the capital
stock/franchise tax--the Commonwealth of Pennsylvania has appealed the
decision but believes the likelihood of an unfavorable outcome is
reasonably possible, and has provided
sufficient reserves to fund the potential loss (potential lost revenue to the
Commonwealth estimated at $30 million annually); (v) litigation has been
filed in both state and federal court by an association of rural and small
schools and several individual school districts and parents challenging the
constitutionality of the Commonwealth's system for funding local school
districts--the federal case has been stayed pending resolution of the state
case and the state case is in
the pre-trial state (no available estimate of potential liability); (vi)
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
<PAGE>
liability for refund of taxes collected or amount of tax revenue at risk);
(vii) 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
(viii) 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 approximately
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
<PAGE>
projects. In September 1993, the Authority issued $178,675,000 of bonds
to advance refund certain of the bonds issued in June 1992.
Texas Trust
Potential purchasers of the Units of the Texas Trust should
consider the fact that the Texas Trust's Portfolio consists of securities
issued by the State of Texas, or its municipalities or authorities (the
"Texas Securities") and realize the substantial risks associated with an
investment in such Texas Securities. The following information is a
brief summary and does not purport to be a complete
description of conditions, developments and risk factors that may
adversely affect the Texas Securities and hence the value of the Units.
The information is drawn principally from publicly available documents.
While the Sponsors have not independently verified such information,
they have no reason to believe that such information is inaccurate.
Economic Factors. Geographic, cultural, climatic and
geological differences within the State of Texas have produced six
generally distinct geographic regions in which economic developments,
such as changes in oil prices, the value of the Mexican peso, and defense
spending can be expected to have varying effects.
Texas experienced a severe economic recession in the 1980's
commencing with a decline of the energy industry which in turn led to
a depression of the real estate industry, financial institution failures and
declines in most sectors of the Texas economy. As the Texas economy
began to level off in the late 1980's, its dependence on certain industry
segments began to shift. The energy industry currently comprises
approximately 15% of the State's total economic output compared to a
peak of 27% in 1981, while the service industry currently comprises
approximately 15% of the State's total economic
output compared to a peak of 27% in 1981, while the service industry
(including health and business services) comprises approximately 17% of
the State's local economic output compared to 11.9% in 1982.
Economic growth and activity in Texas are likely to be
inhibited by many factors including over-capacity in commercial and
residential real estate markets, asset sales by the Resolution Trust
Corporation, conservative lending practices owing to stricter risk-based
capital guidelines imposed on financial institutions, the national
recession, and the unstable international economic and
political environment. Continued low levels of economic growth and
activity in Texas' major industries, budgeting difficulties, constitutional
limitations on taxes, and other matters could adversely affect the Texas
Securities and hence the value of the Units in the Texas Trust. The
Sponsors cannot predict the course of economic trends in Texas.
<PAGE>
State Finances. The State operates on a fiscal year beginning
September 1, and ending August 31. The State's accounting period is a
biennium covering two fiscal years. The State is required by law to
maintain its accounting and reporting functions on a cash basis.
The economic troubles of the 1980's caused numerous
budgeting difficulties for the State and its political subdivisions due
principally to a shrinking and changing tax base. Historically, the
primary sources of the State's revenue have been sales taxes, mineral
severance taxes and federal grants. Due
to the State's economic recession and the consequent enactment of new
tax measures, including those increasing the rates of existing taxes and
expanding the tax base for certain taxes, there has been a reordering in
the relative importance of the State's taxes in terms of their contribution
to the State's total revenue. Key revenue sources in the State of Texas
for the fiscal year ended August 31, 1992 included sales taxes (28.8% of
total revenue), federal grants (28.4% of total revenue), licenses and fees
(6.3% of total revenue), interest and investment income (6.3% of total
revenue) and motor fuels taxes. The State
imposes a corporate franchise tax based on a corporation's taxable capital
apportionable to Texas. While the State currently has no income tax, an
income tax has been and continues to be considered and may be enacted.
For the biennium ended August 31, 1989, the State of Texas
had a budget surplus of approximately $297 million (attributable, in large
part, to increased sales tax revenue), compared to a budget deficit of
approximately $745 million for the biennium ended August 31, 1987
(attributable primarily to the decline of the energy industry which was
principally a result of lower oil and
gas prices). The above biennium end balances include approximately
$300 million in oil overcharge funds which amounts are restricted to
energy conservation projects. The 72nd Legislature meeting in special
session, in the summer of 1991, approved for the Governor's signature
an approximately $9.4 billion budget increase for the fiscal 1992-93
biennium to be financed in part by approximately $3.4 billion in new
revenue measures.
The $3.4 billion in new revenues to finance the new budget
came from several new sources. A tax and fee bill raised a total of $2.1
billion in new revenues for the state. A fiscal management bill added
another $779 million. Legislative approval of a lottery is expected to
add another $462 million. Finally, another $50 million was added
through a change in the Permanent School Fund investment strategy,
which will make additional short-term earnings available to help fund
public schools during the biennium.
The most important component of the tax bill was a major
overhaul of the State's franchise tax, which includes a new measure of
business activity referred to as "earned surplus." A part of the change
<PAGE>
was a lowering of the tax rate on capital from $5.25 to $2.50 per
$1,000. An additional surtax on "earned surplus," which includes
federal net corporate income and officers' and
directors' compensation of 4.5%, was added. Essentially, corporations
pay a tax on capital or a tax on "earned surplus," whichever is higher.
The revised franchise tax is expected to raise an additional $789.3
million over currently projected franchise tax collections during the
1992-93 biennium.
The Texas Constitution prohibits the State from levying ad
valorem taxes on property for general revenue purposes and limits the
rate of such taxes for other purposes to $.35 per $100 of valuation. The
Constitution also permits counties to levy, in addition to all other ad
valorem taxes permitted by the Constitution, ad valorem taxes on
property within the county for flood control
and road purposes in an amount not to exceed $.30 per $100 of
valuation. The Constitution prohibits counties, cities and towns from
levying a tax rate exceeding $.80 per $100 of valuation for general fund
and other specified purposes.
With certain specific exceptions, the Texas Constitution
generally prohibits the creation of debt by or on behalf of the State
unless the voters of the State, by constitutional amendment, authorize the
issuance of debt (including general obligation indebtedness backed by the
State's taxing power and full faith
and credit). In excess of $7.3 billion of general obligation bonds have
been authorized in Texas and almost $2.81 billion of such bonds are
currently outstanding. Of these, over 37% were issued by the Veterans'
Land Board.
Though the full faith and credit of the State are pledged for
the payment of all general obligations issued by the State, much of that
indebtedness is designed to be eventually self-supporting from fees,
payments, and other sources of revenues; in some instances, the receipt
of such revenues by certain issuing agencies has been in sufficient
amounts to pay the principal of and interest on the issuer's outstanding
bonds without requiring the use of appropriated funds.
From the time Standard & Poor's Corporation began rating
Texas general obligation bonds in 1956 until early 1986, the firm gave
such bonds its highest rating, "AAA." In April 1986, in response to the
State economic problems, Standard & Poor's downgraded its rating of
Texas general obligation bonds to "AA+." Such rating was further
downgraded in July 1987 to "AA." Moody's Investors Service, Inc. has
rated Texas bonds since prior to the Great Depression. Moody's
upgraded its rating of Texas general obligation bonds in
1962 from "Aa" to "Aaa", its highest rating, following the imposition of
a statewide sales tax by the Legislature. Moody's downgraded such
rating to "Aa" in March 1987. No prediction can be made concerning
<PAGE>
future changes in ratings by national rating agencies of Texas general
obligation bonds or concerning the effect of such ratings changes on the
market for such issues.
The same economic and other factors affecting the State of
Texas and its agencies also have affected cities, counties, school districts
and other issuers of bonds located throughout the State. Declining
revenues caused by the downturn in the Texas economy in the mid-1980s
forced these various other issuers to raise taxes and cut services to
achieve the balanced budget mandated
by their respective charters or applicable State law requirements.
Standard & Poor's Corporation and Moody's Investors Service, Inc.
assign separate ratings to each issue of bonds sold by these other issuers.
Such ratings may be significantly lower than the ratings assigned by such
rating agencies to Texas general obligation bonds.
Litigation. In October 1989, the Texas Supreme Court in
Edgewood v. Kirby unanimously held that the State public school finance
system violated provisions of the Texas Constitution. The Supreme
Court reinstated an injunction issued by the District Court (enjoining the
State from funding the public school finance system) but postponed its
effect. New legislation intended
to resolve the problem was passed, however, the District Court
subsequently held the new finance system unconstitutional. The Texas
Supreme Court was asked to review the matter, and in January 1991,
held that the new finance system violated the Texas Constitution. The
Texas Supreme Court stayed the effect of the injunction until April 1,
1991.
On April 15, 1991, the Governor signed into law Senate Bill
351, the School Finance Reform Bill. This bill sets a minimum local
property tax rate which guarantees the local school districts a basic state
allotment of a specified amount per pupil. The funding mechanism is
based on tax base consolidation and creates 188 new taxing units, drawn
largely along county lines. Within each taxing unit, school districts will
share the revenue raised by the minimum local property tax. Local
school districts are allowed to "enrich"
programs and provide for facilities construction by levying an additional
tax. In January 1992, the Texas Supreme Court declared the School
Finance Reform Bill unconstitutional because the community education
districts are in essence a state property tax. The legislature was given
until September 1, 1993 to pass a new school finance reform bill. The
Supreme Court said that, in the meantime, the county education districts
could continue to levy and collect property taxes. Several taxpayers have
filed suit challenging the right of such
districts to collect a tax that has been declared unconstitutional by the
Supreme Court. In connection with formulating a new school finance
bill the legislature is expected to consider several proposals, some of
<PAGE>
which could fundamentally change the State's tax structure including a
state income tax.
It is not possible to predict whether the new public school
finance system will be held constitutional and, if it is, how the State will
appropriate the additional funding, and what the impact of such
appropriation will be upon the State. If the new public school system is
held unconstitutional, it is not possible to predict the legislative solution
to the problems or to assess the impact of such solution upon the
financial condition of the State.
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 State Trust
represented a fractional undivided interest in the principal and net income
of such State Trust as is set forth in the "Summary of Essential
Information" of Part A. If any Units are redeemed after the date of this
Prospectus by the Trustee, the principal amount of the Bonds in the
affected State Trust will be reduced by an amount allocable to redeemed
Units and the fractional undivided interest in the affected State 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 each State Trust are offered on a
<PAGE>
dollar price basis, the rate of return on an investment in Units of a State
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 State Trust is determined by dividing the total annual
interest income to such State Trust, less estimated annual fees and
expenses of the Trustee, the Sponsor, and the Evaluator, by the number
of Units of such State Trust outstanding. The Net Annual Income per
Unit of a State Trust will change as
the income or expenses of such State 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 the Public
Offering Price, see Part A under "Summary of Essential Information".
The Estimated Long-Term Return for a State Trust is a
measure of the return to the investor over the estimated life of a State
Trust. The Estimated Long-Term Return represents an average of the
yields to maturity (or call) of the Bonds in a State 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 State
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.
A State 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 State 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.
Tax Status
In the opinion of bond counsel to the issuing governmental
authorities given at the time of the original delivery of the Bonds,
interest income on the Bonds comprising the Portfolios of each Trust is
(except in certain instances, depending upon the Unit holder, as
described below) exempt from Federal income tax under the provisions
of the Internal Revenue Code in effect as of the date of issuance. In the
case of Bonds issued when the Internal Revenue Code of 1954 was in
effect, redesignation of the Code as the Internal Revenue Code of 1986
(the "Code" or the "1986 Code") has not adversely
affected such exemption. (See "Tax Exempt Securities
Trust--Portfolio.")
On the Date of Deposit for each Trust, Messrs. Cahill
Gordon & Reindel, special counsel for the Sponsors and special counsel
on New York tax matters, rendered an opinion under then existing
provisions of the Code, the regulations then promulgated thereunder and
then current rulings of the Internal Revenue Service substantially to the
effect that:
None of the State Trusts is an association taxable as a
corporation for Federal income tax purposes, and interest on the
underlying debt obligations which is exempt from
Federal income tax under the Code when received by each State Trust
(or by a previously issued Series in whose property the State Trust has
an ownership interest) will retain its status as tax-exempt interest, for
Federal income tax purposes, to the Unit holders.
Each Unit holder will be considered the owner of a pro rata
portion of the assets of each State Trust, Units of which are held by him
(including any ownership interest of the State Trust in property
comprising a previously issued Series) under Sections 671-
678 of the Code. Each Unit holder will be considered to have received
a pro rata share of interest derived from such Trust assets when it is
received by the State Trust (or by the previously issued Series), and each
Unit holder will have a taxable event when an underlying debt obligation
is disposed of (whether by sale, exchange, redemption or
payment at maturity) or when the Unit holder redeems or sells Units.
The total tax cost of each Unit to a Unit holder is allocated among each
of the underlying debt obligations held in the particular State Trust (in
accordance with the proportion of the particular State Trust assets
comprised by each underlying debt obligation) in order to
determine the Unit holder's per Unit tax cost for each underlying debt
obligation, and the tax cost reduction requirements of the Code relating
to amortization of bond premium will apply separately to the per Unit tax
cost of each underlying debt obligation. Therefore, under some
circumstances a Unit holder may realize taxable gains when Units are
sold or redeemed for an amount equal to or less than the Unit
holder's original cost.
When a contract to acquire an underlying debt obligation is
settled after the Unit holder's settlement date for a Unit, the Unit
holder's proportionate share of the interest
accrued on the underlying debt obligation on the debt obligation
settlement date will exceed the portion of the purchase price that was
allocable to interest accrued on the
<PAGE>
Unit settlement date. A Unit holder will not be subject to Federal
income tax on the Unit holder's proportionate share of the interest which
accrues during the period between the Unit settlement date and the debt
obligations' settlement date is received
by the Trust or when it is distributed to the Unit holder.
Under the personal income tax laws of the State and City of
New York, the income of each State Trust will be treated as the income
of its Unit holders. Interest on the
underlying debt obligations which is exempt from tax under the laws of
the State and City of New York when received by the New York Trust
(or by a previously-issued Series in whose property the New York Trust
has an interest) will retain its status as
tax-exempt interest to its Unit holders. (Interest on the underlying
obligations in the New York Trust is, however, not excludable from
income in determining the amount
of the income-based (i) New York State franchise taxes on business and
financial corporations, or (ii) the New York City general corporation tax
and the New York City financial corporation tax.) The minimum income
taxes imposed by New York State and New York City on individuals,
estates and trusts exclude from their taxable bases
the federal tax preference item with respect to tax-exempt interest.
Non-residents of New York City will not be subject to the City personal
income tax on gains derived with respect to their Units. Non-residents
of New York State will not be subject to
New York State personal income tax on such gains unless the Units are
employed in a business, trade or occupation carried on in New York
State. A New York State or City resident should determine his basis and
holding period for his Units in the same
manner for New York State and City personal income tax purposes as
for Federal income tax purposes.
If the proceeds received by a State Trust upon the sale or
redemption of an underlying debt obligation
exceed a Unit holder's adjusted tax cost allocable to the debt obligation
disposed of, that Unit holder will realize
a taxable gain to the extent of such excess. Conversely, if the proceeds
received by a State Trust upon the sale or
redemption of an underlying debt obligation are less than a Unit holder's
adjusted tax cost allocable to the debt
obligation disposed of, that Unit holder will realize a loss for tax
purposes to the extent of such difference.
The Revenue Reconciliation Act of 1993 ("P.L. 103-66") was
recently enacted. P.L. 103-66 increases
maximum marginal income tax rates for individuals and corporations
(generally effective for taxable years beginning
after December 31, 1992), extends the authority to issue certain
categories of tax-exempt bonds (qualified small
<PAGE>
issue bonds and qualified mortgage bonds), limits the availability of
capital gain treatment for tax-exempt bonds
purchased at a market discount, increases the amount of Social Security
benefits subject to tax (effective for taxable
years beginning after December 31, 1993) and makes a variety of other
changes. Prospective investors are urged
to consult their own tax advisors as to the effect of P.L. 103-66 on an
investment in Units.
Any gain recognized on a sale or exchange of a Unit holder's
pro rata interest in a Bond, and not
constituting a realization of accrued "market discount", and any loss will
be a capital gain or loss, except in the case
of a dealer or financial institution. Gain realized on the disposition of
the interest of a Unit holder in a market
discount Bond is treated as ordinary income to the extent the gain does
not exceed the accrued market discount.
A Unit holder has an interest in a market discount Bond in a case in
which the tax cost for the Unit holder's pro
rata interest in the Bond is less than the stated redemption price thereof
at maturity (or the issue price plus original
issue discount accrued up to the acquisition date, in the case of an
original issue discount Bond. Any capital gain
or loss arising from the disposition of a Unit holder's pro rata interest in
a Bond will be a long-term capital gain
or loss if the Unit holder has held Units and the Trust has held the Bond
for more than one year. Under the Code,
net capital gain (i.e., the excess of net long-term capital gain over net
short-term capital loss) of individuals, estates
and trusts is subject to a maximum nominal tax rate of 28%. Such net
capital gain may, however, result in a
disallowance of itemized deductions and/or affect a personal exemption
phase-out.
In the case of certain of the underlying debt obligations
comprising the Portfolio of a State Trust, the
opinions of bond counsel indicate that although interest on such
underlying debt obligations is generally exempt from
Federal income tax, such underlying debt obligations are "industrial
development bonds" under the 1954 Code or
"private activity bonds" under the 1986 Code, and interest on such
underlying debt obligations will not be exempt
from Federal income tax for any period during which such underlying
debt obligations are held by a "substantial
user" of the facilities financed by the proceeds of such underlying debt
obligations (or a "related person" to such
a "substantial user"). In the opinion of Messrs. Cahill Gordon &
Reindel, interest attributable to such underlying
debt obligations (although not subject to Federal income tax to on
<PAGE>
Trust), if received by a Unit holder who is such
a "substantial user" or "related person", will be taxable (i.e., not
tax-exempt) to the Unit holder to the same extent
as if such underlying debt obligations were held directly by the Unit
holder as owner. No investigation as to the
users or of the facilities financed by the underlying debt obligations has
been made by the Sponsors or their counsel.
Investors should consult their tax counsel for advice with respect to the
effect of these tax provisions on their
particular tax situations.
Furthermore, exemption of interest on a Bond from regular
federal income tax requires that the issuer
of the Bond (or other user of the Bond proceeds) meets certain ongoing
compliance requirements. Failure to meet
these requirements could result in loss of the exemption and such loss of
exemption could apply retroactively from
the date of issuance. A Bond may provide that if a loss of exemption is
determined to have occurred, the Bond is
immediately due and payable; and, in the case of a secured Bond, that
the security can be reached if the Bond is
not then paid. If such a loss of exemption were to occur and the Bond
did not contain such an acceleration clause,
or if the acceleration did not in fact result in payment of the Bond, the
affected Bond would likely be sold as a
taxable Bond. Sale of a Bond as a taxable Bond would likely result in
a realization of proceeds less than the cost
of the Bond.
Persons in receipt of Social Security benefits should be aware
that a portion of such Social Security benefits may be includible in gross
income. For 1993, the includible amount is the lesser of (a) one-half of
the Social Security benefits or (b) one-half of the amount by which the
sum of "modified adjusted gross income" plus
one-half of the Social Security benefits exceeds a "base amount". The
base amount is $25,000 for unmarried taxpayers, $32,000 for married
taxpayers filing a joint return, and zero for married taxpayers not living
apart who file separate returns.
For 1994 and subsequent taxable years, two threshold
amounts apply. The 1993 rule continues to apply
to a taxpayer whose modified adjusted gross income plus one-half of his
or her Social Security benefits does not
exceed $34,000 ($44,000 for married taxpayers filing a joint return).
Taxpayers with modified adjusted gross income in excess of the $34,000
threshold ($44,000 for married taxpayers filing a joint return) are,
however, required to include up to 85% of their Social Security benefits
in gross income.
<PAGE>
Modified adjusted gross income is adjusted gross income
determined without regard to certain otherwise
allowable deductions and exclusions from gross income, plus tax-exempt
interest on municipal obligations including
interest on the Bonds. To the extent that Social Security benefits are
includible in gross income, they will be treated
as any other item of gross income and therefore may be taxable.
Although tax-exempt interest is included in
modified adjusted gross income solely for the purpose of determining
what portion, if any, of Social Security
benefits will be included in gross income, no tax-exempt interest,
including that received from such Trust, will be
subject to Federal income tax.
The exemption of interest on municipal obligations for
Federal income tax purposes does not
necessarily result in exemption under any other Federal tax law or under
the income or other tax laws of any
state or city. The laws of the several states vary with respect to the
taxation of such obligations.
Opinions relating to the validity of the Bonds and the
exemption of interest thereon from Federal and
specified state and local income tax are rendered by bond counsel to the
issuing governmental authorities given at
the time of the original delivery of the Bonds. Neither the Sponsors nor
their counsel have made any review of
proceedings relating to the issuance of Bonds or the bases for bond
counsels' opinions. It is the view of the Sponsors that interest on the
Securities will not be a tax preference item for purposes of the alternative
minimum tax under the Tax Reform Act of 1986 (the "1986 Act"). Unit
holders are urged to consult their own tax advisors
concerning an investment in Units.
The Code provides generally that adjustments to taxable
income to produce alternative minimum taxable
income for corporations will include 75% of the amount by which
adjusted current earnings (which would include
tax-exempt interest) of the taxpayer exceeds the alternative minimum
taxable income of the taxpayer before any
amount is added to alternative minimum taxable income because of this
adjustment.
The Code also imposes an additional 12/100% ($12.00 per
$10,000) environmental tax on the alternative minimum taxable income
(determined without regard to any alternative tax net operating loss
deduction) of a corporation in excess of $2,000,000 for each taxable year
beginning before January 1, 1996. The
environmental tax is an excise tax and is deductible for United States
<PAGE>
federal income tax purposes (but not for purposes of the environmental
tax itself). Although the environmental tax is based on alternative
minimum taxable income, the environmental tax must be paid in addition
to any Federal income taxes payable by the corporation.
For Federal income tax purposes, State Trust expenses
allocable to producing or collecting State Trust
interest income are not deductible because the income derived by a State
Trust is exempt from Federal income tax.
A state or local income tax may provide for a deduction for the portion
of such Trust expenses attributable to the
production or collection of income derived by a State Trust and taxed by
the state or locality. The effect on any
such deductions of the 1986 Act rules whereby investment expenses and
other miscellaneous deductions are
deductible only to the extent in excess of 2% of adjusted gross income
would depend upon the law of the particular
state or locality involved.
From time to time other proposals have been introduced
before Congress, the purpose of which is to
restrict or eliminate the Federal income tax exemption for interest on
securities similar to the Bonds in the Trusts
or to require treatment of such interest generally as a "tax preference"
for alternative minimum tax purposes, and
it can be expected that similar proposals may be introduced in the future.
The State Trusts and the Sponsors cannot
predict what legislation, if any, in respect of the tax status of interest on
Bonds may be proposed by the Executive
Branch or by members of Congress, nor can they predict which
proposals, if any, might be enacted or whether any
legislation if enacted would apply to the Bonds in the Trusts.
The Portfolio of a State Trust may contain one or more Bonds
which were originally issued at a discount ("original issue discount").
In general, original issue discount can be defined as the difference
between the price at which a Bond was issued and its stated redemption
price at maturity. In the case of a Bond issued
before September 4, 1982, original issue discount is deemed to accrue
(be "earned") as tax-exempt interest ratably over the period from the date
of issuance of the Bond to the date of maturity and is apportioned among
the original holder of the obligation and subsequent purchasers in
accordance with a ratio the numerator of which is the number
of calendar days the obligation was owned by the holder and the
denominator of which is the total number of
calendar days from the date of issuance of the obligation to its date of
maturity. Gain or loss upon the disposition
of an original issue discount Bond in the Portfolio of a State Trust is
measured by the difference between the amount
<PAGE>
realized upon disposition of and the amount paid for such obligation. A
holder is entitled, however, to exclude from
gross income that portion of such gain attributable to accrued interest and
the "earned" portion of original issue discount.
In the case of a Bond issued after September 3, 1982, original
issue discount is deemed to accrue on a constant interest method which
corresponds, in general, to the economic accrual of interest (adjusted to
eliminate proportionately on an elapsed-time basis any excess of the
amount paid for the Bond by the Trust over the sum of
the issue price and the accrued original issue discount on the acquisition
date). A Unit holder's tax basis with regard to such Bond is increased
by the amount of original issue discount that is deemed to accrue while
a Unit holder holds his Units and the Trust holds the Bond. The
difference between the amount realized on a disposition
of the Bond (ex currently accrued interest) and the adjusted tax basis of
the Bond will give rise to taxable gain or deductible loss upon a
disposition of the Bond by the affected State Trust (or a sale or
redemption of Units by a Unit holder).
In addition, investors should be aware that no deduction is
allowed for Federal income tax purposes for interest on indebtedness
incurred or continued to purchase or carry Units. Under rules used by
the Internal Revenue Service for determining when borrowed funds are
considered used for the purpose of purchasing or
carrying particular assets, the purchase of Units may be considered to
have been made with borrowed funds even though the borrowed funds
are not directly traceable to the purchase of the Units.
All taxpayers are required to report for information purposes
on their Federal income tax returns the amount of tax-exempt interest
they receive.
Investors should consult their own tax advisors with respect
to the applicability of the foregoing general comments to their own
particular situations and as respects state and local tax consequences of
an investment in Units.
The description of Federal tax consequences applies separately
for each State Trust. Below, arranged alphabetically by state, is a
description of certain state and local tax consequences for residents of the
state and locality for which such State Trust is named.
California Trust
Messrs. Morgan, Lewis and Bockius acted as special
California counsel to California Trust 98 and all
prior California Trusts. Messrs. Adams, Duque and Hazeltine acted as
special California counsel to California Trust 99 and all subsequent
<PAGE>
California Trusts. On the Date of Deposit for each California Trust, the
respective counsel to the Trusts rendered an opinion under then existing
law substantially to the effect that:
The 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
California Trust will be treated as the income,
deductions and credits against tax of the holders of Units in the
California Trust under the income tax laws of the
State of California;
Interest on the bonds held by the California Trust, and any
interest income received by the California
Trust from its investments in units of previously formed California trusts
included within a Multistate Series or Umbrella Series of Tax Exempt
Securities Trust (the "Previously Formed Trusts"), to the extent that such
interest is exempt from taxation under California law will not lose its
character as tax-exempt income merely because that
income is passed through to the holders of Units; however, a corporation
subject to the California franchise tax is required to include that interest
income in its gross income for purposes of determining its franchise tax
liability;
Each holder of a Unit in the California Trust will have a
taxable event when the 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 California Trust is allocated
among each of the bond issues held in the California Trust (in
accordance with the proportion of the California Trust
comprised by each bond issue) in order to determine 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 taxable gain when the 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 California Trust disposes of any of its ownership interests in a
Previously Formed Trust;
Each holder of a Unit in the California Trust is deemed to be
the owner of a pro rata portion of the California Trust under the personal
property tax laws of the State of California; and
<PAGE>
The pro rata ownership of the bonds held by the California
Trust, as well as the interest income therefrom, are exempt from
California personal property taxes.
Connecticut Trust
On the Date of Deposit for each Connecticut Trust, Messrs.
Day, Berry and Howard, special Connecticut counsel on Connecticut tax
matters, rendered an opinion which was based explicitly on the opinion
of Messrs. Cahill Gordon & Reindel regarding Federal income tax
matters, under then existing Connecticut law substantially to the effect
that:
The Connecticut Trust is not subject to the Connecticut
corporation business tax or any other tax on or measured by net income
imposed by the State of Connecticut;
Interest income of the Connecticut Trust from obligations
issued by or on behalf of the State of Connecticut, any political
subdivision thereof, or any agency, instrumentality, authority, or district
of either (a "Connecticut Issuer"), or from obligations of United States
territories or possessions and their public authorities the
interest on which Federal law would prohibit Connecticut from taxing if
received directly by a Unit holder from the issuer thereof, is not taxable
under the Connecticut income tax on the Connecticut taxable income of
individuals, trusts and estates (the "Connecticut Income Tax"), when
received by the Connecticut Trust or when distributed by
it to such a Unit holder;
Gains and losses recognized by a Unit holder for Federal
income tax purposes upon the sale, redemption, or other disposition of
Units of the Connecticut Trust held by a Unit holder are taken into
account as gains or losses, respectively, for purposes of the Connecticut
Income Tax, except that, in the case of a unit holder
holding a Unit of the Connecticut Trust as a capital asset, such gains and
losses recognized upon the sale or exchange of a Connecticut Bond held
by the Connecticut Trust are excluded from gains and losses taken into
account for purposes of such tax and no opinion is expressed as to the
treatment for purposes of such tax of gains and losses
recognized upon the maturity or redemption of a Connecticut Bond held
by the Connecticut Trust or, to the extent attributable to Connecticut
Bonds, of gains and losses recognized upon the redemption, sale, or
other disposition by a Unit holder of a Unit of the Connecticut Trust held
by him;
The portion of any interest or capital gain of the Connecticut
Trust that is allocable to a Unit holder that is subject to the Connecticut
corporation business tax is includible in the gross income of such Unit
<PAGE>
holder for purposes of such tax; and
An interest in a Unit of the Connecticut Trust that is owned
by or attributable to a Connecticut resident
at the time of his death is includible in his gross estate for purposes of
the Connecticut succession tax and the Connecticut estate tax.
The Connecticut Income Tax was enacted in August 1991.
Generally, under this tax as enacted, a Unit
holder recognizes gain or loss upon the maturity, redemption, sale, or
other disposition by the Connecticut Trust
of an obligation held by it, or upon the redemption, sale, or other
disposition of a Unit of the Connecticut Trust
held by the Unit holder, to the same extent that gain or loss is recognized
by the Unit holder thereupon for Federal income tax purposes.
However, on June 19, 1992, Connecticut legislation was adopted that
provides that gains and losses from the sale or exchange of Connecticut
Bonds held as capital assets will not be taken into account for
purposes of the Connecticut Income Tax for taxable years starting on or
after January 1, 1992. It is not clear whether this provision would apply
to gain or loss recognized by a Unit holder upon the maturity or
redemption of a Connecticut Bond held by the Connecticut Trust or, to
the extent attributable to Connecticut Bonds held by the
Connecticut Trust, to gain or loss recognized by a Unit holder upon the
redemption, sale, or other disposition of a Unit of the Connecticut Trust
held by the Unit holder. Unit holders are urged to consult their own tax
advisers in this regard.
By legislation adopted May 19, 1993, as amended by
legislation adopted June 25, 1993, Connecticut enacted the net
Connecticut minimum tax, retroactive to taxable years beginning on or
after January 1, 1993, which is applicable to individuals, trusts, and
estates that are subject to the Federal alternative minimum tax. Income
of the Connecticut Trust that is subject to the Federal alternative
minimum tax in the case of such Unit holders may also be subject to the
net Connecticut minimum tax.
Florida Trust
On the Date of Deposit for each Florida Trust, Messrs.
Carlton, Fields, Ward, Emmanuel, Smith & Cutler, P.A., special Florida
counsel on Florida tax matters, rendered an opinion, under then existing
law substantially to the effect that:
The Florida Trust will not be subject to the Florida income
tax imposed by Chapter 220 so long as the Florida Trust transacts no
business in Florida or has no income subject to federal income taxation.
In addition, political subdivisions of Florida do not impose any income
<PAGE>
taxes.
Non-Corporate Unit holders will not be subject to any Florida
income taxation on income realized by the Florida Trust. Corporate Unit
holders with commercial domiciles in Florida will be subject to Florida
income taxation on income realized by the Trust. Other corporate Unit
holders will be subject to Florida income taxation
on income realized by the Florida Trust only to the extent that the
income realized is other than "non-business income" as defined by
Chapter 220.
Florida Trust Units will be subject to Florida estate tax if
owned by Florida residents and may be subject to Florida estate tax if
owned by other decedents at death. However, the Florida estate tax is
limited to the amount of the credit allowable under the applicable Federal
Revenue Act (currently Section 2011 [and in some cases
Section 2102] of the Internal Revenue Code of 1986, as amended) for
death taxes actually paid to the several states.
Neither the Bonds nor the Units will be subject to the Florida
ad valorem property tax or the Florida sales or use tax.
The Florida Trust will not be subject to Florida intangible
personal property tax. In addition, Units of the Florida Trust will not be
subject to Florida intangible personal property tax.
The issuance and sale of the Units by the Florida Trust will
not subject either the Florida Trust or the Unit holders to the Florida
documentary stamp tax.
The transfer of Units by a Unit holder will not be subject to
the Florida documentary stamp tax.
In the event Bonds issued by the government of Puerto Rico,
the government of Guam, or the government of the United States Virgin
Islands are included in the Florida Trust, the opinions expressed above
will be unchanged.
For the purposes of the foregoing opinion, the following
terms have the following meanings:
(a) "Non-Corporate Unit holder" -- a Unit holder of the
Florida Trust who is an individual not subject to the Florida state income
tax on corporations under Chapter 220, Florida Statutes (1989 and Supp.
1990) as amended by Chapter 91-112, Laws of Florida ("Chapter 220").
(b) "Corporate Unit holder" -- a Unit holder of the Florida
Trust that is a corporation subject to the Florida state income tax on
corporations under Chapter 220.
<PAGE>
Maryland Trust
Messrs. Venable, Baetjer and Howard acted as special
Maryland counsel to Maryland Trust 75 and all prior Maryland Trusts.
Messrs. Weinberg & Green acted as special Maryland counsel to
Maryland Trust 76 and all subsequent Maryland Trusts. On the Date of
Deposit for each Maryland Trust, the respective counsel to the
Trusts rendered an opinion for Maryland State and local income tax
purposes and under then existing law, substantially to the effect that:
The Maryland Trust will not be treated as an association
taxable as a corporation, and the income of the Maryland Trust will be
treated as the income of the Holders. The Maryland Trust is not a
"financial institution" subject to the Maryland Franchise Tax measured
by net earnings. The Maryland Trust is not subject to Maryland
property taxes imposed on the intangible personal property of certain
corporations.
Except as described below in the case of interest paid on
private activity bonds constituting a tax preference for federal income tax
purposes, a Holder will not be required to include such Holder's pro-rata
share of the earnings of, or distributions from, the Maryland Trust in
such Holder's Maryland taxable income to the extent
that such earnings or distributions represent interest excludable from
gross income for federal income tax purposes received by the Maryland
Trust on obligations of the State of Maryland, the Government of Puerto
Rico, or the Government of Guam and their respective political
subdivisions and authorities. Interest on Debt Obligations is
subject to the Maryland Franchise Tax imposed on "financial institutions"
and measured by net earnings.
In the case of taxpayers who are individuals, Maryland
presently imposes an income tax on items of tax preference with
reference to such items as defined in the Internal Revenue Code, as
amended, for purposes of calculating the federal alternative minimum
tax. Interest paid on certain private activity bonds is a preference item
for purposes of calculating the federal alternative minimum tax.
Accordingly, if the Maryland Trust holds such
bonds, 50% of the interest on such bonds in excess of a threshold
amount is taxable by Maryland.
A Holder will recognize taxable gain or loss, except in the
case of an individual Holder who is not a Maryland resident, when the
Holder disposes of all or part of such Holder's pro-rata portion of the
Debt Obligations in the Maryland Trust. A Holder will be considered
to have disposed of all or part of such Holder's pro-rata
portion of each Debt Obligation when the Holder sells or redeems all or
some of such Holder's Units. A Holder will also be considered to have
disposed of all or part of such Holder's pro-rata portion of a Debt
<PAGE>
Obligation when all or part of the Debt Obligation is disposed of by the
Maryland Trust or is redeemed or paid at maturity. Gain
included in the gross income of Holders for federal income tax purposes
is, however, subtracted from income for Maryland income tax purposes
to the extent that the gain is derived from the disposition of Debt
Obligations issued by the State of Maryland and its political subdivisions.
Profits realized on the sale or exchange of Debt Obligations
are subject to the Maryland Franchise Tax imposed on "financial
institutions" and measured by net earnings.
Units of the Maryland Trust will be subject to Maryland
inheritance and estate tax only if held by Maryland residents.
Neither the Debt Obligations nor the Units will be subject to
Maryland personal property tax.
The sales of Units in Maryland or the holding of Units in
Maryland will not be subject to Maryland Sales or Use Tax.
Massachusetts Trust
On the Date of Deposit for each Massachusetts Trust, Messrs.
Palmer and Dodge, special Massachusetts counsel on Massachusetts tax
matters, rendered an opinion, which is based explicitly on the opinion
of Messrs. Cahill Gordon & Reindel regarding Federal income tax
matters, under then existing Massachusetts law
substantially to the effect that:
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 Trust 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 Unit holders who are subject to
Massachusetts income taxation under Massachusetts General Laws,
Chapter 62.
Capital gain and capital loss realized by the Massachusetts
Trust and included in the Federal gross income of Unit holders 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
<PAGE>
liability for the Massachusetts Trust.
Gains and losses realized on sale or redemption of Units by
Unit holders who are subject to Massachusetts income taxation under
Massachusetts General Laws, Chapter 62 will be includible in their
Massachusetts gross income.
Minnesota Trust
On the Date of Deposit for each Minnesota Trust, Messrs.
Dorsey & Whitney, a partnership including professional corporations,
special Minnesota counsel on Minnesota tax matters, rendered an opinion
under then existing law substantially to the effect that:
The Minnesota Trust is not an association taxable as a
corporation for purposes of Minnesota income taxation. Minnesota
taxable net income is, with certain modifications, determined with
reference to federal taxable income. Each Unit holder of the Minnesota
Trust will be treated as the owner of a pro rata portion of the
Minnesota Trust (including the ownership interest of the Minnesota Trust
in property comprising previously issued Series) for purposes of
Minnesota income taxation, and the income of the Minnesota Trust will
be treated as the income of the Unit holders under Minnesota law.
Interest on Bonds that would be excluded from Minnesota taxable
net income when paid directly to an individual, estate or trust will be
excluded from Minnesota taxable net income of Unit holders that are
individuals, estates or trusts when received by the Minnesota Trust (or
by a previously issued Series in which the Minnesota Trust has an
ownership interest) and when distributed to such Unit holders.
Interest on Bonds that would be included in Minnesota "alternative
minimum taxable income" when paid directly to a noncorporate taxpayer
will be included in Minnesota "alternative minimum taxable income" of
Unit holders that are individuals, estates or trusts for purposes of the
Minnesota alternative minimum tax.
Any such Unit holder that is subject to Minnesota income
taxation will realize taxable gain or loss when the Minnesota Trust (or
a previously issued Series in which the Minnesota Trust has an
ownership interest) disposes of a Bond or an ownership interest in a
previously issued Series (whether by sale, exchange, redemption or
payment at maturity) or when the Unit holder redeems or sells Units at
a price that differs from original cost, as adjusted
for amortization of bond premium and other basis adjustments. The total
tax cost of each Unit to a Unit holder is allocated proportionately (by
value) among each of the Bonds held in the Minnesota Trust. Tax cost
reduction requirements relating to amortization of bond premium may,
under some circumstances, result in the realization of
taxable gain by Unit holders when their Units (or underlying Bonds) are
<PAGE>
sold or redeemed for an amount equal to or less than their original cost.
Minnesota has repealed the favorable treatment of capital gains, but
preserved limitations on the deductibility of capital losses.
Interest income attributable to Bonds that are "industrial
development bonds" or "private activity bonds," as such terms are
defined in the Internal Revenue Code, will be taxable under Minnesota
law to a Unit holder that is a "substantial user" of the facilities financed
by the proceeds of such Bonds (or a "related person" to
such a "substantial user") to the same extent as if such Bonds were held
directly by such Unit holder.
Minnesota law does not permit a deduction for interest on
indebtedness incurred or continued by individuals, estates and trusts to
purchase or carry Units. Minnesota law also restricts the deductibility
of other expenses allocable to Units.
With limited exceptions, interest on Bonds in the Minnesota
Trust will be included in taxable income for purposes of the Minnesota
franchise tax on corporations and financial institutions. No opinion is
expressed as to other Minnesota tax effects on Unit holders that are
corporations or financial institutions.
Missouri Trust
Messrs. Bryan, Cave, McPheeters & McRoberts acted as
special Missouri counsel to Missouri Trust
75 and all prior Missouri Trusts. Messrs. Blackwell Sanders Matheny
Weary & Lombardi acted as special Missouri counsel to Missouri Trust
76 and all subsequent Missouri Trusts. On the Date of Deposit for each
Missouri Trust, the respective counsel to the Trusts rendered an opinion
under then existing law substantially to the effect that:
For Missouri income tax purposes under Chapters 143 of the
Missouri Revised Statutes, the Missouri Trust will be treated as having
the same organizational characteristics as it is accorded for Federal
Income Tax purposes. In reliance upon the opinion of Cahill Gordon &
Reindel as described above, we are therefore of the
opinion that the Missouri Trust is not an association taxable as a
corporation under Missouri law, that each Unit holder will be treated as
the owner of a proportionate, undivided interest in the Missouri Trust,
and the income of the Missouri Trust will be treated as the income of
such Unit holders.
Under Missouri law, interest income received by the Missouri
Trust from (i) obligations of the State of Missouri, its political
subdivisions and authorities, or (ii) bonds issued by the Government of
Puerto Rico, or by its authority, and which is excluded from Federal
<PAGE>
gross income by Federal law or on which Missouri is
prohibited by Federal law from imposing an income tax, will be excluded
from the Missouri taxable income of the Unit holders to the extent that
the interest is exempt from income tax under Missouri law when received
by the Missouri Trust.
Gains and losses from the Missouri Trust treated for Federal
Income Tax purposes as the gains and losses of the Unit holders, to the
extent included in Federal gross income, will be included in the Missouri
taxable income of Unit holders who are individuals, except to the extent
that (i) such Unit holders are non-residents of Missouri and (ii) such
gains and losses of such non-resident Unit holders are derived from
sources wholly without Missouri. Such gains or losses, to the extent
included in determining the Federal taxable income of a corporate Unit
holder after Missouri adjustments, are allocated or apportioned to
Missouri in order to determine Missouri taxable
income.
New Jersey Trust
On the Date of Deposit for each New Jersey Trust, Messrs.
Shanley & Fisher, P.C., special New Jersey counsel on New Jersey tax
matters, rendered an opinion under then existing law substantially to the
effect that:
The proposed activities of the New Jersey Trust will not cause
it to be subject to the New Jersey Corporation Business Tax Act.
The income of the New Jersey Trust will be treated as the
income of individuals, estates and trusts who are the Holders of Units of
the New Jersey Trust for purposes of the New Jersey Gross Income Tax
Act, and interest which is exempt from tax under the New Jersey Gross
Income Tax Act when received by the New Jersey
Trust will retain its status as tax-exempt in the hands of such Unit
Holders. Gains arising from the sale or redemption by a Holder of his
Units or from the sale, exchange, redemption or payment at maturity of
a Bond by the New Jersey Trust are exempt from taxation under the New
Jersey Gross Income Tax Act (P.L. 1976 C. 47), as enacted and
construed on the date hereof, to the extent such gains are attributable to
Bonds, the interest on which is exempt from tax under the New Jersey
Gross Income Tax Act. Any loss realized on such disposition may not
be utilized to offset gains realized by such Unit Holder on the disposition
of assets the gain on which is subject to the New Jersey Gross Income
Tax Act.
Units of the New Jersey Trust may be subject, in the estates
of New Jersey residents, to taxation under the Transfer Inheritance Tax
Law of the State of New Jersey.
<PAGE>
North Carolina Trust
In the opinion of Messrs. Petree Stockton, special North
Carolina counsel on North Carolina tax matters, with respect to the
North Carolina Trust, under then existing law applicable to persons who
are North Carolina residents:
The State of North Carolina imposes a tax upon the
taxable income of individuals, corporations, estates, and trusts.
Nonresident individuals are generally taxed only on income from North
Carolina sources. Corporations doing business within and without North
Carolina are entitled to allocate and
apportion their income if they have income from business activity which
is taxable in another state. The mere ownership of Units will not subject
a nonresident Unit holder to the tax jurisdiction of North
Carolina.
Counsel has been advised that for Federal income tax
purposes the North Carolina Trust will be
a grantor trust and not an association taxable as a corporation. Upon this
assumption, counsel is of the opinion that the North Carolina Trust will
be treated as a grantor trust for North Carolina income
tax purposes and not as an association taxable as a corporation. Each
participant in the North Carolina Trust must report his share of the
taxable income of the North Carolina Trust.
The calculation of North Carolina taxable income of an
individual, corporation, estate or trust begins with Federal taxable
income. Certain modifications are specified, but no such modification
requires the addition of interest on the obligations of the State of North
Carolina, its political subdivisions, or nonprofit educational institutions
organized or chartered under the laws of North Carolina.
As a general rule, gain (or loss) from the sale of
obligations held by the North Carolina Trust (whether as a result of the
sale of such obligations by the North Carolina Trust or as a result of the
sale of a unit by a Unit holder) is includible (or deductible) in the
calculation of the Unit holder's North Carolina taxable income. Under
the language of certain enabling legislation such as the North Carolina
Hospital Authorities Act, the North Carolina Health Care Facilities
Finance Act, the North Carolina Housing Finance Agency Act, the act
establishing the North Carolina State Ports Authority, the North
Carolina Joint Municipal Electric Power and Energy Act, the act
authorizing the organization of business development corporations, the
North Carolina Higher Education Facilities Finance Act, the
North Carolina Agricultural Finance Act, and the act establishing the
North Carolina Solid Waste Management Loan Program, profits made
on the sale of obligations issued by authorities created
thereunder are made expressly exempt from North Carolina income
taxation. The exemption of such profits from North Carolina income
taxation does not require a disallowance of any loss incurred on
the sale of such obligations in the calculation of North Carolina income
taxes.
For Federal income tax purposes, interest on North
Carolina obligations that would otherwise be exempt from taxation may
in certain circumstances be taxable to the recipient. North Carolina law
provides that the interest on North Carolina obligations shall maintain its
exemption from North Carolina income taxation notwithstanding that
such interest may be subject to federal income taxation.
North Carolina imposes a tax on persons for the privilege
of ownership of items of intangible personal property. The tax is
generally imposed at the rate of $.25 per $100 of the value of each item
of intangible personal property at December 31 of each year. Bonds and
other evidences of indebtedness of the State of North Carolina, political
subdivisions of the State, agencies of such governmental units, or
nonprofit educational institutions organized or chartered under the laws
of North Carolina are exempt from the intangible personal property tax.
This exemption does not extend to units of ownership of
an investment trust that owns obligations which would be exempt from
the intangible personal property tax if owned directly by the Unit holders
of the investment trust. However, the North Carolina Department of
Revenue by regulation has announced that the taxable value of units of
ownership in an investment trust may be reduced by a
percentage equal to the ratio of direct obligations of the United States
Government and direct obligations of the State of North Carolina and its
political subdivisions held in the trust on December 31. Thus, if the
assets then held by the North Carolina Trust consist entirely of direct
obligations of the United States Government and direct obligations of the
State of North Carolina and its political subdivisions, the entire value of
the North Carolina Trust Units will not be subject to the intangible
personal property tax under this regulation.
North Carolina imposes a tax on transfers which occur by
reason of death or by gift. Transfers of obligations of North Carolina,
its political subdivisions, agencies of such governmental units, or
nonprofit educational institutions organized or chartered under the laws
of North Carolina are not exempt from the North Carolina inheritance
and gift taxes.
48 U.S.C. Sec.745 provides that bonds issued by the
Government of Puerto Rico, or by its authority, shall be exempt from
taxation by any State or by any county, municipality, or other municipal
subdivision of any State. Accordingly, interest on any such obligations
held by the North Carolina Trust would be exempt from the North
Carolina corporate and individual income taxes. The North
Carolina Department of Revenue takes the position that gains from the
<PAGE>
sale or other disposition of such obligations are subject to the North
Carolina corporate and individual income taxes. Such obligations
would be treated as obligations of the United States for purposes of the
intangible personal property tax and the application of such tax to units
of ownership in an investment trust.
Ohio Trust
On the Date of Deposit for each Ohio Trust, Squire, Sanders
& Dempsey, special Ohio counsel on Ohio tax matters, rendered an
opinion under then existing law substantially to the effect that:
The Ohio Trust is not taxable as a corporation or otherwise
for purposes of the Ohio personal income tax, Ohio school district
income taxes, the Ohio corporation franchise tax, or the Ohio dealers in
intangibles tax.
Income of the Ohio Trust will be treated as the income of the
Unit holders for purposes of the Ohio personal income tax, Ohio school
district income taxes, Ohio municipal income taxes and the Ohio
corporation franchise tax in proportion to the respective interest therein
of each Unit holder.
Interest on Ohio Obligations held by the Ohio Trust is exempt
from the Ohio personal income tax and Ohio school district income
taxes, and is excluded from the net income base of the Ohio corporation
franchise tax when distributed or deemed distributed to Unit holders.
Gains and losses realized on the sale, exchange or other
disposition by the Ohio Trust of Ohio Obligations are excluded in
determining adjusted gross and taxable income for purposes of the Ohio
personal income tax and Ohio school district income taxes, and are
excluded from the net income base of the Ohio corporation
franchise tax when distributed or deemed distributed to Unit holders.
Except as stated in the next sentence, Ohio municipalities may
not impose income taxes on interest on or profit made on the sale of
intangible property, including Ohio Obligations. The municipalities of
Indian Hill, Wickliffe and Wyoming are authorized by state law to, and
do, impose a tax on certain intangible income; however, it is not clear
that such municipalities may tax interest on or profit made on the sale,
exchange or other disposition of Ohio Obligations. In addition, specific
Ohio statutes authorizing the issuance of certain Ohio Obligations
generally provide that the interest on and, in some cases, gain or profit
from the sale or other disposition of such Ohio Obligations are exempt
from all taxation in the State. Interest on and gain or profit from the
sale or other disposition of obligations issued pursuant to such statutes
are exempt from all Ohio municipal income taxes.
<PAGE>
Pennsylvania Trust
On the Date of Deposit for each Pennsylvania Trust, Messrs.
Drinker Biddle & Reath, special Pennsylvania counsel on Pennsylvania
tax matters, rendered an opinion under then existing 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 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, 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 Pennsylvania Acts. However, such bonds are expressly
relieved from state taxation by United States statutes. Therefore, Units
in the Pennsylvania Trust are not subject to Personal Property Tax to the
extent that the Trust is comprised of Possession Bonds. Pennsylvania
Trust Units may be subject to tax in the estate of a resident
decedent under the Pennsylvania inheritance and estate taxes.
Income received by a Unit holder attributable to interest
realized by the Pennsylvania Trust from Pennsylvania Bonds, Possession
Bonds, and Prior Trust Units is not taxable to individuals, estates or
trusts under the Personal Income Tax imposed by Article III of the Tax
Reform Code of 1971; to corporations under the Corporate Net Income
tax imposed by Article IV of the Tax Reform Code of 1971; nor to
individuals under the Philadelphia School District Net Income Tax
("School District Tax") imposed on Philadelphia resident individuals
under the 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. Nor is such
<PAGE>
gain 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 that 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 with respect to
any privilege, excise, franchise or other tax imposed on business
entities not discussed herein (including the Corporate Capital
Stock/Foreign Franchise Tax).
Texas Trust
The opinion of Akin, Gump, Strauss, Hauer & Feld, special
Texas counsel on Texas tax matters with respect to the Texas Trust,
given on the Date of Deposit under then existing Texas law which is
subject to change includes the following:
(1) Neither the State nor any political subdivision of the State
currently imposes an income tax on individuals. Therefore, no portion
of any distribution received by an individual Unitholder of the Trust in
respect of his Units, including a distribution of the proceeds of insurance
in respect of such Units, is subject to income
taxation by the State or any political subdivision of the State;
(2) Except in the case of certain transportation businesses,
savings and loan associations and insurance companies, no Unit of the
Trust is taxable under any property tax levied in the State;
(3) The "inheritance tax" of the State, imposed upon certain
transfers of property of a deceased resident individual Unitholder, may
be measured in part upon the value of Units of the Trust included in the
estate of such Unitholder; and
(4) With respect to any Unitholder which is subject to the
State corporate franchise tax, Units in the Trust held by such Unitholder,
and distributions received thereon, will be taken into account in
<PAGE>
computing the "taxable capital" of the Unitholder allocated to the State,
one of the bases by which such franchise tax is currently
measured (the other being a corporation's "net capital earned surplus,"
which is, generally, its net corporate income plus officers and directors
income).
Expenses and Charges
Initial Expenses
At no cost to the State Trusts, the Sponsors have borne all the
expenses of creating and establishing each Multistate Trust or Umbrella
Series, including the cost of the initial preparation and execution of the
Trust Agreement, initial preparation and printing of the certificates for
Units, the fees of the Evaluator during the initial
public offering, legal expenses, advertising and selling expenses and
other out-of-pocket expenses. 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 Agreement.
Trustee's, Sponsors' and Evaluator's Fees--The Trustee will
receive for its ordinary recurring services to each Multistate Trust or
Umbrella Series an annual fee in the amount set forth in the "Summary
of Essential Information" of Part A. For a discussion of the services
performed by the Trustee pursuant to its obligations under the Trust
Agreement, see "Rights of Unit Holders". The Trustee will receive the
benefit of any reasonable cash balances in the 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 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.
<PAGE>
The Evaluator determines the aggregate bid price of the
underlying securities 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 State Trust. For a discussion of the services performed
by the Evaluator pursuant to its obligations under the Trust
Agreement, see "Evaluator--Responsibility" and "Public
Offering--Offering Price".
Any of such fees may be increased without approval of the
Unit holders by amounts not exceeding proportionate increases in
consumer prices for services as measured by the United States
Department of Labor's Consumer Price Index entitled "All Services Less
Rent" or, if such Index is no longer published, in a similar index
to be determined by the Trustee and the 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 State Trust: all expenses of the Trustee (including fees
and expenses of counsel and auditors) incurred in connection with its
activities under the Trust Agreement, including reports and
communications to Unit holders; expenses and costs of
any action undertaken by the Trustee to protect the Multistate Trust or
Umbrella Series and the rights and interests of the Unit holders; fees of
the Trustee for any extraordinary services performed under the Trust
Agreement; indemnification of the Trustee for any loss or liability
accruing to it without gross negligence, bad faith or willful
misconduct on its part, arising out of or in connection with its acceptance
or administration of a State 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 a State 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 Bonds or any part of a
State Trust (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 such State Trust. In addition, the Trustee is
empowered to sell Bonds in order to make funds available to pay all
expenses.
<PAGE>
PUBLIC OFFERING
Offering Price
The Public Offering Price of the Units of the respective State
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 State Trust at the date of delivery of the Units of such State Trust
to the purchaser is also added to the Public Offering Price.
Units of a State Trust are available to employees of certain of
the Sponsors, pursuant to employee benefit plans, at a Public Offering
Price equal to the Evaluator's determination of the aggregate bid price
of Bonds of a State Trust per Unit plus a sales charge of 1.25% of the
Public Offering Price. Sales through such plans to employees of the
Sponsors require 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" of Part A,
effective for all sales made subsequent to the last preceding
determination. The term "business day," as used herein, shall exclude
Saturdays, Sundays and any day on which the New York Stock Exchange
is closed. The difference between the bid and offering prices of the
Bonds may be expected to average approximately 1.5 % 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 on 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
<PAGE>
Holders--Redemption of Units".
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 pays
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 State 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 Agreement.
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
State Trusts of the Multistate Trust or Umbrella Series 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 not maintained for the Units of any of the State Trusts, a
Unit holder of such State Trust desiring to dispose of his Units may be
able to do so only by tendering such Units to the Trustee for redemption
<PAGE>
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
of this series for units of one or more of any series of Tax Exempt
Securities Trust (the "Exchange Trust") available for sale in the state in
which the Unit holder resides at a Public Offering Price for the units of
the Exchange Trust to be acquired based on a fixed sales
charge of $25 per unit. The 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 Holder will recognize a gain or loss at the time
of exchange. However, an exchange of Units of this Trust for units of
any other 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.
<PAGE>
Reinvestment Programs
Distributions of interest and principal, if any, are made to
Unit holders monthly. The Unit holder will
have the option of either receiving his monthly income check from the
Trustee or participating in one of the reinvestment programs offered by
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
State Trust owned by a Unit holder and may be terminated at any time
by the Unit holder, or the program may be modified or terminated by the
Trustee or the program's Sponsor.
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 State 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 State Trusts is evidenced
by registered certificates executed by the Trustee and the Sponsors. A
Certificate is transferable by presentation and surrender of the Certificate
to the Trustee properly endorsed or accompanied by a written instrument
or instruments of transfer. Certificates may be
issued in denominations of one Unit or any multiple thereof. A Unit
holder may be required to pay $2.00 per certificate reissued or
transferred, and to pay any governmental charge that may be imposed in
connection with each such transfer or interchange. For new certificates
issued to replace destroyed, stolen or lost certificates, the Unit
<PAGE>
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 State Trust will be
distributed on each Monthly Distribution Date on a pro rata basis to Unit
holders in such State Trust of record as of the preceding Record Date.
All distributions
will be net of applicable expenses and funds required for the redemption
of Units and, if applicable, reimbursements to the Trustee for interest
payments advanced to Unit holders on previous Monthly Distribution
Dates. (See Part A, "Summary of Essential Information" and "Tax
Exempt Securities Trust--Expenses and Charges" and "Rights of
Unit Holders--Redemption of Units" in this Section.)
The Trustee will credit to the Interest Account of each
respective State Trust all interest received by such State Trust, including
that part of the proceeds of any disposition of Bonds of such State Trust
which represents accrued interest. Other receipts will be credited to the
Principal Account of the affected State 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 Unit holders as of each Record Date will be made on
the following Distribution Date or shortly thereafter, and shall consist of
an amount substantially equal to one-twelfth of such holders' pro rata
share of the estimated annual income to the Interest Account after
deducting estimated expenses (the "Monthly Interest Distribution") plus
such holders' pro rata share of the cash balance in the Principal Account
computed as of the close of business on the preceding Record Date.
Persons who purchase Units between a Record Date and a Distribution
Date will receive their first distribution on the second Distribution Date
following their purchase of Units. No distribution need be made from
the Principal Account if the balance therein is less than an
amount sufficient to distribute $1.00 per Unit. The Monthly Interest
Distribution per Unit as of the date shown in the "Summary of Essential
Information" in Part A for the particular State Trust will change as the
income and expenses of the respective State Trusts change and as Bonds
are exchanged, redeemed, paid or sold.
Normally, interest on the Bonds in the Portfolio of each State
Trust is paid on a semi-annual basis. Because Bond interest is not
<PAGE>
received by the State Trusts at a constant rate throughout the year, any
Monthly Interest Distribution may be more or less than the amount credit
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, the Trustee may recoup advances made by it in anticipation of
receipt of interest payments on such Bonds by reducing the amount
distributed per Unit in one or more Monthly Interest Distributions. If
units are redeemed subsequent to such advances by the Trustee, but prior
to receipt by the Trustee of actual notice of such failure to pay interest,
the amount of which was so advanced by the Trustee, each remaining
Unit holder will be subject to a greater pro rate 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 State Trust
portfolio, accrued interest at any point in time will be greater than the
amount of interest actually received by a particular
State Trust and distributed to Unit holders. The excess accrued but
undistributed interest amount is known as the accrued interest carryover.
If a Unit holder sells or redeems all or 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
redeems all or a portion of his Units, the Redemption Price per Unit
which he is entitled to receive from the Trustee
will include his 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 State Trust and, to the extent funds are
not sufficient therein, from the Principal Account of such State Trust,
amounts necessary to pay the expenses of such State Trust. (See "Tax
Exempt Securities Trust--Expenses and Charges".) The Trustee
also may withdraw from said accounts such amounts, if any, as it deems
necessary to establish a reserve for any governmental charges payable out
<PAGE>
of a State Trust. Amounts so withdrawn shall not be considered a part
of a State 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 the Trustee has made in anticipation of the
receipt by a Trust of interest in respect of Bonds
which subsequently fail to pay interest when due.
Reports and Records
The Trustee shall furnish Unit holders in connection with each
distribution a statement of the amount of interest, if any, and the amount
of other receipts, if any, which are being distributed, expressed in each
case as a dollar amount per Unit. In the event that the issuer of any of
the Bonds fails to make payment when due of any interest or principal
and such failure results in a change in the amount that would otherwise
be distributed as a monthly distribution, the Trustee will, with the first
such distribution following such failure, set forth in an
accompanying statement, the issuer and the Bonds, the amount of the
reduction in the distribution per Unit resulting from such failure, the
percentage of the aggregate principal amount of Bonds which such Bond
represents and, to the extent then determined, information regarding any
disposition or legal action with respect to such Bond. Within
a reasonable time after the end of each calendar year, the Trustee will
furnish to each person who at any time during the calendar year was a
Unit holder of record, a statement (1) as to the Interest Account: interest
received (including amounts representing interest received upon any
disposition of Bonds), deductions for payment of
applicable taxes and for fees and expenses of a State Trust, redemptions
of Units and the balance remaining after such distributions and
deductions, expressed both as a total dollar amount and as a dollar
amount representing the pro rata share of each Unit outstanding on the
last business day of such calendar year; (2) as to the Principal
Account: the dates of disposition of any Bonds and the net proceeds
received therefrom (excluding any portion representing interest),
deductions for payments of applicable taxes and for fees and expenses of
a State Trust, redemptions of Units, and the balance remaining after such
distributions and deductions, expressed both as a total
dollar amount and as a dollar amount representing the pro rata share of
each Unit outstanding on the last business day of such calendar year; (3)
a list of the Bonds held and the number of Units outstanding on the last
business day of such calendar year; (4) the Redemption Price per Unit
<PAGE>
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 such State Trust 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 upon request.
The Trustee shall keep available for inspection by Unit
holders at all reasonable times during usual business hours, books of
record and account of its transactions as Trustee including records of the
names and addresses of Unit holders, certificates issued or held, a
current list of Bonds in the Portfolio of a State Trust and
a copy of the Trust Agreement.
Redemption of Units
Units may be tendered to the Trustee for redemption at its
unit investment trust office at 770 Broadway,
New York, New York 10003, upon payment of any relevant tax. At the
present time there are no specific taxes related to the redemption of the
Units. No redemption fee will be charged by the Sponsors or the
Trustee. Units redeemed by the Trustee will be canceled.
Certificates for Units to be redeemed must be properly
endorsed or accompanied by a written instrument of transfer. Unit
holders must sign exactly as their name appears on the face of the
certificate with the signature guaranteed by an officer of a national bank
or trust company or by a member of either the New York,
Midwest or Pacific Stock Exchange. In certain instances the Trustee
may require additional documents such as, but not limited to, trust
instruments, certificates of death, appointments as executor or
administrator or certificates of corporate authority.
Within seven calendar days following such tender, the Unit
holder will be entitled to receive in cash an amount for each Unit
tendered equal to the Redemption Price per Unit computed as of the
Evaluation Time set forth in the "Summary of Essential Information" in
Part A on the date of tender. (See "Redemption of Units--
Computation of Redemption Price per Unit".) The "date of tender" is
deemed to be the date on which Units are received by the Trustee,
except that 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 be, in certain circumstances 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 a State
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 State Trust is determined by the Trustee on the basis
of the bid prices of the Bonds in such State Trust as of the Evaluation
Time on the date any such determination is made. The Redemption
Price per Unit of a State Trust is each Unit's pro rata
share, determined by the Trustee, of: (1) the aggregate value of the
Bonds in such State Trust on the bid side of
the market (determined by the Evaluator as set forth under "Public
Offering--Method of Evaluation"), (2) cash on
hand in such State 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 State Trust, (b) the accrued
expenses of such State Trust, and (c) cash held for distribution to Unit
holders of such State 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 therefor to
the Unit holder in an amount not less than the Redemption Price not later
than the day on which the Units would otherwise have been redeemed by
the Trustee. (See "Public Offering--Market for Units".) Units held by
<PAGE>
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 they
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 Shearson 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.
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
<PAGE>
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 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.
<PAGE>
Among other provisions, the Final Judgment enjoins Kidder,
Peabody from engaging in certain transactions, acts, practices or courses
of business which constitute or would constitute violations of Sections
7(c), 10(b), 14(e) and 17(a)(1), or constitute or would constitute aiding
and 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 relate to any of
Kidder, Peabody's activities in connection with
any unit investment trust, or any other investment company.
Smith Barney sponsors seven open-end investment companies,
Smith Barney Equity Funds, Inc., Smith Barney Funds, Inc., Smith
Barney Variable Account Funds, Smith Barney Tax Free Money Fund,
Inc., Smith Barney Money Funds, Inc., Smith Barney Muni Funds,
Smith Barney World Funds, Inc. and four closed-end
investment companies, Smith Barney Intermediate Municipal Fund, Inc.,
Smith Barney Municipal Fund, Inc., Smith Barney High Income
Opportunity Fund Inc. and The Inefficient-Market Fund, Inc. 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 twelve 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
<PAGE>
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
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 or refraining from any action in
good faith or for errors in judgment or responsible in any way for
depreciation or loss incurred by reason of the sale of any Bonds, except
in cases of willful misfeasance, bad faith, gross negligence or
reckless disregard of 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, 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
State 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
<PAGE>
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 a Multistate Trust or
Umbrella Series of any securities other than the Bonds initially deposited
in that particular State Trust is prohibited.
Smith Barney Shearson 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 Shearson 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
Sponsors 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 State Trusts.
TRUSTEE
The Trustee is 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 subject
<PAGE>
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 any of the State Trusts, the Trustee may use the services of The
Depository Trust Company. These services may include safekeeping of
the Bonds and coupon-clipping, computer book-entry
transfer and institutional delivery services. The Depository Trust
Company is a limited purpose trust company organized under the
Banking Law of the State of New York, a member of the Federal
Reserve System and a clearing agency registered under the Securities
Exchange Act of 1934.
Limitations on Liability
The Trustee shall not be liable or responsible in any way for
depreciation or loss incurred by reason of the disposition of any moneys,
securities or certificates or in respect of any evaluation or for any action
taken in good faith reliance on prima facie properly executed documents
except in cases of willful misfeasance, bad faith,
gross negligence or reckless disregard for its obligations and duties. In
addition, the Trustee shall not be personally liable for any taxes or other
governmental charges imposed upon or in respect of any State 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.
<PAGE>
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 State Trust on the basis of their bid prices on the last business
day of June and December in each year, on the day on which any Unit
of such State 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 Trustee have the power to amend the
Trust Agreement without the consent of any of the Unit holders when
<PAGE>
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 State Trusts, except for the substitution of certain refunding
securities for such Bonds or to permit the Trustee to engage in business
or investment activities not specifically authorized in the Trust
Agreement as originally adopted. In the event of any amendment, the
Trustee is obligated to notify promptly all Unit holders of the
substance of such amendment.
Termination
The Trust Agreement provides that if the principal amount of
Bonds is less than 50% of the principal amount of the Bonds originally
deposited in such State Trust, the Trustee may in its discretion and will,
when directed by the Sponsors, terminate such State Trust. Each State
Trust may be terminated at any time by 100% of the Unit holders. See
Part A for additional optional and mandatory termination provisions.
However, in no event may any State Trust continue beyond the
Mandatory Termination Date set forth under Part A "Summary of
Essential Information." In the event of termination, written notice
thereof will be sent by the Trustee to all Unit holders.
Within a reasonable period after termination, the Trustee will sell any
Bonds remaining in the affected State Trust, and, after paying all
expenses and charges incurred by such State Trust, will distribute to each
Unit holder, upon surrender for cancellation of his certificate for Units,
his pro rata share of the balances remaining in the Interest
Account and Principal Account of such State Trust.
LEGAL OPINIONS
Certain legal matters in connection with the Units offered
hereby have been passed upon by Messrs. Cahill Gordon & Reindel, a
partnership including a professional corporation, 80 Pine Street, New
York, New York 10005, as special counsel for the Sponsors.
AUDITORS
The Statements of Financial Condition and Portfolios of
Securities of each State 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.
<PAGE>
BOND RATINGS
All ratings except those identified otherwise are by Standard
& Poor's Corporation.
Standard & Poor's Corporation
A Standard & Poor's corporate or municipal bond rating is
a current assessment of the creditworthiness
of an obligor with respect to a specific debt obligation. This assessment
of creditworthiness may take into consideration obligors such as
guarantors, insurers, or lessees.
The bond rating is not a recommendation to purchase or sell
a security, inasmuch as it does not comment as to market price or
suitability for a particular investor.
The ratings are based on current information furnished to
Standard & Poor's by the issuer and obtained
by Standard & Poor's from other sources it considers reliable. The
ratings may be changed, suspended or withdrawn as a result of changes
in, or unavailability of, such information.
The ratings are based, in varying degrees, on the following
considerations:
I. Likelihood of default--capacity and willingness of the
obligor as to the timely payment of interest and repayment of principal
in accordance with the terms of the obligation;
II. Nature of and provisions of the obligation; and
III. Protection afforded by, and relative position of, the
obligation in the event of bankruptcy,
reorganization or other arrangement under the laws of bankruptcy and
other laws affecting creditors' rights.
A summary of the meaning of the applicable ratings symbols
as published by Standard & Poor's follows:
AAA--This is the highest rating assigned by Standard &
Poor's to a debt obligation and indicates an extremely strong capacity to
pay interest and repay principal.
AA--Bonds rated AA have a very strong capacity to pay
interest and repay principal, and in the majority of instances they differ
from AAA issues only in small degrees.
<PAGE>
A--Bonds rated A have a strong capacity to pay interest and
repay principal, although they are somewhat more susceptible to the
adverse affects of changes in circumstances and economic conditions than
bonds in higher-rated categories.
BBB--Bonds rated BBB are regarded as having an adequate
capacity to pay interest and repay principal.
Whereas they normally exhibit adequate protection parameters, adverse
economic conditions or changing circumstances are more likely to lead
to weakened capacity to pay interest and repay principal for bonds in this
category than for bonds in the higher-rated categories.
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.
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 the rating is provisional. A provisional
rating assumes the successful completion of the project being financed by
the issuance of the bonds being rated and indicates that payment of debt
service requirements is largely or entirely dependent upon the successful
and timely completion of the project. This rating, however, while
addressing credit quality subsequent to completion, makes
no comment on the likelihood of, or the risk of default upon failure of,
such completion. Accordingly, the investor should exercise his own
judgment with respect to such likelihood and risk.
Conditional rating(s), indicated by "con" are given to bonds
for which the continuance of the security rating is contingent upon
Standard & Poor's receipt of an executed copy of escrow agreement or
closing documentation confirming investments and cash flows and/or the
security rating is conditional upon the issuance
of insurance by the respective insurance company.
Moody's Investors Service
A brief description of the applicable Moody's Investors Service's
rating symbols and their meanings is as
follows:
<PAGE>
Aaa--Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and are
generally referred to as "gilt edge". Interest payments are protected by
a large or by an exceptionally stable margin and principal is secure.
While the various protective elements are likely to change,
such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa--Bonds which are rated Aa are judged to be of high
quality by all standards. Together with the Aaa
group they comprise what are generally known as high grade bonds. 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 as medium
grade obligations; i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear adequate for the
present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
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 characteristics of
the desirable investment. Assurance of interest and principal payments
or of maintenance of other terms of the contract over any long period of
time may be small.
Caa--Bonds which are rated Caa are of poor standing. Such
issues may be in default or there may be present elements of danger with
respect to principal or interest.
Ca--Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have
<PAGE>
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.
Fitch Investors Service, Inc.
A brief description of the applicable Fitch Investors Service,
Inc. rating symbols and their meanings
is as follows:
AAA--Bonds which are considered to be investment grade and
of the highest credit quality. The obligor has an exceptionally strong
ability to pay interest and repay principal, which is unlikely to be
affected by reasonably foreseeable events.
AA--Bonds which are considered to be investment grade and
of very high credit quality. The obligor's ability to pay interest and
repay principal is very strong although not quite as strong as bonds rated
AAA.
A--Bonds which are considered to be investment grade and of
high credit quality. The obligor's ability to pay interest and repay
principal is considered to be strong, but may be more vulnerable to
adverse changes in economic conditions and circumstances than bonds
with higher ratings.
BBB-Bonds which are considered to be investment grade and
of satisfactory credit quality. The obligor's ability to pay interest and
repay principal is considered to be adequate. Adverse changes in
economic conditions and circumstances, however, are more likely to
have adverse impact on these bonds, and therefore impair
timely payment. The likelihood that these bonds will fall below
investment grade is higher than for bonds with
higher ratings.
Plus (+) Minus (-)--Plus and minus signs are used with a
rating symbol to indicate the relative position
of a credit within the rating category. Plus and minus signs, however,
are not used in the 'AAA', 'DDD', 'DD' or 'D' categories.
Conditional--A conditional rating is promised on the
successful completion of a project of the occurrence of a specific event.
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, Moody's Investors Service and
Fitch Investors Service, Inc. 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
Portfolios of Securities.
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.
<PAGE>
NR- Not rated (credit characteristics comparable to A or
better on the Date of Deposit).
[/TEXT]
<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>
Index:
Page
Summary of Essential Information . . . . . . . . . . . . . . . . . . . . . . . . .A-
2 Series
255
Financial and Statistical Information . . . . . . . . . . . . . . . . . . . . . . A- 4
Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A- 5
Report of Independent Public Auditors . . . . . . . . . . . . . . . . . . . . . . A- 11
Portfolios of Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . A- 12
16,149 Units
Tax Exempt Securities Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Objectives. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
PROSPECTUS
Additional Considerations Regarding the Trusts. . . . . . . . . . . . . . . . . .2
Dated
February 25, 1994
State Risk Factors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
The Units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Estimated Current Return and Estimated Long-Term Return 49
Tax Status. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Expenses and Charges. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
Public Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Offering Price. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Method of Evaluation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Sponsors
Distribution of Units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Market for Units. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
SMITH BARNEY SHEARSON INC.
Exchange Option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Reinvestment Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
1345 Avenue of the Americas
Sponsors' Profits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
New York, New York 10105
Rights of Unit Holders. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
(800) 298-UNIT
Certificates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
Distribution of Interest and Principal. . . . . . . . . . . . . . . . . . . . . 67
Reports and Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
Redemption of Units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 &
Sponsors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
Limitations on Liability. . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
Responsibility. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
Resignation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
KIDDER, PEABODY & CO.
Limitations on Liability. . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
Incorporated
Resignation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
Evaluator . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
10
Hanover Square
Limitations on Liability. . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
New York, New York 10005
Responsibility. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
(212) 747-5951
Resignation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
Amendment and Termination of the Trust Agreement. . . . . . . . . . . . . . . . . 74
Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
Auditors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
Bond Ratings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
Standard & Poor's Corporation . . . . . . . . . . . . . . . . . . . . . . . . . 75
Moody's Investors Service . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
Fitch Investors Service, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 78
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.
</TABLE>
<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 Shearson
Incorporated
1345 Avenue of the Americas
New York, NY 10105
RE:Tax Exempt Securities Trust
Series 255
Gentlemen:
We have examined the post-effective Amendment to the
Registration Statement File No. 33-8688 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,
F.A. Shinal
Senior Vice President
Chief Financial Officer
tru:l-31
<PAGE>
CONSENT OF COUNSEL
The consent of counsel to
the use of their name in the Prospectus included in this Post-
Effective Amendment to the Registration Statement ("Post-
Effective Amendment") is contained in their opinion filed as
Exhibit 3.1 to the Registration Statement.
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of
our report dated January 21, 1994 included herein and to the
reference to our firm under the heading "AUDITORS" in the
prospectus.
KPMG PEAT MARWICK
New York, New York
January 24, 1994
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933,
the registrant, Tax Exempt Securities Trust, Series 255,
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 January, 1994.
Signatures appear on pages II-3 and II-4.
A majority of the members of the Board of Directors of Smith
Barney Shearson 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.
A majority of the members of the Board of Directors of
Kidder, Peabody & Co. 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 as an exhibit to the Registration Statement of Tax Exempt
Securities Trust, Series 303, Post-Effective Amendment No. 1,
Registration No. 33-28378.
<PAGE>
TAX EXEMPT SECURITIES TRUST
BY SMITH BARNEY SHEARSON INC.
By
(George S. Michinard, Jr.)
By the following persons,* who constitute a majority of
the directors of Smith Barney Shearson Incorporated:
Steven D. Black
James S. Boshart III
Robert K. Difazio
James Dimon
Robert Druskin
Toni A. Elliot
Lewis L. Glucksman
John B. Hoffman
A. Richard Janiak, Jr.
Robert Q. Jones
Robert B. Kane
Jeffrey B. Lane
Thomas A. Maguire
Howard D. Marsh
William J. Mills II
John C. Morris
A. George Saks
Bruce D. Sargent
Melvin B. Taub
Jacques S. Theriot
Stephen J. Treadway
Paul Underwood
Philip M. Waterman, Jr.
By
(George S. Michinard, Jr.
Attorney-in-Fact)
* Pursuant to Powers of Attorney previously filed.
II-3
<PAGE>
TAX EXEMPT SECURITIES TRUST
By Kidder, Peabody & Co. Incorporated
By
(Gilbert R. Ott, Jr.)
By the following persons*, who constitute a majority
of the directors of Kidder, Peabody & Co. Incorporated:
Edward A. Cerullo
Michael A. M. Keehner
John M. Liftin
James A. Mullin
Richard W. O'Donnell
Thomas F. Ryan, Jr.
By
(Gilbert R. Ott, Jr.
Attorney-in-Fact)
___
* Pursuant to Powers of Attorney previously filed.
II-4
