File No. 33-28982 CIK #825400
Securities and Exchange CommissionWashington, D. C. 20549
Post-Effective
Amendment No. 6
to
Form S-6
For Registration under the Securities Act of 1933
of Securities of Unit Investment Trusts Registered
on Form N-8B-2
Kemper Tax-Exempt Insured Income Trust, Series A-59, Kemper
Tax-Exempt Insured Income Trust Multi-State, Series 17, Kemper
Tax-Exempt Income Trust, Series 86, and Kemper Tax-Exempt Income
Trust Multi-State, Series 39
Name and executive office address of Depositor:
EVEREN Unit Investment Trusts
(a division of EVEREN Securities, Inc.)
77 West Wacker - 29th Floor
Chicago, Illinois 60601
Name and complete address of agent for service:
Robert K. Burke
77 West Wacker - 29th Floor
Chicago, Illinois 60601
( X ) Check box if it is proposed that this filing will
become effective at 2:00 p.m. on September 28, 1995 pursuant to
paragraph (b) of Rule 485.
KEMPER TAX-EXEMPT INSURED INCOME TRUST NATIONAL SERIES KEMPER
DEFINED FUNDS INSURED NATIONAL SERIES PART ONE
The date of this Part One is that date which is set forth in Part
Two of the Prospectus
Kemper Tax-Exempt Insured Income Trust and Kemper Defined
Funds Insured National Series (the "Trusts" and each a "Trust")
were formed for the purpose of gaining interest income free from
Federal income taxes while conserving capital and diversifying
risks by investing in an insured, fixed portfolio consisting of
obligations issued by or on behalf of states of the United States
or counties, municipalities, authorities or political
subdivisions thereof.
Units of the Trust are not deposits or obligations of, or
guaranteed by, any bank, and Units are not federally insured or
otherwise protected by the Federal Deposit Insurance Corporation
and involve investment risk including loss of principal.
Insurance guaranteeing the scheduled payment of principal
and interest on all of the Municipal Bonds in the portfolio
listed in Part Two has been obtained from an independent company
by either the Trust, the Sponsor or the issuer of the Municipal
Bonds involved. Insurance obtained by the Sponsor or a Municipal
Bond issuer is effective so long as such Bonds are outstanding.
The insurance, in any case, does not relate to the Units offered
hereby or to their market value. As a result of such insurance,
the Units of the Trust received on the Date of Deposit a rating
of "AAA" by Standard & Poor's Ratings Group ("Standard & Poor's")
or "Aaa" by Moody's Investors Service, Inc. See "Insurance on
the Portfolios" and "Description of Securities Ratings." No
representation is made as to any insurer's ability to meet its
commitments.
This Prospectus is in two parts. Read and retain both parts
for future reference.
SPONSOR: KEMPER UNIT INVESTMENT TRUSTS,a service of Kemper
Securities, Inc.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
<S> <C>
SUMMARY 3
The Trust 3
Insurance 3
Public Offering Price 4
Interest and Principal Distributions 4
Reinvestment 4
Estimated Current Return and Estimated Long-Term Return
4
Market for Units 5
Risk Factors 5
THE TRUST 5
PORTFOLIOS 6
Risk Factors 7
INSURANCE ON THE PORTFOLIOS 14
Financial Guaranty Insurance Company 16
AMBAC Indemnity Corporation 16
Municipal Bond Investors Assurance Corporation 17
Financial Security Assurance 17
Capital Guaranty Insurance Company 19
DISTRIBUTION REINVESTMENT 20
INTEREST AND ESTIMATED LONG-TERM AND CURRENT RETURNS 21
TAX STATUS OF THE TRUST 21
PUBLIC OFFERING OF UNITS 26
Public Offering Price 26
Accrued Interest 28
Purchased and Daily Accrued Interest 29
Public Distribution of Units 30
Profits of Sponsor 30
MARKET FOR UNITS 31
REDEMPTION 31
Computation of Redemption Price 33
UNITHOLDERS 33
Ownership of Units 33
Distributions to Unitholders 34
Interest Distributions 34
Principal Distributions 35
Statement to Unitholders 35
Rights of Unitholders 37
INVESTMENT SUPERVISION 37
ADMINISTRATION OF THE TRUST 38
The Trustee 38
The Evaluator 39
Amendment and Termination 40
Limitations on Liability 41
The Sponsor 41
The Trustee 41
The Evaluator 41
EXPENSES OF THE TRUST 41
THE SPONSOR 43
LEGAL OPINIONS 43
INDEPENDENT AUDITORS 43
DESCRIPTION OF MUNICIPAL BOND RATINGS 44
Essential Information*
Report of Independent Auditors*
Statement of Assets and Liabilities*
Statement of Operations*
Statement of Changes in Net Assets*
Schedule of Investments*
Notes to Schedules of Investments*
Notes to Financial Statements*
</TABLE>
KEMPER TAX-EXEMPT INSURED INCOME TRUST
KEMPER DEFINED FUNDS INSURED NATIONAL SERIES
SUMMARY
The Trust. Kemper Tax-Exempt Insured Income Trust and
Kemper Defined Funds Insured National Series (the "Trusts" and
each a "Trust") are each a unit investment trust consisting of a
number of diversified portfolios (the "Series"), each portfolio
consisting of obligations ("Municipal Bonds," "Securities" or
"Bonds") issued by or on behalf of states of the United States or
counties, municipalities, authorities or political subdivisions
thereof.
The objective of each Series of the Trust is tax-exempt
income and conservation of capital with diversification of risk
through investment in an insured, fixed portfolio of Municipal
Bonds. Interest on certain Municipal Bonds in certain of the
Trusts will be a preference item for purposes of the alternative
minimum tax. Accordingly, such Trusts may be appropriate only
for investors who are not subject to the alternative minimum tax.
There is, of course, no guarantee that the Trusts' objective will
be achieved.
All of the Municipal Bonds in a Series of the Trust were
rated in the category "BBB" or better by Standard & Poor's
Ratings Group ("Standard & Poor's") or "Baa" by Moody's Investors
Service, Inc. ("Moody's") on the date such Series was established
(the "Date of Deposit"). Ratings of the Municipal Bonds may have
changed since the Date of Deposit. See "Description of
Securities Ratings" herein and the "Schedule of Investments" in
Part Two.
The Units, each of which represents a pro rata undivided
fractional interest in the Municipal Bonds deposited in the
appropriate Series of the Trust, are issued and outstanding Units
which have been reacquired by the Sponsor either by purchase of
Units tendered to the Trustee for redemption or by purchase in
the open market. No offering is being made on behalf of the
Trust and any profit or loss realized on the sale of Units will
accrue to the Sponsor and/or the firm reselling such Units.
Insurance. Insurance guaranteeing the scheduled
payment of principal and interest on all of the Municipal Bonds
in the portfolio of each Series of the Trust has been obtained by
the Trust, the Sponsor or directly by the issuer from an
independent insurance company. Series A through A-24 of the
Kemper Tax-Exempt Insured Income Trust are insured by AMBAC
Indemnity Corporation ("AMBAC Indemnity") and Series A-25 and
subsequent Series of the Kemper Tax-Exempt Insured Income Trust
and Kemper Defined Funds Insured National Series are insured by
Financial Guaranty Insurance Company ("Financial Guaranty"),
Municipal Bond Investor Assurance Corporation ("MBIA") or other
insurers. Insurance obtained directly by the issuer may be from
such companies or other insurers. See "Insurance on the
Portfolio" herein and "Schedule of Investments" in Part Two.
Insurance obtained by the Trust remains in effect only while the
insured Municipal Bonds are retained in the Trust, while
insurance obtained by a Municipal Bond issuer is effective so
long as such Bonds are outstanding. Pursuant to an irrevocable
commitment of Financial Guaranty, in the event of a sale of any
Bond from Series A-25 or subsequent Series of the Kemper
Tax-Exempt Insured Income Trust covered under the Trust's
insurance policy, the Trustee has the right to obtain permanent
insurance for such Municipal Bond upon the payment of a single
predetermined insurance premium from the proceeds of the sale of
such Municipal Bond. The insurance, in either case, does not
relate to the Units offered hereby or to their market value. As
a result of such insurance, the Units of each Series of the Trust
received on the original Date of Deposit a rating of "AAA" from
Standard & Poor's. See "Insurance on the Portfolio." No
representation is made as to AMBAC Indemnity's, Financial
Guaranty's, MBIA's or any other insurer's ability to meet its
commitments.
Public Offering Price. The Public Offering Price per
Unit of a Series of the Trust is equal to a pro rata share of the
aggregate bid prices of the Municipal Bonds in such Series (plus
or minus a pro rata share of cash, if any, in the Principal
Account, held or owned by the Series) plus Purchased Interest, if
any, in the case of Kemper Defined Funds Insured National Series
plus a sales charge shown under "Public Offering of Units." In
addition, there will be added to each transaction an amount equal
to the accrued interest from the last Record Date of such Series
to the date of settlement (five business days after order)(such
amount is referred to as Daily Accrued Interest in the case of
Kemper Defined Funds Insured National Series). The sales charge
is reduced on a graduated scale as indicated under "Public
Offering of Units _ Public Offering Price."
Interest and Principal Distributions. Distributions of
the estimated annual interest income to be received by a Series
of the Trust, after deduction of estimated expenses, will be made
monthly unless the Unitholder elects to receive such
distributions quarterly or semi-annually. Distributions will be
paid on the Distribution Dates to holders of record of such
Series on the Record Dates set forth for the applicable option.
See "Essential Information" in Part Two. The distribution of
funds, if any, in the Principal Account of each Series, will be
made semi-annually to Unitholders of Record on the appropriate
dates. See "Essential Information" in Part Two. Unitholders of
Kemper Defined Funds receive monthly distributions of interest
and principal.
Reinvestment. Distributions of interest and principal,
including capital gains, if any, made by a Series of the Trust
will be paid in cash unless a Unitholder elects to reinvest such
distributions. See "Distribution Reinvestment."
Estimated Current Return and Estimated Long-Term
Return. The Estimated Current Return is calculated by dividing
the estimated net annual interest income per Unit by the Public
Offering Price of such Trust. The estimated net annual interest
income per Unit will vary with changes in fees and expenses of
such Trust and with the principal prepayment, redemption,
maturity, exchange or sale of Securities while the Public
Offering Price will vary with changes in the bid price of the
underlying Securities and with changes in the Purchased Interest
for Kemper Defined Funds Insured National Series; therefore,
there is no assurance that the present Estimated Current Return
will be realized in the future. Estimated Long-Term Return is
calculated using a formula which (1) takes into consideration,
and determines and factors in the relative weightings of, the
market values, yields (which takes into account the amortization
of premiums and the accretion of discounts) and estimated
retirements of all of the Securities in the Trust and (2) takes
into account the expenses and sales charge associated with each
Trust Unit. Since the market values and estimated retirements of
the Securities and the expenses of the Trust will change, there
is no assurance that the present Estimated Long-Term Return will
be realized in the future. Estimated Current Return and
Estimated Long-Term Return are expected to differ because the
calculation of Estimated Long-Term Return reflects the estimated
date and amount of principal returned while Estimated Current
Return calculations include only net annual interest income and
Public Offering Price.
Market for Units. While under no obligation to do so,
the Sponsor intends, subject to change at any time, to maintain a
market for the Units of each Series of the Trust and to
continuously offer to repurchase such Units at prices which are
based on the aggregate bid side evaluation of the Municipal Bonds
in such Series of the Trust. If such a market is not maintained
and no other over-the-counter market is available, Unitholders
will still be able to dispose of their Units through redemption
by the Trustee at prices based upon the aggregate bid price of
the Municipal Bonds in such Series of the Trust. See
"Redemption."
Risk Factors. An investment in the Trusts should be
made with an understanding of the risks associated therewith,
including, among other factors, the inability of the issuer or an
insurer to pay the principal of or interest on a bond when due,
volatile interest rates, early call provisions, and changes to
the tax status of the Municipal Bonds. See "Portfolios _ Risk
Factors."
THE TRUST
Each Series of the Trust is one of a series of unit
investment trusts created by the Sponsor under the name Kemper
Tax-Exempt Insured Income Trust or Kemper Defined Funds Insured
National Series, all of which are similar, and each of which was
created under the laws of the State of Missouri pursuant to a
Trust Agreement* (the "Agreement"). Kemper Unit Investment
Trusts, a service of Kemper Securities, Inc., acts as Sponsor and
Evaluator and Investors Fiduciary Trust Company acts as Trustee.
The objectives of the Trust are tax-exempt income and
conservation of capital with diversification of risk through
investment in an insured, fixed portfolio of Municipal Bonds.
Interest on certain Municipal Bonds in the Trusts will be a
preference item for purposes of the alternative minimum tax.
Accordingly, such Trusts may be appropriate only for the
investors who are not subject to the alternative minimum tax.
There is, of course, no guarantee that the Trusts' objectives
will be achieved.
A Series of the Trust may be an appropriate investment
vehicle for investors who desire to participate in a portfolio of
insured, tax-exempt, fixed income securities with greater
diversification than they might be able to acquire individually.
In addition, Municipal Bonds of the type deposited in the Trust
are often not available in small amounts.
Each Series of the Trust consists of an insured portfolio of
interest bearing obligations issued by or on behalf of states of
the United States or counties, municipalities, authorities or
political subdivisions thereof the interest on which is, in the
opinion of bond counsel to the issuing authorities, exempt from
all Federal income taxes under existing law, but may be subject
to state and local taxes. Proceeds from the maturity, redemption
or sale of the Municipal Bonds in a Series of the Trust, unless
used to pay for Units tendered for redemption, will be
distributed to Unitholders of such Series and will not be
utilized to purchase replacement or additional Municipal Bonds
for the Series.
The Units, each of which represents a pro rata undivided
fractional interest in the principal amount of Municipal Bonds
deposited in a Series of the Trust, are issued and outstanding
Units which have been reacquired by the Sponsor either by
purchase of Units tendered to the Trustee for redemption or by
purchase in the open market. No offering is being made on behalf
of the Trust or any Series thereof and any profit or loss
realized on the sale of Units will accrue to the Sponsor and/or
the firm reselling such Units. To the extent that Units of a
Series of the Trust are redeemed, the principal amount of
Municipal Bonds in such Series will be reduced and the undivided
fractional interest represented by each outstanding Unit of the
Series will increase. See "Redemption."
PORTFOLIOS
In selecting the Municipal Bonds which comprise the
portfolio of a Series of the Trust the following requirements,
were deemed to be of primary importance: (a) a minimum rating of
"BBB" by Standard & Poor's or "Baa" by Moody's Investors Service,
Inc. (see "Description of Securities Ratings"); (b) the price of
the Municipal Bonds relative to other issues of similar quality
and maturity; (c) the diversification of the Municipal Bonds as
to purpose of issue; (d) the income to the Unitholders of the
Series; (e) whether such Municipal Bonds were insured, or the
availability and cost of insurance for the prompt payment of
principal and interest, when due, on the Municipal Bonds; and
(f) the dates of maturity of the Municipal Bonds.
Subsequent to the Date of Deposit, a Municipal Bond may
cease to be rated or its rating may be reduced below the minimum
required as of the Date of Deposit. Neither event requires the
elimination of such investment from the portfolio, but may be
considered in the Sponsor's determination to direct the Trustee
to dispose of the investment. See "Investment Supervision"
herein and "Schedule of Investments" in Part Two.
The Sponsor may not alter the portfolio of a Series of the
Trust, except that certain of the Municipal Bonds may be sold
upon the happening of certain extraordinary circumstances. See
"Investment Supervision."
Certain Series of the Trust contain Municipal Bonds which
may be subject to redemption prior to their stated maturity date
pursuant to sinking fund provisions, call provisions or
extraordinary optional or mandatory redemption provisions or
otherwise. A sinking fund is a reserve fund accumulated over a
period of time for retirement of debt. A callable debt
obligation is one which is subject to redemption or refunding
prior to maturity at the option of the issuer. A refunding is a
method by which a debt obligation is redeemed at or before
maturity, by the proceeds of a new debt obligation. In general,
call provisions are more likely to be exercised when the offering
side valuation is at a premium over par than when it is at a
discount from par. Accordingly, any such call, redemption, sale
or maturity will reduce the size and diversity of such Series,
and the net annual interest income of the Series and may reduce
the Estimated Long-Term Returns and/or Estimated Current Return.
See "Interest and Estimated Long-Term and Current Returns." Each
Trust portfolio contains a listing of the sinking fund and call
provisions, if any, with respect to each of the debt obligations.
Extraordinary optional redemptions and mandatory redemptions
result from the happening of certain events. Generally, events
that may permit the extraordinary optional redemption of
Municipal Bonds or may require the mandatory redemption of
Municipal Bonds include among others: a final determination that
the interest on the Municipal Bonds is taxable; the substantial
damage or destruction by fire or other casualty of the project
for which the proceeds of the Municipal Bonds were used; an
exercise by a local, state or Federal governmental unit of its
power of eminent domain to take all or substantially all of the
project for which the proceeds of the Municipal Bonds were used;
changes in the economic availability of raw materials, operating
supplies or facilities or technological or other changes which
render the operation of the project for which the proceeds of the
Municipal Bonds were used uneconomic; changes in law or an
administrative or judicial decree which renders the performance
of the agreement under which the proceeds of the Municipal Bonds
were made available to finance the project impossible or which
creates unreasonable burdens or which imposes excessive
liabilities, such as taxes not imposed on the date the Municipal
Bonds are issued on the issuer of the Municipal Bonds or the user
of the proceeds of the Municipal Bonds; an administrative or
judicial decree which requires the cessation of a substantial
part of the operations of the project financed with the proceeds
of the Municipal Bonds; an overestimate of the costs of the
project to be financed with proceeds of the Municipal Bonds
resulting in excess proceeds of the Municipal Bonds which may be
applied to redeem Municipal Bonds; or an underestimate of a
source of funds securing the Municipal Bonds resulting in excess
funds which may be applied to redeem Municipal Bonds. The
Sponsor is unable to predict all of the circumstances which may
result in such redemption of an issue of Municipal Bonds.
The Sponsor and the Trustee shall not be liable in any way
for any default, failure or defect in any Municipal Bond.
Risk Factors. An investment in Units of a Series of
the Trust should be made with an understanding of the risks which
an investment in fixed rate debt obligations may entail,
including the risk that the value of the portfolio and hence of
the Units will decline with increases in interest rates. The
value of the underlying Municipal Bonds will fluctuate inversely
with changes in interest rates. The uncertain economic
conditions experienced in the past, together with the fiscal
measures adopted to attempt to deal with them, have resulted in
wide fluctuations in interest rates and, thus, in the value of
fixed rate debt obligations generally and long term obligations
in particular. The Sponsor cannot predict whether such
fluctuations will continue in the future.
Certain Series of the Trust contain Municipal Bonds which
are general obligations of a governmental entity that are backed
by the taxing power of such entity. All other Municipal Bonds in
the Series of the Trust are revenue bonds payable from the income
of a specific project or authority and are not supported by the
issuer's power to levy taxes. General obligation bonds are
secured by the issuer's pledge of its faith, credit and taxing
power for the payment of principal and interest. Revenue bonds,
on the other hand, are payable only from the revenues derived
from a particular facility or class of facilities or, in some
cases, from the proceeds of a special excise or other specific
revenue source. There are, of course, variations in the security
of the different Municipal Bonds in the Series of the Trust, both
within a particular classification and between classifications,
depending on numerous factors.
Certain Series of the Trust contain Municipal Bonds which
are obligations of issuers whose revenues are derived from
services provided by hospitals and other health care facilities,
including nursing homes. In view of this an investment in such
Series should be made with an understanding of the
characteristics of such issuers and the risks that such an
investment may entail. Ratings of bonds issued for health care
facilities are often based on feasibility studies that contain
projections of occupancy levels, revenues and expenses. A
facility's gross receipts and net income available for debt
service will be affected by future events and conditions
including, among other things, demand for services and the
ability of the facility to provide the services required,
physicians' confidence in the facility, management capabilities,
economic developments in the service area, competition, efforts
by insurers and governmental agencies to limit rates, legislation
establishing state rate-setting agencies, expenses, the cost and
possible unavailability of malpractice insurance, the funding of
Medicare, Medicaid and other similar third party payor programs,
and government regulation. Federal legislation has been enacted
which implemented a system of prospective Medicare reimbursement
which may restrict the flow of revenues to hospitals and other
facilities which are reimbursed for services provided under the
Medicare program. Future legislation or changes in the areas
noted above, among other things, would affect all hospitals to
varying degrees and, accordingly, any adverse changes in these
areas may adversely affect the ability of such issuers to make
payment of principal and interest on Municipal Bonds held in such
Series. Such adverse changes also may adversely affect the
ratings of the Municipal Bonds held in such Series of the Trust.
Hospitals and other health care facilities are subject to claims
and legal actions by patients and others in the ordinary course
of business. Although these claims are generally covered by
insurance, there can be no assurance that a claim will not exceed
the insurance coverage of a health care facility or that
insurance coverage will be available to a facility. In addition,
a substantial increase in the cost of insurance could adversely
affect the results of operations of a hospital or other health
care facility. Certain hospital bonds may provide for redemption
at par at any time upon the sale by the issuer of the hospital
facilities to a non-affiliated entity or in other circumstances.
For example, certain hospitals may have the right to call bonds
at par if the hospital may legally be required because of the
bonds to perform procedures against specified religious
principles. Certain FHA-insured bonds may provide that all or a
portion of those bonds, otherwise callable at a premium, can be
called at par in certain circumstances. If a hospital defaults
upon a bond obligation, the realization of Medicare and Medicaid
receivables may be uncertain and, if the bond obligation is
secured by the hospital facilities, legal restrictions on the
ability to foreclose upon the facilities and the limited
alternative uses to which a hospital can be put may reduce
severely its collateral value.
Certain Series of the Trust contain Municipal Bonds which
are single family mortgage revenue bonds, which are issued for
the purpose of acquiring from originating financial institutions
notes secured by mortgages on residences located within the
issuer's boundaries and owned by persons of low or moderate
income. Mortgage loans are generally partially or completely
prepaid prior to their final maturities as a result of events
such as sale of the mortgaged premises, default, condemnation or
casualty loss. Because these Municipal Bonds are subject to
extraordinary mandatory redemption in whole or in part from such
prepayments of mortgage loans, a substantial portion of such
Municipal Bonds will probably be redeemed prior to their
scheduled maturities or even prior to their ordinary call dates.
The redemption price of such issues may be more or less than the
offering price of such Municipal Bonds. Extraordinary mandatory
redemption without premium could also result from the failure of
the originating financial institutions to make mortgage loans in
sufficient amounts within a specified time period or, in some
cases, from the sale by the Municipal Bond issuer of the mortgage
loans. Failure of the originating financial institutions to make
mortgage loans would be due principally to the interest rates on
mortgage loans funded from other sources becoming competitive
with the interest rates on the mortgage loans funded with the
proceeds of the single family mortgage revenue bonds.
Additionally, unusually high rates of default on the underlying
mortgage loans may reduce revenues available for the payment of
principal of or interest on such mortgage revenue bonds. Single
family mortgage revenue bonds issued after December 31, 1980 were
issued under Section 103A of the Internal Revenue Code, which
Section contains certain ongoing requirements relating to the use
of the proceeds of such Bonds in order for the interest on such
Municipal Bonds to retain its tax-exempt status. In each case,
the issuer of the Municipal Bonds has covenanted to comply with
applicable ongoing requirements and bond counsel to such issuer
has issued an opinion that the interest on the Municipal Bonds is
exempt from Federal income tax under existing laws and
regulations. There can be no assurances that the ongoing
requirements will be met. The failure to meet these requirements
could cause the interest on the Municipal Bonds to become
taxable, possibly retroactively from the date of issuance.
Certain Series of the Trust contain Municipal Bonds which
are obligations of issuers whose revenues are primarily derived
from mortgage loans to housing projects for low to moderate
income families. The ability of such issuers to make debt
service payments will be affected by events and conditions
affecting financed projects, including, among other things, the
achievement and maintenance of sufficient occupancy levels and
adequate rental income, increases in taxes, employment and income
conditions prevailing in local labor markets, utility costs and
other operating expenses, the managerial ability of project
managers, changes in laws and governmental regulations, the
appropriation of subsidies and social and economic trends
affecting the localities in which the projects are located. The
occupancy of housing projects may be adversely affected by high
rent levels and income limitations imposed under Federal and
state programs. Like single family mortgage revenue bonds,
multi-family mortgage revenue bonds are subject to redemption and
call features, including extraordinary mandatory redemption
features, upon prepayment, sale or non-origination of mortgage
loans as well as upon the occurrence of other events. Certain
issuers of single or multi-family housing bonds have considered
various ways to redeem bonds they have issued prior to the stated
first redemption dates for such bonds. In connection with the
housing Municipal Bonds held by the Trust, the Sponsor has not
had any direct communications with any of the issuers thereof,
but at the initial Date of Deposit it was not aware that any of
the respective issuers of such Municipal Bonds were actively
considering the redemption of such Municipal Bonds prior to their
respective stated initial call dates. However, there can be no
assurance that an issuer of a Municipal Bond in the Trust will
not attempt to so redeem a Municipal Bond in the Trust.
Certain Series of the Trust contain Municipal Bonds which
are obligations of issuers whose revenues are derived from the
sale of water and/or sewerage services. Water and sewerage bonds
are generally payable from user fees. Problems faced by such
issuers include the ability to obtain timely and adequate rate
increases, a decline in population resulting in decreased user
fees, the difficulty of financing large construction programs,
the limitations on operations and increased costs and delays
attributable to environmental considerations, the increasing
difficulty of obtaining or discovering new supplies of fresh
water, the effect of conservation programs and the impact of
"no-growth" zoning ordinances. Issuers may have experienced
these problems in varying degrees. Because of the relatively
short history of solid waste disposal bond financing, there may
be technological risks involved in the satisfactory construction
or operation of the projects exceeding those associated with most
municipal enterprise projects. Increasing environmental
regulation on the federal, state and local level has a
significant impact on waste disposal facilities. While
regulation requires more waste producers to use waste disposal
facilities, it also imposes significant costs on the facilities.
These costs include compliance with frequently changing and
complex regulatory requirements, the cost of obtaining
construction and operating permits, the cost of conforming to
prescribed and changing equipment standards and required methods
of operation and the cost of disposing of the waste residue that
remains after the disposal process in an environmentally safe
manner. In addition, waste disposal facilities frequently face
substantial opposition by environmental groups and officials to
their location and operation, to the possible adverse effects
upon the public health and the environment that may be caused by
wastes disposed of at the facilities and to alleged improper
operating procedures. Waste disposal facilities benefit from
laws which require waste to be disposed of in a certain manner
but any relaxation of these laws could cause a decline in demand
for the facilities' services. Finally, waste disposal facilities
are concerned with many of the same issues facing utilities
insofar as they derive revenues from the sale of energy to local
power utilities.
Certain Series of the Trust contain Municipal Bonds which
are obligations of issuers whose revenues are primarily derived
from the sale of electric energy or natural gas. Utilities are
generally subject to extensive regulation by state utility
commissions which, among other things, establish the rates which
may be charged and the appropriate rate of return on an approved
asset base. The problems faced by such issuers include the
difficulty in obtaining approval for timely and adequate rate
increases from the governing public utility commission, the
difficulty in financing large construction programs, the
limitations on operations and increased costs and delays
attributable to environmental considerations, increased
competition, recent reductions in estimates of future demand for
electricity in certain areas of the country, the difficulty of
the capital market in absorbing utility debt, the difficulty in
obtaining fuel at reasonable prices and the effect of energy
conservation. Issuers may have experienced these problems in
varying degrees. In addition, Federal, state and municipal
governmental authorities may from time to time review existing
and impose additional regulations governing the licensing,
construction and operation of nuclear power plants, which may
adversely affect the ability of the issuers of such Municipal
Bonds to make payments of principal and/or interest on such
Municipal Bonds. The ability of state and local joint action
power agencies to make payments on bonds they have issued is
dependent in large part on payments made to them pursuant to
power supply or similar agreements. Courts in Washington and
Idaho have held that certain agreements between the Washington
Public Power Supply System ("WPPSS") and the WPPSS participants
are unenforceable because the participants did not have the
authority to enter into the agreements. While these decisions
are not specifically applicable to agreements entered into by
public entities in other states, they may cause a reexamination
of the legal structure and economic viability of certain projects
financed by joint action power agencies, which might exacerbate
some of the problems referred to above and possibly lead to legal
proceedings questioning the enforceability of agreements upon
which payment of these bonds may depend.
Certain Series of the Trust contain Municipal Bonds which
are industrial revenue bonds ("IRBs"), including pollution
control revenue bonds, which are tax-exempt securities issued by
states, municipalities, public authorities or similar entities to
finance the cost of acquiring, constructing or improving various
industrial projects. These projects are usually operated by
corporate entities. Issuers are obligated only to pay amounts
due on the IRBs to the extent that funds are available from the
unexpended proceeds of the IRBs or receipts or revenues of the
issuer under an arrangement between the issuer and the corporate
operator of a project. The arrangement may be in the form of a
lease, installment sale agreement, conditional sale agreement or
loan agreement, but in each case the payments to the issuer are
designed to be sufficient to meet the payments of amounts due on
the IRBs. Regardless of the structure, payment of IRBs is solely
dependent upon the creditworthiness of the corporate operator of
the project or corporate guarantor. Corporate operators or
guarantors may be affected by many factors which may have an
adverse impact on the credit quality of the particular company or
industry. These include cyclicality of revenues and earnings,
regulatory and environmental restrictions, litigation resulting
from accidents or environmentally-caused illnesses, extensive
competition and financial deterioration resulting from leveraged
buy-outs or takeovers. The IRBs in the Series of the Trust may
be subject to special or extraordinary redemption provisions
which may provide for redemption at par or, with respect to
original issue discount bonds, at issue price plus the amount of
original issue discount accreted to the redemption date plus, if
applicable, a premium. The Sponsor cannot predict the causes or
likelihood of the redemption of IRBs or other Municipal Bonds in
the Series of the Trust prior to the stated maturity of such
Municipal Bonds.
Certain Series of the Trust contain Municipal Bonds which
are obligations which are payable from and secured by revenues
derived from the ownership and operation of facilities such as
airports, bridges, turnpikes, port authorities, convention
centers and arenas. The major portion of an airport's gross
operating income is generally derived from fees received from
signatory airlines pursuant to use agreements which consist of
annual payments for leases, occupancy of certain terminal space
and service fees. Airport operating income may therefore be
affected by the ability of the airlines to meet their obligations
under the use agreements. The air transport industry is
experiencing significant variations in earnings and traffic, due
to increased competition, excess capacity, increased costs,
deregulation, traffic constraints and other factors, and several
airlines are experiencing severe financial difficulties. The
Sponsor cannot predict what effect these industry conditions may
have on airport revenues which are dependent for payment on the
financial condition of the airlines and their usage of the
particular airport facility. Similarly, payment on Municipal
Bonds related to other facilities is dependent on revenues from
the projects, such as user fees from ports, tolls on turnpikes
and bridges and rents from buildings. Therefore, payment may be
adversely affected by reduction in revenues due to such factors
as increased cost of maintenance, decreased use of a facility,
lower cost of alternative modes of transportation, scarcity of
fuel and reduction or loss of rents.
Certain Series of the Trusts contain Municipal Bonds which
are obligations of issuers which are, or which govern the
operation of, schools, colleges and universities and whose
revenues are derived mainly from ad valorem taxes, or for higher
education systems, from tuition, dormitory revenues, grants and
endorsements. General problems relating to school bonds include
litigation contesting the state constitutionality of financing
public education in part from ad valorem taxes, thereby creating
a disparity in educational funds available to schools in wealthy
areas and schools in poor areas. Litigation or legislation on
this issue may affect the sources of funds available for the
payment of school bonds in the Trusts. General problems relating
to college and university obligations would include the prospect
of a declining percentage of the population consisting of
"college" age individuals, possible inability to raise tuition
and fees sufficiently to cover increased operating costs, the
uncertainty of continued receipt of Federal grants and state
funding and new government legislation or regulations which may
adversely affect the revenues or costs of such issuers. All of
such issuers have been experiencing certain of these problems in
varying degrees. In addition, the ability of universities and
colleges to meet their obligations is dependent upon various
factors, including the size and diversity of their sources of
revenues, enrollment, reputation, management expertise, the
availability and restrictions on the use of endowments and other
funds, the quality and maintenance costs of campus facilities,
and, in the case of public institutions, the financial condition
of the relevant state or other governmental entity and its
policies with respect to education. The institution's ability to
maintain enrollment levels will depend on such factors as tuition
costs, geographic location, geographic diversity and quality of
student body, quality of the faculty and the diversity of program
offerings.
Certain Series of the Trust contain Municipal Bonds which
are Urban Redevelopment Bonds ("URBs"). URBs have generally been
issued under bond resolutions pursuant to which the revenues and
receipts payable under the arrangements with the operator of a
particular project have been assigned and pledged to purchasers.
In some cases, a mortgage on the underlying project may have been
granted as security for the URBs. Regardless of the structure,
payment of the URBs is solely dependent upon the creditworthiness
of the operator of the project.
Certain of the Municipal Bonds in the Trust may be lease
revenue bonds whose revenues are derived from lease payments made
by a municipality or other political subdivision which is leasing
equipment or property for use in its operation. The risks
associated with owning Municipal Bonds of this nature include the
possibility that appropriation of funds for a particular project
or equipment may be discontinued. The Sponsor cannot predict the
likelihood of nonappropriation of funds for these types of lease
revenue Municipal Bonds.
Certain Series of the Trust contain "zero coupon" bonds,
i.e., an original issue discount bond that does not provide for
the payment of current interest. Zero coupon bonds are purchased
at a deep discount because the buyer receives only the right to
receive a final payment at the maturity of the bond and does not
receive any periodic interest payments. The effect of owning
deep discount bonds which do not make current interest payments
(such as the zero coupon bonds) is that a fixed yield is earned
not only on the original investment but also, in effect, on all
discount earned during the life of such obligation. This
implicit reinvestment of earnings at the same rate eliminates the
risk of being unable to reinvest the income on such obligation at
a rate as high as the implicit yield on the discount obligation,
but at the same time eliminates the holder's ability to reinvest
at higher rates in the future. For this reason, zero coupon
bonds are subject to substantially greater price fluctuations
during periods of changing market interest rates than are
securities of comparable quality which pay interest currently.
For the Federal tax consequences of original issue discount bonds
such as the zero coupon bonds, see "Tax Status of the Trust."
Investors should be aware that many of the Municipal Bonds
in the Series of the Trust are subject to continuing requirements
such as the actual use of Municipal Bond proceeds or manner of
operation of the project financed from Municipal Bond proceeds
that may affect the exemption of interest on such Municipal Bonds
from Federal income taxation. Although at the time of issuance
of each of the Municipal Bonds in the Series of the Trust an
opinion of bond counsel was rendered as to the exemption of
interest on such obligations from Federal income taxation, there
can be no assurance that the respective issuer or other obligors
on such obligations will fulfill the various continuing
requirements established upon issuance of the Municipal Bonds. A
failure to comply with such requirements may cause a
determination that interest on such obligations is subject to
Federal income taxation, perhaps even retroactively from the date
of issuance of such Municipal Bonds, thereby reducing the value
of the Municipal Bonds and subjecting Unitholders to
unanticipated tax liabilities.
Federal bankruptcy statutes relating to the adjustment of
debts of political subdivisions and authorities of states of the
United States provide that, in certain circumstances, such
subdivisions or authorities may be authorized to initiate
bankruptcy proceedings without prior notice to or consent of
creditors, which proceedings could result in material and adverse
modification or alteration of the rights of holders of
obligations issued by such subdivisions or authorities.
Certain issues of the Municipal Bonds in some Series of the
Trust represent "moral obligations" of a governmental entity
other than the issuer. In the event that the issuer of the
Municipal Bond defaults in the repayment thereof, such other
governmental entity lawfully may, but is not obligated to,
discharge the obligation of the issuer to repay such Municipal
Bond. If an issuer of moral obligation bonds is unable to meet
its obligations, the repayment of such Municipal Bonds becomes a
moral commitment but not a legal obligation of the state or
municipality in question. Even though the state may be called on
to restore any deficits in capital reserve funds of the agencies
or authorities which issued the bonds, any restoration generally
requires appropriation by the State legislature and accordingly
does not constitute a legally enforceable obligation or debt of
the state. The agencies or authorities generally have no taxing
power.
To the best of the Sponsor's knowledge, as of the Date of
Deposit for each Trust, there is no litigation pending with
respect to any Municipal Bond which might reasonably be expected
to have a material adverse effect on the Trust or any Series
thereof. Although the Sponsor is unable to predict whether any
litigation may be instituted, or if instituted, whether such
litigation might have a material adverse effect on the Trust or
any Series, the Trust received copies of the opinions of bond
counsel given to the issuing authorities at the time of original
delivery of each of the Municipal Bonds to the effect that the
Municipal Bonds had been validly issued and that the interest
thereon is exempt from Federal income taxes.
INSURANCE ON THE PORTFOLIOS
All Municipal Bonds in the portfolios of each Series of the
Trust are insured as to payment of interest and principal, when
due, either by a policy obtained by the Trust, the Sponsor or by
the Bond issuer. Series A through A-24 of the Kemper Tax-Exempt
Insured Income Trust are insured by AMBAC Indemnity and
Series A-25 and subsequent Series of the Kemper Tax-Exempt
Insured
Income Trust and Kemper Defined Funds Insured National Series are
insured by Financial Guaranty, MBIA and other insurers. The
insurance policy obtained by the Trust for a Series is
non-cancelable and will continue in force so long as such Series
of the Trust is in existence, the insurer and/or the reinsures
referred to below remain in business and the Municipal Bonds
described in the policy continue to be held in such Series of the
Trust. The premium for any insurance policy or policies obtained
by an issuer of Municipal Bonds has been paid in advance by such
issuer and any such policy or policies are non-cancelable and
will remain in force so long as the Municipal Bonds so insured
are outstanding and the insurer and/or insurers referred to below
remain in business. In those instances where Municipal Bond
insurance is obtained by the Sponsor or the issuer directly from
an insurer, no premiums for insurance are paid by the Trust and
such bonds are not covered by the Trust's policy. Non-payment of
premiums on the policy obtained by the Trust will not result in
the cancellation of such insurance but will force the insurer to
take action against the Trustee to recover premium payments due
it. Premium rates for each issue of Municipal Bonds protected by
the policy obtained by the Trust are fixed for the life of the
appropriate Series of the Trust.
The aforementioned insurance guarantees the scheduled
payment of principal and interest on all of the Municipal Bonds
as they fall due. It does not guarantee the market value of the
Municipal Bonds or the value of the Units of a Series of the
Trust. The insurance obtained by the Trust is only effective as
to Municipal Bonds owned by and held in a Series of the Trust and
the price which an individual pays on acquisition of Units, or
receives on redemption or resale of Units, does not, except as
indicated below, include any element of value for the insurance
obtained by the Trust. Unitholders should recognize that in
order to receive any benefit from the portfolio insurance
obtained by the Trust they must be owners of the Units of a
Series of the Trust at the time the Trustee becomes entitled to
receive any payment from the insurer for such Series. Insurance
obtained by the issuer of a Municipal Bond is effective so long
as the Municipal Bond is outstanding, whether or not held by a
Series of the Trust.
Pursuant to an irrevocable commitment of Financial Guaranty,
the Trustee, upon the sale of a Municipal Bond from Series A-25
(or any subsequent Series) of the Kemper Tax-Exempt Insured
Income Trust or Kemper Defined Funds Insured National Series
covered under the Trust's insurance policy, has the right to
obtain permanent insurance (the "Permanent Insurance") with
respect to such Municipal Bond (i.e., insurance to the maturity
of the Municipal Bond regardless of the identity of the holder
thereof) upon the payment of a single predetermined insurance
premium from the proceeds of the sale of such Municipal Bond.
Accordingly, every Municipal Bond in Series A-25 (or subsequent
Series) of the Kemper Tax-Exempt Insured Income Trust or Kemper
Defined Funds Insured National Series is eligible to be sold on
an insured basis. It is expected that the Trustee will exercise
the right to obtain Permanent Insurance with respect to Municipal
Bonds in such Series only if upon such exercise the Trust would
receive net proceeds (i.e., the value of such Municipal Bond if
sold as an insured Municipal Bond less the insurance premium
attributable to the Permanent Insurance) from such sale in excess
of the sale proceeds if such Municipal Bond was sold on an
uninsured basis. The insurance premium with respect to each
Municipal Bond is determined based upon the insurability of each
Municipal Bond as of the Date of Deposit and will not be
increased or decreased for any change in the creditworthiness of
such Municipal Bond's issuer.
Insurance obtained by the Trust, under normal circumstances,
has no effect on the price or redemption value of Units. It is
the present intention of the Evaluator to attribute a value to
such insurance for the purpose of computing the price or
redemption value of Units only in circumstances where the credit
quality of an underlying Municipal Bond has significantly
deteriorated. Insurance obtained by the issuer of a Municipal
Bond is effective so long as such Municipal Bond is outstanding.
Therefore, any such insurance may be considered to represent an
element of market value in regard to the Municipal Bonds thus
insured, but the exact effect, if any, of this insurance on such
market value cannot be predicted.
The value to be added to such Municipal Bonds shall be an
amount equal to the excess, if any, by which the net proceeds
realized from the sale of the Municipal Bonds on an insured basis
exceeds the sum of (i) the net proceeds realizable from the sale
of the Municipal Bonds on an uninsured basis plus (ii) in the
case of Series A-25 and subsequent Series of the Kemper
Tax-Exempt Insured Income Trust or Kemper Defined Funds Insured
National Series the premium attributable to the Permanent
Insurance. The portfolio insurance obtained by the Trust from
AMBAC Indemnity for Series A through A-24 of the Kemper
Tax-Exempt Insured Income Trust is applicable only while the
Municipal Bonds remain in the Trust's portfolio. Consequently,
the price received by the Trust upon the disposition of any such
Municipal Bond will reflect a value placed upon it by the market
as an uninsured obligation rather than a value resulting from the
insurance. Due to this fact, the Sponsor will not direct the
Trustee to dispose of Municipal Bonds in Series A through A-24 of
the Kemper Tax-Exempt Insured Income Trust which are in default
or imminent danger of default but to retain such Municipal Bonds
in the portfolio so that if a default in the payment of interest
or principal occurs the Trust may realize the benefits of the
insurance.
The Sponsor will instruct the Trustee not to sell Municipal
Bonds from Series A-25 or subsequent Series of the Kemper
Tax-Exempt Insured Income Trust or Kemper Defined Funds Insured
National Series to effect redemptions or for any reason but
rather to retain them in the portfolio unless value attributable
to the Permanent Insurance can be realized upon sale. See
"Investment Supervision."
Financial Guaranty Insurance Company. Financial
Guaranty is a wholly-owned subsidiary of FGIC Corporation (the
"Corporation"), a Delaware holding company. The Corporation is a
wholly-owned subsidiary is General Electric Capital Corporation
("GECC"). Neither the Corporation nor GECC is obligated to pay
the debt of or the claims against Financial Guaranty. Financial
Guaranty is domiciled in the State of New York and is subject to
regulation by the State of New York Insurance Department. As of
September 30, 1994, the total capital and surplus of Financial
Guaranty was approximately $871,000,000. Copies of Financial
Guaranty's financial statements, prepared on the basis of
statutory accounting principles, and the Corporation's financial
statements, prepared on the basis of generally accepted
accounting principles, may be obtained by writing to Financial
Guaranty at 115 Broadway, New York, New York 10006, Attention:
Communications Department or to the New State Insurance
Department at 160 West Broadway, 18th Floor, New York, New York
10013, Attention: Property Companies Bureau (telephone number
(212) 621-0389). Financial Guaranty's telephone number is (212)
312-3000.
In addition, Financial Guaranty Insurance Company is
currently authorized to write insurance in all 50 states and the
District of Columbia.
The information relating to Financial Guaranty contained
above has been furnished by such corporation. The financial
information contained herein with respect to such corporation is
unaudited but appears in reports or other materials filed with
state insurance regulatory authorities and is subject to audit
and review by such authorities. No representation is made herein
as to the accuracy or adequacy of such information or as to the
absence of material adverse changes in such information
subsequent to the date thereof but the Sponsor is not aware that
the information herein is inaccurate or incomplete.
AMBAC Indemnity Corporation. AMBAC Indemnity
Corporation ("AMBAC") is a Wisconsin-domiciled stock insurance
company, regulated by the office of Commissioner of Insurance of
Wisconsin, and licensed to do business in 50 states, the District
of Columbia and the Commonwealth of Puerto Rico, with admitted
assets (unaudited) of approximately $1,936,000,000 and statutory
capital (unaudited) of approximately $1,096,000,000 as of
September 30, 1993. Statutory capital consists of statutory
contingency reserve and policyholders' surplus. AMBAC Indemnity
is a wholly-owned subsidiary of AMBAC Inc., a 100% publicly held
company. Moody's Investors Service, Inc. and Standard & Poor's
Corporation have both assigned a AAA claims-paying ability rating
to AMBAC. Copies of AMBAC's financial statements prepared in
accordance with statutory accounting standards are available from
AMBAC. The address of AMBAC's administrative offices and its
telephone number are One State Street Plaza, 17 Floor, New York,
New York 10004 and (212) 668-0340. AMBAC has entered into quota
share reinsurance agreements under which a percentage of the
insurance underwritten pursuant to certain municipal bank
insurance programs of AMBAC Indemnity has been and will be
assumed by a number of foreign and domestic unaffiliated
reinsures.
Municipal Bond Investors Assurance Corporation.
Municipal Bond Investors Assurance Corporation ("MBIA
Corporation") is the principal operating subsidiary of MBIA,
Inc., a New York Stock Exchange listed Company. MBIA, Inc. is
obligated to pay the debts of or claims against MBIA Corporation.
MBIA Corporation, which commenced municipal bond insurance
operations on January 5, 1987, is a limited liability corporation
rather than a several liability association. MBIA Corporation is
domiciled in the State of New York and licensed to do business in
all 50 states, the District of Columbia and the Commonwealth of
Puerto Rico.
As of September 30, 1994 MBIA Corporation had admitted
assets of $3.3 billion (unaudited), total liabilities of $2.2
billion (unaudited), and total capital and surplus of $1.1
billion (unaudited) prepared in accordance with statutory
accounting practices prescribed or permitted by insurance
regulatory authorities. Standard & Poor's has rated the
claims-paying ability of MBIA "AAA." Copies of MBIA
Corporation's financial statements prepared in accordance with
statutory accounting practices are available from MBIA
Corporation. The address of MBIA Corporation is 113 King Street,
Armonk, New York 10504.
Effective December 31, 1993, MBIA Inc. acquired Bond
Investors Group, Inc. On January 5, 1990, the Insurer acquired
all of the outstanding stock of Bond Investors Group, Inc., the
parent of BIG, now known as MBIA Insurance Corp. of Illinois.
Through a reinsurance agreement, BIG has ceded all of its net
insured risks, as well as its unearned premium and contingency
reserves, to the Insurer and the Insurer has reinsured BIG's net
outstanding exposure.
Moody's Investors Service rates all bonds issues insured by
MBIA "Aaa" and short-term loans "MIG1," both designated to be of
the highest quality. Standard & Poor's rates all new issues
insured by MBIA "AAA."
Financial Security Assurance. Financial Security
Assurance ("Financial Security" or "FSA") is a monoline insurance
company incorporated on March 16, 1984 under the laws of the
State of New York. The operations of Financial Security
commenced on July 25, 1985, and Financial Security received its
New York State insurance license on September 23, 1985.
Financial Security and its two wholly owned subsidiaries are
licensed to engage in financial guaranty insurance business in 49
states, the District of Columbia and Puerto Rico.
Financial Security and its subsidiaries are engaged
exclusively in the business of writing financial guaranty
insurance, principally in respect of asset-backed and other
collateralized securities offered in domestic and foreign
markets. Financial Security and its subsidiaries also write
financial guaranty insurance in respect of municipal and other
obligations and reinsure financial guaranty insurance policies
written by other leading insurance companies. In general,
financial guaranty insurance consists of the issuance of a
guaranty of scheduled payments of an issuer's securities, thereby
enhancing the credit rating of these securities, in consideration
for payment of a premium to the insurer.
Financial Security is 91.6% owned by U S West, Inc., and
8.4% owned by Tokio Marine and Fire Insurance Co., Ltd. ("Tokio
Marine"). Neither U S West, Inc. nor Tokio Marine is obligated
to pay the debts of or the claims against Financial Security.
Financial Security is domiciled in the State of New York and is
subject to regulation by the State of New York Insurance
Department.
As of March 31, 1993 the total policyholders' surplus and
contingency reserves and the total unearned premium reserve,
respectively, of Financial Security and its consolidated
subsidiaries were, in accordance with statutory accounting
principles, approximately $479,110,000 (unaudited) and
$220,078,000 (unaudited), and the total shareholders' equity and
the unearned premium reserve, respectively of Financial Security
and its consolidated subsidiaries were, in accordance with
generally accepted accounting principles, approximately
$628,119,000 (unaudited) and $202,493,000 (unaudited).
Copies of Financial Security's financial statements may be
obtained by writing of Financial Security at 350 Park Avenue, New
York, New York 10022, attention Communications Department.
Financial Security's and its telephone number is (212) 826-0100.
Pursuant to an intercompany agreement, liabilities on
financial guaranty insurance written by Financial Security or
either of its subsidiaries are reinsured among such companies at
an agreed-upon percentage substantially proportional to their
respective capital, surplus and reserves, subject to applicable
statutory risk limitations. In addition, Financial Security
reinsures a portion of its liabilities under certain of its
financial guaranty insurance policies with unaffiliated reinsures
under various quota share treaties and on a
transaction-by-transaction basis. Such reinsurance is utilized
by Financial Security as a risk management device and to comply
with certain statutory and rating agency requirements; it does
not alter or limit Financial Security's obligations under any
financial guaranty insurance policy.
Financial Security's claims-paying ability is rated "Aaa" by
Moody's Investors Service, Inc., and "AAA" by Standard & Poor's,
Nippon Investors Service Inc., Duff & Phelps Inc. and Australian
Ratings Pty. Ltd. Such ratings reflect only the views of the
respective rating agencies, are not recommendations to buy, sell
or hold securities and are subject to revision or withdrawal at
any time by such rating agencies.
Capital Guaranty Insurance Company. Capital Guaranty
Insurance Company ("Capital Guaranty" or "CGIC") is a "Aaa/AAA"
rated monoline stock insurance company incorporated in the State
of Maryland, and is a wholly owned subsidiary of Capital Guaranty
Corporation, a Maryland insurance holding company. Capital
Guaranty Corporation is a publicly owned company whose shares are
traded on the New York Stock Exchange.
Capital Guaranty Corporation is authorized to provide
insurance in all 50 states, the District of Columbia, the
Commonwealth of Puerto Rico, Guam and the U.S. Virgin Islands.
Capital Guaranty focuses on insuring municipal securities and
provides policies which guaranty the timely payment of principal
and interest when due for payment on new issue and secondary
market issue municipal bond transactions. Capital Guaranty's
claims-paying ability is rated "Triple-A" by both Moody's and
Standard & Poor's.
As of December 31, 1994, Capital Guaranty had $15.7 billion
in net exposure outstanding (excluding defeased issues). The
total statutory policyholders' surplus and contingency reserve of
Capital Guaranty was $196,529,000 and the total admitted assets
were $303,723,316 as reported to the Insurance Department of the
State of Maryland as of December 31, 1994.
Financial statements for Capital Guaranty Insurance Company,
that have been prepared in accordance with statutory insurance
accounting standards, are available upon request. The address of
Capital Guaranty's headquarters is Steuart Tower, 22nd Floor, One
Market Plaza, San Francisco, CA 94105-1413 and the telephone
number is (415) 955-8000.
In order to be in a Series of the Trust, Municipal Bonds
must be insured by the issuer thereof or be eligible for the
insurance obtained by the Series of the Trust. In determining
eligibility, the company insuring the portfolio has applied its
own standards which correspond generally to the standards it
normally uses in establishing the insurability of new issues of
municipal bonds and which are not necessarily the criteria used
in regard to the selection of Municipal Bonds by the Sponsor. To
the extent the standards of the insurer are more restrictive than
those of the Sponsor, the previously stated Trust investment
criteria have been limited.
On the date shown under "Essential Information" in Part Two,
the Estimated Long-Term and Current Returns per Unit for the
Trust, after payment of the insurance premium, if any, were as
indicated. The Estimated Long-Term and Current Returns per Unit
for a trust with an identical portfolio without the insurance
obtained by the Trust would have been higher on such date.
An objective of the portfolio insurance obtained by the
Trust is to obtain a higher yield on the portfolio of the Series
of the Trust than would be available if all the Municipal Bonds
in such portfolio had Standard & Poor's "AAA" rating and/or
Moody's "Aaa" rating(s), while having the protection of insurance
of prompt payment of interest and principal, when due, on the
Municipal Bonds. There is, of course, no certainty that this
result will be achieved. Municipal Bonds in a Series of the
Trust which have been insured by the issuer (all of which are
rated "AAA" by Standard & Poor's and/or "Aaa" by Moody's) may or
may not have a higher yield than uninsured bonds rated "AAA" by
Standard & Poor's or "Aaa" by Moody's. In selecting such
Municipal Bonds for the portfolio, the Sponsor has applied the
criteria described above.
In the event of nonpayment of interest or principal, when
due, in respect of a Municipal Bond, the appropriate insurer
shall make such payment not later than 30 days after it has been
notified that such nonpayment has occurred or is threatened (but
not earlier than the date such payment is due). The insurer, as
regards any payment it may make, will succeed to the rights of
the Trustee in respect thereof.
The Internal Revenue Service has issued a letter ruling
which holds, in effect, that insurance proceeds representing
maturity interest on defaulted municipal obligations paid to
municipal bond funds substantially similar to the Trust, under
policy provisions substantially identical to the policies
described herein, will be excludable from Federal gross income
under Section 103(a)(1) of the Internal Revenue Code. Holders of
Units in the Trust should discuss with their tax advisers the
degree of reliance which they may place on this letter ruling.
Furthermore, Chapman and Cutler, Counsel for the Sponsor, have
given an opinion to the effect that such payment of proceeds
would be excludable from Federal gross income to the same extent
that such interest would have been so excludable if paid by the
issuer of the defaulted obligations. See "Tax Status of the
Trust."
DISTRIBUTION REINVESTMENT
Each Unitholder of a Trust Fund may elect to have
distributions of principal (including capital gains, if any) or
interest or both automatically invested without charge in shares
of any mutual fund registered in such Unitholder's state of
residence which is underwritten or advised by Kemper Financial
Services, Inc., an affiliate of the sponsor, (the "Kemper
Funds"), other than those Kemper Funds sold with a contingent
deferred sales charge. Since the portfolio securities and
investment objectives of such Kemper Funds may differ
significantly from that of the Trust Funds, Unitholders should
carefully consider the consequences, including the fact that
distributions from such Kemper Funds may be taxable, before
selecting such Kemper Funds for reinvestment. Detailed
information with respect to the investment objectives and the
management of the Funds is contained in their respective
prospectuses, which can be obtained from and appropriate Trust
Fund Underwriter upon request. An investor should read the
prospectus of the reinvestment fund selected prior to making the
election to reinvest. Unitholders who desire to have such
distributions automatically reinvested should inform their broker
at the time of purchase or should file with the Program Agent
referred to below a written notice of election.
Unitholders who are receiving distributions in cash may
elect to participate in distribution reinvestment by filing with
the Program Agent an election to have such distributions
reinvested without charge. Such election must be received by the
Program Agent at least ten days prior to the Record Date
applicable to any distribution in order to be in effect for such
Record Date. Any such election shall remaining effect until a
subsequent notice is received by the Program Agent (See
"Distributions to Unitholders").
The Program Agent is Investors Fiduciary Trust Company. All
inquiries concerning participation in distribution reinvestment
should be directed to the Program Agent at P.O. Box 419430,
Kansas City, Missouri 64173-0216, telephone (816) 474-8786.
INTEREST AND ESTIMATED LONG-TERM AND CURRENT RETURNS
As of the opening of business on the date indicated therein,
the Estimated Current Returns, if applicable, and the Estimated
Long-Term Returns for the Trust were as set forth under
"Essential Information" in Part Two of this Prospectus.
Estimated Current Returns are calculated by dividing the
estimated net annual interest income per Unit by the Public
Offering Price. The estimated net annual interest income per
Unit will vary with changes in fees and expenses of the Trust and
with the principal prepayment, redemption, maturity, exchange or
sale of Securities while the Public Offering Price will vary with
changes in the offering price of the underlying Securities and
with changes in Purchased Interest for Kemper Defined Funds;
therefore, there is no assurance that the present Estimated
Current Returns will be realized in the future. Estimated
Long-Term Returns are calculated using a formula which (1) takes
into consideration, and determines and factors in the relative
weightings of, the market values, yields (which takes into
account the amortization of premiums and the accretion of
discounts) and estimated retirements of all of the Securities in
the Trust and (2) takes into account the expenses and sales
charge associated with the Trust Unit. Since the market values
and estimated retirements of the Securities and the expenses of
the Trust will change, there is no assurance that the present
Estimated Long-Term Returns will be realized in the future.
Estimated Current Returns and Estimated Long-Term Returns are
expected to differ because the calculation of Estimated Long-Term
Returns reflects the estimated date and amount of principal
returned while Estimated Current Returns calculations include
only net annual interest income and Public Offering Price.
TAX STATUS OF THE TRUST
All Municipal Bonds in the Trust were accompanied by copies
of opinions of bond counsel given to the issuers thereof at the
time of original delivery of the Municipal Bonds to the effect
that the interest thereon is exempt from all Federal income
taxes. In connection with the offering of Units of the Trust
Funds, neither the Sponsor, the Trustee, the auditors nor their
respective counsel have made any review of the proceedings
relating to the issuance of the Municipal Bonds or the basis for
such opinions. Gain realized on the sale or redemption of the
Municipal Bonds by the Trustee or of a Unit by a Unitholder is,
however, includable in gross income for Federal income tax
purposes. Such gain does not include any amounts received in
respect of accrued interest or earned original issue discount.
It should be noted that under recently enacted legislation
described below that subjects accretion of market discount on
tax-exempt bonds to taxation as ordinary income, gain realized on
the sale or redemption of Municipal Bonds by the Trustee or of
Units by a Unitholder that would have been treated as capital
gain under prior law is treated as ordinary income to the extent
it is attributable to accretion of market discount. Market
discount can arise based on the price a Trust Fund pays for
Municipal Bonds or the price a Unitholder pays for his or her
Units. In addition, bond counsel to the issuing authorities
rendered opinions as to the exemption of interest on such Bonds,
when held by residents of the state in which the issuers of such
bonds are located, from state income taxes and, where applicable,
local income taxes.
Neither the Sponsor, the Trustee, the Independent Auditors
nor their respective counsel, have made any review of the
proceedings relating to the issuance of the Municipal Bonds or
the bases for such opinions. However, bond counsel to the
issuing authorities rendered opinions as to the exemption of
interest on such Bonds, when held by residents of the state in
which the issuers of such bonds are located, from state income
taxes and, where applicable, local income taxes.
In the opinion of Chapman and Cutler, counsel for the
Sponsor:
Each series of the Trust is not an association taxable
as a corporation for federal income tax purposes and
interest and accrued original issue discount on Bonds which
is excludable from gross income under the Internal Revenue
Code of 1986 (the "Code") will retain its status when
distributed to Unitholders, except to the extent such
interest is subject to the alternative minimum tax, an
additional tax on branches of foreign corporations and the
environmental tax (the "Superfund Tax"), as noted below.
Exemption of interest and accrued original issue
discount on any Municipal Bonds for Federal income tax
purposes does not necessarily result in tax-exemption under
the laws of the several states as such laws vary with
respect to the taxation of such securities and in many
states all or part of such interest and accrued original
issue discount may be subject to tax.
Each Unitholder is considered to be the owner of a pro
rata portion of each asset of the respective Series of the
Trust in the proportion that the number of Units of such
Trust held by him bears to the total number of Units
outstanding of such Trust under subpart E, subchapter J of
chapter 1 of the Code and will have a taxable event when
such Trust disposes of a Bond, or when the Unitholder
redeems or sells his Units. Unitholders must reduce the tax
basis of their Units for their share of accrued interest
received by a Trust, if any, on Bonds delivered after the
Unitholders pay for their Units to the extent that such
interest accrued on such Bonds during the period from the
Unitholder's settlement date to the date such Bonds are
delivered to a Trust and, consequently, such Unitholders may
have an increase in taxable gain or reduction in capital
loss upon the disposition of such Units. Gain or loss upon
the sale or redemption of Units is measured by comparing the
proceeds of such sale or redemption with the adjusted basis
of the Units. If the Trustee disposes of Bonds (whether by
sale, payment on maturity, redemption or otherwise), gain or
loss is recognized to the Unitholder. The amount of any
such gain or loss is measured by comparing the Unitholder's
pro rata share of the total proceeds from such disposition
with the Unitholder's basis for his or her fractional
interest in the asset disposed of. In the case of a
Unitholder who purchases Units, such basis (before
adjustment for earned original issue discount and amortized
bond premium, if any) is determined by apportioning the cost
of the Units among each of the Trust's assets ratably
according to value as of the date of acquisition of the
Units. The basis of each Unit and of each Municipal Bond
which was issued with original issue discount must be
increased by the amount of the accrued original issue
discount and the basis of each Unit and of the Unitholder's
interest in each Municipal Bond which was acquired by such
Unitholder at a premium must be reduced by the annual
amortization of Municipal Bond premium. The tax cost
reduction requirements of the Code relating to amortization
of bond premium may, under some circumstances, result in the
Unitholder realizing a taxable gain when his Units are sold
or redeemed for an amount equal to his original cost.
Any proceeds paid under individual insurance policies
obtained by issuers of Bonds or under any insurance policies
obtained by the Trust or the Sponsor which represent
maturing interest on defaulted obligations held by the
Trustee will be excludable from Federal gross income if, and
to the same extent as, such interest would have been so
excludable if paid in the normal course by the issuer of the
defaulted obligations; provided that, at the time such
policies are purchased, the amounts paid for such policies
are reasonable, customary and consistent with the reasonable
expectation that the issuer of the obligations, rather than
the insurer, will pay debt service on the obligations.
Sections 1288 and 1272 of the Internal Revenue Code of 1986
(the "Code") provide a complex set of rules governing the accrual
of original issue discount. These rules provide that original
issue discount accrues either on the basis of a constant compound
interest rate or ratably over the term of the Municipal Bond,
depending on the date the Municipal Bond was issued. In
addition, special rules apply if the purchase price of a
Municipal Bond exceeds the original issue price plus the amount
of original issue discount which would have previously accrued
based upon its issue price (its "adjusted issue price"). The
application of these rules will also vary depending on the value
of the Municipal Bond on the date a Unitholder acquires his
Units, and the price the Unitholder pays for his Units.
Investors with questions regarding these Code sections should
consult with their tax advisers.
"The Revenue Reconciliation Act of 1993" (the "Tax Act")
subjects tax-exempt bonds to the market discount rules of the
Code effective for bonds purchased after April 30, 1993. In
general, market discount is the amount (if any) by which the
stated redemption price at maturity exceeds an investor's
purchase price (except to the extent that such difference, if
any, is attributable to original issue discount not yet accrued)
subject to a statutory "de minimis" rule. Market discount can
arise based on the price a Trust pays for Municipal Bonds or the
price a Unitholder pays for his or her Units. Under the Tax Act,
accretion of market discount is taxable as ordinary income; under
prior law the accretion had been treated as capital gain. Market
discount that accretes while a Trust Fund holds a Municipal Bond
would be recognized as ordinary income by the Unitholders when
principal payments are received on the Municipal Bond, upon sale
or at redemption (including early redemption), or upon sale or
redemption of his or her Units, unless a Unitholder elects to
include market discount in taxable income as it accrues. The
market discount rules are complex and Unitholders should consult
their tax advisers regarding these rules and their application.
In the case of all Unitholders (both individuals and
corporations), interest on all or certain Bonds held by certain
Series of the Trusts may be treated as an item of tax preference
for purposes of computing the alternative minimum tax.
Accordingly, investments in Units may subject Unitholders to (or
result in increased liability under) the alternative minimum tax.
Due to the complexity of the alternative minimum tax, Unitholders
are urged to consult their tax advisers regarding the impact, if
any, of the alternative minimum tax.
In the case of certain corporations, the alternative minimum
tax and the Superfund Tax depend upon the corporation's
alternative minimum taxable income, which is the corporation's
taxable income with certain adjustments. One of the adjustment
items used in computing the alternative minimum taxable income
and the Superfund Tax of a corporation (other than an S
Corporation, Regulated Investment Company, Real Estate Investment
Trust, or REMIC) is an amount equal to 75% of the excess of such
corporation's "adjusted current earnings" over an amount equal to
its alternative minimum taxable income (before such adjustment
item and the alternative tax net operating loss deduction).
"Adjusted current earnings" includes all tax-exempt interest,
including interest on all of the Bonds in a Trust. Unitholders
are urged to consult their tax advisers with respect to the
particular tax consequences to them including the corporate
alternative minimum tax, the Superfund Tax and the branch profits
tax imposed by Section 884 of the Code.
Counsel for the Sponsor has also advised that under Section
265 of the Code, interest on indebtedness incurred or continued
to purchase or carry Units of a Trust is not deductible for
Federal income tax purposes. The Internal Revenue Service has
taken the position that such indebtedness need not be directly
traceable to the purchase or carrying of Units (however, these
rules generally do not apply to interest paid on indebtedness
incurred to purchase or improve a personal residence). Also,
under Section 265 of the Code, certain financial institutions
that acquire units would generally not be able to deduct any of
the interest expense attributable to ownership of such Units.
Investors with questions regarding these issues should consult
with their tax advisers.
In the case of certain Municipal Bonds in certain Series of
the Trust, the opinions of bond counsel indicate that interest on
such securities received by a "substantial user" of the
facilities being financed with the proceeds of these securities
or persons related thereto, for periods while such securities are
held by such a user or related person, will not be excludable
from Federal gross income, although interest on such securities
received by others would be excludable from Federal gross income.
"Substantial user" and "related person" are defined under U.S.
Treasury Regulations. Any person who believes that he or she may
be a "substantial user" or a "related person" as so defined
should contact his or her tax adviser.
In the case of corporations, the alternative tax rate
applicable to long-term capital gains is 35% effective for
long-term capital gains realized in taxable years beginning on or
after January 1, 1993. For taxpayers other than corporations,
net capital gains are subject to a maximum marginal stated tax
rate of 28%. However, it should be noted that legislative
proposals are introduced from time to time that affect tax rates
and could affect relative differences at which ordinary income
and capital gains are taxed. Under the Code, taxpayers must
disclose to the Internal Revenue Service the amount of tax-exempt
interest earned during the year.
Under existing law, the Trusts are not associations taxable
as a corporation and the income of the Trusts will be treated as
the income of the Unitholders under the income tax laws of the
State of Missouri.
All statements of law in the Prospectus concerning exclusion
from gross income for Federal, state or other tax purposes are
the opinions of counsel and are to be so construed.
At the respective times of issuance of the Bonds, opinions
relating to the validity thereof and to the exclusion of interest
thereon from Federal gross income are rendered by bond counsel to
the respective issuing authorities. Neither the Sponsor nor
Chapman and Cutler has made any special review for the Trust
Funds of the proceedings relating to the issuance of the Bonds or
of the basis for such opinions.
Section 86 of the Code, in general, provides that fifty
percent of Social Security benefits are includible in gross
income to the extent that the sum of "modified adjusted gross
income" plus fifty percent of the Social Security benefits
received exceeds a "base amount." The base amount is $25,000 for
unmarried taxpayers, $32,000 for married taxpayers filing a joint
return and zero for married taxpayers who do not live apart at
all times during the taxable year and who file separate returns.
Modified adjusted gross income is adjusted gross income
determined without regard to certain otherwise allowable
deductions and exclusions from gross income and by including
tax-exempt interest. To the extent that Social Security benefits
are includible in gross income, they will be treated as any other
item of gross income.
In addition, under the Tax Act, for taxable years beginning
after December 31,1993, up to eighty-five percent of Social
Security benefits are includible in gross income to the extent
that the sum of "modified adjusted gross income" plus fifty
percent of Social Security benefits received exceeds an "adjusted
base amount." The adjusted base amount is $34,000 for married
taxpayers, $44,000 for married taxpayers filing a joint return
and zero for married taxpayers who do not live apart at all times
during the taxable year and who file separate returns.
Although tax-exempt interest is included in modified
adjusted gross income solely for the purpose of determining what
portion, if any, of Social Security benefits will be included in
gross income, no tax-exempt interest, including that received
from the Trust, will be subject to tax. A taxpayer whose
adjusted gross income already exceeds the base amount or the
adjusted base amount must include fifty percent or eighty-five
percent, respectively of his Social Security benefits in gross
income whether or not he receives any tax-exempt interest. A
taxpayer whose modified adjusted gross income (after inclusion of
tax-exempt interest) does not exceed the base amount need not
include any Social Security benefits in gross income.
The exemption of interest on state and local obligations for
Federal income tax purposes discussed above does not necessarily
result in exemption under the income or other tax laws of any
state or city. The laws of the several states vary with respect
to the taxation of such obligations.
PUBLIC OFFERING OF UNITS
Public Offering Price. Units of each Series of the
Trust are offered at the Public Offering Price, plus accrued
interest to the expected settlement date (Daily Accrued Interest
for Kemper Defined Funds). The Public Offering Price per Unit of
a Series is equal to the aggregate bid side evaluation of the
Municipal Bonds in the Series' portfolio (as determined pursuant
to the terms of a contract with the Evaluator, by Muller Data
Corporation, a non-affiliated firm regularly engaged in the
business of evaluating, quoting or appraising comparable
securities), plus or minus cash, if any, in the Principal
Account, held or owned by the Series, divided by the number of
outstanding Units of that Series of the Trust, plus Purchased
Interest in the case of Kemper Defined Funds, plus the sales
charge applicable. The sales charge is based upon the dollar
weighted average maturity of the Trust and is determined in
accordance with the table set forth below. Investors who
purchase Units through brokers or dealers pursuant to a current
management agreement which by contract or operation of law does
not allow such broker or dealer to earn an additional commission
(other than any fee or commission paid for maintenance of such
investor's account under the management agreement) on such
transactions may purchase such Units at the current Public
Offering Price net of the applicable broker or dealer concession.
See "Public Distribution of Units" below. For purposes of this
computation, Municipal Bonds will be deemed to mature on their
expressed maturity dates unless: (a) the Municipal Bonds have
been called for redemption or funds or securities have been
placed in escrow to redeem them on an earlier call date, in which
case such call date will be deemed to be the date upon which they
mature; or (b) such Municipal Bonds are subject to a "mandatory
tender," in which case such mandatory tender will be deemed to be
the date upon which they mature. The effect of this method of
sales charge computation will be that different sales charge
rates will be applied to the Trust based upon the dollar weighted
average maturity of such Trust's portfolio, in accordance with
the following schedule:
<TABLE>
<CAPTION>
PERCENT OF PERCENT
DOLLAR WEIGHTED PUBLIC OF NET
AVERAGE YEARS OFFERING AMOUNT
TO MATURITY PRICE INVESTED
<S> <C> <C>
1 to 3.99 years 2.00% 2.041%
4 to 7.99 years 3.50 3.627
8 to 14.99 years 4.50 4.712
15 or more years 5.50 5.820
</TABLE>
The sales charge per Unit will be reduced as set forth
below:
<TABLE>
<CAPTION>
DOLLAR WEIGHTED AVERAGE YEARS TO MATURITY*
4 to 7.99 8 to 14.99 15 or more
Amount of Investment Sales Charge (% of Public Offering Price)
<S> <C> <C> <C>
$1,000 to $99,999 3.50% 4.50% 5.50%
$100,000 to $499,999 3.25 4.25 5.00
$500,000 to $999,999 3.00 4.00 4.50
$1,000,000 or more 2.75 3.75 4.00
- -------------------
</TABLE>
* If the dollar weighted average maturity of a Trust is from 1
to 3.99 years, the sales charge is 2% and 1.5% of the Public
Offering Price for purchases of $1 to $249,999 and $250,000 or
more, respectively.
The reduced sales charge as shown on the preceding charts
will apply to all purchases of Units on any one day by the same
purchases from the same dealer, and for this purpose, purchases
of Units of a Series of the Trust will be aggregated with
concurrent purchases of Units of any other unit investment trust
that may be offered by the Sponsor. Additionally, Units
purchased in the name of a spouse or child (under 21) of such
purchaser will be deemed to be additional purchases by such
purchaser. The reduced sales charge will also be applicable to a
trust or other fiduciary purchasing for a single trust estate or
single fiduciary account.
The Sponsor intends to permit officers, directors and
employees of the Sponsor and Evaluator and, at the discretion of
the Sponsor, registered representatives of selling firms to
purchase Units of the Trusts without a sales charge, although a
transaction processing fee may be imposed on such trades.
The Public Offering Price on the date shown on the cover
page of Part Two of the Prospectus or on any subsequent date will
vary from the amounts stated under "Essential Information" in
Part Two in accordance with fluctuations in the prices of the
underlying Municipal Bonds. The aggregate bid side evaluation of
the Municipal Bonds shall be determined (a) on the basis of
current bid prices of the Municipal Bonds, (b) if bid prices are
not available for any particular Municipal Bond, on the basis of
current bid prices for comparable bonds, (c) by determining the
value of the Municipal Bonds on the bid side of the market by
appraisal, or (d) by any combination of the above. Except as
described in "Insurance on the Portfolios" above, the Evaluator
will not attribute any value to the insurance obtained by the
Trust. On the other hand, the value of insurance obtained by an
issuer of Municipal Bonds or by the Sponsor is reflected and
included in the market value of such Municipal Bonds.
In any case, the Evaluator will consider the ability of an
insurer to meet its commitments under the Trust's insurance
policy (if any). For example, if the Trust were to hold the
Municipal Bonds of a municipality which had significantly
deteriorated in credit quality, the Evaluator would first
consider in its evaluation the market price of the Municipal
Bonds at their lower credit rating. The Evaluator would also
attribute a value to the insurance feature of the Municipal Bonds
which would be equal to the difference between the market value
of such Municipal Bonds and the market value of bonds of a
similar nature which were of investment grade rating. It is the
position of the Sponsor that this is a fair method of valuing
insured Municipal Bonds and reflects a proper valuation method in
accordance with the provisions of the Investment Company Act of
1940. For a description of the circumstances under which a full
or partial suspension of the right of Unitholders to redeem their
Units may occur, see "Redemption."
The foregoing evaluations and computations shall be made as
of the Evaluation Time stated under "Essential Information" in
Part Two, on each business day effective for all sales made
during the preceding 24-hour period, and for purposes of resales
and repurchases of Units.
The interest on the Municipal Bonds in each Series of the
Trust, less the estimated fees and expenses, is estimated to
accrue in the annual amounts per Unit set forth under "Essential
Information" in Part Two. The amount of net interest income
which accrues per Unit may change as Municipal Bonds mature or
are redeemed, exchanged or sold, or as the expenses of a Series
of the Trust change or as the number of outstanding Units of such
Series changes.
Payment for Units must be made on or before the fifth
business day following purchase (the "settlement date"). A
purchaser becomes the owner of Units on the settlement date. If
a Unitholder desires to have certificates representing Units
purchased, such certificates will be delivered as soon as
possible following his written request therefor. For information
with respect to redemption of Units purchased, but as to which
certificates requested have not been received, see "Redemption"
below.
The following section "Accrued Interest" applies to
Unitholders of Kemper Tax-Exempt Insured Income Trust:
Accrued Interest. Accrued Interest consists of two
elements. The first arises as a result of accrued interest which
is the accumulation of unpaid interest on a bond from the last
day on which interest thereon was paid. Interest on Bonds in the
Trust Funds is actually paid either monthly or semi-annually to
the Trust Fund. However, interest on the Bonds in the Trust
Funds is accounted for daily on an accrual basis. Because of
this, a Trust Fund always has an amount of interest earned but
not yet collected by the Trustee because of coupons that are not
yet due. For this reason, the Public Offering Price of Units
will have added to it the proportionate share of accrued and
undistributed interest to the date of settlement.
The Trustee will advance the amount of accrued interest as
of the First Settlement Date and the same will be distributed to
Sponsor. Such advance will be repaid to the Trustee through the
first receipts of interest received on the Municipal Bonds.
Consequently, the amount of accrued interest to be added to the
Public Offering Price of Units will include only accrued interest
arising after the First Settlement Date of a Trust Fund, less any
distributions from the Interest Account subsequent to this First
Settlement Date. Since the First Settlement Date is the date of
settlement for anyone ordering Units on the Date of Deposit, no
accrued interest will be added to the Public Offering Price of
Units ordered on the Date of Deposit.
The second element of accrued interest arises because of the
structure of the Interest Account. The Trustee has no cash for
distribution to Unitholders until it receives interest payments
on the Bonds in a Trust Fund. The Trustee is obligated to
provide its own funds, at times, in order to advance interest
distributions. The Trustee will recover these advancements when
such interest is received. Interest Account balances are
established so that it will not be necessary on a regular basis
for the Trustee to advance its own funds in connection with such
interest distributions. The Interest Account balances are also
structured so that there will generally be positive cash balances
and since the funds held by the Trustee will be used by it to
earn interest thereon, it benefits thereby (see "Expenses of the
Trust").
Accrued interest is computed as of the initial Record Date
of the Trust Funds. On the date of the first distribution of
interest to Unitholders after the First Settlement Date, the
interest collected by the Trustee will be sufficient to repay its
advances, to allow for accrued interest under the monthly,
quarterly and semi-annual plans of distribution and to generate
enough cash to commence distributions to Unitholders. If a
Unitholder sells or redeems all or a portion of his Units or if
the Bonds in a Trust Fund are sold or otherwise removed or if a
Trust Fund is liquidated, he will receive at that time his
proportionate share of the accrued interest computed to the
settlement date in the case of sale or liquidation and to the of
tender in the case of redemption in such Trust Fund.
The following section "Purchased and Daily Accrued Interest"
applies to Unitholders of Kemper Defined Funds Insured National
Series:
Purchased and Daily Accrued Interest. Accrued interest
consist of two elements. The first element arises as a result of
accrued interest which is the accumulation of unpaid interest on
a bond from the later of the last day on which interest thereon
was paid or the date of original issuance of the bond. Interest
on the coupon Bonds in the Trust fund is paid semi-annually to
the Trust. A portion of the aggregate amount of such accrued
interest on the Bonds in the Trust to the First Settlement Date
of the Trust Units is the Purchased Interest. In an effort to
reduce the amount of Purchased Interest which would otherwise
have to be paid by Unitholders, the Trustee may advance a portion
of the accrued interest to the Sponsor as the Unitholder of
record as of the First Units in the Trust Fund is accounted for
daily on an accrual basis (herein referred to as "Daily Accrued
Interest"). Because of this, the Units always have an amount of
interest earned but not yet paid or reserved for payment. For
this reason, the Public Offering Price of Units will include the
proportionate share of Daily Accrued Interest to the date of
settlement.
If a Unitholder sells or redeems all or a portion of his
Units or if the bonds are sold or otherwise removed or if the
Trust Fund is liquidated, he will receive at that time his
proportionate share of the Purchase Interest and Daily Accrued
Interest computed to the settlement date in the case of sale or
liquidation and to the date of tender in the case of redemption
in the Trust Fund.
Public Distribution of Units. The Sponsor has
qualified Units for sale in all states. Units will be sold
through dealers who are members of the National Association of
Securities Dealers, Inc. and through others. Sales may be made
to or through dealers at prices which represent discounts from
the Public Offering Price as set forth in the table below.
Certain commercial banks are making Units of the Trust available
to their customers on an agency basis. A portion of the sales
charge paid by their customers is retained by or remitted to the
banks, in the amount shown in the table below. Under the
Glass-Steagall Act, banks are prohibited from underwriting Trust
Units; however, the Glass-Steagall Act does permit certain agency
transactions and the banking regulators have indicated that these
particular agency transactions are permitted under such Act. In
addition, state securities laws on this issue may differ from the
interpretations of Federal law expressed herein and banks and
financial institutions may be required to register as dealers
pursuant to state law.
<TABLE>
<CAPTION>
DOLLAR WEIGHTED AVERAGE YEARS TO MATURITY*
4 to 7.99 8 to 14.99 15 or more
Amount of Investment Discount per Unit (% of Public Offering Price)
<S> <C> <C> <C>
$1,000 to $99,999 2.00% 3.00% 4.00%
$100,000 to $499,999 1.75 2.75 3.50
$500,000 to $999,999 1.50 2.50 3.00
$1,000,000 or more 1.25 2.25 2.50
- -----------------
</TABLE>
* If the dollar weighted average maturity of a Trust is from 1
to 3.99 years, the concession or agency commission is 1.00% of
the Public Offering Price.
In addition to such discounts, the Sponsor may, from time to
time, pay or allow an additional discount, in the form of cash or
other compensation, to dealers employing registered
representatives who sell, during a specified time period, a
minimum dollar amount of Units of the Trusts and other unit
investment trusts underwritten by the Sponsor.
The Sponsor reserves the right to change the levels of
discounts at any time. The difference between the discount and
the sales charge will be retained by the Sponsor.
The Sponsor reserves the right to reject, in whole or in
part, any order for the purchase of Units.
Profits of Sponsor. The Sponsor will retain a portion
of the sales charge on each Unit sold, representing the
difference between the Public Offering Price of the Units and the
discounts allowed to firms selling such Units. The Sponsor may
realize additional profit or loss as a result of the possible
change in the daily evaluation of the Municipal Bonds in the
Trust, since the value of its inventory of Units may increase or
decrease.
MARKET FOR UNITS
While not obligated to do so, the Sponsor intends to, and
certain of the Underwriters may, subject to change at any time,
maintain a market for Units of each Series of the Trust offered
hereby and to continuously offer to purchase said Units at
prices, as determined by the Evaluator, based on the aggregate
bid prices of the underlying Municipal Bonds of such Series,
together with accrued interest to the expected date of
settlement. Unitholders who wish to dispose of their Units
should inquire of their broker or bank as to the current market
price of the Units in order to determine whether there is in
existence any price in excess of the Redemption Price and, if so,
the amount thereof.
REDEMPTION
A Unitholder who does not dispose of Units in the secondary
market described above may cause their Units to be redeemed by
the Trustee by making a written request to the Trustee, Investors
Fiduciary Trust Company, P.O. Box 419430, Kansas City, Missouri
64173-0216 and, in the case of Units evidenced by a certificate,
by tendering such certificate to the Trustee, properly endorsed
or accompanied by a written instrument or instruments of transfer
in form satisfactory to the Trustee. Unitholders must sign the
request, and such certificate or transfer instrument, exactly as
their names appear on the records of the Trustee and on any
certificate representing the Units to be redeemed. If the amount
of the redemption is $25,000 or less and the proceeds are payable
to the Unitholder(s) of record at the address of record, no
signature guarantee is necessary for redemptions by individual
account owners (including joint owners). Additional
documentation may be requested, and a signature guarantee is
always required, from corporations, executors, administrators,
trustees, guardians or associations. The signatures must be
guaranteed by a participant in the Securities Transfer Agents
Medallion Program ("STAMP") or such other guarantee program in
addition to, or in substitution for, STAMP, as may be accepted by
the Trustee. A certificate should only be sent by registered or
certified mail for the protection of the Unitholder. Since
tender of the certificate is required for redemption when one has
been issued, Units represented by a certificate cannot be
redeemed until the certificate representing such Units has been
received by the purchaser.
Redemption shall be made by the Trustee on the seventh
calendar day following the day on which a tender for redemption
is received, or if the seventh calendar day is not a business
day, on the first business day prior thereto (the "Redemption
Date"), by payment of cash equivalent to the Redemption Price for
that Series of the Trust, determined as set forth below under
"Computation of Redemption Price," as of the evaluation time
stated under "Essential Information" in Part Two, next following
such tender, multiplied by the number of Units being redeemed.
Any Units redeemed shall be cancelled and any undivided
fractional in the Trust Fund extinguished. The price received
upon redemption might be more or less than the amount paid by
the Unitholder depending on the value of the Municipal Bonds in
the portfolio at the time of redemption. Any Units redeemed
shall be cancelled and any undivided fractional interest in that
Series of the Trust will be extinguished.
Under regulations issued by the Internal Revenue Service,
the Trustee is required to withhold a specified percentage of the
principal amount of a Unit redemption if the Trustee has not been
furnished the redeeming Unitholder's tax identification number in
the manner required by such regulations. Any amount so withheld
is transmitted to the Internal Revenue Service and may be
recovered by the Unitholder only when filing a tax return. Under
normal circumstances the Trustee obtains the Unitholder's tax
identification number from the selling broker. However, any time
a Unitholder elects to tender Units for redemption, such
Unitholder should make sure that the Trustee has been provided a
certified tax identification number in order to avoid this
possible "back-up withholding." In the event the Trustee has not
been previously provided such number, one must be provided at the
time redemption is requested.
Any amounts paid on redemption representing interest shall
be withdrawn from the Interest Account of such Series to the
extent that funds are available for such purpose. All other
amounts paid on redemption shall be withdrawn from the Principal
Account of such Series. The Trustee is empowered to sell
Municipal Bonds from the portfolio of a Series in order to make
funds available for the redemption of Units of such Series. Such
sale may be required when Municipal Bonds would not otherwise be
sold and might result in lower prices than might otherwise be
realized. To the extent Municipal Bonds are sold, the size and
diversity of that Series of the Trust will be reduced.
The Trustee is irrevocably authorized in its discretion, if
an Underwriter does not elect to purchase any Units tendered for
redemption, in lieu of redeeming such Units, to sell such Units
in the over-the-counter market for the account of tendering
Unitholders at prices which will return to such Unitholders
amounts in cash, net after brokerage commissions, transfer taxes
and other charges, equal to or in excess of the Redemption Price
for such Units. In the event of any such sale, the Trustee shall
pay the net proceeds thereof to the Unitholders on the day they
would otherwise be entitled to receive payment of the Redemption
Price.
The right of redemption may be suspended and payment
postponed (1) for any period during which the New York Stock
Exchange is closed, other than customary weekend and holiday
closings, or during which (as determined by the Securities and
Exchange Commission) trading on the New York Stock Exchange is
restricted; (2) for any period during which an emergency exists
as a result of which disposal by the Trustee of Municipal Bonds
is not reasonably practicable or it is not reasonably practicable
to fairly determine the value of the underlying Municipal Bonds
in accordance with the Trust Agreements; or (3) for such other
period as the Securities and Exchange Commission may by order
permit. Because insurance obtained by certain Series of the
Trust terminates as to Bonds which are sold by the Trustee and
because the insurance obtained by such Series of the Trust does
not have a realizable cash value which can be used by the Trustee
to meet redemptions of Units, under certain circumstances the
Sponsor may apply to the Securities and Exchange Commission for
an order permitting a full or partial suspension of the right of
Unitholders to redeem their Units if a significant portion of the
Bonds in the portfolio is in default in payment of principal or
interest or in significant risk of such default. The Trustee is
not liable to any person or in any way for any loss or damage
which may result from any such suspension or postponement.
Computation of Redemption Price. The Redemption Price
for Units of each Series of the Trust is computed by the
Evaluator as of the evaluation time stated under "Essential
Information" in Part Two next occurring after the tendering of a
Unit for redemption and on any other business day desired by it,
by:
A. adding (1) the cash on hand in such Series of the
Trust other than cash depositor in the Trust Funds to
purchase Municipal Bonds not applied to the purchase of such
Bonds; (2) the aggregate value of the Municipal Bonds held
in such Series of the Trust, as determined by the Evaluator
on the basis of bid prices therefor; and (3) interest
accrued and unpaid on the Municipal Bonds in that Series of
the Trust as of the date of computation; and
B. deducting therefrom (1) amounts representing any
applicable taxes or governmental charges payable out of that
Series of the Trust and for which no deductions have been
previously made for the purpose of additions to the Reserve
Account described under "Expenses of the Trust"; (2) amounts
representing estimated accrued expenses of that Series of
the Trust including, but not limited to, fees and expenses
of the Trustee (including legal and auditing fees and
insurance costs), the Evaluator, the Sponsor and bond
counsel, if any; (3) cash held for distribution to
Unitholders of record as of the business day prior to the
evaluation being made; and (4) other liabilities incurred by
such Series of the Trust; and
C. finally, dividing the results of such computation
by the number of Units of such Series of the Trust
outstanding as of the date thereof.
UNITHOLDERS
Ownership of Units. Ownership of Units of a Trust will
not be evidenced by certificates unless a Unitholder, the
Unitholder's registered broker/dealer or the clearing agent makes
a written request to the Trustee. Units are transferable by
making a written request to the Trustee and, in the case of Units
evidenced by a certificate, by presenting and surrendering such
certificate to the Trustee properly endorsed or accompanied by a
written instrument or instruments of transfer which should be
sent registered or certified mail for the protection of the
Unitholder. Unitholders must sign such written request, and such
certificate or transfer instrument, exactly as their names appear
on the records of the Trustee and on any certificate representing
the Units to be transferred. Such signatures must be guaranteed
by a participant in the Securities Transfer Agents Medallion
Program ("STAMP") or such other signature guarantee program in
addition to, or in substitution for, STAMP, as may be accepted by
the Trustee.
Units may be purchased and certificates, if requested, will
be issued in denominations of one Unit or any multiple thereof
subject to any minimum investment requirement established by the
Sponsor from time to time. Any Certificate issued will be
numbered serially for identification, issued in fully registered
form and will be transferable only on the books of the Trustee.
The Trustee may require a Unitholder to pay a reasonable fee, to
be determined in the sole discretion of the Trustee, for each
certificate re-issued or transferred, and to pay any governmental
charge that may be imposed in connection with each such transfer
or interchange. The Trustee at the present time does not intend
to charge for the normal transfer or interchange of certificates.
Destroyed, stolen, mutilated or lost certificates will be
replaced upon delivery to the Trustee of satisfactory indemnity
(generally amounting to 3% of the market value of the Units),
affidavit of loss, evidence of ownership and payment of expenses
incurred.
DISTRIBUTIONS TO UNITHOLDERS.
Interest Distributions. Interest received by a Series
of the Trust, including any portion of the proceeds from a
disposition of Municipal Bonds which represents accrued interest,
is credited by the Trustee to the Interest Account for such
Series. All other receipts are credited by the Trustee to a
separate Principal Account for such Series. During each year the
distributions to the Unitholders of each Series of the Trust as
of each Record Date (see "Essential Information" in Part Two)
will be made on the following Distribution Date or shortly
thereafter and shall consist of an amount substantially equal to
one-twelfth, one-fourth or one-half (depending on the
distribution option selected except in Series of Kemper Defined
Funds in which case only monthly distributions are available) of
such Unitholders' pro rata share of the estimated net annual
interest income to the Interest Account for such Series of the
Trust. However, the interest to which Unitholders of a Series of
the Trust are entitled will at most times exceed the amount
available for distribution, there will almost always remain an
item of accrued interest that is added to the daily value of the
Units of such Series. If Unitholders of a Series sell or redeem
all or a portion of their Units they will be paid their
proportionate share of the accrued interest of such Series to,
but not including, the fifth business day after the date of sale
or to the date of tender in the case of a redemption.
Persons who purchase Units between a Record Date and a
Distribution Date will receive their first distribution on the
Second Distribution Date following the purchase of their Units.
Since interest on Municipal Bonds in each Series of the Trust is
payable at varying intervals, usually in semiannual installments,
and distributions of income are made to Unitholders of a Series
of the Trust at what may be different intervals from receipt of
interest, the interest accruing to such Series of the Trust may
not be equal to the amount of money received and available for
distribution from the Interest Account of such Series.
Therefore, on each Distribution Date the amount of interest
actually on deposit in the Interest Account and available for
distribution may be slightly more or less than the interest
distribution made. In order to eliminate fluctuations in
interest distributions resulting from such variances, the Trustee
is authorized by the Agreement to advance such amounts as may be
necessary to provide interest distributions of approximately
equal amounts. The Trustee will be reimbursed, without interest,
for any such advances from funds available in the Interest
Account of such Series.
Unitholders purchasing Units will initially receive
distributions in accordance with the election of the prior owner.
Unitholders desiring to change their distribution option, if
applicable, may do so by sending written notice to the Trustee,
together with their certificate (if one was issued).
Certificates should only be sent by registered or certified mail
to minimize the possibility of loss. If written notice and any
certificate are received by the Trustee not later than January 1
of a year, the change will become effective on January 2 for
distributions commencing with February 15 of that year. If
notice is not received by the Trustee, the Unitholder will be
deemed to have elected to continue with the same option for the
subsequent twelve months.
Principal Distributions. The Trustee will distribute
on each semi-annual Distribution Date (or in the case of Kemper
Defined Funds, on each Distribution Date) or shortly thereafter,
to each Unitholder of Record of the Trust on the preceding Record
Date, an amount substantially equal to such Unitholder's pro rata
share of the cash balance, if any, in the Principal Account of
such Trust computed as of the close of business on the preceding
Record Date. However, no distribution will be required if the
balance in the Principal Account is less than $1.00 per Unit (or
$.001 per Unit for certain Series). Except for Series of Kemper
Tax-Exempt Insured Income Trust, if such balance is between $5.00
and $10.00 per Unit, distributions will be made on each quarterly
Distribution Date and if such balance exceeds $10.00 per Unit,
such amounts will be distributed on the next monthly Distribution
Date.
Statement to Unitholders. With each distribution, the
Trustee will furnish or cause to be furnished each Unitholder a
statement of the amount of interest and the amount of other
receipts, if any, which are being distributed, expressed in each
case as a dollar amount per Unit.
The accounts of each Series of the Trust are required to be
audited annually, at the Series' expense, by independent auditors
designated by the Sponsor, unless the Trustee determines that
such an audit would not be in the best interest of the
Unitholders of such Series of the Trust. The accountants' report
will be furnished by the Trustee to any Unitholder of such Series
of the Trust upon written request.
Within a reasonable period of time after the end of each
calendar year, the Trustee shall furnish to each person who at
any time during the calendar year was a Unitholder of a Series of
the Trust a statement covering the calendar year, setting forth:
A. As to the Interest Account:
1. The amount of interest received on the
Municipal Bonds in such Series and the percentage of
such amount by states and territories in which the
issuers of such Municipal Bonds are located;
2. The amount paid from the Interest Account of
such Series representing accrued interest of any Units
redeemed;
3. The deductions from the Interest Account of
such Series for applicable taxes, if any, fees and
expenses (including insurance costs and auditing fees)
of the Trustee, the Evaluator, the Sponsor and bond
counsel, if any;
4. Any amounts credited by the Trustee to a
Reserve Account for such Series described under
"Expenses of the Trust"; and
5. The net amount remaining after such payments
and deductions, expressed both as a total dollar amount
and a dollar amount per Unit outstanding on the last
business day of such calendar year.
B. As to the Principal Account:
1. The dates of the maturity, liquidation or
redemption of any of the Municipal Bonds in such Series
and the net proceeds received therefrom excluding any
portion credited to the Interest Account;
2. The amount paid from the Principal Account of
such Series representing the principal of any Units
redeemed;
3. The deductions from the Principal Account of
such Series for payment of applicable taxes, if any,
fees and expenses (including insurance costs and
auditing expenses) of the Trustee, the Evaluator, the
Sponsor and of bond counsel, if any;
4. Any amounts credited by the Trustee to a
Reserve Account for such Series described under
"Expenses of the Trust"; and
5. The net amount remaining after distributions
of principal and deductions, expressed both as a dollar
amount and as a dollar amount per Unit outstanding on
the last business day of such calendar year.
C. The following information:
1. A list of the Municipal Bonds in such Series
as of the last business day of such calendar year;
2. The number of Units of such
Series
outstanding on the last business day of such calendar
year;
3. The Redemption Price of such Series based on
the last Trust Evaluation made during such calendar
year; and
4. The amount actually distributed during such
calendar year from the Interest and Principal Accounts
of such Series separately stated, expressed both as
total dollar amounts and as dollar amounts per Unit of
such Series outstanding on the Record Date for each
such distribution.
Rights of Unitholders. A Unitholder may at any time
tender Units to the Trustee for redemption. No Unitholder of a
Series shall have the right to control the operation and
management of such Series or of the Trust in any manner, except
to vote with respect to amendment of the Trust Agreements or
termination of such Series of the Trust. The death or incapacity
of any Unitholder will not operate to terminate the Series or the
Trust nor entitle legal representatives or heirs to claim an
accounting or to bring any action or proceeding in any court for
partition or winding up of such Series or the Trust.
INVESTMENT SUPERVISION
The Sponsor may not alter the portfolio of the Trust by the
purchase, sale or substitution of Municipal Bonds, except in the
special circumstances noted below. Thus, with the exception of
the redemption or maturity of Municipal Bonds in accordance with
their terms, and/or the sale of Municipal Bonds to meet
redemption requests, the assets of the Trust will remain
unchanged under normal circumstances.
The Sponsor may direct the Trustee to dispose of Municipal
Bonds the value of which has been affected by certain adverse
events, including institution of certain legal proceedings, a
decline in their price or the occurrence of other market factors,
including advance refunding, so that in the opinion of the
Sponsor the retention of such Municipal Bonds in a Series of the
Trust would be detrimental to the interest of the Unitholders of
such Series. The proceeds from any such sales, exclusive of any
portion which represents accrued interest, will be credited to
the Principal Account for distribution to the Unitholders.
The portfolio insurance obtained by the Trust from AMBAC
Indemnity for Series A through A-24 of the Kemper Tax-Exempt
Insured Income Trust is applicable only while the Municipal Bonds
remain in the portfolio of a Series of the Trust. Consequently,
the price received by such Series of the Trust upon the
disposition of any such Municipal Bond will reflect a value
placed upon it by the market as an uninsured obligation rather
than a value resulting from the insurance. Due to this fact, the
Sponsor will not direct the Trustee to dispose of Municipal Bonds
in Series A through A-24 of the Kemper Tax-Exempt Insured Income
Trust which are in default or imminent danger of default but to
retain such Municipal Bonds in the portfolio so that if a default
in the payment of interest or principal occurs, the Trust may
realize the benefits of the insurance.
Pursuant to an irrevocable commitment of Financial Guaranty,
the Trustee, at the time of the sale of a Municipal Bond covered
under the Trust's insurance policy with respect to Series A-25
and subsequent Series of the Kemper Tax-Exempt Insured Income
Trust, has the right to obtain permanent insurance with respect
to such Municipal Bond (i.e., insurance to maturity of the
Municipal Bond regardless of the identity of the holder thereof)
(the "Permanent Insurance") upon the payment of a single
predetermined insurance premium from the proceeds of the sale of
such Municipal Bond. Accordingly, every Municipal Bond in such
Series of the Trust is eligible to be sold on an insured basis.
It is expected that the Trustee will exercise the right to obtain
Permanent Insurance for Municipal Bonds in Series A-25 and
subsequent Series of the Kemper Tax-Exempt Insured Income Trust
only if upon such exercise a Series of the Trust would receive
net proceeds (i.e., the value of such Municipal Bond if sold as
an insured bond less the insurance premium attributable to the
Permanent Insurance) from such sale in excess of the sale
proceeds if such Municipal Bond were sold on an uninsured basis.
The insurance premium with respect to each Municipal Bond in such
Series is determined based upon the insurability of each
Municipal Bond as of the initial Date of Deposit and will not be
increased or decreased for any change in the creditworthiness of
such Municipal Bond's issuer.
The Trustee is permitted to utilize the option to obtain
Permanent Insurance available on Series A-25 and subsequent
Series of the Kemper Tax-Exempt Insured Income Trust only in
circumstances where the value added to the Municipal Bonds
exceeds the costs of acquiring such Permanent Insurance. Unless
such Permanent Insurance may be obtained at an acceptable price,
the Sponsor will not direct the Trustee to dispose of Municipal
Bonds which are in default or imminent danger of default but to
retain such Municipal Bonds in the portfolio so that the Trust
may realize the benefits of the insurance on the portfolio.
The Sponsor is required to instruct the Trustee to reject
any offer made by an issuer of Municipal Bonds to issue new
obligations in exchange or substitution for any of such Municipal
Bonds pursuant to a refunding financing plan except that the
Sponsor may instruct the Trustee to accept or reject such an
offer or to take any other action with respect thereto as the
Sponsor may deem proper if (1) the issuer is in default with
respect to such Bonds or (2) in the written opinion of the
Sponsor the issuer will probably default with respect to such
Bonds in the reasonably foreseeable future. Any obligation so
received in exchange or substitution will be held by the Trustee
subject to the terms and conditions of the Trust Agreement to the
same extent as Bonds originally deposited thereunder. Within
five days after the deposit of obligations in exchange or
substitution for underlying Bonds, the Trustee is required to
give notice thereof to each Unitholder, identifying the Bonds
eliminated and the Bonds substituted therefor.
The Trustee may sell Municipal Bonds designated by the
Sponsor from a Series of the Trust for the purpose of redeeming
Units of such Series tendered for redemption and the payment of
expenses. See "Redemption."
ADMINISTRATION OF THE TRUST
The Trustee. The Trustee, Investors Fiduciary
Company, is a trust company specializing in investment related
services, organized and existing under the laws of Missouri,
having its trust office at 127 West 10th Street, Kansas City,
Missouri 64105. The Trustee is subject to supervision and
examination by the Division of Finance of the State of Missouri
and the Federal Deposit Insurance Corporation. Investors
Fiduciary Trust Company is owned by State Street Boston
Corporation.
The Trustee, whose duties are ministerial in nature, has not
participated in selecting the portfolio of any Series of the
Trust. For information relating to the responsibilities of the
Trustee under the Agreement, reference is made to the material
set forth under "Unitholders."
In accordance with the Trust Agreements, the Trustee shall
keep records of all transactions at its office. Such records
shall include the name and address of, and the number of Units
held by, every Unitholder of each Series. The books and records
with respect to a Series of the Trust shall be open to inspection
by any Unitholder of such Series at all reasonable times during
the usual business hours. The Trustee shall make such annual or
other reports as may from time to time be required under any
applicable state or Federal statute, rule or regulation. The
Trustee shall keep a certified copy or duplicate original of the
Trust Agreements on file in its office available for inspection
at all reasonable times during usual business hours by any
Unitholder, together with a current list of the Municipal Bonds
held in each Series of the Trust. Pursuant to the Trust
Agreements, the Trustee may employ one or more agents for the
purpose of custody and safeguarding of Municipal Bonds comprising
the portfolios.
Under the Trust Agreements, the Trustee or any successor
trustee may resign and be discharged of its duties created by the
Trust Agreements by executing an instrument in writing and filing
the same with the Sponsor.
The Trustee or successor trustee must mail a copy of the
notice of resignation to all Unitholders then of record, not less
than sixty days before the date specified in such notice when
such resignation is to take effect. The Sponsor upon receiving
notice of such resignation is obligated to appoint a successor
trustee promptly. If, upon such resignation, no successor
trustee has been appointed and has accepted the appointment
within thirty days after notification, the retiring Trustee may
apply to a court of competent jurisdiction for the appointment of
a successor. The Sponsor may at any time remove the Trustee with
or without cause and appoint a successor trustee as provided in
the Trust Agreements. Notice of such removal and appointment
shall be mailed to each Unitholder by the Sponsor. Upon
execution of a written acceptance of such appointment by a
successor trustee, all the rights, powers, duties and obligations
of the original Trustee shall vest in the successor. The Trustee
shall be a corporation organized under the laws of the United
States or any state thereof, which is authorized under such laws
to exercise trust powers. The Trustee shall have at all times an
aggregate capital, surplus and undivided profits of not less than
$5,000,000.
The Evaluator. Kemper Unit Investment Trusts, a
service of Kemper Securities, Inc., the Sponsor, also serves as
Evaluator. The Evaluator may resign or be removed by the
Trustee, in which event the Trustee is to use its best efforts
to appoint a satisfactory successor. Such resignation or removal
shall become effective upon acceptance of appointment by the
successor evaluator. If, upon resignation of the Evaluator, no
successor has accepted appointment within thirty days after
notice of resignation, the Evaluator may apply to a court of
competent jurisdiction for the appointment of a successor.
Notice of such resignation or removal and appointment shall be
mailed by the Trustee to each Unitholder. At the present time,
pursuant to a contract with the Evaluator, Muller Data
Corporation, a non-affiliated firm regularly engaged in the
business of evaluating, quoting or appraising comparable
securities, provides portfolio evaluations of the Municipal Bonds
in the Trust which are then reviewed by the Evaluator. In the
event the Sponsor is unable to obtain current evaluations from
Muller Data Corporation, it may make its own evaluations or it
may utilize the services of any other non-affiliated evaluator or
evaluators it deems appropriate.
Amendment and Termination. The Trust Agreements may be
amended by the Trustee and the Sponsor without the consent of any
of the Unitholders: (1) to cure any ambiguity or to correct or
supplement any provision which may be defective or inconsistent;
(2) to change any provision thereof as may be required by the
Securities and Exchange Commission or any successor governmental
agency; or (3) to make such provisions as shall not adversely
affect the interests of the Unitholders. The Trust Agreements
may also be amended in any respect by the Sponsor and the
Trustee, or any of the provisions thereof may be waived, with the
consent of the holders of Units representing 66-2/3% of the Units
then outstanding, provided that no such amendment or waiver will
reduce the interest in a Series of the Trust of any Unitholder
without the consent of such Unitholder or reduce the percentage
of Units required to consent to any such amendment or waiver
without the consent of all Unitholders. In no event shall the
Trust Agreements be amended to increase the number of Units
issuable thereunder or to permit, except in accordance with the
provisions of the Trust Agreements, the acquisition of any
Municipal Bonds in addition to or in substitution for those in
the Trust. The Trustee shall promptly notify Unitholders of the
substance of any such amendment.
The Trust Agreements provide that a Series of the Trust
shall terminate upon the maturity, redemption or other
disposition, of the last of the Municipal Bonds held in such
Series. If the value of a Series of the Trust shall be less than
the applicable minimum Trust value stated under "Essential
Information" in Part Two the Trustee may, in its discretion, and
shall, when so directed by the Sponsor, terminate such Series of
the Trust. A Series of the Trust may be terminated at any time
by the holders of Units representing 66-2/3% of the Units of such
Series then outstanding. In the event of termination, written
notice thereof will be sent by the Trustee to all Unitholders of
such Series. Within a reasonable period after termination, the
Trustee will sell any Municipal Bonds remaining in such Series of
the Trust and, after paying all expenses and charges incurred by
such Series of the Trust, will distribute to Unitholders of such
Series (upon surrender for cancellation of certificates for
Units, if issued) their pro rata share of the balances remaining
in the Interest and Principal Accounts of such Series.
Notwithstanding the foregoing, in connection with final
distributions to Unitholders, it should be noted that because the
portfolio insurance obtained by Series A through A-24 of the
Kemper Tax-Exempt Insured Income Trust is applicable only while
Bonds so insured are held by such Series of the Trust, the price
to be received by such Series of the Trust upon the disposition
of any such Bond which is in default by reason of nonpayment of
principal or interest, will not reflect any value based on such
insurance. Therefore, in connection with any liquidation of such
Series it shall not be necessary for the Trustee to, and the
Trustee does not currently intend to, dispose of any Bond or
Bonds if retention of such Bond or Bonds, until due, shall be
deemed to be in the best interest of Unitholders, including, but
not limited to situations in which a Bond or Bonds so insured are
in default and situations in which a Bond or Bonds so insured
have a deteriorated market price resulting from a significant
risk of default. All proceeds received, less applicable
expenses, from insurance on defaulted Bonds not disposed of at
the date of termination will ultimately be distributed to
Unitholders of record as of such date of termination as soon as
practicable after the date such defaulted Bond or Bonds become
due and applicable insurance proceeds have been received by the
Trustee.
Limitations on Liability.
The Sponsor;. The Sponsor is liable for the performance
of its obligations arising from its responsibilities under the
Trust Agreements, but will be under no liability to the
Unitholders for taking any action or refraining from any action
in good faith pursuant to the Trust Agreements or for errors in
judgment, except in cases of its own gross negligence, bad faith
or willful misconduct. The Sponsor shall not be liable or
responsible in any way for depreciation or loss incurred by
reason of the sale of any Municipal Bonds.
The Trustee. The Trust Agreements provide that the
Trustee shall be under no liability for any action taken in good
faith in reliance upon prima facie properly executed documents or
for the disposition of monies, Municipal Bonds, or certificates
except by reason of its own gross negligence, bad faith or
willful misconduct, nor shall the Trustee be liable or
responsible in any way for depreciation or loss incurred by
reason of the sale by the Trustee of any Municipal Bonds. In the
event that the Sponsor shall fail to act, the Trustee may act and
shall not be liable for any such action taken by it in good
faith. The Trustee shall not be personally liable for any taxes
or other governmental charges imposed upon or in respect of the
Municipal Bonds or upon the interest thereon. In addition, the
Trust Agreements contain other customary provisions limiting the
liability of the Trustee.
The Evaluator. The Trustee and Unitholders may rely on
any evaluation furnished by the Evaluator and shall have no
responsibility for the accuracy thereof. The Trust Agreements
provide that the determinations made by the Evaluator shall be
made in good faith upon the basis of the best information
available to it, provided, however, that the Evaluator shall be
under no liability to the Trustee or Unitholders for errors in
judgment, but shall be liable only for its gross negligence, lack
of good faith or willful misconduct.
EXPENSES OF THE TRUST
The Sponsor will charge each Series a surveillance fee for
services performed for such Series in an amount not to exceed
that amount set forth in "Essential Information" in Part Two but
in no event will such compensation, when combined with all
compensation received from other unit investment trusts for which
the Sponsor both acts as sponsor and provides portfolio
surveillance, exceed the aggregate cost to the Sponsor for
providing such services. Such fee shall be based on the total
number of Units of each Series outstanding as of the January
Record Date for any annual period. The Sponsor paid all the
expenses of creating and establishing the Trust, including the
cost of the initial preparation, printing and execution of the
Prospectus, Agreement and the certificates, legal and accounting
expenses, advertising and selling expenses, payment of closing
fees, expenses of the Trustee, initial evaluation fees and other
out-of-pocket expenses.
The Trustee receives for its services a fee calculated on
the basis of the annual rate set forth under "Essential
Information" in Part Two, based on the largest aggregate
principal amount of Municipal Bonds in such Series at any time
during the monthly, quarterly or semi-annual period, as
appropriate. Funds that are available for future distributions,
redemptions and payment of expenses are held in accounts which
are non-interest bearing to Unitholders and are available for use
by the Trustee pursuant to normal banking procedures; however,
the Trustee is also authorized by the Trust Agreements to make
from time to time certain non-interest bearing advances to the
Trust Funds. The Trustee also receives indirect benefits to the
extent that it holds funds on deposit in the various non-interest
bearing accounts created pursuant to the Agreement; however, the
Trustee is also authorized by the Agreement to make from time to
time certain non-interest bearing advances to the Trust. See
"Unitholders_Distributions to Unitholders."
For evaluation of Municipal Bonds in a Series of the Trust,
the Evaluator receives a fee, payable monthly, calculated on the
basis of an annual rate as set forth under "Essential
Information" in Part Two, based upon the largest aggregate
principal amount of Municipal Bonds in such Series of the Trust
at any time during such monthly period.
The Trustee's and Evaluator's fees are payable monthly on or
before each Distribution Date by deductions from the Interest
Account of each Series to the extent funds are available and then
from the Principal Account of such Series. Such fees may be
increased without approval of Unitholders by amounts not
exceeding a proportionate increase in the Consumer Price Index
entitled "All Services Less Rent of Shelter," published by the
United States Department of Labor, or any equivalent index
substituted therefor.
The following additional charges are or may be incurred by a
Series of the Trust: (a) fees for the Trustee's extraordinary
services; (b) expenses of the Trustee (including legal and
auditing expenses and insurance costs, but not including any fees
and expenses charged by any agent for custody and safeguarding of
Municipal Bonds) and of bond counsel, if any; (c) various
governmental charges; (d) expenses and costs of any action taken
by the Trustee to protect the Trust or such Series, or the rights
and interests of the Unitholders; (e) indemnification of the
Trustee for any loss, liability or expense incurred by it in the
administration of such Series of the Trust without gross
negligence, bad faith or willful misconduct on its part;
(f) indemnification of the Sponsor for any loss, liability or
expense incurred in acting in that capacity without gross
negligence, bad faith or willful misconduct; and (g) expenditures
incurred in contacting Unitholders upon termination of the
Series. The fees and expenses set forth herein are payable out
of such Series of the Trust and, when owed to the Trustee, are
secured by a lien on the assets of the Series of the Trust. Fees
or charges relating to the Trust shall be allocated to each Trust
Fund in the same ratio as the principal amount of such Trust Fund
bears to the total principal amount of all Trust Funds in the
Trust. Fees or charges relating solely to a particular Trust
Fund shall be charged only to such Trust Fund.
Fees and expenses of a Series of the Trust shall be deducted
from the Interest Account of such Series, or, to the extent funds
are not available in such Account, from the Principal Account of
such Series. The Trustee may withdraw from the Principal Account
or the Interest Account of such Series such amounts, if any, as
it deems necessary to establish a reserve for any taxes or other
governmental charges or other extraordinary expenses payable out
of that Series of the Trust. Amounts so withdrawn shall be
credited to a separate account maintained for such Series known
as the Reserve Account and shall not be considered a part of such
Series when determining the value of the Units of such Series
until such time as the Trustee shall return all or any part of
such amounts to the appropriate account.
THE SPONSOR
The Sponsor, Kemper Unit Investment Trusts, with an office
at 77 West Wacker Drive, 29th Floor, Chicago, Illinois 60601,
(800) 621-5024, is a service of Kemper Securities, Inc., which is
a wholly-owned subsidiary of Kemper Financial Companies, Inc.,
which, in turn, is a wholly-owned subsidiary of Kemper
Corporation. The Sponsor acts as underwriter of a number of
other Kemper unit investment trusts and will act as underwriter
of any other unit investment trust created by the Sponsor in the
future. As of January 31, 1994, the total stockholder's equity
of Kemper Securities, Inc. was approximately $261,673,436
(unaudited).
If at any time the Sponsor shall of fail to perform any of
its duties under the Agreement or shall become incapable of
acting or shall be adjudged a bankrupt or insolvent or its
affairs are taken over by public authorities, then the Trustee
may (a) appoint a successor sponsor at rates of compensation
deemed by the Trustee to be reasonable and not exceeding such
reasonable amounts as may be prescribed by the Securities and
Exchange Commission, or (b) terminate the Agreement and liquidate
the Trust or any Series thereof as provided therein or
(c) continue to act as Trustee without terminating the Agreement.
The foregoing financial information with regard to the
Sponsor relates to the Sponsor only and not to this Trust or any
Series. Such information is included in this Prospectus only for
the purposes of informing investors as to the financial
responsibility of the Sponsor and its ability to carry out its
contractual obligations with respect to the Series of the Trust.
More comprehensive financial information can be obtained upon
request from the Sponsor.
LEGAL OPINIONS
The legality of the Units offered hereby and certain matters
relating to Federal tax law were originally passed upon by
Chapman and Cutler, 111 West Monroe Street, Chicago, Illinois
60603, as counsel for the Sponsor.
INDEPENDENT AUDITORS
The statement of net assets, including the schedule of
investments, appearing in Part Two of this Prospectus and
Registration Statement, with information pertaining to the
specific Series of the Trust to which such statement relates, has
been audited by Ernst & Young LLP, independent auditors, as set
forth in their report appearing in Part Two and is included in
reliance upon such report given upon the authority of such firm
as experts in accounting and auditing.
DESCRIPTION OF MUNICIPAL BOND RATINGS*
Standard & Poor's Ratings Group _ A brief description of the
applicable Standard & Poor's Ratings Group ("Standard & Poor's")
rating symbols and their meanings follows:
A Standard & Poor's corporate or municipal bond rating is a
current assessment of the creditworthiness of an obligor with
respect to a specific debt obligation. This assessment may take
into consideration obligors such as guarantors, insurers, or
lessees.
The bond rating is not a recommendation to purchase, sell or
hold a security, inasmuch as it does not comment as to market
price or suitability for a particular investor.
The ratings are based on current information furnished by
the issuer and obtained by Standard & Poor's from other sources
it considers reliable. Standard & Poor's does not perform an
audit in connection with any rating and may, on occasion, rely on
unaudited financial information. The ratings may be changed,
suspended, or withdrawn as a result of changes in, or
unavailability of, such information, or for other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
I. Likelihood of default _ capacity and willingness
of the obligor as to the timely payment of interest and
repayment of principal in accordance with the terms of the
obligation;
II. Nature of and provisions of the obligation;
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.
AAA _ Bonds rated AAA have the highest rating assigned by
Standard & Poor's to a debt obligation. Capacity to pay interest
and repay principal is extremely strong.
AA _ Bonds rated AA have a very strong capacity to pay
interest and repay principal and differ from the highest rated
issues only in small degree.
A _ Bonds rated A have a strong capacity to pay interest and
repay principal although they are somewhat more susceptible to
the adverse effects of changes in circumstances and economic
conditions than bonds in higher rated categories.
BBB _ Bonds rated BBB are regarded as having an adequate
capacity to pay interest and repay principal. Whereas they
normally exhibit adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead to a
weakened capacity to pay interest and repay principal for bonds
in this category than for bonds in higher rated categories.
Plus (+) or Minus (-): The ratings from "AA" to "A" may be
modified by the addition of a plus or minus sign to show relative
standing within the major rating categories.
Provisional Ratings: The letter "p" indicates the rating is
provisional. A provisional rating assumes the successful
completion of the project being financed by the bonds being rated
and indicates that payment of debt service requirements is
largely or entirely dependent upon the successful and timely
completion of the project. This rating, however, while
addressing credit quality subsequent to completion of the
project, makes no comment on the likelihood of, or the risk of
default upon failure of, such completion. The investor should
exercise his own judgment with respect to such likelihood and
risk.
Moody's Investors Service, Inc. _ A brief description of the
applicable Moody's Investors Service, Inc. rating symbols and
their meanings follow:
Aaa _ Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and
are generally referred to as "gilt edge." Interest payments are
protected by a large or by an exceptionally stable margin and
principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of such
issues. Their safety is so absolute that with the occasional
exception of oversupply in a few specific instances,
characteristically, their market value is affected solely by
money market fluctuations.
Aa _ Bonds which are rated Aa are judged to be of high
quality by all standards. Together with the Aaa group they
comprise what are generally known as high grade bonds. They are
rated lower than the best bonds because margins of protection may
not be as large as in Aaa securities or fluctuations of
protective elements may be of greater amplitude or there may be
other elements present which make the long term risks appear
somewhat larger than in Aaa securities. Their market value is
virtually immune to all but money market influences, with the
occasional exception of oversupply in a few specific instances.
A _ Bonds which are rated A possess many favorable
investment attributes and are to be considered as upper medium
grade obligations. Factors giving security to principal and
interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the
future. The market value of A-rated bonds may be influenced to
some degree by economic performance during a sustained period of
depressed business conditions, but, during periods of normalcy,
A-rated bonds frequently move in parallel with Aaa and Aa
obligations, with the occasional exception of oversupply in a few
specific instances.
A1 _ Bonds which are rated A1 offer the maximum in security
within their quality group, can be bought for possible upgrading
in quality, and additionally, afford the investor an opportunity
to gauge more precisely the relative attractiveness of offerings
in the market place.
Baa _ Bonds which are rated Baa are considered as lower
medium grade obligations, i.e., they are neither highly protected
nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements
may be lacking or may be characteristically unreliable over any
great length of time. Such bonds lack outstanding investment
characteristics and, in fact, have speculative characteristics as
well. The market value of Baa-rated bonds is more sensitive to
changes in economic circumstances and, aside from occasional
speculative factors applying to some bonds of this class, Baa
market valuations move in parallel with Aaa, Aa and A obligations
during periods of economic normalcy, except in instances of
oversupply.
Conditional Ratings: Bonds rated "Con(-)" are ones for
which the security depends upon the completion of some act or the
fulfillment of some condition. These are bonds secured by
(a) earnings of projects under construction, (b) earnings of
projects unseasoned in operation experience, (c) rentals which
begin when facilities are completed, or (d) payments to which
some other limiting condition attaches. Parenthetical rating
denotes probable credit stature upon completion of construction
or elimination of basis of condition.
Note: Moody's applies numerical modifiers, 1, 2, and 3 in
each generic rating classification from Aa through B in certain
areas of its bond rating system. The modifier 1 indicates that
the security ranks in the higher end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates that the issue ranks in the lower end of its
generic rating category.
<PAGE>
Kemper Tax-Exempt Insured Income Trust
Series A-59
Part Two
Dated September 28, 1995
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY
IS A CRIMINAL OFFENSE.
NOTE: Part Two of this Prospectus May Not Be Distributed unless
Accompanied by
Part One.
<PAGE>
Kemper Tax-Exempt Insured Income Trust
Series A-59
Essential Information
As of August 15, 1995
Sponsor and Evaluator: Kemper Unit Investment
Trusts
Trustee: Investors Fiduciary Trust
Company
<TABLE>
<CAPTION>
General Information
<S>
<C>
Principal Amount of Municipal Bonds
$11,300,000
Number of Units
22,567
Fractional Undivided Interest in the Trust per Unit
1/22,567
Principal Amount of Municipal Bonds per Unit
$500.73
Public Offering Price:
Aggregate Bid Price of Municipal Bonds in the Portfolio
$10,519,231
Aggregate Bid Price of Municipal Bonds per Unit
$466.13
Cash per Unit (1)
$-
Sales Charge 3.627% (3.5% of Public Offering Price)
$16.91
Public Offering Price per Unit (exclusive of accrued
interest) (2)
$483.04
Redemption Price per Unit (exclusive of accrued interest)
$466.13
Excess of Public Offering Price per Unit Over Redemption
Price per Unit
$16.91
Minimum Value of the Trust under which Trust Agreement
may be terminated
$4,119,000
</TABLE>
Date of Trust
June 15, 1989
Mandatory Termination Date
December 31, 2039
Annual Evaluation Fee: $.30 per $1,000 principal amount of
Municipal Bonds.
Evaluations for purpose of sale, purchase or redemption of Units
are made as
of the close of business of the Sponsor next following receipt of
an order for
a sale or purchase of Units or receipt by Investors Fiduciary
Trust Company of
Units tendered for redemption.
[FN]
1. This amount, if any, represents principal cash or overdraft
which is an
asset or liability of the Trust and is included in the Public
Offering Price.
2. Units are offered at the Public Offering Price plus accrued
interest to
the date of settlement (three business days after purchase). On
August 15,
1995, there was added to the Public Offering Price of $483.04,
accrued
interest to the settlement date of August 18, 1995 of $9.09,
$11.99 and $12.06
for a total price of $492.13, $495.03 and $495.10 for the
monthly, quarterly
and semiannual distribution options, respectively.
<PAGE>
Kemper Tax-Exempt Insured Income Trust
Series A-59
Essential Information (continued)
As of August 15, 1995
Sponsor and Evaluator: Kemper Unit Investment
Trusts(4)
Trustee: Investors Fiduciary Trust
Company
<TABLE>
<CAPTION>
Special Information Based on Various Distribution Options
Monthly Quarterly
Semiannual
<S> <C> <C>
<C>
-------- --------
--------
Calculation of Estimated Net Annual
Interest Income per Unit (3):
Estimated Annual Interest Income $35.0540 $35.0540
$35.0540
Less: Estimated Annual Expense 1.0515 .8752
.6961
-------- --------
--------
Estimated Net Annual Interest Income $34.0025 $34.1788
$34.3579
======== ========
========
Calculation of Interest Distribution
per Unit:
Estimated Net Annual Interest Income $34.0025 $34.1788
$34.3579
Divided by 12, 4 and 2, respectively $2.8335 $8.5447
$17.1790
Estimated Daily Rate of Net Interest
Accrual per Unit $.0945 $.0949
$.0954
Estimated Current Return Based on Public
Offering Price (3) 7.04% 7.08%
7.11%
Estimated Long-Term Return (3) 6.27% 6.31%
6.34%
</TABLE>
Trustee's Annual Fees and Expenses (including Evaluator's Fee):
$1.0515,
$.8752 and $.6961 ($.3619, $.3261 and $.3130 of which represent
expenses) per
Unit under the monthly, quarterly and semiannual distribution
options,
respectively.
Record and Computation Dates: First day of the month, as
follows: monthly -
each month; quarterly - January, April, July and October;
semiannual - January
and July.
Distribution Dates: Fifteenth day of the month, as follows:
monthly - each
month; quarterly - January, April, July and October; semiannual -
January and
July.
[FN]
3. The Estimated Long-Term Return and Estimated Current Return
will vary.
For detailed explanation, see Part One of this prospectus.
4. See Note 6 to the accompanying financial statements of the
Trust regarding
a change in ownership of Kemper Unit Investment Trusts and Kemper
Securities,
Inc.
<PAGE>
Report of Independent Auditors
Unitholders
Kemper Tax-Exempt Insured Income Trust
Series A-59
We have audited the accompanying statement of assets and
liabilities of Kemper
Tax-Exempt Insured Income Trust Series A-59, including the
schedule of
investments, as of May 31, 1995, and the related statements of
operations and
changes in net assets for each of the three years in the period
then ended.
These financial statements are the responsibility of the Trust's
sponsor. Our
responsibility is to express an opinion on these financial
statements based on
our audits.
We conducted our audits in accordance with generally accepted
auditing
standards. Those standards require that we plan and perform the
audit to
obtain reasonable assurance about whether the financial
statements are free of
material misstatement. An audit includes examining, on a test
basis, evidence
supporting the amounts and disclosures in the financial
statements. Our
procedures included confirmation of investments owned as of May
31, 1995, by
correspondence with the custodial bank. An audit also includes
assessing the
accounting principles used and significant estimates made by the
sponsor, as
well as evaluating the overall financial statement presentation.
We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in
all material respects, the financial position of Kemper
Tax-Exempt Insured
Income Trust Series A-59 at May 31, 1995, and the results of its
operations
and the changes in its net assets for the periods indicated above
in
conformity with generally accepted accounting principles.
Ernst & Young LLP
Kansas City, Missouri
September 14, 1995, except for Note 6, as
to which the date is September 26, 1995
<PAGE>
Kemper Tax-Exempt Insured Income Trust
Series A-59
Statement of Assets and Liabilities
May 31, 1995
<TABLE>
<CAPTION>
<S> <C>
<C>
Assets
Municipal Bonds, at value (cost $10,777,667)
$10,574,376
Interest receivable
205,969
Cash
86,935
- -----------
10,867,280
Liabilities and net assets
Accrued liabilities
2,321
Net assets, applicable to 22,567 Units outstanding:
Cost of Trust assets, exclusive of interest $10,777,667
Unrealized depreciation (203,291)
Distributable funds 290,583
-----------
- -----------
Net assets
$10,864,959
===========
</TABLE>
[FN]
See accompanying notes to financial statements.
<PAGE>
Kemper Tax-Exempt Insured Income Trust
Series A-59
Statements of Operations
<TABLE>
<CAPTION>
Year ended
May 31
1995 1994
1993
<S> <C> <C>
<C>
----------- -----------
- ----------
Investment income - interest $1,275,234 $1,756,394
$1,756,394
Expenses:
Trustee's fees and related expenses 23,895 26,846
26,829
Evaluator's fees 5,016 6,175
6,175
----------- -----------
- ----------
Total expenses 28,911 33,021
33,004
----------- -----------
- ----------
Net investment income 1,246,323 1,723,373
1,723,390
Realized and unrealized gain (loss)
on investments:
Realized loss (1,467,945) -
-
Unrealized appreciation
(depreciation) during the year 845,445 (1,150,755)
130,081
----------- -----------
- ----------
Net gain (loss) on investments (622,500) (1,150,755)
130,081
----------- -----------
- ----------
Net increase in net assets resulting
from operations $623,823 $572,618
$1,853,471
=========== ===========
==========
</TABLE>
[FN]
See accompanying notes to financial statements.
<PAGE>
Kemper Tax-Exempt Insured Income Trust
Series A-59
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Year ended
May 31
1995 1994
1993
<S> <C> <C>
<C>
------------ -----------
- -----------
Operations:
Net investment income $1,246,323 $1,723,373
$1,723,390
Realized loss on investments (1,467,945) -
-
Unrealized appreciation
(depreciation) on investments
during the year 845,445 (1,150,755)
130,081
------------ -----------
- -----------
Net increase in net assets resulting
from operations 623,823 572,618
1,853,471
Distributions to Unitholders:
Net investment income (1,453,765) (1,724,729)
(1,715,184)
Principal from investment
transactions (9,309,982) -
-
Capital transactions:
Redemption of Units (201,080) -
-
------------ -----------
- -----------
Total increase (decrease) in net
assets (10,341,004) (1,152,111)
138,287
Net assets:
At the beginning of the year 21,205,963 22,358,074
22,219,787
------------ -----------
- -----------
At the end of the year (including
distributable funds applicable to
Trust Units of $290,583, $508,096
and $509,452 at May 31, 1995,
1994 and 1993, respectively) $10,864,959 $21,205,963
$22,358,074
============ ===========
===========
Trust Units outstanding at the end
of the year 22,567 22,880
22,880
============ ===========
===========
</TABLE>
[FN]
See accompanying notes to financial statements.
<PAGE>
<TABLE>
Kemper Tax-Exempt
Insured Income Trust
Series
A-59
Schedule of
Investments
May 31,
1995
<CAPTION>
Coupon
Maturity Redemption Principal
Name of Issuer and Title of Bond(5)(6) Rate
Date Provisions(2) Rating(1) Amount(4) Value(3)
<S> <C> <C>
<C> <C> <C> <C>
-------
- ---------- -------------- --------- ----------- -----------
+Colorado Health Facilities Authority, Revenue 9.40%
11/01/2008 1997 @ 100 AAA $500,000 $534,140
Refunding Bonds, Rose Medical Center Project,
Series 1985. Insured by Municipal Bond Investors
Assurance Corporation (MBIA).
Colorado Health Facilities Authority Revenue Bonds, 9.00
8/01/2003 2000 @ 100 S.F. AAA 1,000,000 985,360
Kaiser Permanente Medical Care Program, Series
1995 @ 102
1985 A. Insured by MBIA.
Dallas-Fort Worth, Texas, Regional Airport Authority 9.125
11/01/2015 2006 @ 100 S.F. AAA 1,000,000 1,001,580
Revenue Bonds, Dallas-Fort Worth International
1995 @ 102.5
Airport. Insured by Bond Investors Guaranty
Insurance Company (BIG).
+District of Columbia, General Obligation Refunding 6.25
6/01/2007 1996 @ 100 AAA 925,000 943,417
Bonds, Series 1986D. Insured by BIG.
+City of Farmington, New Mexico, Utility System 9.75
5/15/2013 1996 @ 102 AAA 2,000,000 2,139,500
Revenue Bonds, Series 1985. Insured by
Financial Guaranty Insurance Company.
Georgia Municipal Electric Authority, Power 0.00
1/01/2012 Non-Callable AAA 570,000 206,158
Refunding Bonds, Series 1988Q. Insured by
BIG. (7)
+Harris County, Texas, Hospital District, Mortgage 8.50
4/01/2015 1996 @ 102 AAA 500,000 526,975
Revenue Refunding Bonds. Insured by AMBAC
Indemnity Corporation.
Intermountain Power Agency, Power Supply Revenue 0.00
7/01/2005 Non-Callable AAA 805,000 446,686
Refunding Bonds, Series 1989 A. Insured by
MBIA. (7)
+Lower Colorado River Authority, Texas, Revenue 8.375
1/01/2015 1996 @ 102 AAA 2,000,000 2,086,280
Refunding Bonds. Insured by MBIA.
Metropolitan Fair & Exposition Authority, Illinois, 5.00
6/01/2015 2012 @ 100 S.F. AAA 2,000,000 1,704,280
Dedicated State Tax Revenue Bonds, Series 1986 A.
1997 @ 100 ----------- -----------
Insured by BIG.**
$11,300,000 $10,574,376
=========== ===========
</TABLE>
[FN]
See accompanying notes to Schedule of Investments.
<PAGE>
Kemper Tax-Exempt Insured Income Trust
Series A-59
Notes to Schedule of Investments
1. All ratings are by Standard & Poor's Corporation, unless
marked with the
symbol "*", in which case the rating is by Moody's Investors
Service, Inc.
The symbol "NR" indicates Bonds for which no rating is available.
2. There is shown under this heading the year in which each
issue of Bonds is
initially redeemable and the redemption price for that year or,
if currently
redeemable, the redemption price currently in effect; unless
otherwise
indicated, each issue continues to be redeemable at declining
prices
thereafter, but not below par value. The Bond issue marked with
the symbol
"**" originally was issued at a discount. The tax effect of
Bonds issued at
an original issue discount is described in "tax status of the
trust funds,"
Part One. In addition, certain Bonds in the Portfolio may be
redeemed in
whole or in part other than by operation of the stated redemption
or sinking
fund provisions under certain unusual or extraordinary
circumstances specified
in the instruments setting forth the terms and provisions of such
Bonds.
"S.F." indicates a sinking fund is established with respect to an
issue of
Bonds. Redemption pursuant to call provisions generally will,
and redemption
pursuant to sinking fund provisions may, occur at times when the
redeemed
Bonds have a valuation which represents a premium over the call
price or par.
To the extent that the Bonds were deposited in the Trust at a
price higher
than the price at which they are redeemed, this will represent a
loss of
capital when compared with the original Public Offering Price of
the Units.
To the extent that the Bonds were acquired at a price lower than
the
redemption price, this may represent an increase in capital when
compared with
the original Public Offering Price of the Units. Distributions
of net income
will generally be reduced by the amount of the income which would
otherwise
have been paid with respect to redeemed Bonds and, unless
utilized to pay for
Units tendered for redemption, there will be distributed to
Unitholders the
principal amount and any premium received on such redemption. In
this event
the estimated current return and estimated long-term return may
be affected by
such redemptions.
3. See Note 1 to the accompanying financial statements for a
description of
the method of determining cost and value.
<PAGE>
Kemper Tax-Exempt Insured Income Trust
Series A-59
Notes to Schedule of Investments
(continued)
4. At May 31, 1995, the Portfolio of the Trust consists of 10
obligations
issued by entities located in 6 states and the District of
Columbia. Nine
issues, representing $10,375,000 of the aggregate principal
amount, are
payable from the income of a specific project or authority and
are not
supported by an issuer's power to levy taxes. One issue,
representing
$925,000 of the aggregate principal amount, is a general
obligation of a
governmental entity and is backed by the taxing power of such
entity. The
sources of payment for the revenue bonds are divided as follows:
Airport, 1;
Electric Systems, 3; Hospitals and Health Care, 3; Public
Utilities, 1;
Miscellaneous, 1. Approximately 30% of the aggregate principal
amount of
Bonds in the Trust are obligations of electrical system issuers.
Approximately 31% of the aggregate principal amount of Bonds in
the Trust are
from issuers located in the state of Texas. Approximately 88% of
the
aggregate principal amount of Bonds in the Trust are subject to
call by the
issuers within five years after May 31, 1995.
5. Insurance on the Bonds in the Trust was obtained by the
issuers of such
Bonds.
6. Those securities preceded by (+) are secured by, and payable
from,
escrowed U.S. Government securities.
7. These Bonds have been purchased at a discount from the par
value because
there is no stated interest income thereon. Such Bonds are
normally described
as "zero coupon" Bonds. Over the lives of the Bonds the values
increase, so
that upon maturity, the holders of the Bonds will receive 100% of
the
principal amount thereof.
[FN]
See accompanying notes to financial statements.
<PAGE>
Kemper Tax-Exempt Insured Income Trust
Series A-59
Notes to Financial Statements
1. Significant Accounting Policies
Valuation of Municipal Bonds
Municipal Bonds (Bonds) are stated at bid prices as determined by
Kemper Unit
Investment Trusts (A Service of Kemper Securities, Inc.), the
"Evaluator" and
sponsor of the Trust. The aggregate bid prices of the Bonds are
determined by
the Evaluator based on (a) current bid prices of the Bonds, (b)
current bid
prices for comparable bonds, (c) appraisal, or (d) any
combination of the
above. (See Note 5 - Insurance.)
Cost of Municipal Bonds
Cost of the Trust's Bonds was based on the offering prices of the
Bonds on
June 15, 1989 (Date of Deposit). The premium or discount
(including any
original issue discount) existing at June 15, 1989, is not being
amortized.
Realized gain (loss) from Bond transactions is reported on an
identified cost
basis.
2. Unrealized Appreciation and Depreciation
Following is an analysis of net unrealized depreciation at May
31, 1995:
<TABLE>
<CAPTION>
<S>
<C>
Gross unrealized depreciation
$(654,165)
Gross unrealized appreciation
450,874
- ----------
Net unrealized depreciation
$(203,291)
==========
</TABLE>
3. Transactions with Affiliates
From the inception of the Trust through January 31, 1995, the
Trustee,
Investors Fiduciary Trust Company (IFTC), was 50% owned by Kemper
Financial
Services, Inc., an affiliate of Kemper Unit Investment Trusts.
On that date,
State Street Boston Corporation acquired IFTC. Prior to January
1, 1995, the
Trustee's fee (not including the reimbursement of out-of-pocket
expenses),
calculated monthly, was at the annual rate of $1.22, $.9285 and
$.6275 under
the monthly, quarterly and semiannual distribution options,
respectively, per
$1,000 principal amount of Bonds in the Trust, based on the
largest aggregate
principal amount of Bonds in the Trust at any time during such
monthly,
quarterly or semiannual periods. Effective January 1, 1995, such
fees were
revised to $1.3772, $1.0966 and $.7651 under the monthly,
quarterly and
semiannual distribution options, respectively. The Evaluator
received a fee,
payable monthly, at an annual rate of $.30 per $1,000 principal
amount of
Bonds, based on the largest aggregate principal amount of Bonds
in the Trust
at any time during such monthly period.
<PAGE>
Kemper Tax-Exempt Insured Income Trust
Series A-59
Notes to Financial Statements (continued)
4. Federal Income Taxes
The Trust is not an association taxable as a corporation for
federal income
tax purposes. Each Unitholder is considered to be the owner of a
pro rata
portion of the Trust under Subpart E, Subchapter J of Chapter 1
of the
Internal Revenue Code of 1986, as amended. Accordingly, no
provision has been
made for federal income taxes.
5. Other Information
Cost to Investors
The cost to initial investors of Units of the Trust was based on
the aggregate
offering price of the Bonds on the date of an investor's
purchase, plus a
sales charge of 4.9% of the Public Offering Price (equivalent to
5.152% of the
net amount invested). The Public Offering Price for secondary
market
transactions is based on the aggregate bid price of the Bonds
plus or minus a
pro rata share of cash or overdraft in the Principal Account, if
any, on the
date of an investor's purchase, plus a sales charge of 3.5% of
the Public
Offering Price (equivalent to 3.627% of the net amount invested).
Insurance
Insurance guaranteeing the payment of all principal and interest
on the Bonds
in the portfolio has been obtained from independent companies by
the
respective issuers of such Bonds. Insurance obtained by a Bond
issuer is
effective as long as such Bonds are outstanding. As a result of
such
insurance, the Units of the Trust have received a rating of "AAA"
by Standard
& Poor's Corporation. No representation is made as to any
insurer's ability
to meet its commitments.
Distributions
Distributions of net investment income to Unitholders are
declared and paid in
accordance with the option (monthly, quarterly or semiannual)
selected by the
investor. Such income distributions, on a record date basis, are
as follows:
<TABLE>
<CAPTION>
Year ended Year ended
Year ended
Distribution May 31, 1995 May 31, 1994 May
31, 1993
Plan Per Unit Total Per Unit Total Per
Unit Total
<S> <C> <C> <C> <C> <C>
<C>
-------- ---------- -------- ----------
- -------- ----------
Monthly $60.65 $1,023,066 $75.19 $1,269,289
$74.80 $1,259,794
Quarterly 64.31 91,113 75.49 107,736
75.09 107,478
Semiannual 74.37 335,955 75.77 347,704
75.38 347,912
---------- ----------
----------
$1,450,134 $1,724,729
$1,715,184
========== ==========
==========
</TABLE>
<PAGE>
Kemper Tax-Exempt Insured Income Trust
Series A-59
Notes to Financial Statements (continued)
5. Other Information (continued)
In addition, the Trust redeemed Units with proceeds from the sale
of Bonds as
follows:
<TABLE>
<CAPTION>
Year ended
May 31,
1995
<S>
<C>
--------
Principal portion
$201,080
Net interest accrued
3,631
--------
$204,711
========
Units
313
========
</TABLE>
<PAGE>
<TABLE>
Kemper Tax-Exempt
Insured Income Trust
Series
A-59
Notes to Financial
Statements (continued)
5. Other Information (continued)
Selected data for a Unit of the Trust outstanding throughout each
year -
<CAPTION>
Monthly
Quarterly Semiannual
Year ended May 31
Year ended May 31 Year ended May 31
1995 1994 1993
1995 1994 1993 1995 1994 1993
<S> <C> <C> <C>
<C> <C> <C> <C> <C> <C>
-------- ------- -------
- -------- ------- ------- -------- ------- -------
Investment income - interest $56.06 $76.77 $76.77
$56.06 $76.77 $76.77 $56.06 $76.77 $76.77
Expenses 1.38 1.58 1.58
1.13 1.28 1.29 .89 1.00 1.00
-------- ------- -------
- -------- ------- ------- -------- ------- -------
Net investment income 54.68 75.19 75.19
54.93 75.49 75.48 55.17 75.77 75.77
Distributions to Unitholders:
Net investment income (60.65) (75.19) (74.80)
(64.31) (75.49) (75.09) (74.37) (75.77) (75.38)
Principal from investment
transactions (409.39) - -
(409.39) - - (409.39) - -
Net gain (loss) on investments (27.20) (50.30) 5.69
(27.20) (50.30) 5.69 (27.20) (50.30) 5.69
-------- ------- -------
- -------- ------- ------- -------- ------- -------
Change in net asset value (442.56) (50.30) 6.08
(445.97) (50.30) 6.08 (455.79) (50.30) 6.08
Net asset value:
Beginning of the year 921.37 971.67 965.59
927.78 978.08 972.00 946.83 997.13 991.05
-------- ------- -------
- -------- ------- ------- -------- ------- -------
End of the year, including
distributable funds $478.81 $921.37 $971.67
$481.81 $927.78 $978.08 $491.04 $946.83 $997.13
======== ======= =======
======== ======= ======= ======== ======= =======
</TABLE>
<PAGE>
Kemper Tax-Exempt Insured Income Trust
Series A-59
Notes to Financial Statements (continued)
6. Subsequent Event
Effective September 14, 1995, through an ESOP, the members of
certain Kemper
Corporation operating units have acquired ownership of certain
Kemper
Corporation operating units, which included Kemper Securities,
Inc., the
Trust's sponsor and evaluator. In connection with the
acquisition, Kemper
Securities, Inc. changed its name to EVEREN Securities, Inc., and
Kemper Unit
Investment Trusts is now a Service of EVEREN Securities, Inc.
Subsequent to
the date of acquisition, neither EVEREN Securities, Inc. nor
Kemper Unit
Investment Trusts is affiliated with Kemper Financial Services,
Inc. or Kemper
Corporation. On September 26, 1995, Kemper Unit Investment
Trusts changed its
name to EVEREN Unit Investment Trusts.
<PAGE>
Consent of Independent Auditors
We consent to the reference to our firm under the caption
"Independent
Auditors" and to the use of our report dated September 14, 1995,
in this Post-
Effective Amendment to the Registration Statement (Form S-6) and
related
Prospectus of Kemper Tax-Exempt Insured Income Trust Series A-59
dated
September 28, 1995.
Ernst & Young LLP
Kansas City, Missouri
September 28, 1995
<PAGE>
KEMPER TAX-EXEMPT INSURED INCOME TRUST
MULTI-STATE SERIES
OHIO TAX-EXEMPT BOND TRUST SERIES 11-22
KEMPER DEFINED FUNDS (TAX-EXEMPT PORTFOLIO)
PART ONE
The date of this Part One is that date
which is set forth in Part Two of the Prospectus
Each State Trust of the Kemper Tax-Exempt Insured Income Trust, Multi-
State Series, Series 11-22 of the Ohio Tax-Exempt Bond Trust and Kemper
Defined Funds (Tax-Exempt Portfolio) was formed for the purpose of gaining
interest income free from Federal, State and, where applicable, local income
taxes and/or property taxes, while conserving capital and diversifying risks
by investing in an insured, fixed portfolio of Municipal Bonds consisting of
obligations issued primarily by or on behalf of the State for which such
Trust is named or counties, municipalities, authorities or political
subdivisions thereof.
Insurance guaranteeing the scheduled payment of principal and interest on
all of the Municipal Bonds in the portfolio of each State Trust has been
obtained by the Trust from Financial Guaranty Insurance Company ("Financial
Guaranty") or other insurers or directly by the issuer or the Sponsor from
Financial Guaranty, MBIA Insurance Corporation or other insurers. See
"Insurance on the Portfolios" herein and the "Schedule of Investments" in
Part Two. Insurance obtained by the Trust remains in effect only while the
insured Municipal Bonds are retained in such State Trust, while insurance
obtained by a Municipal Bond issuer or the Sponsor is effective so long as
such Bonds are outstanding. Pursuant to an irrevocable commitment of
Financial Guaranty or such other insurers, in the event of a sale of any Bond
covered under the Trust's insurance policy, the Trustee has the right to
obtain permanent insurance for such Bond upon the payment of a single
predetermined insurance premium from the proceeds of the sale of such Bond.
The insurance, in either case, does not relate to the Units offered hereby or
to their market value. As a result of such insurance, the Units of each
State Trust received on the original date of deposit a rating of either "AAA"
by Standard & Poor's. a Division of The McGraw Hill Companies ("Standard &
Poor's") or "Aaa" by Moody's Investors Service, Inc. and, while held in a
State Trust, the Municipal Bonds are rated either "Aaa" by Moody's Investors
Service, Inc. or "AAA" by Standard & Poor's. See "Insurance on the
Portfolios" and "Description of Securities Ratings." No representation is
made as to Financial Guaranty's, MBIA Insurance Corporation's or any other
insurer's ability to meet its commitments.
Units of the Trust are not deposits or obligations of, or guaranteed by,
any bank, and Units are not federally insured or otherwise protected by the
Federal Deposit Insurance Corporation and involve investment risk including
loss of principal.
This Prospectus is in two parts. Read and retain both parts for
future reference.
- --------------------------------------------------------------------------------
SPONSOR: KEMPER UNIT INVESTMENT TRUSTS,
a service of Kemper Securities, Inc.
- --------------------------------------------------------------------------------
THE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO
-------
<S> <C>
SUMMARY................................................... 3
The Trust............................................ 3
Insurance............................................ 3
Public Offering Price................................ 4
Interest and Principal Distributions................. 4
Reinvestment......................................... 4
Estimated Current Return and
Estimated Long-Term Return.......................... 4
Market for Units..................................... 4
Risk Factors......................................... 4
THE TRUST................................................. 5
PORTFOLIOS................................................ 5
Risk Factors......................................... 6
INSURANCE ON THE PORTFOLIOS............................... 11
Financial Guaranty Insurance
Company............................................. 13
AMBAC Indemnity Corporation.......................... 14
MBIA Insurance....................................... 14
Financial Security Assurance......................... 14
Capital Guaranty Insurance
Company............................................. 15
DISTRIBUTION REINVESTMENT................................. 16
INTEREST, ESTIMATED CURRENT RETURN
AND LONG-TERM RETURN................................. 17
FEDERAL TAX STATUS OF THE STATE
TRUSTS............................................... 17
DESCRIPTION AND STATE TAX STATUS
OF THE STATE TRUSTS.................................. 20
Alabama Trusts....................................... 20
Arizona Trusts....................................... 22
California Trusts.................................... 25
Colorado Trust....................................... 31
Florida Trusts....................................... 34
Louisiana Trusts..................................... 39
Massachusetts Trusts................................. 42
Michigan Trusts...................................... 44
Minnesota Trusts..................................... 46
Missouri Trusts...................................... 48
New Jersey Trusts.................................... 51
New York Trusts...................................... 54
North Carolina Trusts................................ 63
Ohio Trusts.......................................... 68
Pennsylvania Trusts.................................. 72
Texas Trusts......................................... 77
PUBLIC OFFERING OF UNITS.................................. 80
Public Offering Price................................ 80
Public Distribution of Units......................... 83
Profits of Sponsor................................... 84
MARKET FOR UNITS.......................................... 84
REDEMPTION................................................ 84
Computation of Redemption Price...................... 86
UNITHOLDERS............................................... 86
Ownership of Units................................... 86
Distributions to Unitholders......................... 86
Statements to Unitholders............................ 88
Rights of Unitholders................................ 89
INVESTMENT SUPERVISION.................................... 89
ADMINISTRATION OF THE TRUST............................... 90
The Trustee.......................................... 90
The Evaluator........................................ 91
Amendment and Termination............................ 91
Limitations on Liability............................. 91
EXPENSES OF THE TRUST..................................... 92
THE SPONSOR............................................... 93
LEGAL OPINIONS............................................ 93
AUDITORS.................................................. 93
DESCRIPTION OF SECURITIES RATINGS......................... 94
Standard & Poor's.................................... 94
Moody's Investors Service, Inc....................... 95
</TABLE>
Essential Information*
Report of Certified Public Accountants*
Statement of Assets and Liabilities*
Statement of Operations*
Statement of Changes in Net Assets*
Schedule of Investments*
Notes to Schedules of Investments*
Notes to Financial Statements*
*INFORMATION ON THESE ITEMS APPEARS
IN PART TWO FOR THE APPROPRIATE
STATE TRUST
-2-
<PAGE>
KEMPER TAX-EXEMPT INSURED INCOME TRUST
MULTI-STATE SERIES
OHIO TAX-EXEMPT BOND TRUST
SERIES 11-22
KEMPER DEFINED FUNDS
(TAX-EXEMPT PORTFOLIO)
SUMMARY
THE TRUST. Kemper Tax-Exempt Insured Income Trust, Multi-State Series,
Ohio Tax-Exempt Bond Trust, Series 11-22 and Kemper Defined Funds (Tax-Exempt
Portfolio) (collectively, the "Trust") are unit investment trusts consisting
of a number of diversified portfolios designated as the State Trusts. Each
State Trust consists of obligations ("Municipal Bonds", "Bonds" or
"Securities") issued primarily by or on behalf of the State for which such
State Trust is named or counties, municipalities, authorities or political
subdivisions thereof.
Each State Trust's investment objective is interest income which is exempt
from Federal, State and, where applicable, local income taxes and/or property
taxes, while conserving capital and diversifying risks by investing in an
insured, fixed portfolio of Municipal Bonds consisting of obligations issued
primarily by or on behalf of the State for which such State Trust is named or
counties, municipalities, authorities or political subdivisions thereof.
There is, of course, no guarantee that the State Trusts' objective will be
achieved.
All of the Municipal Bonds in the State Trust portfolios were rated in the
category "BBB" or better by either Standard & Poor's ("Standard & Poor's") or
"Baa" by Moody's Investors Service, Inc. ("Moody's") on the date such State
Trust was established (the "Date of Deposit"). Ratings of the Municipal
Bonds may have changed since the Date of Deposit. See "Description of
Securities Ratings" herein and the "Schedule of Investments" in Part Two.
The Units, each of which represents a pro rata undivided fractional
interest in the principal amount of Municipal Bonds deposited in the
appropriate Trust, are issued and outstanding Units which have been
reacquired by the Sponsor either by purchase of Units tendered to the Trustee
for redemption or by purchase in the open market. No offering is being made
on behalf of the State Trust and any profit or loss realized on the sale of
Units will accrue to the Sponsor and/or the firm reselling such Units.
INSURANCE. Insurance guaranteeing the scheduled payment of principal and
interest on all of the Municipal Bonds in the portfolio of each State Trust
has been obtained by the Trust from Financial Guaranty Insurance Company
("Financial Guaranty"), MBIA Insurance Corporation ("MBIA Corporation" or
"MBIA") or other insurers, or directly by the issuer or the Sponsor from
Financial Guaranty, MBIA or other insurers. See "Insurance on the
Portfolios" herein and the "Schedule of Investments" in Part Two. Insurance
obtained by the Trust remains in effect only while the insured Municipal
Bonds are retained in such State Trust, while insurance obtained by a
Municipal Bond issuer or the Sponsor is effective so long as such Bonds are
outstanding. Pursuant to an irrevocable commitment of Financial Guaranty,
MBIA or such other insurers, in the event of a sale of any bond covered under
the Trust's insurance policy, the Trustee has the right to obtain permanent
insurance for such Municipal Bonds upon the payment of a single predetermined
insurance premium from the proceeds of the sale of such Municipal Bond. The
insurance, in either case, does not relate to the Units offered hereby or to
their market value. As a result of such insurance, the Units of each State
Trust received on the original Date of Deposit a rating of "AAA" from
Standard & Poor's and, while held in a State Trust, the Municipal Bonds are
rated "Aaa" by Moody's. See "Insurance on the Portfolios." No
representation is made as to Financial Guaranty's or any other insurer's
ability to meet its commitments.
PUBLIC OFFERING PRICE. The Public Offering Price per Unit of each State
Trust is equal to a pro rata share of the aggregate bid prices of the
Municipal Bonds in such State Trust plus or minus a pro rata share of cash,
if any, in the Principal Account, held or owned by the State Trust plus, in
the case of Kemper Defined Funds,
-3-
<PAGE>
Purchased Interest, plus a sales charge shown under "Public Offering of
Units." In addition, there will be added to each transaction in a State
Trust an amount equal to the accrued interest ("Daily Accrued Interest" in
the case of Kemper Defined Funds) from the last Record Date of such State
Trust to the date of settlement (five business days after order). The sales
charge is reduced on a graduated scale for sales as indicated under "Public
Offering of Units."
INTEREST AND PRINCIPAL DISTRIBUTIONS. Distributions of the estimated
annual interest income to be received by each State Trust, after deduction of
estimated expenses, will be made monthly unless the Unitholder elects to
receive such distributions quarterly or semi-annually. Distributions will be
paid on the Distribution Dates to holders of record of such State Trust on
the Record Dates set forth for the applicable option. See "Essential
Information" in Part Two. Only monthly distributions of estimated annual
interest income will be available for Kemper Defined Funds Unitholders.
The distribution of funds, if any, in the Principal Account of each State
Trust, will be made as provided in "Unitholders - Distributions to
Unitholders."
REINVESTMENT. Each Unitholder of a State Trust offered herein may elect
to have distributions of principal or interest or both automatically invested
without charge in shares of certain mutual funds sponsored by Kemper
Financial Services, Inc. See "Distribution Reinvestment."
ESTIMATED CURRENT RETURN AND ESTIMATED LONG-TERM RETURN. The Estimated
Current Return is calculated by dividing the estimated net annual interest
income per Unit by the Public Offering Price of the applicable State Trust.
The estimated net annual interest income per Unit will vary with changes in
fees and expenses of the Trusts and with the principal prepayment,
redemption, maturity, exchange or sale of Bonds while the Public Offering
Price will vary with changes in the bid price of the underlying Bonds and
with changes in Purchased Interest for Kemper Defined Funds; therefore, there
is no assurance that the present Estimated Current Returns will be realized
in the future. Estimated Long-Term Return is calculated using a formula
which (1) takes into consideration, and determines and factors in the
relative weightings of, the market values, yields (which takes into account
the amortization of premiums and the accretion of discounts) and estimated
retirement dates of all of the Bonds in the State Trust and (2) takes into
account the expenses and sales charge associated with each State Trust Unit.
Since the market values and estimated retirement dates of the Bonds and the
expenses of the State Trust will change, there is no assurance that the
present Estimated Long-Term Return will be realized in the future. Estimated
Current Return and Estimated Long-Term Return are expected to differ because
the calculation of Estimated Long-Term Return reflects the estimated date and
amount of principal returned while Estimated Current Return calculations
include only net annual interest income and Public Offering Price.
MARKET FOR UNITS. While under no obligation to do so and subject to
change at any time, the Sponsor intends to and certain Underwriters may,
maintain a market for the Units of each State Trust and continuously offer to
repurchase such Units at prices which are based on the aggregate bid side
evaluation of the Municipal Bonds in each State Trust plus accrued interest
to the date of settlement (which, in the case of Kemper Defined Funds,
consists of Purchased Interest and Daily Accrued Interest).
RISK FACTORS. An investment in the Trusts should be made with an
understanding of the risks associated therewith, including, among other
factors, the inability of the issuer or an insurer to pay the principal of or
interest on a bond when due, volatile interest rates, early call provisions,
and changes to the tax status of the Securities. See "Portfolios - Risk
Factors."
THE TRUST
Each State Trust Fund is one of a series of unit investment trusts created
by the Sponsor under the name Kemper Tax-Exempt Insured Income Trust, Multi-
State Series, Series 11-22 of Ohio Tax-Exempt Bond Trust or Kemper Defined
Funds (Tax-Exempt Portfolio), all of which are similar, and each of which was
created
-4-
<PAGE>
under the laws of the State of Missouri pursuant to a Trust Agreement/1/ (the
"Agreement") (such "State Trusts" being collectively referred to herein as
the "Trust"). Kemper Unit Investment Trusts, a service of Kemper Securities,
Inc., acts as Sponsor and Evaluator and Investors Fiduciary Trust Company
acts as Trustee.
A State Trust may be an appropriate investment vehicle for investors who
desire to participate in a portfolio of insured, tax-exempt, fixed income
securities with greater diversification than they might be able to acquire
individually. In addition, Municipal Bonds of the type deposited in the
State Trusts are often not available in small amounts.
Each State Trust was formed for the purpose of gaining interest income
free from Federal, State and, where applicable, local income and/or property
taxes, while conserving capital and diversifying risks by investing in an
insured, fixed portfolio of Municipal Bonds consisting of obligations issued
primarily by or on behalf of the State for which such State Trust is named or
counties, municipalities, authorities or political subdivisions thereof.
There is, of course, no guarantee that the State Trusts' objective will be
achieved.
All of the Municipal Bonds in the State Trusts' portfolios are rated "BBB"
or better by Standard & Poor's or "Baa" or better by Moody's. See
"Description of Securities Ratings" herein and the "Schedule of Investments"
in Part Two.
Each State Trust consists of an insured portfolio of interest bearing
obligations issued by or on behalf of states of the United States or
counties, municipalities, authorities or political subdivisions thereof the
interest on which is, in the opinion of bond counsel to the issuing
authorities, exempt from all Federal income taxes under existing law, but may
not be subject to State and local taxes. Proceeds of the maturity,
redemption or sale of the Municipal Bonds in a State Trust, unless used to
pay for Units tendered for redemption, will be distributed to Unitholders
thereof and will not be utilized to purchase replacement or additional
Municipal Bonds for the State Trust.
The Units, each of which represents a pro rata undivided fractional
interest in the principal amount of Municipal Bonds deposited in the
appropriate State Trust, are issued and outstanding Units which have been
reacquired by the Sponsor either by purchase of Units tendered to the Trustee
for redemption or by purchase in the open market. No offering is being made
on behalf of the State Trusts and any profit or loss realized on the sale of
Units will accrue to the Sponsor and/or the firm reselling such Units. To
the extent that Units of any State Trust are redeemed, the principal amount
of Municipal Bonds in such State Trust will be reduced and the undivided
fractional interest represented by each outstanding Unit of such State Trust
will increase. See "Redemption."
PORTFOLIOS
The selection of Municipal Bonds for each State Trust was based largely
upon the experience and judgment of the Sponsor. In making such selections
the Sponsor considered the following factors: (a) a minimum rating in the
category "BBB" by Standard & Poor's or "Baa" by Moody's Investors Service,
Inc. (see "Description of Securities Ratings") except that the Sponsor may,
from time to time, in specifically designated State Trusts, have deemed it to
be acceptable to acquire unrated municipal bonds which had, in the opinion of
the Sponsor, credit characteristics at least equal to municipal bonds so
rated; (b) the price of the Municipal Bonds relative to other issues of
similar quality and maturity; (c) the diversification of the Municipal Bonds
as to purpose of issue; (d) the income to the Unitholders of the State Trust;
(e) whether such Municipal Bonds were insured, or the cost and availability
of insurance for the scheduled payment of principal and interest, when due,
on the Municipal Bonds; and (f) the dates of maturity of the Municipal Bonds.
----------
/1/Reference is hereby made to said Trust Agreement, and any statements
contained herein are qualified in ther entirety by the provisions of said
Trust Agreement.
-5-
<PAGE>
Subsequent to the Date of Deposit, a Municipal Bond may cease to be rated
or its rating may be reduced below the minimum required as of the Date of
Deposit. Neither event requires the elimination of such investment from a
State Trust, but may be considered in the Sponsor's determination to direct
the Trustee to dispose of the investment. See "Investment Supervision"
herein and the "Schedule of Investments" in Part Two.
The Sponsor may not alter the portfolio of a State Trust except that
certain of the Municipal Bonds may be sold upon the happening of certain
extraordinary circumstances. See "Investment Supervision."
Certain of the Municipal Bonds in the State Trusts may be subject to
redemption prior to their stated maturity date pursuant to sinking fund
provisions, call provisions or extraordinary optional or mandatory redemption
provisions or otherwise. A sinking fund is a reserve fund accumulated over a
period of time for retirement of debt. A callable debt obligation is one
which is subject to redemption or refunding prior to maturity at the option
of the issuer. A refunding is a method by which a debt obligation is
redeemed, at or before maturity, by the proceeds of a new debt obligation.
In general, call provisions are more likely to be exercised when the offering
side valuation is at a premium over par than when it is at a discount from
par. Accordingly, any such call, redemption, sale or maturity will reduce
the size and diversity of such State Trust, and the net annual interest
income of the State Trust and may reduce the Estimated Current and Long-Term
Returns. See "Interest and Estimated Current and Long-Term Returns." Each
State Trust portfolio contains a listing of the sinking fund and call,
provisions if any, with respect to each of the debt obligations.
Extraordinary optional redemptions and mandatory redemptions result from the
happening of certain events. Generally, events that may permit the
extraordinary optional redemption of Municipal Bonds or may require the
mandatory redemption of Municipal Bonds include, among others: a final
determination that the interest on the Municipal Bonds is taxable; the
substantial damage or destruction by fire or other casualty of the project
for which the proceeds of the Municipal Bonds were used; an exercise by a
local, State or Federal governmental unit of its power of eminent domain to
take all or substantially all of the project for which the proceeds of the
Municipal Bonds were used; changes in the economic availability of raw
materials, operating supplies or facilities or technological or other changes
which render the operation of the project for which the proceeds of the
Municipal Bonds were used uneconomic; changes in law or an administrative or
judicial decree which renders the performance of the agreement under which
the proceeds of the Municipal Bonds were made available to finance the
project impossible or which creates unreasonable burdens or which imposes
excessive liabilities, such as taxes, not imposed on the date the Municipal
Bonds are issued on the issuer of the Municipal Bonds or the user of the
proceeds of the Municipal Bonds; an administrative or judicial decree which
requires the cessation of a substantial part of the operations of the project
financed with the proceeds of the Municipal Bonds; an overestimate of the
costs of the project to be financed with the proceeds of the Municipal Bonds
resulting in excess proceeds of the Municipal Bonds which may be applied to
redeem Municipal Bonds; or an underestimate of a source of funds securing the
Municipal Bonds resulting in excess funds which may be applied to redeem
Municipal Bonds. The Sponsor is unable to predict all of the circumstances
which may result in such redemption of an issue of Municipal Bonds.
The Sponsor and the Trustee shall not be liable in any way for any
default, failure or defect in any Municipal Bond.
RISK FACTORS. An investment in the Units of a State Trust should be made
with an understanding of the risks which an investment in fixed rate debt
obligations may entail, including the risk that the value of the portfolio
and hence of the State Trusts will decline with increases in interest rates.
The value of the underlying Municipal Bonds will fluctuate inversely with
changes in interest rates. The uncertain economic conditions of recent
years, together with the fiscal measures adopted to attempt to deal with
them, have resulted in wide fluctuations in interest rates and, thus, in the
value of fixed rate debt obligations generally and long term obligations in
particular. The Sponsor cannot predict whether such fluctuations will
continue in the future.
Certain of the Municipal Bonds in the State Trusts may be general
obligations of a governmental entity that are backed by the taxing power of
such entity. All other Municipal Bonds in the State Trusts are revenue
bonds payable from the income of a specific project or authority and are not
supported by the issuer's power to levy taxes. General obligation bonds are
secured by the issuer's pledge of its faith, credit and taxing power
-6-
<PAGE>
for the payment of principal and interest. Revenue bonds, on the other hand,
are payable only from the revenues derived from a particular facility or
class of facilities or, in some cases, from the proceeds of a special excise
or other specific revenue source. There are, of course, variations in the
security of the different Municipal Bonds in the State Trusts, both within a
particular classification and between classifications, depending on numerous
factors.
Certain of the Municipal Bonds in the State Trusts may be obligations of
issuers whose revenues are derived from services provided by hospitals and
other health care facilities, including nursing homes. Ratings of bonds
issued for health care facilities are often based on feasibility studies that
contain projections of occupancy levels, revenues and expenses. A facility's
gross receipts and net income available for debt service will be affected by
future events and conditions including, among other things, demand for
services and the ability of the facility to provide the services required,
physicians' confidence in the facility, management's capabilities, economic
developments in the service area, competition, efforts by insurers and
governmental agencies to limit rates, legislation establishing state rate-
setting agencies, expenses, the cost and possible unavailability of
malpractice insurance, the funding of Medicare, Medicaid and other similar
third party payor programs, and government regulation. Federal legislation
has been enacted which implement a system of prospective Medicare
reimbursement which may restrict the flow of revenues to hospitals and other
facilities which are reimbursed for services provided under the Medicare
program. Future legislation or changes in the areas noted above, among other
things, would affect all hospitals to varying degrees and, accordingly, any
adverse changes in these areas may adversely affect the ability of such
issuers to make payment of principal and interest on Municipal Bonds held in
the State Trusts. Such adverse changes also may adversely affect the ratings
of the Municipal Bonds held in the State Trusts.
Hospitals and other health care facilities are subject to claims and legal
actions by patients and others in the ordinary course of business. Although
these claims are generally covered by insurance, there can be no assurance
that a claim will not exceed the insurance coverage of a health care facility
or that insurance coverage will be available to a facility. In addition, a
substantial increase in the cost of insurance could adversely affect the
results of operations of a hospital or other health care facility. Certain
hospital bonds may provide for redemption at par at any time upon the sale by
the issuer of the hospital facilities to a non-affiliated entity or in other
circumstances. For example, certain hospitals may have the right to call
bonds at par if the hospital may legally be required because of the bonds to
perform procedures against specified religious principles. Certain FHA-
insured bonds may provide that all or a portion of those bonds, otherwise
callable at a premium, can be called at par in certain circumstances. If a
hospital defaults upon a bond obligation, the realization of Medicare and
Medicaid receivables may be uncertain and, if the bond obligation is secured
by the hospital facilities, legal restrictions on the ability to foreclose
upon the facilities and the limited alternative uses to which a hospital can
be put may reduce severely its collateral value.
Certain of the Municipal Bonds in the State Trusts may be single family
mortgage revenue bonds, which are issued for the purpose of acquiring from
originating financial institutions notes secured by mortgages on residences
located within the issuer's boundaries and owned by persons of low or
moderate income. Mortgage loans are generally partially or completely
prepaid prior to their final maturities as a result of events such as sale of
the mortgaged premises, default, condemnation or casualty loss. Because
these Municipal Bonds are subject to extraordinary mandatory redemption in
whole or in part from such prepayments of mortgage loans, a substantial
portion of such Municipal Bonds will probably be redeemed prior to their
scheduled maturities or even prior to their ordinary call dates. The
redemption price of such issues may be more or less than the offering price
of such Municipal Bonds. Extraordinary mandatory redemption without premium
could also result from the failure of the originating financial institutions
to make mortgage loans in sufficient amounts within a specified time period
or, in some cases, from the sale by the Municipal Bond issuer of the mortgage
loans. Failure of the originating financial institutions to make mortgage
loans would be due principally to the interest rates on mortgage loans funded
from other sources becoming competitive with the interest rates on the
mortgage loans funded with the proceeds of the single family mortgage revenue
bonds. Additionally, unusually high rates of default on the underlying
mortgage loans may reduce revenues available for the payment of principal of
or interest on such mortgage revenue bonds. Single family mortgage revenue
bonds issued after December 31, 1980 were issued under Section 103A of the
Internal Revenue Code of 1954, which Section contains certain ongoing
requirements relating to the use of the proceeds of such Municipal Bonds in
order for
-7-
<PAGE>
the interest on such Municipal Bonds to retain its tax-exempt status. In
each case, the issuer of the Municipal Bonds has covenanted to comply with
applicable ongoing requirements and bond counsel to such issuer has issued an
opinion that the interest on the Municipal Bonds is exempt from Federal
income tax under existing laws and regulations There can be no assurances
that the ongoing requirements will be met. The failure to meet these
requirements could cause the interest on the Municipal Bonds to become
taxable, possibly retroactively from the date of issuance.
Certain of the Municipal Bonds in the State Trusts may be obligations of
issuers whose revenues are primarily derived from mortgage loans to housing
projects for low to moderate income families. The ability of such issuers
to make debt service payments will be affected by events and conditions
affecting financed projects, including, among other things, the achievement
and maintenance of sufficient occupancy levels and adequate rental income,
increases in taxes, employment and income conditions prevailing in local
labor markets, utility costs and other operating expenses, the managerial
ability of project managers, changes in laws and governmental regulations,
the appropriation of subsidies and social and economic trends affecting the
localities in which the projects are located. The occupancy of housing
projects may be adversely affected by high rent levels and income limitations
imposed under Federal and State programs. Like single family mortgage
revenue bonds, multi-family mortgage revenue bonds are subject to redemption
and call features, including extraordinary mandatory redemption features,
upon prepayment, sale or non-origination of mortgage loans as well as upon
the occurrence of other events. Certain issuers of single or multi-family
housing bonds have considered various ways to redeem bonds they have issued
prior to the stated first redemption dates for such bonds. In connection
with the housing Municipal Bonds held by the State Trusts, the Sponsor has
not had any direct communications with any of the issuers thereof, but at
the Initial Date of Deposit it was not aware that any of the respective
issuers of such Municipal Bonds were actively considering the redemption of
such Municipal Bonds prior to their respective stated initial call dates.
However, there can be no assurance that an issuer of a Municipal Bond in the
State Trusts will not attempt to so redeem a Municipal Bond in the State
Trusts.
Certain of the Municipal Bonds in the State Trusts may be obligations of
issuers whose revenues are derived from the sale of water and/or sewerage
services. Water and sewerage bonds are generally payable from user fees.
Problems faced by such issuers include the ability to obtain timely and
adequate rate increases, a decline in population resulting in decreased user
fees, the difficulty of financing large construction programs, the
limitations on operations and increased costs and delays attributable to
environmental considerations, the increasing difficulty of obtaining or
discovering new supplies of fresh water, the effect of conservation programs
and the impact of "no-growth" zoning ordinances. Issuers may have
experienced these problems in varying degrees.
Because of the relatively short history of solid waste disposal bond
financing, there may be technological risks involved in the satisfactory
construction or operation of the projects exceeding those associated with
most municipal enterprise projects. Increasing environmental regulation on
the Federal, State and local level has a significant impact on waste
disposal facilities. While regulation requires more waste producers to use
waste disposal facilities, it also imposes significant costs on the
facilities. These costs include compliance with frequently changing and
complex regulatory requirements, the cost of obtaining construction and
operating permits, the cost of conforming to prescribed and changing
equipment standards and required methods of operation and the cost of
disposing of the waste residue that remains after the disposal process in an
environmentally safe manner. In addition, waste disposal facilities
frequently face substantial opposition by environmental groups and officials
to their location and operation, to the possible adverse effects upon the
public health and the environment that may be caused by wastes disposed of at
the facilities and to alleged improper operating procedures. Waste disposal
facilities benefit from laws which require waste to be disposed of in a
certain manner but any relaxation of these laws could cause a decline in
demand for the facilities' services. Finally, waste disposal facilities are
concerned with many of the same issues facing utilities insofar as they
derive revenues from the sale of energy to local power utilities.
Certain of the Municipal Bonds in the State Trusts may be obligations of
issuers whose revenues are primarily derived from the sale of electric energy
or natural gas. Utilities are generally subject to extensive regulation by
state utility commissions which, among other things, establish the rates
which may be charged
-8-
<PAGE>
and the appropriate rate of return on an approved asset base. The problems
faced by such issuers include the difficulty in obtaining approval for timely
and adequate rate increases from the governing public utility commission, the
difficulty in financing large construction programs, the limitations on
operations and increased costs and delays attributable to environmental
considerations, increased competition, recent reductions in estimates of
future demand for electricity in certain areas of the country, the difficulty
of the capital market in absorbing utility debt, the difficulty in obtaining
fuel at reasonable prices and the effect of energy conservation. Issuers may
have experienced these problems in varying degrees. In addition, Federal,
state and municipal governmental authorities may from time to time review
existing and impose additional regulations governing the licensing,
construction and operation of nuclear power plants, which may adversely
affect the ability of the issuers of such Municipal Bonds to make payments of
principal and/or interest on such Municipal Bonds.
The ability of state and local joint action power agencies to make
payments on bonds they have issued is dependent in large part on payments
made to them pursuant to power supply or similar agreements. Courts in
Washington and Idaho have held that certain agreements between the Washington
Public Power Supply System ("WPPSS") and the WPPSS participants are
unenforceable because the participants did not have the authority to enter
into the agreements. While these decisions are not specifically applicable
to agreements entered into by public entities in other states, they may cause
a reexamination of the legal structure and economic viability of certain
projects financed by joint action power agencies, which might exacerbate
some of the problems referred to above and possibly lead to legal
proceedings questioning the enforceability of agreements upon which payment
of these bonds may depend.
Certain of the Municipal Bonds in the State Trusts may be industrial
revenue bonds ("IRBs"), including pollution control revenue bonds, which are
tax-exempt securities issued by states, municipalities, public authorities or
similar entities to finance the cost of acquiring, constructing or improving
various industrial projects. These projects are usually operated by
corporate entities. Issuers are obligated only to pay amounts due on the
IRBs to the extent that funds are available from the unexpended proceeds of
the IRBs or receipts or revenues of the issuer under an arrangement between
the issuer and the corporate operator of a project. The arrangement may be
in the form of a lease, installment sale agreement, conditional sale
agreement or loan agreement, but in each case the payments to the issuer are
designed to be sufficient to meet the payments of amounts due on the IRBs.
Regardless of the structure, payment of IRBs is solely dependent upon the
creditworthiness of the corporate operator of the project or corporate
guarantor. Corporate operators or guarantors may be affected by many factors
which may have an adverse impact on the credit quality of the particular
company or industry. These include cyclicality of revenues and earnings,
regulatory and environmental restrictions, litigation resulting from
accidents or environmentally-caused illnesses, extensive competition and
financial deterioration resulting from leveraged buy-outs or takeovers. The
IRBs in the State Trusts may be subject to special or extraordinary
redemption provisions which may provide for redemption at par or, with
respect to original issue discount bonds, at issue price plus the amount of
original issue discount accreted to the redemption date plus, if applicable,
a premium. The Sponsor cannot predict the causes or likelihood of the
redemption of IRBs or other Municipal Bonds in the State Trusts prior to the
stated maturity of such Municipal Bonds.
Certain of the Municipal Bonds in the State Trusts may be obligations
which are payable from and secured by revenues derived from the ownership and
operation of facilities such as airports, bridges, turnpikes, port
authorities, convention centers and arenas. The major portion of an
airport's gross operating income is generally derived from fees received from
signatory airlines pursuant to use agreements which consist of annual
payments for leases, occupancy of certain terminal space and service fees.
Airport operating income may therefore by affected by the ability of the
airlines to meet their obligations under the use agreements. The air
transport industry is experiencing significant variations in earnings and
traffic, due to increased competition, excess capacity, increased costs,
deregulation, traffic constraints and other factors, and several airlines are
experiencing severe financial difficulties. The Sponsor cannot predict what
effect these industry conditions may have on airport revenues which are
dependent for payment on the financial condition of the airlines and their
usage of the particular airport facility. Similarly, payment on Municipal
Bonds related to other facilities is dependent on revenues from the projects,
such as user fees from ports, tolls on turnpikes and bridges and rents from
buildings. Therefore, payment may be adversely affected by reduction in
revenues due to such factors
-9-
<PAGE>
as increased cost of maintenance, decreased use of a facility, lower cost of
alternative modes of transportation, scarcity of fuel and reduction or loss
of rents.
Certain of the Municipal Bonds in the State Trusts may be obligations of
issuers which are, or which govern the operation of, schools, colleges and
universities and whose revenues are derived mainly from ad valorem taxes, or
for higher education systems, from tuition, dormitory revenues, grants and
endowments. General problems relating to school bonds include litigation
contesting the state constitutionality of financing public education in part
from ad valorem taxes, thereby creating a disparity in educational funds
available to schools in wealthy areas and schools in poor areas. Litigation
or legislation on this issue may affect the sources of funds available for
the payment of school bonds in the Trust. General problems relating to
college and university obligations would include the prospect of a declining
percentage of the population consisting of "college" age individuals,
possible inability to raise tuition and fees sufficiently to cover increased
operating costs, the uncertainty of continued receipt of Federal grants and
state funding and new government legislation or regulations which may
adversely affect the revenues or costs of such issuers. All of such issuers
have been experiencing certain of these problems in varying degrees.
In addition, the ability of universities and colleges to meet their
obligations is dependent upon various factors, including the size and
diversity of their sources of revenues, enrollment, reputation, management
expertise, the availability and restrictions on the use of endowments and
other funds, the quality and maintenance costs of campus facilities, and, in
the case of public institutions, the financial condition of the relevant
state or other governmental entity and its policies with respect to
education. The institution's ability to maintain enrollment levels will
depend on such factors as tuition costs, geographic location, geographic
diversity and quality of student body, quality of the faculty and the
diversity of program offerings.
Certain of the Municipal Bonds in the State Trusts may be Urban
Redevelopment Bonds ("URBs"). URBs have generally been issued under bond
resolutions pursuant to which the revenues and receipts payable under the
arrangements with the operator of a particular project have been assigned and
pledged to purchasers. In some cases, a mortgage on the underlying project
may have been granted as security for the URBs. Regardless of the
structure, payment of the URBs is solely dependent upon the creditworthiness
of the operator of the project.
Certain of the Municipal Bonds in the State Trusts may be lease revenue
bonds whose revenues are derived from lease payments made by a municipality
or other political subdivision which is leasing equipment or property for use
in its operation. The risks associated with owning Municipal Bonds of this
nature include the possibility that appropriation of funds for a particular
project or equipment may be discontinued. The Sponsor cannot predict the
likelihood of nonappropriation of funds for these types of lease revenue
Municipal Bonds.
Certain of the Bonds in the Trust Funds may be sales and/or use tax
revenue bonds whose revenues are derived from the proceeds of a special sales
or use tax. Such taxes are generally subject to continuing Legislature
approval. Payments may be adversely affected by reduction of revenues due to
decreased use of a facility or decreased sales.
Certain of the Municipal Bonds in the State Trusts may be "zero coupon"
bonds, i.e., an original issue discount bond that does not provide for the
payment of current interest. Zero coupon bonds are purchased at a deep
discount because the buyer receives a final payment at the maturity of the
bond and does not receive any periodic interest payments. The effect of
owning deep discount bonds which do not make current interest payments (such
as the zero coupon bonds) is that a fixed yield is earned not only on the
original investment but also, in effect, on all discount earned during the
life of such obligation. This implicit reinvestment of earnings at the same
rate eliminates the risk of being unable to reinvest the income on such
obligation at a rate as high as the implicit yield on the discount
obligation, but at the same time eliminates the holder's ability to reinvest
at higher rates in the future. For this reason, zero coupon bonds are
subject to substantially greater price fluctuations during periods of
changing market interest rates than are securities of comparable quality
which pay interest currently. For the Federal tax consequences of original
issue discount bonds such as the zero coupon bonds, see "Federal Tax Status
of the State Trusts."
-10-
<PAGE>
Investors should be aware that many of the Municipal Bonds in the State
Trusts are subject to continuing requirements such as the actual use of
Municipal Bond proceeds or manner of operation of the project financed from
Municipal Bond proceeds that may affect the exemption of interest on such
Municipal Bonds from Federal income taxation. Although at the time of
issuance of each of the Municipal Bonds in the State Trusts an opinion of
bond counsel was rendered as to the exemption of interest on such obligations
from Federal income taxation, there can be no assurance that the respective
issuers or other obligers on such obligations will fulfill the various
continuing requirements established upon issuance of the Municipal Bonds. A
failure to comply with such requirements may cause a determination that
interest on such obligations is subject to Federal income taxation, perhaps
even retroactively from the date of issuance of such Municipal Bonds, thereby
reducing the value of the Municipal Bonds and subjecting Unitholders to
unanticipated tax liabilities.
Federal bankruptcy statutes relating to the adjustment of debts of
political subdivisions and authorities of states of the United States provide
that, in certain circumstances, such subdivisions or authorities may be
authorized to initiate bankruptcy proceedings without prior notice to or
consent of creditors, which proceedings could result in material and adverse
modification or alteration of the rights of holders of obligations issued by
such subdivisions or authorities.
Certain issues of the Municipal Bonds in the State Trusts represent "moral
obligations" of another governmental entity. In the event that the issuer of
the Municipal Bond defaults in the repayment thereof, such other governmental
entity lawfully may, but is not obligated to, discharge the obligation of the
issuer to repay such Municipal Bond.
If an issuer of moral obligation bonds is unable to meet its obligations,
the repayment of such Municipal Bonds becomes a moral commitment but not a
legal obligation of the State or municipality in question. Even though the
State may be called on to restore any deficits in capital reserve funds of
the agencies or authorities which issued the bonds, any restoration generally
requires appropriation by the State legislature and accordingly does not
constitute a legally enforceable obligation or debt of the State. The
agencies or authorities generally have no taxing power.
To the best of the Sponsor's knowledge, as of the date of this Prospectus,
there is no litigation pending with respect to any Municipal Bond which might
reasonably be expected to have a material adverse effect on the Trust or any
State Trust. Although the Sponsor is unable to predict whether any
litigation may be instituted, or if instituted, whether such litigation might
have a material adverse effect on the Trust, the Trust received copies of the
opinions of bond counsel given to the issuing authorities at the time of
original delivery of each of the Municipal Bonds to the effect that the
Municipal Bonds had been validly issued and that the interest thereon is
exempt from Federal income taxes.
INSURANCE ON THE PORTFOLIOS
All Municipal Bonds in the portfolio of the State Trusts are insured as to
the scheduled payment of interest and principal, when due, by policies
obtained directly by the Trust from Financial Guaranty Insurance Company
("Financial Guaranty") or by the Sponsor or by the issuer from Financial
Guaranty, MBIA or other insurers. The insurance policies obtained by the
Trust for a Series are non-cancelable and will continue in force so long as
such State Trust is in existence, Financial Guaranty remains in business and
the Municipal Bonds described in the policy continue to be held in such State
Trusts. The premium for any insurance policy or policies obtained by an
issuer of Municipal Bonds or the Sponsor has been paid in advance by such
issuer or the Sponsor and any such policy or policies are non-cancelable and
will remain in force so long as the Municipal Bonds so insured are
outstanding and the insurer and/or insurers referred to below remain in
business. A monthly premium is paid by each State Trust for the insurance
obtained by the Trust, which is payable from the interest received by such
State Trust. In those instances where Municipal Bond insurance is obtained
by the issuer or the Sponsor directly from an insurer, no premiums for
insurance are paid by the State Trust and such bonds are not covered by the
State Trust's policy. Nonpayment of premiums on the policy obtained by the
State Trust will not result in the cancellation of such insurance but will
force the insurer to take action against the Trustee to recover premium
payments due it. Premium rates for each issue of
-11-
<PAGE>
Municipal Bonds protected by the policy obtained by the Trust are fixed for
the life of the appropriate State Trusts. If the provider of an original
issuance insurance policy is unable to meet its obligations under such policy
or if the rating assigned to the claims paying ability of any such insurer
deteriorates, no other insurer has an obligation to insure any issue
adversely affected by either of the above describe events.
The aforementioned insurance guarantees the scheduled payment of principal
and interest on the Municipal Bonds of each State Trust. It does not
guarantee the market value of the Municipal Bonds or the value of the Units
of a State Trust. The insurance obtained by the Trust is only effective as
to Municipal Bonds owned by and held in a State Trust and the price which an
individual pays on acquisition of Units, or receives on redemption or resale
of Units, does not, except as indicated below, include any element of value
for the insurance obtained by the Trust. Unitholders should recognize that
in order to receive any benefit from the portfolio insurance obtained by the
State Trust, they must be owners of the Units of a State Trust at the time
the Trustee becomes entitled to receive any payment from the insurer for such
State Trust. Insurance obtained by the issuer or the Sponsor of a Municipal
Bond is effective so long as the Municipal Bond is outstanding, whether or
not held by the State Trust.
Pursuant to an irrevocable commitment of Financial Guaranty, the Trustee,
upon the sale of a Municipal Bond under the Trust's insurance policy, has the
right to obtain permanent insurance with respect to such Municipal Bond
(i.e., insurance to the maturity of the Municipal Bond regardless of the
identity of the holder thereof) (the "Permanent Insurance") upon the payment
of a single predetermined insurance premium from the proceeds of the sale of
such Municipal Bond. Accordingly, every Municipal Bond in the Trust is
eligible to be sold on an insured basis. It is expected that the Trustee
will exercise the right to obtain Permanent Insurance with respect to
Municipal Bonds in the State Trust only if upon such exercise the Trust would
receive net proceeds (i.e., the value of such Municipal Bond if sold as an
insured Municipal Bond less the insurance premium attributable to the
Permanent Insurance) from such sale in excess of the sale proceeds if such
Municipal Bond was sold on an uninsured basis. The insurance premium with
respect to each Municipal Bond is determined based upon the insurability of
each Municipal Bond as of the Date of Deposit and will not be increased or
decreased for any change in the creditworthiness of such Municipal Bond's
issuer.
Insurance obtained for a State Trust, under normal circumstances, has no
effect on the price or redemption value of Units. It is the present
intention of the Evaluator to attribute a value to such insurance for the
purpose of computing the price or redemption value of Units only in
circumstances where the credit quality of an underlying Municipal Bond has
significantly deteriorated. Insurance obtained by the issuer of a Municipal
Bond is effective so long as such Municipal Bond is outstanding. Therefore,
any such insurance may be considered to represent an element of market value
in regard to the Municipal Bonds thus insured, but the exact effect, if any,
of this insurance on such market value cannot be predicted.
The value to be added to such Municipal Bonds shall be an amount equal to
the excess, if any, by which the net proceeds realizable from the sale of the
Municipal Bond on an insured basis exceeds the sum of (i) the net proceeds
receivable from the sale of the Municipal Bonds on an uninsured basis plus
(ii) the insurance premium attributable to the Permanent Insurance.
Insurance obtained by the issuer of a Municipal Bond is effective so long as
such Municipal Bond is outstanding. Therefore, any such insurance may be
considered to represent an element of market value in regard to the
Municipal Bonds thus insured, but the exact effect, if any, of this insurance
on such market value cannot be predicted.
Under the provisions of the aforementioned insurance, Financial Guaranty
unconditionally and irrevocably agrees to pay to Citibank, N.A., or its
successor, as its agent (the "Fiscal Agent"), that portion of the principal
of and interest on the covered Municipal Bonds which shall become due for
payment but shall be unpaid by reason of nonpayment by the issuer of the
Municipal Bonds. The term "due for payment" means, when referring to the
principal of a Municipal Bond, its stated maturity date or the date on which
it shall have been called for mandatory sinking fund redemption and does not
refer to any earlier date on which payment is due by reason of call for
redemption (other than by mandatory sinking fund redemption), acceleration or
other advancement of maturity and means, when referring to interest on a
Municipal Bond, the stated date for payment of interest. When the interest
on a Municipal Bond shall have been determined, as provided in the underlying
documentation relating to such Municipal Bond, to be subject to Federal
income taxation, "due for
-12-
<PAGE>
payment" also means, when referring to the principal of such Municipal Bond,
the date on which such Municipal Bond has been called for mandatory
redemption as a result of such determination of taxability, and when
referring to interest on such Municipal Bond, the accrued interest at the
rate provided in such documentation to the date on which such Municipal Bond
has been called for such mandatory redemption, together with any applicable
redemption premium.
Financial Guaranty will make such payments to the Fiscal Agent on the date
such principal or interest becomes due for payment or on the business day
next following the day on which Financial Guaranty shall have received notice
of nonpayment, whichever is later. The Fiscal Agent will disburse to the
Trustee the face amount of principal and interest which is then due for
payment but is unpaid by reason of nonpayment and interest which is then due
for payment but is unpaid by reason of nonpayment by the issuer but only
upon receipt by the Fiscal Agent of (i) evidence of the Trustee's right to
receive payment of the principal or interest due for payment and (ii)
evidence, including any appropriate instruments of assignment, that all of
the rights to payment of such principal or interest due for payment shall
thereupon vest in Financial Guaranty. Upon such disbursement, Financial
Guaranty shall become the owner of the Municipal Bond, appurtenant coupon or
right to payment of principal or interest on such Municipal Bond and shall be
fully subrogated to all the Trustee's rights thereunder, including the right
to payment thereof.
FINANCIAL GUARANTY INSURANCE COMPANY. The policy obtained by the Trust
was issued by Financial Guaranty, a New York stock insurance company.
Financial Guaranty is a wholly-owned subsidiary of FGIC Corporation, a
Delaware holding company (the "Corporation"). The Corporation is a wholly
owned subsidiary of General Electric Capital Corporation ("GECC"). Neither
the Corporation nor GECC is obligated to pay the debts of or the claims
against Financial Guaranty. Financial Guaranty is domiciled in the State of
New York and is subject to regulation by the State of New York Insurance
Department. As of September 30, 1994 the total capital and surplus of
Financial Guaranty was approximately $871,000,000. Copies of Financial
Guaranty's financial statements, prepared on the basis of statutory
accounting principles, and the Corporation's financial statements, prepared
on the basis of generally accepted accounting principles, may be obtained by
writing to Financial Guaranty at 115 Broadway, New York, New York 10006,
Attention: Communications Department (telephone number is (212) 312-3000) or
to the New York State Insurance Department at 160 West Broadway, 18th Floor,
New York 10013, Attention: Property Companies Bureau (telephone number
(212) 621-0389).
In addition, Financial Guaranty is currently authorized to write with
insurance in all 50 states and the District of Columbia.
The information relating to Financial Guaranty contained above has been
furnished by such corporation. The financial information contained herein
with respect to such corporation is unaudited but appears in reports or other
materials filed with state insurance regulatory authorities and is subject to
audit and review by such authorities. No representation is made herein as to
the accuracy or adequacy of such information or as to the absence of material
adverse changes in such information subsequent to the date thereof but the
Sponsor is not aware that the information herein is inaccurate or incomplete.
In determining whether to insure bonds, Financial Guaranty has applied its
own standards, which are not necessarily the same as the criteria used in
regard to the selection of bonds by the Sponsor. This decision is made prior
to the Date of Deposit, as bonds not covered by such insurance are generally
not deposited in the Trust. The insurance obtained by the Trust covers
Municipal Bonds deposited in each State Trust and physically delivered to the
Trustee in the case of bearer bonds or registered in the name of the Trustee
or its nominee for Municipal Bonds held in book-entry form. Contracts to
purchase Municipal Bonds are not covered by the insurance obtained by the
Trust, although Municipal Bonds underlying such contracts are covered by
insurance upon physical delivery to the Trustee.
The contract of insurance relating to the State Trusts and the
negotiations in respect thereof represent the only relationship between
Financial Guaranty and the Trust. Otherwise, neither Financial Guaranty nor
its parent, FGIC Corporation, or any affiliate thereof has any significant
relationship, direct or indirect, with the Trust or the Sponsor, except that
Kemper Reinsurance Co., an affiliate of the Sponsor, has participated to a
-13-
<PAGE>
very limited extent, pursuant to an exemptive order obtained from the
Securities and Exchange Commission, in the reinsurance program of Financial
Guaranty. Neither the State Trusts, the related Units nor the portfolios of
such State Trusts are otherwise insured directly or indirectly by FGIC
Corporation.
AMBAC INDEMNITY CORPORATION. AMBAC Indemnity Corporation ("AMBAC") is a
Wisconsin-domiciled stock insurance company, regulated by the Office of the
Commissioner of Insurance of the State of Wisconsin, and licensed to do
business in 50 states, the District of Columbia and the Commonwealth of
Puerto Rico, with admitted assets (unaudited) of approximately $1,988,000,000
and statutory capital (unaudited) of approximately $1,148,000,000 as of
September 30, 1993. Statutory capital consists of AMBAC policyholders'
surplus and statutory contingency reserve. AMBAC is a wholly owned
subsidiary of AMBAC Inc., a 100% publicly-held company. Moody's Investors
Service, Inc. and Standard & Poor's have both assigned a AAA claims-paying
ability rating to AMBAC. Copies of AMBAC's financial statements prepared in
accordance with statutory accounting standards are available from AMBAC. The
address of AMBAC's administrative offices and its telephone number at One
State Street Plaza, 17th Floor, New York, New York 10004 and (212) 668-0340.
AMBAC has entered into quota share reinsurance agreements under which a
percentage of the insurance underwritten pursuant to certain municipal bonds
insurance programs of AMBAC has been and will be assumed by a number of
foreign and domestic unaffiliated reinsurers.
MBIA INSURANCE CORPORATION. MBIA Insurance Corporation ("MBIA
Corporation") is the principal operating subsidiary of MBIA, Inc., a New York
Stock Exchange listed company. MBIA, Inc. is not obligated to pay the debts
of or claims against MBIA Corporation. MBIA Corporation, which commenced
municipal bond insurance operations on January 5, 1987, is a limited
liability corporation rather than a several liability association. MBIA
Corporation is domiciled in the State of New York and licensed to do business
in all 50 states, the District of Columbia and the Commonwealth of Puerto
Rico.
As of September 30, 1994 MBIA Corporation had admitted assets of $3.3
billion (unaudited), total liabilities of $2.2 billion (unaudited), and total
capital and surplus of $1.1 billion (unaudited) prepared in accordance with
statutory accounting practices prescribed or permitted by insurance
regulatory authorities. Standard & Poor's has rated the claims paying
ability of MBIA "AAA." Copies of MBIA Corporation's financial statements
prepared in accordance with statutory accounting practices are available form
MBIA Corporation. The address of MBIA Corporation is 113 King Street,
Armonk, New York 10504.
Effective December 31, 1989 MBIA Inc. acquired Bond Investors Group, Inc.
On January 5,1990, the Insurer acquired all of the outstanding stock of Bond
Investors Group, Inc., The parent of BIG, now known as MBIA Insurance Corp.
of Illinois. Though a reinsurance agreement, BIG has ceded all of its net
insured risks, as well as its unearned premium and contingency reserves, to
the Insurer and the Insurer has reinsured BIG's net outstanding exposure.
Moody's Investors Service rates all bonds issues insured by MBIA "Aaa" and
short-term loans "MIG1," both designated to be of the highest quality.
Standard & Poor's rates all new issues insured by MBIA "AAA."
FINANCIAL SECURITY ASSURANCE. Financial Security Assurance ("Financial
Security" or "FSA") is monoline insurance company incorporated on March 16,
1984 under the laws of the State of New York. The operations of Financial
Security commenced on July 25, 1985, and Financial Security received its New
York State insurance license on September 23, 1985. Financial Security and
its two wholly owned subsidiaries are licensed to engage in financial
guaranty insurance business in 49 states, the District of Columbia and Puerto
Rico.
Financial Security and its subsidiaries are engaged exclusively in the
business of writing financial guaranty insurance, principally in respect of
asset-backed and other collateralized securities offered in domestic and
foreign markets. Financial Security and its subsidiaries also write
financial guaranty insurance in respect of municipal and other obligations
and reinsure financial guaranty insurance policies written by other leadings
insurance companies. In general, financial guaranty insurance consists of
the issuance of a guaranty of scheduled payments of an issuer's securities,
thereby enhancing the credit rating of these securities, in consideration for
payment of a premium to the insurer.
-14-
<PAGE>
Financial Security is 91.6% owned by U S West, Inc., and 8.4% owned by
The Tokio Marine and Fire Insurance Co., Ltd. ("Tokio Marine"). Neither U S
WEST, Inc. nor Tokio Marine is obligated to pay the debts of or the claims
against Financial Security. Financial Security is domiciled in the State of
New York and is subject to regulation by the State of New York Insurance
Department.
As of March 31, 1993, the total policyholders' surplus and contingency
reserves and the total unearned premium reserve, respectively, of Financial
Security and its consolidated subsidiaries were, in accordance with statutory
accounting principles, approximately $479,110,000 (unaudited) and
$220,078,000 (unaudited), and the total shareholder's equity and the
unearned premium reserve, respectively of Financial Security and its
consolidated subsidiaries were, in accordance with generally accepted
accounting principles, approximately $628,119,000 (unaudited) and
$202,493,000 (unaudited).
Copies of Financial Security's financial statements may be obtained by
writing to Financial Security at 350 Park Avenue, New York, New York 10022,
Attention: Communications Department. Financial Security's Telephone number
is (212) 826-0100.
Pursuant to an intercompany agreement, liabilities on financial guaranty
insurance written by Financial Security or either of its subsidiaries are
insured among such companies at an agreed-upon percentage substantially
proportional to their respective capital, surplus and reserves, subject to
applicable statutory risk limitations. In addition, Financial Security
reinsurers a portion of its liabilities under certain of its financial
guaranty insurance policies with unaffiliated reinsurers under various quota
share treaties and on a transaction-by-transaction basis. Such reinsurance
is utilized by Financial Security as a risk management device and to comply
with certain statutory and rating agency requirements; it does not alter or
limit Financial Security's obligations under any financial guaranty insurance
policy.
Financial Security's claims-paying ability is rated "Aaa" by Moody's
Investors Service, Inc., and "AAA" by Standard & Poor's, Nippon Investors
Service Inc., Duff & Phelps Inc. and Australian Ratings Pty. Ltd. Such
ratings reflect only the views of the respective rating agencies, are not
recommendations to buy, sell or hold securities and are subject to revision
or withdrawal at any time by such rating agencies.
CAPITAL GUARANTY INSURANCE COMPANY. Capital Guaranty Insurance Company
("Capital Guaranty") was incorporated in Maryland on June 25, 1986, and is
wholly owned subsidiary of Capital Guaranty Corporation, a Maryland insurance
holding company. Capital Guaranty Corporation is a publicly owned company
whose shares are traded on the New York Stock Exchange.
Capital Guaranty Insurance Company is authorized to provide insurance in
all 50 states, the District of Columbia and three U.S. territories. Capital
Guaranty focuses on insuring municipal securities and provides policies which
guaranty the timely payment of principal and interest when due for payment on
new issue and secondary market issue municipal bond transactions. Capital
Guaranty's claims-paying ability is rated "Triple-A" by both Moody's and
Standard & Poor's.
As of September 30, 1994, Capital Guaranty had $14.6 billion in net
exposure outstanding (excluding defeased issues). The total policyholders'
surplus and contingency reserve of Capital Guaranty was $293,036,690
(unaudited), and the total admitted assets were $193,194,000 (unaudited) as
reported to the Insurance Department of the State of Maryland. Financial
statements for Capital Guaranty Insurance Company, that have been prepared in
accordance with statutory insurance accounting standards, are available upon
request. The address of Capital Guaranty's headquarters is Steuart Tower,
22nd Floor, One Market Plaza, San Francisco, CA 94105-1413 and the telephone
number is (415) 995-8000.
Because the Municipal Bonds are insured as to the scheduled payment of
principal and interest and on the basis of the financial condition and the
method of operation of the insurance companies referred to above, either
Standard & Poor's or Moody's has assigned to the State Trusts' Units its
"AAA" or "Aaa" investment rating, respectively, and, in addition, Moody's has
assigned its "Aaa" investment rating to each of the Municipal Bonds covered
by the Financial Guaranty policy while held in the Trust. These are the
highest ratings assigned to securities by such rating agencies. See
"Description of Securities Ratings" herein. These
-15-
<PAGE>
ratings should not be construed as an approval of the offering of the Units
by Standard & Poor's or Moody's or as a guarantee of the market value of the
State Trusts or the Units. There is no guarantee that the "AAA" or "Aaa"
investment ratings will be maintained.
On the date shown under "Essential Information" in Part Two, the Estimated
Long-Term and Current Returns per Unit for the Trust, after payment of the
insurance premium, if any, were as indicated. The Estimated Long-Term and
Current Returns per Unit for a trust with an identical portfolio without the
insurance obtained by the Trust would have been higher on such date.
An objective of the portfolio insurance obtained by the Trust is to obtain
a higher yield on the portfolio of the Series of the Trust than would be
available if all the Municipal Bonds in such portfolios had Standard &
Poor's "AAA" rating and/or Moody's "Aaa" rating, and at the same time to have
the protection of insurance of prompt payment of interest and principal, when
due, on the Municipal Bonds. There is, of course, no certainty that this
result will be achieved. Municipal Bonds in a Series of the Trust which have
been insured by the issuer (all of which are rated "AAA" by Standard & Poor's
and/or "Aaa" by Moody's) may or may not have a higher yield than uninsured
bonds rated "AAA" by Standard & Poor's or "Aaa" by Moody's. In selecting
such Municipal Bonds for the portfolio, the Sponsor has applied the criteria
described above.
In the event of nonpayment of interest or principal, when due, in respect
of a Municipal Bond, the appropriate insurer shall make such payment not
later than 30 days after it has been notified that such nonpayment has
occurred or is threatened (but not earlier than the date such payment is
due). The insurer, as regards any payment it may make, will succeed to the
rights of the Trustee in respect thereof.
The Internal Revenue Service has issued a letter ruling which holds, in
effect, that insurance proceeds representing maturing interest on defaulted
municipal obligations paid to municipal bond funds substantially similar to
the Trust, under policy provisions substantially identical to the policies
described herein, will be excludable from Federal gross income under Section
103(a)(1) of the Internal Revenue Code. Holders of Units in the State Trust
should discuss with their tax advisers the degree of reliance which they may
place on this letter ruling. Furthermore, Chapman and Cutler, counsel for
the Sponsor, has given an opinion to the effect that such payment of proceeds
would be excludable from Federal gross income to the same extent that such
interest would have been so excludable if paid by the issuer of the defaulted
obligations. See "Federal Tax Status of the State Trusts."
DISTRIBUTION REINVESTMENT
Each Unitholder of a State Trust may elect to have distributions of
principal (including capital gains, if any) or interest or both automatically
invested without charge in shares of any mutual fund underwritten or advised
by Kemper Financial Services, Inc., an affiliate of the sponsor (the "Kemper
Funds") which are registered in the Unitholder's State of Residence, other
than those Kemper Funds sold with a contingent deferred sales charge. Since
the portfolio securities and investment objectives of such Kemper Funds may
differ significantly from that of the Trust, Unitholders should carefully
consider the consequences, including the fact that distributions from such
Kemper Funds may be taxable, before selecting such Kemper Funds for
reinvestment. Detailed information with respect to the investment objectives
and the management of the Funds is contained in their respective
prospectuses, which can be obtained from the Sponsor, and many investment
firms, upon request. An investor should read the appropriate prospectus
prior to making the election to reinvest.
A Unitholder who desires to have such distributions automatically
reinvested without charge should file a written notice of election with the
Program Agent referred to below. Such election must be received by the
Program Agent at least ten days prior to the Record Date applicable to any
distribution in order to be in effect for such Record Date. Any such
election shall remain in effect until a subsequent notice is received by the
Program Agent. See "Unitholders - Distributions to Unitholders."
-16-
<PAGE>
The Program Agent is Investors Fiduciary Trust Company. All inquiries
concerning participation in distribution reinvestment should be directed to
the Kemper Service Company, service agent for the Program Agent at P.O. Box
419430, Kansas City, Missouri 64173-0216, telephone (800) 422-2848.
INTEREST, ESTIMATED CURRENT RETURN AND ESTIMATED LONG-TERM RETURN
As of the opening of business on the date indicated therein, the Estimated
Current Returns and the Estimated Long-Term Returns for each State Trust were
as set forth under "Essential Information" for the applicable State Trust in
Part Two of this Prospectus. Estimated Current Returns are calculated by
dividing the estimated net annual interest income per Unit by the Public
Offering Price. The estimated net annual interest income per Unit will vary
with changes in fees and expenses of the Trustee, the Sponsor and the
Evaluator and with the principal prepayment, redemption, maturity, exchange
or sale of Securities while the Public Offering Price will vary with changes
in the offering price of the underlying Securities and with changes in
Purchased Interest in the case of Kemper Defined Funds; therefore, there is
no assurance that the present Estimated Current Returns will be realized in
the future. Estimated Long-Term Returns are calculated using a formula
which (1) takes into consideration, and determines and factors in the
relative weightings of, the market values, yields (which takes into account
the amortization of premiums and the accretion of discounts) and estimated
retirements of all of the Securities in the State Trust and (2) takes into
account the expenses and sales charge associated with each State Trust Unit.
Since the market values and estimated retirements of the Securities and the
expenses of the State Trust will change, there is no assurance that the
present Estimated Long-Term Returns will be realized in the future.
Estimated Current Returns and Estimated Long-Term Returns are expected to
differ because the calculation of Estimated Long-Term Returns reflects the
estimated date and amount of principal returned while Estimated Current
Returns calculations include only net annual interest income and Public
Offering Price.
FEDERAL TAX STATUS OF THE STATE TRUSTS
All Municipal Bonds deposited in the State Trusts were accompanied by
copies of opinions of bond counsel given to the issuers thereof at the time
of original delivery of the Municipal Bonds to the effect that the interest
thereon is excludable from gross income for Federal income taxes. In
addition, bond counsel to the issuing authorities rendered opinions as to the
exemption of interest on such Municipal Bonds, when held by residents of the
state in which the issuers of such Municipal Bonds are located, from State
income taxes and, where applicable, local income taxes. Gain realized on the
sale or redemption of the Municipal Bonds by the Trustee or of a Unit by a
Unitholder is, however, includable in gross income for Federal income tax
purposes. Such gain does not include any amounts received in respect of
accrued interest or earned original issue discount. It should be noted that
under recently enacted legislation described below that subjects accretion of
market discount on tax-exempt bonds to taxation as ordinary income, gain
realized on the sale or redemption of Municipal Bonds by the Trustee or of
Units by a Unitholder that would have been treated as capital gain under
prior law is treated as ordinary income to the extent it is attributable to
accretion of market discount. Market discount can arise based on the price a
Trust Fund pays for Municipal Bonds or the price a Unitholder pays for his or
her Units.
In connection with the offering of Units of the State Trusts, neither the
Sponsor, the Trustee, the Auditors nor their respective counsel have made any
review of the proceedings relating to the issuance of the Municipal Bonds or
the bases for such opinions.
In the opinion of Chapman and Cutler, counsel for the Sponsor:
Each State Trust is not an association taxable as a corporation for
Federal income tax purposes and interest and accrued original issue
discount on Bonds which is excludable from gross income under the Internal
Revenue Code of 1986 (the "Code") will retain its status when distributed
to Unitholders, except to the extent such interest is subject to the
alternative minimum tax, an additional tax on branches of foreign
corporations and the environmental tax (the "Superfund Tax"), as noted
below.
-17-
<PAGE>
Exemption of interest and accrued original issue discount on any
Municipal Bonds for Federal income tax purposes does not necessarily
result in tax-exemption under the laws of the several states as such laws
vary with respect to the taxation of such securities and in many states
all or part of such interest and accrued issue discount may be subject to
tax.
Each Unitholder is considered to be the owner of a pro rata portion of
each asset of the respective State Trust in the proportion that the number
of Units of such Trust held by him bears to the total number of Units
outstanding of such State Trust under subpart E, subchapter J of chapter 1
of the Code and will have a taxable event when such State Trust disposes
of a Bond, or when the Unitholder redeems or sells his Units. Unitholders
must reduce the tax basis of their Units for their share of accrued
interest received by a State Trust, if any, on Bonds delivered after the
Unitholders pay for their Units to the extent that such interest accrued
on such Bonds during the period from the Unitholder's settlement date to
the date such Bonds are delivered to a State Trust and, consequently, such
Unitholders may have an increase in taxable gain or reduction in capital
loss upon the disposition of such Units. Gain or loss upon the sale or
redemption of Units is measured by comparing the proceeds of such sale or
redemption with the adjusted basis of the Units. If the Trustee disposes
of Bonds (whether by sale, payment on maturity, redemption or otherwise),
gain or loss is recognized to the Unitholder. The amount of any such
gain or loss is measured by comparing the Unitholder's pro rata share of
the total proceeds from such disposition with the Unitholder's basis for
his or her fractional interest in the asset disposed of. In the case of a
Unitholder who purchases Units, such basis (before adjustment for earned
original issue discount and amortized bond premium, if any) is determined
by apportioning the cost of the Units among each of the State Trust's
assets ratably according to the value as of the date of acquisition of the
Units. The basis of each Unit and of each Municipal Bond which was issued
with original issue discount must be increased by the amount of the
accrued original issue discount and the basis of each Unit and of the
Unitholder's interest in each Municipal Bond which was acquired by such
Unitholder at a premium must be reduced by the annual amortization of
Municipal Bond premium. The tax cost reduction requirements of the Code
relating to amortization of bond premium may, under some circumstances,
result in the Unitholder realizing a taxable gain when his Units are sold
or redeemed for an amount equal to his original cost.
Any proceeds paid under individual policies obtained by issuers of
Bonds which represent maturing interest on defaulted obligations held by
the Trustee will be excludable from Federal gross income if, and to the
same extent as, such interest would have been so excludable if paid in the
normal course by the issuer of the defaulted obligations provided that, at
the time such policies are purchased, the amounts paid for such policies
are reasonable, customary and consistent with the reasonable expectation
that the issuer of the obligations, rather than the insurer, will pay debt
service on the obligations.
Sections 1288 and 1272 of the Internal Revenue Code of 1986 (the "Code")
provide a complex set of rules governing the accrual of original issue
discount. These rules provide that original issue discount accrues either on
the basis of a constant compound interest rate or ratably over the term of
the Municipal Bond, depending on the date the Municipal Bond was issued. In
addition, special rules apply if the purchase price of a Municipal Bond
exceeds the original issue price plus the amount of original issue discount
which would have previously accrued based upon its issue price (its "adjusted
issue price"). The application of these rules will also vary depending on
the value of the Municipal Bond on the date a Unitholder acquires his Units,
and the price the Unitholder pays for his Units. Investors with questions
regarding these Code sections should consult with their tax advisers.
"The Revenue Reconciliation Act of 1993" (the "Tax Act") subjects tax-
exempt bonds to the market discount rules of the Code effective for bonds
purchased after April 30, 1993. In general, market discount is the amount
(if any) by which the stated redemption price at maturity exceeds an
investor's purchase price (except to the extent that such difference, if any,
is attributable to original issue discount not yet accrued) subject to a
statutory "de minimis" rule. Market discount can arise based on the price a
Trust pays for Municipal Bonds or the price a Unitholder pays for his or her
Units. Under the Tax Act, accretion of market discount is taxable as
ordinary income; under prior law the accretion had been treated as capital
gain. Market
-18-
<PAGE>
discount that accretes while a Trust Fund holds a Municipal Bond would be
recognized as ordinary income by the Unitholders when principal payments are
received on the Municipal Bond, upon sale or at redemption (including early
redemption), or upon the sale or redemption of his or her Units, unless a
Unitholder elects to include market discount in taxable income as it
accrues. The market discount rules are complex and Unitholders should
consult their tax advisers regarding these rules and their application.
In the case of certain corporations, the alternative minimum tax and the
Superfund Tax depend upon the corporation's alternative minimum taxable
income, which is the corporation's taxable income with certain adjustments.
One of the adjustment items used in computing the alternative minimum taxable
income and the Superfund Tax of a corporation (other than an S Corporation,
Regulated Investment Company, Real Estate Investment Trust, or REMIC) is an
amount equal to 75% of the excess of such corporation's "adjusted current
earnings" over an amount equal to its alternative minimum taxable income
(before such adjustment item and the alternative tax net operating loss
deduction). "Adjusted current earnings" includes all tax-exempt interest,
including interest on all the Bonds in a State Trust. Unitholders are urged
to consult their tax advisers with respect to the particular tax consequences
to them including the corporate alternative minimum tax, the Superfund Tax
and the branch profits tax imposed by Section 884 of the Code.
Counsel for the Sponsor has also advised that under Section 265 of the
Code, interest on indebtedness incurred or continued to purchase or carry
Units of a State Trust is not deductible for Federal income tax purposes.
The Internal Revenue Service has taken the position that such indebtedness
need not be directly traceable to the purchase or carrying of Units (however,
these rules generally do not apply to interest paid on indebtedness incurred
to purchase or improve a personal residence or to purchase goods or services
for personal consumption). Also, under Section 265 of the Code, certain
financial institutions that acquire Units would generally not be able to
deduct any of the interest expense attributable to ownership of such Units.
Investors with questions regarding these issues should consult with their tax
advisers.
In the case of certain Municipal Bonds in the State Trusts, the opinions
of bond counsel indicate that interest on such securities received by a
"substantial user" of the facilities being financed with the proceeds of
these securities or persons related thereto, for periods while such
securities are held by such a user or related person, will not be excludable
from Federal gross income, although interest on such securities received by
others would be excludable from Federal gross income. "Substantial user" and
"related person" are defined under U.S. Treasury Regulations. Any person who
believes that he or she may be a "substantial user" or a "related person" as
so defined should contact his or her tax adviser.
In the case of corporations, the alternative tax rate applicable to long-
term capital gains is 35% effective for long-term capital gains realized in
taxable years beginning on or after January 1, 1993. For taxpayers other
than corporations, net capital gains are subject to a maximum marginal stated
tax rate of 28%. However, it should be noted that legislative proposals are
introduced from time to time that affect tax rates and could affect relative
differences at which ordinary income and capital gains are taxed. Under the
Code, taxpayers must disclose to the Internal Revenue Service the amount of
tax-exempt interest earned during the year.
Under existing law, the State Trusts are not associations taxable as a
corporation and the income of the Trust Funds will be treated as the income
of the Unitholders under the income tax laws of the State of Missouri.
All statements of law in the Prospectus concerning exclusion from gross
income for Federal, State or other tax purposes are the opinions of counsel
and are to be so construed.
At the respective times of issuance of the Bonds, opinions relating to the
validity thereof and to the exclusion of interest thereon from Federal gross
income are rendered by bond counsel to the respective issuing authorities.
Neither the Sponsor nor Chapman and Cutler has made any special review for
the State Trusts of the proceedings relating to the issuance of the Bonds or
of the basis for such opinions.
Section 86 of the Code, in general, provides that fifty percent of Social
Security benefits are includible in gross income to the extent that the sum
of "modified adjusted gross income" plus fifty percent of the Social
-19-
<PAGE>
Security benefits received exceeds a "base amount." The base amount is
$25,000 for unmarried taxpayers, $32,000 for married taxpayers filing a joint
return and zero for married taxpayers who do not live apart at all times
during the taxable year and who file separate returns. Modified adjusted
gross income is adjusted gross income determined without regard to certain
otherwise allowable deductions and exclusions from gross income and by
including tax exempt interest. To the extent that Social Security benefits
are includible in gross income, they will be treated as any other item of
gross income.
In addition, under the Tax Act, for taxable years beginning after December
31, 1993, up to 85 percent of Social Security benefits are includible in
gross income to the extent that the sum of "modified adjusted gross income"
plus fifty percent of Social Security benefits received exceeds an "adjusted
base amount." The adjusted base amount is $34,000 for married taxpayers,
$44,000 for married taxpayers filing a joint return and zero for married
taxpayers who do not live apart at all times during the taxable year and who
file separate returns.
Although tax-exempt interest is included in modified adjusted gross income
solely for the purpose of determining what portion, if any, of Social
Security benefits will be included in gross income, no tax-exempt interest,
including that received from the Trust Fund, will be subject to tax. A
taxpayer whose adjusted gross income already exceeds the base amount or the
adjusted base amount must include fifty percent or eighty-five percent of his
Social Security benefits in gross income whether or not he receives any tax-
exempt interest. A taxpayer whose modified adjusted gross income (after
inclusion of tax-exempt interest) does not exceed the base amount need not
include any Social Security benefits in gross income.
For a discussion of the State tax status of income earned on Units of a
State Trust, see the discussion of tax status for the applicable trust.
Except as noted therein, the exemption of interest on State and local
obligations for Federal income tax purposes discussed above does not
necessarily result in exemption under the income or other tax laws of any
State or city. The laws of the several States vary with respect to the
taxation of such obligations.
DESCRIPTION AND STATE TAX STATUS OF THE STATE TRUSTS
ALABAMA TRUSTS. Alabama's economy has experienced a major trend toward
industrialization over the past two decades. By 1990, manufacturing
accounted for 26.7% of Alabama's Real Gross State Product (the total value of
goods and services produced in Alabama). During the 1960s and 1970s the
State's industrial base became more diversified and balanced, moving away
from primary metals into pulp and paper, lumber, furniture, electrical
machinery, transportation equipment, textiles (including apparel), chemicals,
rubber and plastics. Since the early 1980s, modernization of existing
facilities and an increase in direct foreign investments in the State has
made the manufacturing sector more competitive in domestic and international
markets.
Among several leading manufacturing industries have been pulp and papers
and chemicals. In recent years Alabama has ranked as the fifth largest
producer of timber in the nation. The State's growing chemical industry has
been the natural complement of production of wood pulp and paper. Mining,
oil and gas production and service industries are also important to Alabama's
economy. Coal mining is by far the most important mining activity.
Major service industries that are deemed to have significant growth
potential include the research and medical training and general health care
industries, most notably represented by the University of Alabama medical
complex in Birmingham and the high technology research and development
industries concentrated in the Huntsville area.
Real Gross State Product. Real Gross State Product (RGSP) is a
comprehensive measure of economic performance for the State of Alabama.
Alabama's RGSP is defined as the total value of all final goods and services
produced in the State in constant dollar terms. Hence, changes in RGSP
reflect changes in final output. From 1984 to 1990 RGSP originating in
manufacturing increased by 22.99% whereas RGSP originating in all the non-
manufacturing sectors grew by 17.88%.
-20-
<PAGE>
Those non-manufacturing sectors exhibiting large percentage increases in
RGSP originating between 1984 and 1990 were 1) Services; 2) Trade; 3)
Farming; and 4) Finance, Insurance and Real Estate. From 1984 to 1990 RGSP
originating in Services increased by 35.07%; Trade grew by 21.53%; Farming
increased by 19.78%; and the gain in Finance, Insurance and Real Estate was
19.19%. The present movement toward diversification of the State's
manufacturing base and a similar present trend toward enlargement and
diversification of the service industries in the State are expected to lead
to increased economic stability.
Employment. The recent national economic recession was felt severely in
Alabama. The manufacturing growth described above reached a peak in 1979,
and was followed by a decrease in activity. The national economic recession
was principally responsible for this decline. The State's industrial
structure is particularly sensitive to high interest rates and monetary
policy, and the resulting unemployment during 1981-1984 was acute.
Unemployment rates have improved as the impact of the national economic
recovery has benefited the State. The economic recovery experienced on the
national level since 1982 has been experienced in Alabama as well, but to a
different degree and with a time lag.
Among other risks, the State of Alabama's economy depends upon cyclical
industries such as iron and steel, natural resources, and timber and forest
products. As a result, economic activity may be more cyclical than in
certain other Southeastern states. The national economic recession in the
early 1980s caused a decline in manufacturing activity and natural resource
consumption, and Alabama's unemployment rate was 14.4% in 1982, significantly
higher than the national average. Unemployment remains high in some rural
areas of the State. A trend towards diversification of the State's economic
base and an expansion of service industries may lead to improved economic
stability in the future, although there is no assurance of this.
Political subdivisions of the State of Alabama have limited taxing
authority. In addition, the Alabama Supreme Court has held that a
governmental unit may first use its taxes and other revenues to pay the
expenses of providing governmental service before paying debt service on its
bonds, warrants or other indebtedness. The State has statutory budget
provisions which result in a proration procedure in the event estimated
budget resources in a fiscal year are insufficient to pay in full all
appropriations for that year. Proration has a materially adverse effect on
public entities that are dependent upon State funds subject to proration.
Deterioration of economic conditions could adversely affect both tax and
other governmental revenues, as well as revenues to be used to service
various revenue obligations, such as industrial development obligations.
Such difficulties could affect the market value of the bonds held by the
Alabama Trust and thereby adversely affect Unitholders.
The foregoing information constitutes only a brief summary of some of the
financial difficulties 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 in the Alabama 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 Bonds, could
affect or could have an adverse impact on the financial condition of the
State and various agencies and political subdivisions located in the State.
The Sponsor is unable to predict whether or to what extent such factors or
other factors may affect the issuers of Bonds, the market value or
marketability of the Bonds or the ability of the respective issuers of the
Bonds acquired by the Alabama Trust to pay interest on or principal of the
Bonds.
At the time of the closing for each Alabama Trust, Special Counsel to the
Fund for Alabama tax matters rendered an opinion under then existing Alabama
income tax law applicable to taxpayers whose income is subject to Alabama
income taxation substantially to the effect that:
(1) The Alabama Trust is not taxable as a corporation for purposes of
the Alabama income tax.
(2) Income of the Alabama Trust, to the extent it is taxable, will be
taxable to the Unitholders, not the Alabama Trust.
-21-
<PAGE>
(3) Each Unitholder's distributive share of the Alabama Trust's net
income will be treated as the income of the Unitholder for purposes
of the Alabama income tax.
(4) Interest on obligations held by the Alabama Trust which is exempt
from the Alabama income tax will retain its tax-exempt character
when the distributive share thereof is distributed or deemed
distributed to each Unitholder.
(5) Any proceeds paid to the Alabama Trust under insurance policies
issued to the Sponsor or under individual policies obtained by the
Sponsor, the issuer or underwriter of the respective obligations
which represent maturing interest on defaulted obligations held by
the Trustee will be exempt from Alabama income tax if and to the
same extent as such interest would be exempt from such taxes if
paid directly by the issuer of such obligations.
(6) Each Unitholder will, for purposes of the Alabama income tax, treat
his distributive share of gains realized upon the sale or other
disposition of the Bonds held by the Alabama Trust as though the
Bonds were sold or disposed of directly by the Unitholders.
(7) Gains realized on the sale or redemption of Units by Unitholders,
who are subject to the Alabama income tax will be includable in the
Alabama income of such Unitholders.
ARIZONA TRUSTS. The following brief summary regarding the economy of
Arizona is based upon information drawn from publicly available sources and
is included for the purpose of providing the information about general
economic conditions that may or may not affect issuers of the Arizona Bonds.
The Sponsor has not independently verified any of the information contained
in such publicly available documents.
Arizona is the nation's sixth largest state in terms of area. Arizona's
main economic sectors include services, tourism and manufacturing. Mining
and agriculture are also significant, although they tend to be more capital
than labor intensive. Services is the single largest economic sector. Many
of these jobs are directly related to tourism.
The unemployment rate in Arizona for 1993 was 6.2% and for 1992 was 7.4%
compared to a national rate of 6.8% in 1993 and 7.4% in 1992. Job growth may
be adversely affected by the closing of a major air force base near Phoenix
and the bankruptcy of several major employers, including America West
Airlines.
In 1986, the value of Arizona real estate began a steady decline,
reflecting a market which had been overbuilt in the previous decade with a
resulting surplus of completed inventory. This decline adversely affected
both the construction industry and those Arizona financial institutions which
had aggressively pursued many facets of real estate lending. In the near
future, Arizona's financial institutions are likely to continue to experience
problems until the excess inventories of commercial and residential
properties are absorbed. The problems of the financial institutions have
adversely affected employment and economic activity. Longer prospects are
brighter. Arizona has been, and is projected to continue to be, one of the
fastest growing areas in the United States. Over the last several decades
the State has outpaced most other regions of the country in virtually every
major category of growth, including population, personal income, gross state
product and job creation.
The state operates on a fiscal year beginning July 1 and ending June 30.
Fiscal year 1995 refers to the year ending June 30, 1995.
Total General Fund revenues of $4.3 billion are expected during fiscal
year 1995. Approximately 44.5% of this budgeted revenue comes from sales and
use taxes, 44.4% from income taxes (both individual and corporate) and 4.4%
from property taxes. All taxes total approximately $4.0 billion, or 93% of
General Funds revenues. Non-tax revenue includes items such as income from
the state lottery, licenses, fees and permits, and interest.
-22-
<PAGE>
For fiscal year 1994 the budget called for expenditures of approximately
$4.1 billion. These expenditures fell into the following major categories:
education (47.4%), health and welfare (26.3%), protection and safety (4.0%),
general government (15.5%) and inspection and regulation, natural resources
and transportation (6.8%). The States's general fund expenditures for fiscal
year 1995 are budgeted at approximately $4.7 billion.
Most or all of the Bonds of the Arizona Trust are not obligations of the
State of Arizona, and are not supported by the State's taxing powers. The
particular source of payment and security for each of the Bonds is detailed
in the instruments themselves and in related offering materials. There can
be no assurances, however, with respect to whether the market value of
marketability of any of the Bonds issued by an entity other than the State of
Arizona will be affected by the financial or other condition of the State or
of any entity located within the State. In addition, it should be noted that
the State of Arizona, as well as counties, municipalities, political
subdivisions and other public authorities of the state, are subject to
limitations imposed by Arizona's constitution with respect to ad valorem
taxation, bonded indebtedness and other matters. For example, the
legislature cannot appropriate revenues in excess of 7% of the total personal
income of the state in any fiscal year. These limitations may affect the
ability of the issuers to generate revenues to satisfy their debt
obligations.
On July 21, 1994, the Arizona Supreme Court rendered its opinion in
Roosevelt Elementary School District Number 66, et al. v. Dianne Bishop, et
al. (the "Roosevelt Opinion"). In this opinion, the Arizona Supreme Court
held that the present statutory financing scheme for public education in the
State of Arizona does not comply with the Arizona constitution.
Subsequently, the Arizona School Boards Association, with the approval of the
appellants and the appellees to the Roosevelt Opinion, and certain Arizona
school districts, filed with the Arizona Supreme Court motions for
clarification of the Roosevelt Opinion, specifically with respect to seeking
prospective application of the Roosevelt Opinion. On July 29, 1994, the
Arizona Supreme Court clarified the Roosevelt Opinion to hold that such
opinion will have prospective effect only.
Certain other circumstances are relevant to the market value,
marketability and payment of any hospital and health care revenue bonds in
the Arizona Trust. The Arizona Legislature has in the past sought to enact
health care cost control legislation. Certain other health care regulatory
laws have expired. It is expected that the Arizona legislature will at
future sessions continue to attempt to adopt legislation concerning health
care cost control and related regulatory matters. The effect of any such
legislation or of the continued absence of any legislation restricting
hospital bed increased and limiting new hospital construction on the ability
of Arizona hospitals and other health care providers to pay debt service on
their revenue bonds cannot be determined at this time.
Arizona does not participate in the federally administered Medicaid
program. Instead, the state administers an alternative program, Arizona
Health Care Cost Containment System ("AHCCCS"), which provides health care to
indigent persons meeting certain financial eligibility requirements, through
managed care programs. In fiscal year 1994, AHCCCS was financed
approximately 60% by federal funds, 29% by state funds, and 11% by county
funds.
Under state law, hospitals retain the authority to raise with notification
and review by, but not approval from, the Department of Health Services.
Hospitals in Arizona have experienced profitability problems along with those
in other states. At least two Phoenix based hospitals have defaulted on or
reported difficulties in meeting their bond obligations in recent years.
Insofar as tax-exempt Arizona public utility pollution control revenue
bonds are concerned, the issuance of such bonds and the periodic rate
increases needed to cover operating costs and debt service are subject to
regulation by the Arizona Corporation Commission, the only significant
exception being the Salt River Project Agricultural Improvement and Power
District which, as a Federal instrumentality, is exempt from rate regulation.
On July 15, 1991, several creditors of Tucson Electric Power Company ("Tucson
Electric") filed involuntary petitions under Chapter 11 of the U.S.
Bankruptcy Code to force Tucson Power to reorganize under the supervision of
the bankruptcy court. On December 31, 1991, the Bankruptcy Court approved
the utility's motion to dismiss the July petition after five months of
negotiations between Tucson Electric and its
-23-
<PAGE>
creditors to restructure the utility's debts and other obligations. In
December 1992, Tucson Electric announced that it had completed its financial
restructuring. In January 1993, Tucson Electric asked the Arizona
Corporation Commission for a 9.3% average rate. Tucson Electric serves
approximately 270,000 customers, primarily in the Tucson area. Inability of
any regulated public utility to secure necessary rate increases could
adversely affect, to an indeterminable extent, its ability to pay debt
service on its pollution control revenue bonds.
Based on a recent U.S. Supreme Court ruling, the State has determined to
refund $197 million, including statutory interest, in State income taxes
previously collected from Federal retirees on their pensions. This payment
will be made over a four-year period beginning with approximately $14.6
million in tax refunds in fiscal year 1994. A combination of tax refunds and
tax credits will be used to satisfy this liability.
At the time of the closing for each Arizona Trust, Special Counsel to the
Fund for Arizona tax matters rendered an opinion under then existing Arizona
income tax law applicable to taxpayers whose income is subject to Arizona
income taxation substantially to the effect that:
For Arizona income tax purposes, each Unitholder will be treated as the
owner of a pro rata portion of the Arizona Trust, and the income of the Trust
therefore will be treated as the income of the Unitholder under State law.
For Arizona income tax purposes, interest on the Bonds which is excludable
from Federal gross income and which is exempt from Arizona income taxes when
received by the Arizona Trust, and which would be excludable from Federal
gross income and exempt from Arizona income taxes if received directly by a
Unitholder, will retain its status as tax-exempt interest when received by
the Arizona Trust and distributed to the Unitholders.
To the extent that interest derived from the Arizona Trust by a Unitholder
with respect to the Bonds is excludable from Federal gross income, such
interest will not be subject to Arizona income taxes.
Each Unitholder will receive taxable gain or loss for Arizona income tax
purposes when Bonds held in the Arizona Trust are sold, exchanged, redeemed
or paid at maturity, or when the Unitholder redeems or sells Units, at a
price that differs from original cost as adjusted for amortization of Bond
discount or premium and other basis adjustments, including any basis
reduction that may be required to reflect a Unitholder's share of interest,
if any, accruing on Bonds during the interval between the Unitholders
settlement date and the date such Bonds are delivered to the Arizona Trust,
if later.
Amounts paid by the Insurer under an insurance policy or policies issued
to the Trust, if any, with respect to the Bonds in the Trust with represent
maturing interest on defaulted obligations held by the Trustee will be exempt
from State income taxes if, and to the same extent as, such interest would
have been so exempt if paid by the issuer of the defaulted obligations
provided that, at the time such policies are purchased, the amounts paid for
such policies are reasonable, customary and consistent with the reasonable
expectation that the issuer of the obligations, rather that the insurer, will
pay debt service on the obligations.
Arizona law does not permit a deduction for interest paid or incurred on
indebtedness incurred or continued to purchase or carry Units in the Arizona
Trust, the interest on which is exempt from Arizona income taxes.
Neither the Bonds nor the Units will be subject to Arizona property taxes,
sales tax or use tax.
CALIFORNIA TRUSTS. The Trust will invest substantially all of its assets
in California Municipal Obligations. The Trust is therefore susceptible to
political, economic or regulatory factors affecting issuers of California
Municipal Obligations. These include the possible adverse effects of certain
California constitutional amendments, legislative measures, voter initiatives
and other matters that are described below. The following information
provides only a brief summary of the complex factors affecting the financial
situation in California (the"State") and is derived from sources that are
generally available to investors and are believed to be accurate. No
independent verification has been made of the accuracy or completeness of any
of the following
-24-
<PAGE>
information. It is based in part on information obtained from various State
and local agencies in California or contained in official statements for
various California Municipal Obligations.
There can be no assurance that future statewide or regional economic
difficulties, and the resulting impact on State or local governmental
finances generally, will not adversely affect the market value of California
Municipal Obligations held in the portfolio of the Fund or the ability of
particular obligors to make timely payments of debt service on (or relating
to) those obligations.
California's economy is the largest among the 50 states and one of the
largest in the world. The State's population of over 30 million represents
12% of the total United States population and grew by 27% in the 1980s.
Total personal income in the State, at an estimated $662 billion in 1991,
accounts for 13% of all personal income in the nation. Total employment is
almost 14 million, the majority of which is in the service, trade and
manufacturing sectors.
Reports issued by the State Department of Finance and other sources
indicate that the States economy is suffering its worst recession since the
1930s, with prospects for recovery slower than for the nation as a whole.
The State has lost over 800,000 jobs since the start of the recession in mid
1990 and additional job losses are expected before an upturn begins. The
largest job losses have been in Southern California, led by declines in the
aerospace and construction industries. Weaknesses statewide occurred in
manufacturing, construction, services and trade and will be hurt in the next
few years by continued cuts in federal defense spending and base closures.
Unemployment is expected to remain well above the national average in 1994.
The States economy is only expected to pull out of the recession slowly,
following the national recovery which has begun. Delay in recovery will
exacerbate shortfalls in State revenues.
Certain California Municipal Obligations may be obligations of issuers
which rely in whole or in part, directly or indirectly, on ad valorem
property taxes as a source of revenue. The taxing powers of California local
governments and districts are limited by Article XIIIA of the California
Constitution, enacted by the voters in 1978 and commonly known as
"Proposition 13." Briefly, Article XIIIA limits to 1% of full cash value the
rate of ad valorem property taxes on real property and generally restricts
the reassessment of property to 2% per year, except upon new construction or
change of ownership (subject to a number of exemptions). Taxing entities
may, however, raise ad valorem taxes above the 1% limit to pay debt service
on voter-approved bonded indebtedness.
Under Article XIIIA, the basic 1% ad valorem tax levy is applied against
the assessed value of property as of the owner's date of acquisition (or as
of March 1, 1975, if acquired earlier), subject to certain adjustments. This
system has resulted in widely varying amounts of tax on similarly situated
properties. Several lawsuits have been filed challenging the acquisition-
based assessment system of Proposition 13, and on June 18, 1992 the U.S.
Supreme Court announced a decision upholding Proposition 13.
Article XIIIA prohibits local governments from raising revenues through ad
valorem property taxes above the 1% limit; it also requires voters of any
governmental unit to give two-thirds approval to levy any "special tax"
However, court decisions allowed non-voter approved levy of "general taxes"
which were not dedicated to a specific use. In response to these decisions,
the voters of the State in 1986 adopted an initiative statute which imposed
significant new limits on the ability of local entities to raise or levy
general taxes, except by receiving majority local voter approval.
Significant elements of this initiative, "Proposition 62", have been
overturned in recent court cases. An initiative proposed to reenact the
provisions of Proposition 62 as a constitutional amendment was defeated by
the voters in November 1990, but such a proposal may be renewed in the
future.
California and its local governments are subject to an annual
"appropriations limit" imposed by Article XIIIB of the California
Constitution, enacted by the voters in 1979 and significantly amended by
Propositions 98 and 111 in 1988 and 1990, respectively. Article XIIIB
prohibits the State or any covered local government from spending
"appropriations subject to limitation" in excess of the appropriations limit
imposed. "Appropriations subject to limitation" are authorizations to spend
"proceeds of taxes," which consists of tax revenues and certain other funds,
including proceeds from regulatory licenses, user charges or other fees to
-25-
<PAGE>
the extent that such proceeds exceed the cost of providing the product or
service, but "proceeds of taxes" excludes most State subventions to local
governments. No limit is imposed on appropriations or funds which are not
"proceeds of taxes," such as reasonable user charges or fees and certain
other non-tax funds, including bond proceeds.
Among the expenditures not included in the Article XIIIB appropriations
limit are (1) the debt service cost of bonds issued or authorized prior to
January 1, 1979, or subsequently authorized by the voters, (2) appropriations
arising from certain emergencies declared by the Governor, (3) appropriations
for certain capital outlay projects, (4) appropriations by the State of post-
1989 increases in gasoline taxes and vehicle weight fees, and (5)
appropriations made in certain cases of emergency.
The appropriations limit for each year is adjusted annually to reflect
changes in cost of living and population, and any transfers of service
responsibilities between government units. The definitions for such
adjustments were liberalized in 1990 by Proposition 111 to follow more
closely growth in California's economy.
"Excess revenues are measured over a two-year cycle. Local governments
must return any excess to taxpayers by rate reduction. The State must refund
50% of any excess, with the other 50% paid to schools and community colleges.
With more liberal annual adjustment factors since 1988, and depressed
revenues since 1990 because of the recession, few governments are currently
operating near their spending limits, but this condition may change over
time. Local governments may by voter approval exceed their spending limits
for up to four years.
During fiscal year 1986-87, State receipts from proceeds of taxes exceeded
its appropriations limit by $1.1 billion, which was returned to taxpayers.
Since that year, appropriations subject to limitation have been under the
State limit. State appropriations are expected to be $3.7 billion under the
limit for Fiscal Year 1993-94.
Because of the complex nature of Articles XIIIA and XIIIB of the
California Constitution, the ambiguities and possible inconsistencies in
their terms, and the impossibility of predicting future appropriations or
changes in population and cost of living, and the probability of continuing
legal challenges, it is not currently possible to determine fully the impact
of Article XIIIA or Article XIIIB on California Municipal Obligations or on
the ability of the State or local governments to pay debt service on such
California Municipal Obligations. It is not presently possible to predict
the outcome of any pending litigation with respect to the ultimate scope,
impact or constitutionality of either Article XIIIA or Article XIIIB, or the
impact of any such determinations upon State agencies or local governments,
or upon their ability to pay debt service on their obligations. Future
initiative or legislative changes in laws or the California Constitution may
also affect the ability of the State or local issuers to repay their
obligations.
As of April 1, 1994, California had approximately $18.1 billion of general
obligation bonds outstanding, and $5.6 billion remained authorized but
unissued. In addition, at June 30, 1993, the State had lease-purchase
obligations, payable from the State's General Fund, of approximately $4.0
billion. Of the States's outstanding general obligation debt, approximately
28% os presently self-liquidating (for which program revenues are anticipated
to be sufficient to reimburse the General Fund for debt service payments).
Four general obligation bond propositions, totalling $5.9 billion, will be on
the June, 1994 ballot. In Fiscal Year 1992-93, debt service on general
obligation bonds and lease-purchase debt was approximately 4.1% of General
Fund revenues. The State has paid the principal of and interest on its
general obligation bonds, lease-purchase debt and short-term obligations when
due.
The principal sources of General Fund revenues in 1992-93 were the
California personal income tax (44% of total revenues), the sales tax (38%),
bank and corporation taxes (12%), and the gross premium tax on insurance
(3%). California maintains a Special Fund for Economic Uncertainties (the
"Economic Uncertainties Fund"), derived from General Fund revenues, as a
reserve to meet cash needs of the General Fund, but which is required to be
replenished as soon as sufficient revenues are available. Year-end balances
in the Economic Uncertainties Fund are included for financial reporting
purposes in the General Fund balance. In recent years, California has
budgeted to maintain the Economic Uncertainties Fund at around 3% of General
Fund
-26-
<PAGE>
expenditures but essentially no reserve is budgeted in 1992-93 or 1993-94
because reserves have been reduced by the recession.
Throughout the 1980s, State spending increased rapidly as the State
population and economy also grew rapidly, including increased spending for
many assistance programs to local governments, which were constrained by
Proposition 13 and other laws. The largest State program is assistance to
local public school districts. In 1988, an initiative (Proposition 98) was
enacted which (subject to suspension by a two-thirds vote of the Legislature
and the Governor) guarantees local school districts and community college
districts a minimum share of State General Fund revenues (currently about
34%).
Since the start of 1990-91 Fiscal Year, the State has faced adverse
economic, fiscal and budget conditions. The economic recession seriously
affected State tax revenues. It also caused increased expenditures for
health and welfare programs. The State is also facing a structural imbalance
in its budget with the largest programs supported by the General Fund (K-14
education, health, welfare and corrections) growing at rates significantly
higher than the growth rates for the principal revenue sources of the General
Fund. As a result, the State entered a period of budget imbalance, with
expenditures exceeding revenues for four of the last five fiscal years
through 1991-92.
As the State fell into a deep recession in the summer of 1990, the State
budget fell sharply out of balance in the 1990-91 and 1991-92 fiscal years,
despite significant expenditure cuts and tax increases. The State has
accumulated a $2.8 billion budget deficit by June 30, 1992. This deficit
also severely reduced the State's cash resources, so that it had to rely on
external borrowing in the short-term markets to meet its cash needs.
With the failure to enact a budget by July 1, 1992, the State had no legal
authority to pay many of its vendors until the budget was passed;
nevertheless, certain obligations (such as debt service, school
apportionments, welfare payments and employee salaries) were payable because
of continuing or special appropriations or court orders. However, the State
Controller did not have enough cash to pay all of these ongoing obligations
as they came due, as well as valid obligations incurred in the prior fiscal
year.
Starting on July 1, 1992, the Controller was required to issue "registered
warrants" in lieu of normal warrants backed by cash to pay many State
obligations. Available cash was used to pay constitutionally mandated and
priority obligations. Between July 1 and September 3, 1992, the Controller
issued an aggregate of approximately $3.8 billion of registered warrants, all
of which were called for redemption by September 4, 1992 following enactment
of the 1992-93 Budget Act and issuance by the State of $3.3 billion of
Interim Notes.
The 1992-93 Budget Act, when finally adopted, was projected to eliminate
the State's accumulation deficit, with additional expenditure cuts and a $1.3
billion transfer of State education funding costs to local governments by
shifting local property taxes to school districts. However, as the recession
continued longer and deeper than expected, revenues once again were far below
projections, and only reached a level just equal to the amount of
expenditures. Thus, the State continued to carry its $2.8 billion budget
deficit at June 30, 1993.
The 1993-94 Budget Act was similar to the prior year in reliance on
expenditure cuts and an additional $2.6 billion transfer of costs to local
government, particularly counties. A major feature of the budget was a two-
year plan to eliminate the accumulated deficit by borrowing into the 1994-95
fiscal year. With the recession still continuing longer than expected, the
1994-95 Governor's Budget now projects that in the 1993-94 Fiscal Year, the
General Fund will have $900 million less revenue and $800 million higher
expenditures than budgeted. As a result revenues will only exceed
expenditures by about $400 million. If this projection is met, it will be
the first operating surplus in four years; however, some budget analysts
outside the Department of Finance project revenues in the balance of 1993-94
will not even meet the revised, lower projection. In addition, the General
Fund may have some unplanned costs for relief related to the January 17, 1994
Northward earthquake.
-27-
<PAGE>
The State has implemented its short-term borrowing as part of the deficit
elimination plan, and has also borrowed additional sums to cover cash flow
shortfalls in the spring of 1994, for a total of $3.2 billion, coming due in
July and December, 1994. Repayment of these short-term notes will require
additional borrowing, as the State's cash position continues to be adversely
affected.
The Governor's 1994-95 Budget proposal recognizes the need to bridge a gap
of around $5 billion by June 30, 1995. Over $3.1 billion of this amount is
being requested from the federal government as increased aid, particularly
for costs associated with incarcerating, educating and providing health and
welfare services to undocumented immigrants. However, President Clinton has
not included these costs in his proposed Fiscal 1995 Budget. The rest of the
budget gap is proposed to be closed with expenditure cuts and projected $600
million of new revenue assuming the State wins a tax case presently pending
in the U.S. Supreme Court. Thus the State will once again face significant
uncertainties and very difficult choices in the 1994-95 budget, as tax
increases are unlikely and many cuts and budget adjustments have been made in
the past three years.
The State's severe financial difficulties for the current and upcoming
budget years will result in continued pressure upon various local
governments, particularly school districts and counties which depend on State
aid. Despite efforts in recent years to increase taxes and reduce
governmental expenditures, there can be no assurance that the State will not
face budget gaps in the future.
State general obligation bonds are currently rated "A1" by Moody's and "A"
by S&P. Both of these ratings were recently reduced from "Aa" and "A+"
levels, respectively. There can be no assurance that such ratings will be
maintained in the future. It should be noted that the creditworthiness of
obligations issued by local California issuers may be unrelated to the
creditworthiness of obligations issued by the State of California, and that
there is no obligation on the part of the State to make payment on such local
obligations in the event of default.
The State is involved in certain legal proceedings (described in the
State's recent financial statements) that, if decided against the State, may
require the State to make significant future expenditures or may
substantially impair revenues.
On December 7, 1994, Orange County, California (the "County"), together
with its pooled investment fund (the "Fund") filed for protection under
Chapter 9 of the federal Bankruptcy Code, after reports that the Fund had
suffered significant market losses in its investments which caused a
liquidity crisis for the Fund and the County. Approximately 180 other
public entities, most but not all located in the County, were also depositors
in the Fund. As of December 13, 1994, the County indicated that the Fund had
lost about 27% of its initial deposits of approximately $7.4 billion. The
County may suffer further losses as it sells investments to restructure the
Fund. Many of the entities which kept moneys in the Fund, including the
County, are facing cash flow difficulties because of the bankruptcy filing
and may be required to reduce programs or capital projects.
The State of California has no obligations with respect to any bonds or
other securities of the County or any of the other participating entities,
although under existing legal precedents, the State may be obligated to
ensure that school districts have sufficient funds to operate.
Property tax revenues received by local governments declined more than 50%
following passage of Proposition 13. Subsequently, the California
Legislature enacted measures to provide for the redistribution of the State's
General Fund surplus to local agencies, the reallocation of certain State
revenues to local agencies and the assumption of certain governmental
functions by the State to assist municipal issuers to raise revenues. Total
local assistance from the State's General Fund was budgeted at approximately
75% of General Fund expenditures in recent years, including the effect of
implementing reductions in certain aid programs. To reduce State General
Fund support school districts, the 1992-93 and 1993-94 Budget Acts caused
local governments to transfer $3.9 billion of property tax revenues to school
districts, representing loss of the post-Proposition 13 "bailout" aid. Local
governments have in return received greater revenues and greater flexibility
to operate health and welfare programs. To the extent the State should be
constrained by its Article XIIIB appropriations limit, or its obligation to
conform to Proposition 98, or other fiscal considerations,
-28-
<PAGE>
the absolute level, or the rate of growth, of State assistance to local
governments may be reduced. Any such reductions in State aid could compound
the serious fiscal constraints already experienced by many local governments,
particularly counties. The Richmond United School District (Contra Costa
County) entered bankruptcy proceedings in May 1991, but the proceedings have
been dismissed.
California Municipal Obligations which are assessment bonds may be
adversely affected by a general decline in real estate values or a slowdown
in real estate sales activity. In many cases, such bonds are secured by land
which is undeveloped at the time of issuance but anticipated to be developed
within a few years after issuance. In the event of such reduction or
slowdown, such development may not occur or may be delayed, thereby
increasing the risk of a default on the bonds. Because the special
assessments or taxes securing these bonds are not the personal liability of
the owners of the property assessed, the lien on the property is the only
security for the bonds. Moreover, in most cases the issuer of these bonds is
not required to make payments on the bonds in the event of delinquency in the
payment of assessments or taxes, except from amounts, if any, in a reserve
fund established for the bonds.
Certain California long-term lease obligations, though typically payable
from the general fund of the municipality, are subject to "abatement" in the
event the facility being leased is unavailable for beneficial use and
occupancy by the municipality during the term of the lease. Abatement is not
a default, and there may be no remedies available to the holders of the
certificates evidencing the lease obligation in the event abatement occurs.
The most common causes of abatement are failure to complete construction of
the facility before the end of the period during which lease payments have
been capitalized and uninsured casualty losses to the facility (e.g., due to
earthquake). In the event abatement occurs with respect to a lease
obligation, lease payments may be interrupted (if all available insurance
proceeds and reserves are exhausted) and the certificates may not be paid
when due.
Several years ago the Richmond United School District (the "District")
entered into a lease transaction in which certain existing properties of the
District were sold and leased back in order to obtain funds to cover
operating deficits. Following a fiscal crisis in which the District's
finances were taken over by a State receiver (including a brief period under
bankruptcy court protection), the District failed to make rental payments on
this lease, resulting in a lawsuit by the Trustee for the Certificate of
Participation holders, in which the State was a named defendant (on the
grounds that it controlled the District's finances). One of the defenses
raised in answer to this lawsuit was the invalidity of the original lease
transaction. The trial court has upheld the validity of the District's
lease, and the case has been settled. Any judgment in any future case
against the position asserted by the Trustee in the Richmond case may have
adverse implications for lease transactions of a similar nature by other
California entities.
The repayment of Industrial Development Securities secured by real
property may be affected by California laws limiting foreclosure rights of
creditors. Securities backed by health care and hospital revenues may be
affected by changes in State regulations governing cost reimbursements to
health care providers under Medi-Cal (the State's Medicaid program),
including risks related to the policy of awarding exclusive contracts to
certain hospitals.
Limitations on ad valorem property taxes may particularly affect "tax
allocation" bonds issued by California redevelopment agencies. Such bonds
are secured solely by the increase in assessed valuation of a redevelopment
project area after the start of redevelopment activity. In the event that
assessed values in the redevelopment project decline (e.g., because of a
major natural disaster such as an earthquake), the tax increment revenue may
be insufficient to make principal and interest payments on these bonds. Both
Moody's and S&P suspended ratings on California tax allocation bonds after
the enactment of Articles XIIIA and XIIIB, and only resumed such ratings on a
selective basis.
Proposition 87, approved by California voters in 1988, requires that all
revenues produced by a tax rate increase go directly to the taxing entity
which increased such tax rate to repay that entity's general obligation
indebtedness. As a result, redevelopment agencies (which, typically, are the
Issuers of tax allocation securities) no longer receive an increase in tax
increment when taxes on property in the project area are increased to repay
voter-approved bonded indebtedness.
-29-
<PAGE>
The effect of these various constitutional and statutory changes upon the
ability of California municipal securities issuers to pay interest and
principal on their obligations remains unclear. Furthermore, other measures
affecting the taxing or spending authority of California or its political
subdivisions may be approved or enacted in the future. Legislation has been
or may be introduced which would modify existing taxes or other revenue-
raising measures or which either would further limit or, alternatively, would
increase the abilities of state and local governments to impose new taxes or
increase existing taxes. It is not presently possible to determine the
impact of any such legislation on California Municipal Obligations in which
the Fund may invest, future allocations of state revenues to local
governments or the abilities of state or local governments to pay the
interest on, or repay the principal of, such California Municipal
Obligations.
Substantially all of California is within an active geologic region
subject to major seismic activity. Any California Municipal Obligation in
the Portfolio could be affected by an interruption of revenues because of
damaged facilities, or, consequently, income tax deductions for casualty
losses or property tax assessment reductions. Compensatory financial
assistance could be constrained by the inability of (i) an issuer to have
obtained earthquake insurance coverage at reasonable rates; (ii) an insurer
to perform on its contracts of insurance in the event of widespread losses;
or (iii) the Federal or State government to appropriate sufficient funds
within their respective budget limitations.
At the time of the closing for each California Trust, Special Counsel to
each California Trust for California tax matters, rendered an opinion under
then existing California income tax law applicable to taxpayers whose income
is subject to California income taxation substantially to the effect that:
(1) the California Trust is not an association taxable as a corporation
and the income of the California Trust will be treated as the
income of the Unitholders under the income tax laws of California;
(2) amounts treated as interest on the underlying Securities in the
California Trust which are exempt from tax under California
personal income tax and property tax laws when received by the
California Trust will, under such laws, retain their status as tax-
exempt interest when distributed to Unitholders. However, interest
on the underlying Securities attributed to a Unitholder which is a
corporation subject to the California franchise tax laws may be
includable in its gross income for purposes of determining its
California franchise tax. Further, certain interest which is
attributable to a Unitholder subject to the California personal
income tax and which is treated as an item of tax preference for
purposes of the federal alternative minimum tax pursuant to Section
57(a)(5) of the Internal Revenue Code of 1986 may also be treated
as an item of tax preference that must be taken into account in
computing such Unitholder's alternative minimum taxable income for
purposes of the California alternative minimum tax enacted by 1987
California Statutes, chapter 1138. However, because of the
provisions of the California Constitution exempting the interest on
bonds issued by the State of California, or by local governments
within the state, from taxes levied on income, the application of
the new California alternative minimum tax to interest otherwise
exempt from the California personal income tax in some cases may be
unclear;
(3) under California income tax law, each Unitholder in the California
Trust will have a taxable event when the California Trust disposes
of a Security (whether by sale, exchange, redemption, or payment at
maturity) or when the Unitholder redeems or sells Units. Because of
the requirement that tax cost basis be reduced to reflect
amortization of bond premium, under some circumstances a Unitholder
may realize taxable gains when Units are sold or redeemed for an
amount equal to, or less than, their original cost. The total cost
of each Unit in the California Trust to a Unitholder is allocated
among each of the Bond issues held in the California Trust (in
accordance with the proportion of the California Trust comprised by
each Bond issue) in order to determine his per Unit tax cost for
each Bond issue; and the tax cost reduction requirements relating
to amortization of bond premium will apply separately to the per
Unit tax cost of each Bond issue. Unitholders' bases in their
units, and the bases for their fractional interest in each Trust
asset, may have to be adjusted for their pro rata share of accrued
interest received, if any, on Securities delivered after the
Unitholders' respective settlement dates;
-30-
<PAGE>
(4) under the California personal property tax laws, bonds (including
the Securities in the California Trust) or any interest therein is
exempt from such tax;
(5) any proceeds paid under the insurance policy issued to the
California Trust with respect to the Securities which represent
maturing interest on defaulted obligations held by the Trustee will
be exempt from California personal income tax if, and to the same
extent as, such interest would have been so exempt if paid by the
issuer of the defaulted obligations; and
(6) under Section 17280(b)(2) of the California Revenue and Taxation
Code, interest on indebtedness incurred or continued to purchase or
carry Units of the California Trust is not deductible for the
purposes of the California personal income tax. While there
presently is no California authority interpreting this provision,
Section 17280(b)(2) directs the California Franchise Tax Board to
prescribe regulations determining the proper allocation and
apportionment of interest costs for this purpose. The Franchise Tax
Board has not yet proposed or prescribed such regulations. In
interpreting the generally similar Federal provision, the Internal
Revenue Service has taken the position that such indebtedness need
not be directly traceable to the purchase or carrying of Units
(although the Service has not contended that a deduction for
interest on indebtedness incurred to purchase or improve a personal
residence or to purchase goods or services for personal consumption
will be disallowed). In the absence of conflicting regulations or
other California authority, the California Franchise Tax Board
generally has interpreted California statutory tax provisions in
accord with Internal Revenue Service interpretations of similar
Federal provisions.
At the respective times of issuance of the Securities, opinions relating
to the validity thereof and to the exemption of interest thereon from Federal
income tax and California personal income tax are rendered by bond counsel to
the respective issuing authorities. Except in certain instances in which
Special Counsel acted as bond counsel to issuers of Securities, and as such
made a review of proceedings relating to the issuance of certain Securities
at the time of their issuance, Special Counsel has not made any special
review for the California Trust of the proceedings relating to the issuance
of the Securities or of the basis for such opinions.
COLORADO TRUST. The State Constitution requires that expenditures for any
fiscal year not exceed revenues for such fiscal year. By statute, the amount
of General Fund revenues available for appropriation is based upon revenue
estimates which, together with other available resources, must exceed annual
appropriations by the amount of the unappropriated reserve
(the "Unappropriated Reserve"). The Unappropriated Reserve requirement for
fiscal years 1991, 1992 and 1993 was set at 3% of total appropriations from
the General Fund. For fiscal years 1994 and thereafter, the Unappropriated
Reserve requirement is set at 4%. In addition to the Unappropriated Reserve,
a constitutional amendment approved by Colorado voters in 1992 requires the
State and each local government to reserve a certain percentage of its fiscal
year spending (excluding bonded debt service) for emergency use (the
"Emergency Reserve"). The minimum Emergency Reserve is set at 2% for 1994
and 3% for 1995 and later years. For fiscal year 1992 and thereafter,
General Fund appropriations are also limited to an amount equal to the cost
of performing certain required reappraisals of taxable property plus an
amount equal to the lesser of (i) five percent of Colorado personal income or
(ii) 106% of the total General Fund appropriations for the previous fiscal
year. This restriction does not apply to any General Fund appropriations
which are required as a result of a new federal law, a final state or federal
court order or moneys derived from the increase in the rate or amount of any
tax or fee approved by a majority of the registered electors of the State
voting at any general election. In addition, the statutory limit on the
level of General Fund appropriations may be exceeded for a given fiscal year
upon the declaration of a State fiscal emergency by the State General
Assembly.
The 1992 General Fund balance was $133.3 million, which was $49.1 million
below the Unappropriated Reserve requirement. The 1993 fiscal year ending
General Fund balance was $326.6 million, or $196.7 million over the required
Unappropriated Reserve and Emergency Reserve. Based on June 20, 1994
estimates, the 1994 fiscal year ending General Fund balance is expected to be
$337.7 million, or $224.3 million over the required Unappropriated Reserve
and Emergency Reserve.
-31-
<PAGE>
On November 3, 1992 voters in Colorado approved a constitutional amendment
(the "Amendment") which, in general, became effective December 31, 1992, and
which could restrict the ability of the State and local governments to
increase revenues and impose taxes. The Amendment applies to the State and
all local governments, including home rule entities ("Districts").
Enterprises, defend as government-owned businesses authorized to issue
revenue bonds and receiving under 10% of annual revenue in grants from all
Colorado state and local governments combined, are excluded from the
provisions of the Amendment.
The provisions of the Amendment are unclear and will probably require
judicial interpretation. Among other provisions, beginning November 4, 1992,
the Amendment requires voter approval prior to tax increases, creation of
debt, or mill levy or valuation for assessment ratio increases. The
Amendment also limits increases in government spending and property tax
revenues to specified percentages. The Amendment requires that District
property tax revenues yield no more than the prior year's revenues adjusted
for inflation, voter approved changes and (except with regard to school
districts) local growth in property values according to a formula set forth
in the Amendment. School districts are allowed to adjust tax levies for
changes in student enrollment. Pursuant to the Amendment, local government
spending is to be limited by the same formula as the limitation for property
tax revenues. The Amendment limits increases in expenditures from the State
General Fund and program revenues (cash funds) to the growth in inflation
plus the percentage change in State population in the prior calendar year.
The bases for initial spending and revenue limits are fiscal year 1992
spending and 1991 property taxes collected in 1992. The bases for spending
and revenue limits for fiscal year 1994 and later years will be the prior
fiscal year's spending and property taxes collected in the prior calendar
year. Debt service changes, reductions and voter-approved revenue changes are
excluded from the calculation bases. The Amendment also prohibits new or
increased real property transfer tax rates, new State real property taxes and
local District income taxes.
Litigation concerning several issues relating to the Amendment is pending
in the Colorado courts. The litigation deals with three principal issues:
(i) whether Districts can increase mill levies to pay debt service on general
obligation bonds without obtaining voter approval; (ii) whether a multi-year
lease purchase agreement subject to annual appropriations is an obligation
which requires voter approval prior to execution of the agreement; and(iii)
what constitutes an "enterprise" which is excluded from the provisions of the
Amendment. In September, 1994, the Colorado Supreme Court held that
Districts can increase mill levies to pay levies to pay debt service on
general obligation bonds issued after the effective date of the Amendment;
litigation regarding mill levy increases to pay general obligation bonds
issued prior to the Amendment is still pending. Various cases addressing the
remaining issues are at different stages in the trial and appellate process.
The outcome of such litigation cannot be predicted at this time.
According to the Colorado Economic Perspective, Fourth Quarter, FY 1993-
94, June 20, 1994 (the "Economic Report"), inflation for 1992 was 3.8% and
population grew at the rate of 2.8% in Colorado. Accordingly, under the
Amendment, increases in State expenditures during the 1994 fiscal year will
be limited to 6.6% over expenditures during the 1993 fiscal year. The 1993
fiscal year is the base year for calculating the limitation for the 1994
fiscal year. The limitation for the 1995 fiscal year is projected to be
7.1%, based on projected inflation of 4.2% for 1993 and projected population
growth of 2.9% during 1993. For the 1993 fiscal year, the General Fund
revenues totalled $3,443.3 million and program revenues (cash funds) totalled
$1,617.6 million, resulting in total estimated base revenues of $5,060.9
million. Expenditures for the 1994 fiscal year, therefore, cannot exceed
$5,394.9 million. However, the 1994 fiscal year General Fund and program
revenues (cash funds) are projected to be only $5,242.8 million, or $152.1
million less than expenditures allowed under the spending limitation.
There is also a statutory restriction on the amount of annual increases in
taxes that the various taxing jurisdictions in Colorado can levy without
electoral approval. This restriction does not apply to taxes levied to pay
general obligation debt.
As the State experienced revenue shortfalls in the mid-1980s, it adopted
various measures, including impoundment of funds by the Governor, reduction
of appropriations by the General Assembly, a temporary increase in the sales
tax, deferral of certain tax reductions and inter-fund borrowings. On a GAAP
basis, the State had unrestricted General Fund balances at June 30 of
approximately $100.3 million in fiscal year 1988,
-32-
<PAGE>
$134.8 million in fiscal year 1989 $116.6 million in fiscal year 1990, $16.3
million in fiscal year 1991 and $133.3 million in fiscal year 1992 and
$326.6 million in fiscal year 1993. The fiscal year 1994 unrestricted
General Fund is currently projected to be $337.7 million.
For fiscal year 1993, the following tax categories generated the following
respective revenue percentages of the States's $3,443.3 million total gross
receipts: individual taxes represented 51.1% of gross fiscal year 1993
receipts; sales, use and excise taxes represented 31.3% of gross fiscal year
1993 receipts; and corporate income taxes represented 4.0% of gross fiscal
year 1993 receipts. The final budget for fiscal year 1994 projects general
fund revenues of approximately $3,570.8 million and appropriations of
approximately $3,556.8 million. The percentages of general fund revenue
generated by type of tax for fiscal year 1994 are not expected to be
significantly different from fiscal year 1993 percentages.
Under its constitution, the State of Colorado is not permitted to issue
general obligation bonds secured by the full faith and credit of the State.
However, certain agencies and instrumentalities of the State are authorized
to issue bonds secured by revenues from specific projects and activities.
The State enters into certain lease transactions which are subject to annual
renewal at the option of the State. In addition, the State is authorized to
issue short-term revenue anticipation notes. Local governmental units in the
State are also authorized to incur indebtedness. The major source of
financing for such local government indebtedness is an ad valorem property
tax. In addition, in order to finance public projects, local governments in
the State can issue revenue bonds payable from the revenues of a utility or
enterprise or from the proceeds of an excise tax, or assessment bonds payable
from special assessments. Colorado local governments can also finance public
projects through leases which are subject to annual appropriation at the
option of the local government. Local governments in Colorado also issue tax
anticipation notes. The Amendment requires prior voter approval for the
creation of any multiple fiscal year debt or other financial obligation
whatsoever, except for refundings at a lower rate or obligations of an
enterprise.
Based on data published by the State of Colorado, Office of State Planning
and Budgeting as presented in the Economic Report, over 50% of non-
agricultural employment in Colorado in 1993 was concentrated in the retail
and wholesale trade and service sectors, reflecting the importance of tourism
to the State's economy and of Denver as a regional economic and
transportation hub. The government and manufacturing sectors followed as the
fourth and fifth largest employment sectors in the State, representing
approximately 17.8% and 11.3%, respectively, of non-agricultural employment
in the State in 1993.
According to the Economic Report, the unemployment rate improved slightly
from an average of 5.9% during 1992 to 5.2% during 1993. Total retail sales
increased by 9.7% during 1993. Colorado continued to surpass the job growth
rate of the U.S. with a 3.4% rate of growth projected for Colorado in 1994,
as compared with 2.2% for the nation as a whole. However, the rate o job
growth in Colorado is expected to decline in 1995, primarily due to the
completion in 1994 of large public works projects such as Denver
International Airport, Coors Baseball Field, and the Denver public Library
renovation project.
Personal income rose 6.6% in Colorado during 1992 and 5.5% in 1991. In
1992, Colorado was the twelfth fastest growing state in terms of personal
income growth. However, because of heavy migration into the state and a
large increase in low-paying retail sector jobs, per capita personal income
in Colorado increased by only 3.8% in 1992, 0.1% below the increase in per
capita personal income for the nation as a whole.
Economic conditions in the State may have continuing effects on other
governmental units within the State (including issuers of the Bonds in the
Colorado Trust), which, to varying degrees, have also experienced reduced
revenues as a result of recessionary conditions and other factors.
At the time of the closing for each Colorado Trust, Special Counsel to the
Fund for Colorado tax matters rendered an opinion under then existing
Colorado income tax law applicable to taxpayers whose income is subject to
Colorado income taxation substantially to the effect that:
Because Colorado income tax law is based upon the Federal law, the
Colorado Trust is not an association taxable as a corporation for purposes of
Colorado income taxation.
-33-
<PAGE>
With respect to Colorado Unitholders, in view of the relationship between
Federal and Colorado tax computations described above:
(1) Each Colorado Unitholder will be treated as owning a pro rata share
of each asset of the Colorado Trust for Colorado income tax
purposes in the proportion that the number of Units of such Trust
held by the Unitholder bears to the total number of outstanding
Units of the Colorado Trust, and the income of the Colorado Trust
will therefore be treated as the income of each Colorado Unitholder
under Colorado law in the proportion described;
(2) Interest on Bonds that would not be includable in income for income
tax purposes when paid directly to a Colorado Unitholder will be
exempt from Colorado income taxation when received by the Colorado
Trust and attributed to such Colorado Unitholder and when
distributed to such Colorado Unitholder;
(3) Any proceeds paid under an insurance policy or policies issued to
the Colorado Trust with respect to the Bonds in the Colorado Trust
which represent maturing interest on defaulted obligations held by
the Trustee will be excludable from Colorado adjusted gross income
if, and to the same extent as, such interest would have been so
excludable if paid in the normal cause by the issuer of the
defaulted obligations;
(4) Any proceeds paid under individual policies obtained by issuers of
Bonds in the Colorado Trust which represent maturing interest on
defaulted obligations held by the Trustee will not be includable
in income for Colorado income tax purposes if, and to the same
extent as, such interest would have been so excludable if paid in
the normal course by the issuer of the defaulted obligations;
(5) Each Colorado Unitholder will realize taxable gain or loss when the
Colorado Trust disposes of a Bond (whether by sale, exchange,
redemption, or payment at maturity) or when the Colorado Unitholder
redeems or sells Units at a price that differs from original cost
as adjusted for amortization of bond discount or premium and other
basis adjustments (including any basis reduction that may be
required to reflect a Colorado Unitholders share of interest, if
any, accuring on Bonds during the interval between the Colorado
Unitholders settlement date and the date such Bonds are delivered
to the Colorado Trust, if later);
(6) Tax cost reduction requirements relating to amortization of bond
premium may, under some circumstances, result in Colorado
Unitholders realizing taxable gain when their Units are sold or
redeemed for an amount equal to or less than their original cost;
and
(7) If interest on indebtedness incurred or continued by a Colorado
Unitholder to purchase Units in the Colorado Trust is not
deductible for federal income tax purposes, it also will be non-
deductible for Colorado income tax purposes.
Unitholders should be aware that all tax-exempt interest, including their
share of interest on the Bonds paid to the Colorado Trust, is taken into
account for purposes of determining eligibility for the Colorado Property
Tax/Rent/Heat Rebate.
FLORIDA TRUSTS. Florida's economy has in the past 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 1993 the share had edged downward to five
percent. This trend is expected to continue as Florida's economy continues
to diversify. Florida, nevertheless, has a dynamic construction industry
with single and multi-family housing starts accounting for 8.5% of total U.S.
housing starts in 1993 while the State's population is 5.3% of the U.S.
-34-
<PAGE>
total population. Florida's housing starts since 1980 have represented an
average of 11.0% of the U.S.'s total annual starts, and since 1980 total
housing starts have averaged 156,450 a year.
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 (with an estimated population of 13.4 million),
its annual population growth is now projected to decline as the number of
people moving into the State is expected to hover near the mid 250,000 range
annually throughout the 1990s. This population trend should provide fuel for
business and home builders to keep construction activity lively in Florida
for some time to come. However, other factors do influence the level of
construction in the State. For example, Federal tax reform in 1986 and other
changes to the Federal income tax code have eliminated tax deductions for
owners of two or more residential real estate properties and have lengthened
depreciation schedules on investment and commercial properties. Economic
growth and existing supplies of homes also contribute to the level of
construction activity in the State.
Since 1980, the State's job creation rate is almost 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
total number of new jobs created. Contributing to the State's rapid rate of
growth in employment and income is international trade. Since 1980, the
State's unemployment rate has generally been below that of the U.S. In
recent years, however, as the State's economic growth has slowed from its
previous highs, the State's unemployment rate has tracked above the national
average. The average in Florida since 1980 has been 6.5% while the national
average is 7.1%. According to the U.S. Department of Commerce, the Florida
Department of Labor and Employment Security, and the Florida Consensus
Economic Estimating Conference (together, the "Organization"), the State's
unemployment rate was 8.2% during 1992. As of January, 1994, the
Organization estimates that the unemployment rate will be 6.7% for 1993-94
and 6.1% in 1994-95.
The rate of job creation in Florida's manufacturing sector has exceeded
that of the U.S. From the beginning of 1980 through 1993, the State added
over 50,100 new manufacturing jobs, an 11.7% increase. During the same
period, national manufacturing employment declined ten out of the fourteen
years, for a loss of 2,977,000 jobs.
Total non-farm employment in Florida is expected to increase 2.7% in 1993-
94 and rise 3.8% in 1994-95. Trade and services, the two largest figures,
account for more than half of the total non-farm employment. Employment in
the service sectors should experience an increase of 3.9% in 1993-94, while
growing 4.9% in 1994-95. Trade is expected to expand 2.2% in 1994 and 3.4%
in 1995. The service sector is now the State's largest employment category.
Tourism is one of Florida's most important industries. Approximately 41.1
million tourists visited the State in 1993, as reported by the Florida
Department of Commerce. In terms of business activities and state tax
revenues, tourists in Florida in 1993 represented an estimated 4.5 million
additional residents. Visitors to the State tend to arrive equally by air
and car. The State's tourism industry over the years has become more
sophisticated, attracting visitors year-round and, to a degree, reducing its
seasonality. Tourist arrivals are expected to decline by almost two percent
this year, but are expected to recover next year with 5.0% growth. By the
end of the State's current fiscal year, 41.0 million domestic and
international tourists are expected to have visited the State. In 1994-95,
tourist arrivals should approximate 43.0 million.
The State's per capita personal income in 1992 of $19,711 was slightly
below the national average of $20,105 and significantly ahead of that for the
southeast United States, which was $17,296. Real personal income in the
State is estimated to increase 5.5% in 1993-94 and 4.7% in 1994-95. By the
end of 1994-95, real personal income per capita in the State is projected to
average 6.7% higher than its 1992-93 level.
Compared to other states, Florida has a proportionately greater retirement
age population which comprises 18.3% (as of April 1, 1991) of the State's
population and is forecast to grow at an average annual rate of 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 source of income. For example,
Florida's total wages and salaries and other labor income in 1993 was 62.0%
of total income,
-35-
<PAGE>
while a similar figure for the nation for 1992 was 72.0%. Transfer payments
are typically less sensitive to the business cycle than employment income
and, therefore, act as stabilizing forces in weak economic periods. While
many of the U.S.'s senior citizens choose the State as their place of
retirement, the State is also recognized as attracting a significant number
of working age people. Since 1982, the prime working age population (18-44)
has grown at an average annual rate of 3.3%.
In fiscal year 1991-92, approximately 64% of the State's total direct
revenue to its three operating funds will be 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 68%, 7%
and 5%, respectively, of total receipts by the General Revenue Fund during
fiscal year 1991-92. In that same year, expenditures for education, health
and welfare, and public safety amounted to 53%, 30% and 13.3%, respectively,
of total expenditures from the General Revenue Fund.
Hurricane Andrew left some parts of south Florida devastated. Post-
Hurricane Andrew clean up and rebuilding have changed the outlook for the
State's economy. Single and multi-family housing starts in 1993-94 are
projected to reach a combined level of 118,000, increasing to 134,300 next
year. Lingering recessionary effects on consumers and tight credit are two
of the reasons for relatively slow core construction activity, as well as
lingering effects from the 1986 tax reform legislation discussed above.
However, construction is one of the sectors most severely affected by
Hurricane Andrew. Low interest rates and pent up demand combined with
improved consumer confidence should lead to improved housing starts. The
construction figures above, include additional housing, starts as a result of
destruction by Hurricane Andrew. Total construction expenditures are
forecasted to increase 15.6% this year and increase 13.3% next year.
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. Additionally, the State
Constitution prohibits issuance of State obligations to fund State
operations.
Estimated fiscal year 1993-94 General Revenue plus Working Capital funds
available total $13,582.7 million, an 8.4% increase over 1992-93. This
reflects a transfer of $190 million, out of an estimated $220.0 million in
non-recurring revenue due to Andrew, to a hurricane relief trust fund. Of
the total General Revenue plus Working Capital funds available to the State,
$12,943.5 million of that is Estimated Revenues (excluding the Andrew impact)
which represents an increase of 7.3% over the previous year's Estimated
Revenues. With effective General Revenues plus Working Capital Fund
appropriations at $13,276.9 million, unencumbered reserves at the end of
1993-94 are estimated at $302.8 million. Estimated, fiscal year 1994-95
General Revenue plus Working Capital and Budget Stabilization funds available
total $14,573.7 million, a 7.3% increase over 1993-94. This amount reflects
a transfer of $159.00 million in non-recurring revenue due to Hurricane
Andrew, to a hurricane relief trust fund. The 13,860.8 million is Estimated
Revenues (excluding the Hurricane Andrew impact) represent an increase of
7.1% over the previous year's Estimated Revenues. The massive effort to
rebuild and replace destroyed or damaged property in the wake of Andrew is
responsible for the substantial positive revenue impacts shown here. Most of
the impact is in the increase in the State's sales tax.
In fiscal year 1992-93, approximately 62% of the State's total direct
revenue to its three operating funds derived from State taxes, with Federal
grants and other special revenue accounting for the balance. State sales and
use tax, corporate income tax, intangible personal property tax, and beverage
tax amounted to 68%, 7%, and 4%, respectively, of total General Revenue funds
available during fiscal 1992-93. In that same year, expenditures for
education, health and welfare, and public safety amounted to approximately
49%, 30%, and 11%, respectively, of total expenditures from the General
Revenue Fund.
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
the municipalities therein. In
-36-
<PAGE>
addition to this distribution, local governments may (by referendum) assess a
0.5% or a 1.0% discretionary sales tax 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, and non-consolidated
counties with a population in excess of 800,000 may levy a local option sales
tax to fund indigent health care. It alone cannot exceed 0.5% and when
combined with the infrastructure surtax cannot exceed 1.0%. For the fiscal
year ended June 30, 1993, sales and use tax receipts (exclusive of the tax on
gasoline and special fuels) totalled $9,426.0 million, an increase of 12.5%
over fiscal year 1991-92.
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 Revenue Fund.
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 $442.2 million in the fiscal year ending June 30,
1993. Alcoholic beverage tax receipts declined 1.6% over the previous year.
The revenues collected from this tax are deposited into the State's General
Revenue 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, 1993, receipts from this source were $846.6 million, a
decrease of 5.6% from fiscal year 1991-92.
The State also imposes a documentary 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 $639.0 million during fiscal
year 1992-93, a 27.0% increase from the previous fiscal year. Beginning in
fiscal year 1992-93, 71.29% of these taxes are to be deposited to the General
Revenue Fund.
The State imposes a gross receipts tax on electric, natural gas, and
telecommunications services. All gross receipts utilities tax collections
are credited to the State's Public Education Capital Outlay and Debt Service
Trust Fund. In fiscal year 1992-93, this amounted to $447.9 million.
The State imposes an intangible personal property tax on stocks, bonds,
including bonds secured by liens in Florida real property, notes,
governmental leaseholds, and certain other intangibles not secured by a lien
on Florida real property. The annual rate of tax is 2 mils. Second, the
State imposes a non-recurring 2 mil tax on mortgages and other obligations
secured by liens on Florida real property. In fiscal year 1992-93, total
tangible personal property tax collections were $783.4 million, a 33%
increase over the prior year. Of the tax proceeds, 66.5% are distributed to
the General Revenue Fund.
The State began its own lottery in 1988. State law requires that lottery
revenues be distributed 50% to the public in prizes, 38% for use in enhancing
education, and the balance, 12.0%, for costs of administering the lottery.
Fiscal year 1992-93 lottery ticket sales totalled $2.13 billion, providing
education with $810.4 million.
The State's severance tax applies to oil, gas, and sulphur production, as
well as the severance of phosphate rock and other solid minerals. Total
collections from severance taxes total $64.5 million during fiscal year 1992-
93, down 4.0% from the previous year. Currently, 60.0% of this amount is
transferred to the General Revenue Fund.
The State has continuously been dependent on the highly cyclical
construction and construction related manufacturing industries. While that
dependency has decreased, the State is still somewhat at the mercy of the
construction and construction related manufacturing industries. The
construction industry is driven to a great extent by the State's rapid growth
in population. There can be no assurance that population growth will in fact
continue throughout the 1990's in which case there could be an adverse impact
on the State's economy through the loss of construction and construction
related manufacturing jobs. Also, while interest rates remain
-37-
<PAGE>
low currently, an increase in interest rates could significantly adversely
impact the financing of new construction within the State, thereby adversely
impacting unemployment and other economic factors within the State. In
addition, available commercial office space has tended to remain high over
the past few years. So long as this glut of commercia rental space
continues, construction of this type of space will likely continue to remain
slow.
At the end of fiscal 1993, approximately $5.61 billion in principal amount
of debt secured by the full faith and credit of the State was outstanding.
In addition, since July 1, 1993, the State issued about $1.13 billion in
principal amount of full faith and credit bonds.
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 believe 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. Additionally, the State
Constitution prohibits issuance of State obligations to fund State
operations.
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 affect on
Florida's financial position.
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. This case and others, along
with pending refund claims, total about $150 million.
The State imposes a $295 fee on the issuance of certificates of title for
motor vehicles previously titled outside the State. The State has been sued
by plaintiffs alleging that this fee violates the Commerce Clause of the U.S.
Constitution. The Circuit Court in which the case was filed has granted
summary judgement for the plaintiffs and has enjoined further collection of
the impact fee and has ordered refunds to all those who have paid the fee
since the collection of the fee went into effect. The State has appealed the
lower Court's decision and an automatic stay has been granted to the State
allowing it to continue to collect the fee. The potential refund exposure to
the State if it should lose the case may be in excess of $100 million.
Florida maintains a bond rating of Aa and AA from Moody's Investors
Service and Standard & Poor's, 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 sources from
which such series derives funds for repayment. While these ratings and some
of the information presented above 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 Municipal Obligations purchased by
the Fund 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.
At the time of the closing for each Florida Trust, Counsel to each Florida
Trust for Florida tax matters, rendered an opinion under then existing
Florida income tax law applicable to taxpayers whose income is subject to
Florida income taxation substantially to the effect that:
(1) For Florida state income tax purposes, the Florida Trust will not
be subject to the Florida income tax imposed by Chapter 220,
Florida Statutes. In addition, Florida does not impose any income
taxes at the local level.
-38-
<PAGE>
(2) Because Florida does not impose an income tax on individuals, non-
corporate Unitholders residing in Florida will not be subject to
any Florida income taxation on income realized by the Florida
Trust. Any amounts paid to the Florida Trust or to non-corporate
Unitholders residing in Florida under an insurance policy issued to
the Florida Trust or the Sponsor which represent maturing interest
on defaulted obligations held by the Trustee will not be subject to
the Florida income tax imposed by Chapter 220, Florida Statutes to
the extent not included in gross income for Federal income tax
purposes.
(3) Corporate Unitholders with commercial domiciles in Florida will be
subject to Florida income or franchise taxation on income realized
by the Florida Trust and on payments of interest pursuant to any
insurance policy. Other corporate Unitholders will be subject to
Florida income or franchise taxation on income realized by the
Florida Trust (or on payments of interest pursuant to any
insurance policy) only to the extent that the income realized does
not constitute "non-business income" as defined by Chapter 220.
(4) Units will be subject to Florida estate tax only if held by Florida
residents. However, the Florida estate tax is limited to the amount
of the credit for state death taxes provided for in Section 2011
of the Internal Revenue Code.
(5) Neither the Bonds nor the Units will be subject to the Florida ad
valorem property tax, the Florida intangibles personal property tax
or Florida sales or use tax.
LOUISIANA TRUSTS. The following discussion regarding the financial
condition of the state government may not be relevant to general obligation
or revenue bonds issued by political subdivisions of and other issuers in the
State of Louisiana (the "State"). Such information, and the following
discussion regarding the economy of the State, is based upon information
about general economic conditions that may or may not affect issuers of the
Louisiana obligations. The Sponsor has not independently verified any of the
information contained in such publicly available documents, but is not aware
of any facts which would render such information inaccurate. On December 19,
1990 the State received a rating upgrade on its general obligation bonds to
the current Standard & Poor's rating of A from BBB-plus and was placed on
Standard & Poor's Corporation's positive credit watch. Standard & Poor's
cited improvements in the State's cash flow and fiscal reforms approved by
voters in the fall of 1990. The current Moody's rating on the State's
general obligation bonds remains unchanged at BBB-plus. There can be no
assurance that the economic conditions on which these ratings were based will
continue or that particular bond issues may not be adversely affected by
changes in economic or political conditions.
The Revenue Estimating Conference (the "Conference") was established by
Act No. 814 of the 1987 Regular Session of the State Legislature. The
Conference was established by the Legislature to provide an official estimate
of anticipated State revenues upon which the executive budget shall be based,
to provide for a more stable and accurate method of financial planning and
budgeting and to facilitate the adoption of a balanced budget as is required
by Article VII, Section 10(B) of the State Constitution. Act No. 814
provides that the Governor shall cause to be prepared an executive budget
presenting a complete financial and programmatic plan for the ensuing fiscal
year based only upon the official estimate of anticipated State revenues as
determined by the Revenue Estimating Conference. Act No. 814 further
provides that at no time shall appropriations or expenditures for any fiscal
year exceed the official estimate of anticipated State revenues for that
fiscal year. During the 1990 Regular Session of the Louisiana Legislature a
constitutional amendment was approved (Act No. 1096), which was approved by
the State electorate, granting constitutional status to the existence of the
Revenue Estimating Conference without altering its structure, powers, duties
and responsibilities which are currently provided by statute.
The State General Fund is the principal operating fund of the State, and
was established administratively to provide for the distribution of funds
appropriated by the State Legislature for the ordinary expenses of the State
government. Revenue is provided from the direct deposit of federal grants
and the transfer of State revenues from the Bond Security and Redemption Fund
after general obligation debt requirements are met.
-39-
<PAGE>
The Revenue Estimating Conference met in February of 1991 and reported a
projected $437.5 million State General Fund surplus for the fiscal year
ending June 30, 1991. This surplus will be available for expenditures during
the Fiscal Year 1991-92. The beginning State General Fund surplus for fiscal
year 1990-1991 was $702.3 million. The official recurring State General Fund
estimate for Fiscal Year 1990-91 (Revenue Estimating Conference February 1991
as revised April 1991) is $4,173.5 million.
The Transportation Trust Fund was established pursuant to (i) Section 27
of Article VII of the State Constitution and (ii) Act No. 16 of the First
Extraordinary Session of the Louisiana Legislature for the year 1989
(collectively the "Act") for the purpose of funding construction and
maintenance of state and federal roads and bridges, the statewide flood-
control program, ports, airports, transit and state police traffic control
projects and to fund the Parish Transportation Fund. The Transportation
Trust Fund is funded by a levy of $0.20 per gallon on gasoline and motor
fuels and on special fuels (diesel, propane, butane and compressed natural
gas) used, sold or consumed in the state (the "Gasoline and Motor Fuels Taxes
and Special Fuels Taxes"). This levy was increased from $0.16 per gallon
(the "Existing Taxes") to the current $0.20 per gallon pursuant to Act No. 16
of the First Extraordinary Session of the Louisiana Legislature for the year
1989, as amended. The additional tax of $0.04 per gallon (the "Act 16
Taxes") became effective January 1, 1990 and will expire on the earlier of
January 1, 2005 or the date on which obligations secured by the Act No. 16
taxes are no longer outstanding. The Transportation Infrastructure Model for
Economic Development Account (the "TIME Account") was established in the
Transportation Trust Fund. Moneys in the TIME Account will be expended for
certain projects identified in the Act aggregating $1.4 billion and to fund
not exceeding $160 million of additional capital transportation projects.
The State issued $263,902,639.95 of Gasoline and Fuels Tax Revenue Bonds,
1990 Series A, dated April 15, 1990 payable from the (i) Act No. 16 Taxes,
(ii) any Act No. 16 Taxes and Existing Taxes deposited in the Transportation
Trust Fund, and (iii) any additional taxes on gasoline and motor fuels and
special fuels pledged for the payment of said Bonds.
The Louisiana Recovery District (the "Recovery District") was created
pursuant to Act No. 15 of the First Extraordinary Session of the Legislature
of Louisiana of 1988 to assist the State in the reduction and elimination of
a deficit existing at the time and the delivery of essential services to its
citizens and to assist parishes, cities and other units of local government
experiencing cash flow difficulties. The Recovery District is a special
taxing district the boundaries of which are coterminous with the State and is
a body politic and corporate and a political subdivision of the State. The
Recovery District issued $979,125,000 of Louisiana Recovery District Sales
Tax Bonds, Series 1988, dated July 1, 1988, secured by (i) the revenues
derived from the District's 1% statewide sales and use tax remaining after
the costs of collection and (ii) all funds and accounts held under the
Recovery District's General Bond Resolution and all investment earnings on
such funds and accounts. As of June 30, 1990, the principal amount
outstanding was $851,880,000. The Legislature passed tax measures which are
projected to raise approximately $418 million in additional revenues for
Fiscal Year 1990-91, the most important of which include the following: sales
tax $328.3 million; hazardous waste tax $41.3 million; severance tax $39.2
million; income tax $14.9 million; and tobacco tax $14.0 million. The
Legislature also passed several constitutional amendments which were approved
by the state electorate, resulting in comprehensive budgetary reforms
mandating that: both proposed and adopted budgets be balanced in accordance
with the official forecast of the Revenue Estimating Conference; any new tax
proposal be tied to specific expenditures; all mineral revenues earned by the
State in excess of $750 million be placed in the Revenue Stabilization
Mineral Trust Fund, to be used as a "rainy day fund"; and the regular
legislative session must end prior to the completion of the fiscal year in
order to streamline budgetary reporting and planning. The Legislature also
adopted a proposed constitutional amendment which was approved by the State
electorate permitting the creation of a Louisiana lottery. The lottery is
projected to generate approximately $111 million per year in net revenues for
the State. Only local governmental units levy ad valorem taxes at present.
Under the 1921 State Constitution a 5.75 mills ad valorem tax was being
levied by the State until January 1, 1973 at which time a constitutional
amendment to the 1921 Constitution abolished the ad valorem tax. Under the
1974 State Constitution a State ad valorem tax of up to 5.75 mills was
provided for but is not presently being levied. The property tax is
underutilized at the parish level due to a constitutional homestead exemption
from the property tax applicable to the first $75,000 of the full market
value of single family residences. Homestead exemptions do not apply to ad
valorem property taxes levied by municipalities, with the exception of the
City of New Orleans. Since local governments are also prohibited from
levying an individual income tax by the constitution, their reliance on State
government is increased under the existing tax structure.
-40-
<PAGE>
The foregoing information constitutes only a brief summary of some of the
financial difficulties 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 the Louisiana 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 Bonds, could
affect or could have an adverse impact on the financial condition of the
State and various agencies and political subdivisions located in the State.
The Sponsor is unable to predict whether or to what extent such factors may
affect the issuers of Bonds, the market value or marketability of the Bonds
or the ability of the respective issuers of the Bonds acquired by the
Louisiana Trust to pay interest on or principal of the Bonds.
At the time of the closing for each Louisiana Trust, Special Counsel to
each Louisiana Trust for Louisiana tax matters rendered an opinion under then
existing Louisiana income tax law applicable to taxpayers whose income is
subject to Louisiana income taxation substantially to the effect that:
(1) The Louisiana Trust will be treated as a trust for Louisiana income
tax purposes and not as an association taxable as a corporation.
(2) The Louisiana income tax on resident individuals is imposed upon
the "tax table income" of resident individuals. The calculation of
the "tax table income" of a resident individual begins with federal
adjusted gross income. Certain modifications are specified, but no
such modification requires the addition of interest on obligations
of the State of Louisiana and its political subdivisions, public
corporations created by them and constitutional authorities thereof
authorized to issue obligations on their behalf. Accordingly,
amounts representing interest excludable from gross income for
federal income tax purposes received by the Louisiana Trust with
respect to such obligations will not be taxed to the Louisiana
Trust or, except as provided below, to the resident individual
Unitholder, for Louisiana income tax purposes. In addition to the
foregoing, interest on the respective Securities may also be exempt
from Louisiana income taxes pursuant to the statutes authorizing
their issuance.
(3) To the extent that gain from the sale, exchange or other
disposition of obligations held by the Louisiana Trust (whether as
a result of a sale or exchange of such obligations by the
Louisiana Trust or as a result of a sale or exchange of a Unit by
a Unitholder) is includable in the federal adjusted gross income
of a resident individual, such gain will be included in the
calculation of the Unitholders Louisiana taxable income; and
(4) Gain or loss on the Unit or as to underlying bonds for Louisiana
income tax purposes would be determined by taking into account the
basis adjustments for federal income tax purposes described in this
Prospectus.
As no opinion is expressed regarding the Louisiana tax consequences of
Unitholders other than individuals who are Louisiana residents, tax counsel
should be consulted by other prospective Unitholders. The Internal Revenue
Code of 1986, as amended (the "1986 Code"), contains provisions relating to
investing in tax-exempt obligations (including, for example, corporate
minimum tax provisions which treat certain tax-exempt interest and corporate
book income which may include tax-exempt interest, as tax preference items,
provisions reducing the deductibility of interest expense by financial
institutions) which could have a corresponding effect on the Louisiana tax
liability of the Unitholders.
In rendering the opinions expressed above, counsel has relied upon the
opinion of Chapman and Cutler that the Louisiana Trust is not an association
taxable as a corporation for federal income tax purposes, that each
Unitholder of the Louisiana Trust will be treated as the owner of a pro rata
portion of such Louisiana Trust under the 1986 Code and that the income of
the Louisiana Trust will be treated as income of the Unitholders under the
1986 Code.
Tax counsel should be consulted as to the other Louisiana tax consequences
not specifically considered herein, and as to the Louisiana tax status of
taxpayers other than resident individuals who are Unitholders in
-41-
<PAGE>
the Louisiana Trust. In addition, no opinion is being rendered as to
Louisiana tax consequences resulting from any proposed or future federal or
state tax legislation.
MASSACHUSETTS TRUSTS. As described above, the Massachusetts Trust will
invest substantially all of its net assets in obligations issued by or on
behalf of the Commonwealth of Massachusetts, political subdivisions thereof,
or agencies or instrumentalities of the Commonwealth or its political
subdivisions (the "Bonds"). The Massachusetts Trust is therefore susceptible
to general or particular political, economic, or regulatory factors that may
affect issuers of such Massachusetts Investments. The following information
constitutes only a brief summary of some of the many complex factors that may
have an effect. The information may not be applicable to "conduit"
obligations on which the public issuer itself has no financial
responsibility. This information is derived from official statements of the
Commonwealth and certain of its agencies or instrumentalities in connection
with the issuance of securities, and from other publicly available documents,
and is believed to be accurate. No independent verification has been made of
any of the following information.
The Massachusetts Economy. After declining since 1987, Massachusetts
employment in 1993 has shown positive annual growth. While Massachusetts has
benefitted from an annual job growth rate of approximately 2% since the early
1980s, by 1989, employment had started to decline. Nonagricultural
employment declined 0.7% in fiscal 1989, 4.0% in fiscal 1990, 5.5% in fiscal
1991, 1.5% in fiscal 1992, and 0.8% in fiscal 1993. A comparison of total,
nonagricultural employment in November 1992 with that in November 1993
indicates an increase of 0.4%.
From 1980 to 1989, Massachusetts' unemployment rate was significantly
lower than the national average. By 1990, however, unemployment reached
6.0%, exceeding the national average for the first time since 1977. The
Massachusetts unemployment peaked in 1991 at 9.0% and dropped to 6.9% in
1993.
In recent years, per capita personal income growth in Massachusetts has
slowed, after several years during which it was among the highest in the
nation. Between the second quarter of fiscal 1992 and the second quarter of
fiscal 1993, aggregate personal income in Massachusetts increased 4.0% as
compared to 5.5% for the nation as a whole.
The Commonwealth, while the third most densely populated state according
to the 1990 census, has experienced only a modest increase in population from
1980 to 1990 at a rate equal to approximately one-half the rate of increase
in the United States population as a whole.
Massachusetts possesses a diversified economic base which includes
traditional manufacturing, high technology and service industries, served by
an extensive transportation system and related facilities. The Massachusetts
service sector, at approximately 34.2% of the state work force in May of
1994, is the largest sector in the Massachusetts economy. Government
employment is below the national average, representing less than 14% of the
Massachusetts work force. In recent years, the construction, manufacturing
and trade sectors have experienced the greatest decreases in employment in
Massachusetts, with more modest declines taking place in the government,
finance, insurance and real estate, and service sectors. From 1990 to
November of 1994, manufacturing employment in Massachusetts declined by some
15.5%. At the same time, there has occurred a reversal of the dramatic
growth which occurred during the 1980s in the finance, insurance and real
estate sector and in the construction sector of the Massachusetts economy.
Over the next decade, Massachusetts has a very full public construction
agenda which is expected not only to improve mobility, but to provide a
substantial number of construction and related employment opportunities,
including the six billion dollar Central Artery/Tunnel project involving the
construction of a third tunnel under Boston Harbor linking the MassPike and
downtown Boston with Logan International Airport, and the depression into
tunnels of the Central Artery that traverses the City of Boston. Federal
funds are expected to cover approximately 90% of the cost of this project.
The Central Artery/Tunnel project is expected to employ approximately 5,000
on-site workers and 10,000 auxiliary workers during the peak years of
construction in the mid-1990s.
-42-
<PAGE>
State Finances. In fiscal years 1987 through 1991, Commonwealth spending
exceeded revenues. Spending in five major expenditure categories-Medicaid,
debt service, public assistance, group health insurance and transit
subsidies-grew at rates well in excess of the rate of inflation for the
comparable period. During the same period, the Commonwealth's tax revenues
repeatedly failed to meet official forecasts. That revenue shortfall
combined with steadily escalating costs contributed to serious budgetary and
financial difficulties which have affected the credit standing and borrowing
abilities of Massachusetts and certain of its public bodies and
municipalities, and which may have contributed to higher interest rates on
debt obligations issued by them.
More conservative revenue forecasting for fiscal 1992 together with
significant efforts to restrain spending during fiscal 1991 and reductions in
budgeted program expenditures for fiscal 1992 and fiscal year 1993 and fiscal
1994 have moderated these difficulties, and the Commonwealth has shown
significant surpluses of revenues and other sources over expenditures and
other uses in the Commonwealth's budgeted operating funds for those years.
Notwithstanding these actions, a worsening of the present and its effect on
the financial condition of the Commonwealth and its public authorities and
municipalities could result in a decline in the market values of, or default
on existing obligations including the Bonds deposited in the Massachusetts
Trust.
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 Massachusetts 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 Bonds, could affect or could have an adverse impact on the
financial condition of the Commonwealth and various agencies and political
subdivisions located in the Commonwealth. The Sponsor is unable to predict
whether or to what extent such factors or other factors may affect the
issuers of the Bonds, the market value or marketability of the Bonds or the
ability of the respective issuers of the Bonds acquired by the Massachusetts
Trust to pay interest on or principal of the Bonds.
At the time of the closing for each Massachusetts Trust Special Counsel to
each Massachusetts Trust for Massachusetts tax matters rendered an opinion
under then existing Massachusetts income tax law applicable to taxpayers
whose income is subject to Massachusetts income taxation substantially to the
effect that:
(1) For Massachusetts income tax purposes, the Massachusetts Trust will
be treated as a corporate trust under Section 8 of Chapter 62 of
the Massachusetts General Laws and not as a grantor trust under
Section 10(e) of Chapter 62 of the Massachusetts General Laws.
(2) The Massachusetts Trust will not be held to be engaging in business
in Massachusetts within the meaning of said Section 8 and will,
therefore, not be subject to Massachusetts income tax.
(3) Massachusetts Unitholders who are subject to Massachusetts income
taxation under Chapter 62 of Massachusetts General Laws will not be
required to include their respective shares of the earnings of or
distributions from the Massachusetts Trust in their Massachusetts
gross income to the extent that such earnings or distributions
represent tax-exempt interest for federal income tax purposes
received by Massachusetts Trust on obligations issued by
Massachusetts, its counties, municipalities, authorities, political
subdivisions or instrumentalities, or issued by United States
territories or possessions.
(4) Any proceeds of insurance obtained by the Trustee of the Trust or
by the issuer of a Bond held by the Massachusetts Trust which are
paid to Massachusetts Unitholders and which represent maturing
interest on defaulted obligations held by the Trustee will be
excludable from Massachusetts gross income of a Massachusetts
Unitholder if, and to the same extent as, such interest would have
been so excludable if paid by the issuer of the defaulted Bond.
(5) The Massachusetts Trust's capital gains and/or capital losses
realized upon disposition of Bonds held by it will be includable
pro rata in the federal gross income of Massachusetts Unitholders
who are subject to Massachusetts income taxation under Chapter 62
of the Massachusetts General Laws, and such gains and/or losses
will be included as capital gains and/or losses in the
-43-
<PAGE>
Massachusetts Unitholders' Massachusetts gross income, except where
capital gain is specifically exempted from income taxation under
acts authorizing issuance of said Bonds.
(6) Gains or losses realized upon sale or redemption of Units by
Massachusetts Unitholders who are subject to Massachusetts income
taxation under Chapter 62 of the Massachusetts General Laws will be
includable in their Massachusetts gross income.
(7) In determining such gain or loss Massachusetts Unitholders will, to
the same extent required for federal tax purposes, have to adjust
their tax bases for their Units for accrued interest received, if
any, on Bonds delivered to the Trustee after the Unitholders pay
for their Units and for amortization of premiums, if any, on
obligations held by the Massachusetts Trust.
(8) The Units of the Massachusetts Trust are not subject to any
property tax levied by Massachusetts or any political subdivision
thereof, nor to any income tax levied by any such political
subdivision. They are includable in the gross estate of a deceased
Massachusetts Unitholder who is a resident of Massachusetts for
purposes of the Massachusetts Estate Tax.
MICHIGAN TRUSTS. Investors should be aware that the economy of the State
of Michigan has, in the past, proven to be cyclical, due primarily to the
fact that the leading sector of the State's economy is the manufacturing of
durable goods. While the State's efforts to diversify its economy have
proven successful, as reflected by the fact that the share of employment in
the State in the durable goods sector has fallen from 33.1 percent in 1960 to
17.9 percent in 1990, durable goods manufacturing still represents a sizable
portion of the State's economy. As a result, any substantial national
economic downturn is likely to have an adverse effect on the economy of the
State and on the revenues of the State and some of its local governmental
units.
In May 1986, Moody's Investors Service raised the State's general
obligation bond rating to "Al". In October 1989, Standard & Poor's Ratings
Group raised its rating on the State's general obligation bonds to "AA".
The State's economy could continue to be affected by changes in the auto
industry, notably consolidation and plant closings resulting from competitive
pressures and over-capacity. Such actions could adversely affect State
revenues and the financial impact on the local units of government in the
areas in which plants are closed could be more severe.
General Motors Corporation has announced the scheduled closing of several
of its plants in Michigan in 1993 and 1994. Some of these closings have
occurred and some have been deferred. The ultimate impact these closures may
have on the State's revenues and expenditures is not currently known. The
impact on the financial condition of the municipalities in which the plants
are located may be more severe than the impact on the State itself.
In recent years, the State has reported its financial results in
accordance with generally accepted accounting principles. For each of the
five fiscal years ending with the fiscal year ended September 30, 1989, the
State reported positive year-end General Fund balances and positive cash
balances in the combined General Fund/School Aid Fund. For the fiscal years
ending September 30, 1990 and 1991, the State reported negative year-end
General Fund Balances of $310.4 million and $169.4 million, respectively, but
ended the 1992 fiscal year with its general fund in balance and ended the
1993 fiscal year with a small general fund surplus. A positive cash balance
in the combined General Fund/School Aid Fund was recorded at September 30,
1990. In the 1991 through 1993 fiscal years the State experienced
deteriorating cash balances which necessitated short term borrowing and the
deferral of certain scheduled cash payments. The State borrowed $900 million
for cash flow purposes in the 1993 fiscal year, which was repaid on September
30, 1993. The State's Budget Stabilization Fund received a $283 million
transfer from the General Fund in the 1993 State fiscal year, bringing the
fund balance to $303 million at September 30, 1993.
-44-
<PAGE>
The Michigan Constitution of 1963 limits the amount of total revenues of
the State raised from taxes and certain other sources to a level for each
fiscal year equal to a percentage of the State's personal income for the
prior calendar year. In the event that the State's total revenues exceeds
the limit by 1 percent or more, the Michigan Constitution of 1963 requires
that the excess be refunded to taxpayers.
On March 15, 1994, Michigan voters approved a school finance reform
amendment to the State's Constitution which, among other things, increased
the State sales ax rate from 4% to 6% and placed a cap on property assessment
increases for all property taxes. Concurrent legislation cut the State's
income tax rate from 4.6% to 4.4.%, reduced some property taxes and altered
local school funding sources to a combination of property taxes and state
revenues, some of which is provided from other new or increased State taxes.
The legislation also contained other provisions that alter (and, in some
cases, may reduce) the revenues of local units of government, and tax
increment bonds could be particularly affected. While the ultimate impact of
the constitutional amendment and related legislation cannot yet be accurately
predicted, investors should be alert to the potential effect of such measures
upon the operations and revenues of Michigan local units of government.
Although all or most of the Bonds in the Michigan Trust are revenue
obligations or general obligations of local governments or authorities rather
than general obligations of the State of Michigan itself, there can be no
assurance that any financial difficulties the State may experience will not
adversely affect the market value or marketability of the Bonds or the
ability of the respective obligors to pay interest on or principal of the
Bonds, particularly in view of the dependency of local governments and other
authorities upon State aid and reimbursement programs and, in the case of
bonds issued by the State Building Authority, the dependency of the State
Building Authority on the receipt of rental payments from the State to meet
debt service requirements upon such bonds. In the 1991 fiscal year, the
State deferred certain scheduled cash payments to municipalities, school
districts, universities and community colleges. While such deferrals were
made up at specified later dates, similar future deferrals could have an
adverse impact on the cash position of some local governmental units.
Additionally, the State reduced revenue sharing payments to municipalities
below that level provided under formulas by $10.9 million in the 1991 fiscal
year, up $34.4 million in the 1992 fiscal year, $45.5 million in the 1993
fiscal year and $64.6 million (budgeted) in the 1994 fiscal year.
The Michigan Trust may contain general obligation bonds of local units of
government pledging the full faith and credit of the local unit which are
payable from the levy of ad valorem taxes on taxable property within the
jurisdiction of the local unit. Such bonds issued prior to December 22,
1978, or issued after December 22, 1978 with the approval of the electors of
the local unit, are payable from property taxes levied without limitation as
to rate or amount. With respect to bonds issued after December 22, 1978, and
which were not approved by the electors of the local unit, the tax levy of
the local unit for debt service purposes is subject to constitutional,
statutory and charter tax rate limitations. In addition, several major
industrial corporations have instituted challenges of their ad valorem
property tax assessments in a number of local municipal units in the State.
If successful, such challenges could have an adverse impact on the ad valorem
tax bases of such units which could adversely affect their ability to raise
funds for operating and debt service requirements.
At the time of the closing for each Michigan Trust, Special Counsel to
each Michigan Trust for Michigan tax matters rendered an opinion under then
existing Michigan income tax law applicable to taxpayers whose income is
subject to Michigan income taxation substantially to the effect that:
The Michigan Trust and the owners of Units will be treated for
purposes of the Michigan income tax laws and the Single Business Tax in
substantially the same manner as they are for purposes of the Federal
income tax laws, as currently enacted. Accordingly, we have relied
upon the opinion of Messrs. Chapman and Cutler as to the applicability
of Federal income tax under the Internal Revenue Code of 1986 to the
Michigan Trust and the Holders of Units.
Under the income tax laws of the State of Michigan, the Michigan
Trust is not an association taxable as a corporation; the income of
the Michigan Trust will be treated as the income of the Unitholders and
be deemed to have been received by them when received by the Michigan
Trust.
-45-
<PAGE>
Interest on the underlying Bonds which is exempt from tax under these
laws when received by the Michigan Trust will retain its status as tax
exempt interest to the Unitholders.
For purposes of the foregoing Michigan tax laws, each Unitholder will
be considered to have received his pro rata share of Bond interest when
it is received by the Michigan Trust, and each Unitholder will have a
taxable event when the Michigan Trust disposes of a Bond (whether by
sale, exchange, redemption or payment at maturity) or when the
Unitholder redeems or sells his Certificate to the extent the
transaction constitutes a taxable event for Federal income tax
purposes. The tax cost of each unit to a Unitholder will be
established and allocated for purposes of these Michigan tax laws in
the same manner as such cost is established and allocated for Federal
income tax purposes;
Under the Michigan Intangibles Tax, the Michigan Trust is not taxable
and the pro rata ownership of the underlying Bonds, as well as the
interest thereon, will be exempt to the Unitholders to the extent the
Michigan Trust consists of obligations of the State of Michigan or its
political subdivisions or municipalities, or of obligations of
possessions of the United States
The Michigan Single Business Tax replaced the tax on corporate and
financial institution income under the Michigan Income Tax, and the
Intangible Tax with respect to those intangibles of persons subject to
the Single Business Tax the income from which would be considered in
computing the Single Business Tax. Persons are subject to the Single
Business Tax only if they are engaged in "business activity", as
defined in the Act. Under the Single Business Tax, both interest
received by a Michigan Trust on the underlying Bonds and any amount
distributed from the Michigan Trust to a Unitholder, if not included in
determining taxable income for Federal income tax purposes, is also not
included in the adjusted tax base upon which the Single Business Tax is
computed, of either the Michigan Trust or the Unitholders. If the
Michigan Trust or the Unitholders have a taxable event for Federal
income tax purposes when the Michigan Trust disposes of a Bond (whether
by sale, exchange, redemption or payment at maturity) or the Unitholder
redeems or sells his Certificate, an amount equal to any gain realized
from such taxable event which was included in the computation of
taxable income for Federal income tax purposes (plus an amount equal to
any capital gain of an individual realized in connection with such
event but excluded in computing that individual's Federal taxable
income) will be included in the tax base against which, after
allocation, apportionment and other adjustments, the Single Business
Tax is computed. The tax base will be reduced by an amount equal to
any capital loss realized from such a taxable event, whether or not the
capital loss was deducted in computing Federal taxable income in the
year the loss occurred. Unitholders should consult their tax advisor
as to their status under Michigan law.
Any proceeds paid under an insurance policy issued to the Trustee of
the Trust, or paid under individual policies obtained by issuers of
Bonds, which, when received by the Unitholders, represent maturing
interest on defaulted obligations held by the Trustee, will be
excludable from the Michigan income tax laws and the Single Business
Tax if, and to the same extent as, such interest would have been so
excludable if paid by the issuer of the defaulted obligations. While
treatment under the Michigan Intangibles Tax is not premised upon the
characterization of such proceeds under the Internal Revenue Code, the
Michigan Department of Treasury should adopt the same approach as under
the Michigan income tax laws and the Single Business Tax.
As the Tax Reform Act of 1986 eliminates the capital gain deduction for
tax years beginning after December 31, 1986, the federal adjusted gross
income, the computation base for the Michigan Income Tax, of a Unitholder
will be increased accordingly to the extent such capital gains are realized
when the Michigan Trust disposes of a Bond or when the Unitholder redeems or
sells a Unit, to the extent such transaction constitutes a taxable event for
Federal income tax purposes.
MINNESOTA TRUSTS. In the early 1980s, the State of Minnesota experienced
financial difficulties due to a downturn in the State's economy resulting
from the national recession. As a consequence, the State's revenues were
significantly lower than anticipated in the July 1, 1979 to June 30, 1981
biennium and the July 1, 1981 to June 30, 1983 biennium.
-46-
<PAGE>
In response to revenue shortfalls, the legislature broadened and increased
the State sales tax, increased income taxes (by increasing rates and
eliminating deductions) and reduced appropriations and deferred payment of
State aid, including appropriations for and aids to local governmental units.
The State's fiscal problems affected other governmental units within the
State, such as local government, school districts and state agencies, which,
in varying degrees, also faced cash flow difficulties. In certain cases,
revenues of local governmental units and agencies were reduced by the
recession.
Because of the State's fiscal problems, Standard & Poor's Corporation
reduced its rating on the State's outstanding general obligation bonds from
AAA to AA+ in August 1981 and to AA in March 1982. Moody's Investors
Service, Inc. lowered its rating on the State's outstanding general
obligation bonds from Aaa to Aa in April 1982. The State's economy recovered
in the July 1, 1983 to June 30, 1985 biennium, and substantial reductions in
the individual income tax were enacted in 1984 and 1985. Standard & Poor's
raised its rating on the State's outstanding general obligation bonds to AA+
in January 1985. In 1986, 1987, 1991, 1992, and 1993, legislation was
required to eliminate projected budget deficits by raising additional
revenue, reducing expenditures, including aids to political subdivisions and
higher education, reducing the State's budget reserve (cash flow account),
imposing a sales tax on purchases by local governmental units, and making
other budgetary adjustments. A budget forecast released by the Minnesota
Department of Finance on March 1, 1994 projects a balanced General Fund at
the end of the current biennium, June 30, 1995, plus an increase in the
State's cash flow account from $360 million to $500 million. Total projected
expenditures and transfers for the biennium are $17.0 billion. The forecast
also projects, however, a shortage of $29.5 million in the Local Government
Trust Fund at June 30, 1995, against total projected expenditures from the
Fund of $1.8 billion for the biennium.
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 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.
At the time of the closing for each Minnesota Trust, Special Counsel to
each Minnesota Trust for Minnesota tax matters rendered an opinion under
then existing Minnesota income tax law applicable to taxpayers whose income
is subject to Minnesota income taxation substantially to the effect that:
We understand that the Minnesota Trust will only have income consisting
of (i) interest from bonds issued by the State of Minnesota and its
political and governmental subdivisions, municipalities and
governmental agencies and instrumentalities and bonds issued by
possessions of the United States which would be exempt from federal and
Minnesota income taxation when paid directly to an individual, trust or
estate (the "Bonds"), (ii) gain on the disposition of such Bonds, and
(iii) proceeds paid under certain insurance policies issued to the
Trustee or to the issuers of the Bonds which represent maturing
interest or principal payments on defaulted Bonds held by the Trustee.
Neither the Sponsor not its counsel have independently examined the Bonds
to be deposited in and held in the Trust. However, although no opinion
expressed herein regarding such matters, it is assumed that: (i) the Bonds
were validly issued, (ii) the interest thereon is excludible from gross
income for federal income tax purposes and (iii) the interest thereon is
exempt from income tax imposed by Minnesota that is applicable to
individuals, trusts and estates (the "Minnesota Income Tax"). It should be
noted that interest on the Bonds is subject to tax in the case of
corporations subject to the Minnesota Corporate Franchise Tax or the
Corporate Alternative Minimum Tax and is a factor in the computation of the
Minimum Fee applicable to financial institutions. The opinion set forth
below does not address the taxation of persons other than full time residents
of Minnesota.
(1) Minnesota Trust will be treated as the owner of a pro rata portion
of the Minnesota Trust, and the
-47-
<PAGE>
income of such portion of the Minnesota Trust will therefore be
treated as the income of the Unitholder for Minnesota Income Tax
purposes;
(2) Income on the Bonds which is exempt from the Minnesota Income Tax
when received by a Unitholder of the Minnesota Trust and which
would be exempt from the Minnesota Income Tax if received directly
by a Unitholder, will retain its status as exempt from such tax
when received by the Minnesota Trust and distributed to such
Unitholder;
(3) To the extent that interest on the Bonds, if any, which is
includible in the computation of "alternative minimum taxable
income" for federal income tax purposes, such interest will also be
includible in the computation of "alternative minimum taxable
income" for purposes of the Minnesota Alternative Minimum Tax
imposed on individuals, estates and trusts and on corporations;
(4) Each Unitholder of the Minnesota Trust will recognize gain or loss
for Minnesota Income Tax purposes if the Trustee disposes of a Bond
(whether by redemption, sale or otherwise) or if the Unitholder
redeems or sells Units of the Minnesota Trust to the extent that
such a transaction results in a recognized gain or loss to such
Unitholder for federal income tax purposes;
(5) Tax cost reduction requirements relating to amortization of bond
premium may, under some circumstances, result in Unitholders
realizing taxable gain for Minnesota Income Tax purposes when their
Units are sold or redeemed for an amount equal to or less than
their original cost;
(6) Proceeds, if any, paid under individual insurance policies obtained
by issuers of Bonds or the Trustee which represent maturing
interest on defaulted obligations held by the Trustee will be
excludible from Minnesota net income if, and to the same extent as,
such interest would have been so excludible from Minnesota net
income if, and to the same extent as, such interest would have been
so excludible if paid in the normal course by the issuer of the
defaulted obligation provided that, at the time such policies are
purchased, the amounts paid for such policies are reasonable,
customary and consistent with the reasonable expectation that the
issuer of the Bonds, rather than the insurer, will pay debt service
on the Bonds; and
(7) To the extent that interest derived from the Minnesota Trust by a
Unitholder with respect to any Possession Bonds is
excludible from gross income for federal income tax purposes
pursuant to 48 U.S.C. Section 745, 48 U.S.C. Section 1423a and 48
U.S.C. Section 1403, such interest will not be subject to either
the Minnesota Income Tax or the Minnesota alternative minimum tax
imposed on individuals, estates and trusts. It should be noted that
interest relating to Possession Bonds is subject to tax in the case
of corporations subject to the Minnesota Corporate Franchise Tax or
the Alternative Tax.
We have not examined any of the Bonds to be deposited and held in the
Minnesota Trust or the proceedings for the issuance thereof or the opinions
of bond counsel with respect thereto, and therefore express no opinions to
the exemption from State income taxes of interest on the Bonds if received
directly by a Unitholder.
MISSOURI TRUSTS. The following discussion regarding constitutional
limitations and the economy of the State of Missouri is included for the
purpose of providing general information that may or may not affect issuers
of the Bonds in Missouri.
In November 1981, the voters of Missouri adopted a tax limitation
amendment to the constitution of the State of Missouri (the "Amendment").
The Amendment prohibits increases in local taxes, licenses, or fees by
political subdivisions without approval of the voters of such political
subdivision. The Amendment also limits the growth in revenues and
expenditures of the State to the rate of growth in the total personal income
of the
-48-
<PAGE>
citizens of Missouri. The limitation may be exceeded if the General Assembly
declares an emergency by a two-thirds vote.
Although the June 1993 revenue estimate has been revised downward by $27.5
million, the State budget for Fiscal Year 1993 remained balanced due
primarily to delayed spending for desegregation capital projects. The
downward revision in revenues was considered necessary because of weak
economic performance, and more importantly an economic outlook for the second
half of Fiscal Year 1993 which projected slower growth than was anticipated
in June 1992.
For Fiscal Year 1994, the majority of revenues for the State of Missouri
will be obtained from individual income taxes (53.1%), sales and use taxes
(30.0%), corporate income taxes (5.9%), and county foreign insurance taxes
(3.0%). Major expenditures for Fiscal Year 1994 include elementary and
secondary education (30.6%), human services (25.4%), higher education (14.8%)
and desegregation (8.9%).
The Fiscal Year 1994 budget balances resources and obligations based on
the consensus revenue and refund estimate and an opening balance resulting
from continued withholdings and delayed spending for desegregation capital
projects. The total general revenue operating budget for Fiscal Year 1994
exclusive of desegregation is $3,844.6 million. The court-ordered
desegregation estimate is $377.7 million, an increase of $30.7 million over
the revised Fiscal Year 1993 estimate.
The economy of Missouri is diverse and includes manufacturing, retail and
wholesale trade, services, agriculture, tourism and mining. In recent years,
growth in the wholesale and retail trade has offset the more slowly growing
manufacturing and agricultural sectors of the economy. According to the
United States Bureau of Labor Statistics, the 1992 unemployment rate in
Missouri was 5.7% and the 1993 rate was 6.4%. Although not strictly
comparable, the preliminary seasonally adjusted rate for May of 1994 was
5.0%. 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 Ratings Group rates Missouri general
obligation bonds "AAA". Although these ratings indicate that the State of
Missouri is in relatively good economic health, there can be, of course, no
assurance that this will continue or that particular bond issues may not be
adversely affected by changes in the State or local economic or political
conditions.
The foregoing information constitutes only a brief summary of some of the
general factors which may impact certain issuers of Bonds and does not
purport to be a complete or exhaustive description of all adverse conditions
to which the issuers of obligations held by the Missouri Trust are subject.
Additionally, many factors including national economic, social and
environmental policies and conditions, which are not within the control of
the issuers of the Bonds, could affect or could have an adverse impact on the
financial condition of the State and various agencies and political
subdivisions located in the State. The Sponsor is unable to predict whether
or to what extent such factors or other factors may affect the issuers of the
Bonds, the market value or marketability of the Bonds or the ability of the
respective issuers of the Bonds acquired by the Missouri Trust to pay
interest on or principal of the Bonds.
At the time of the closing for each Missouri Trust, Special Counsel for
Missouri tax matters rendered an opinion under then existing Missouri income
tax law applicable to taxpayers whose income is subject to Missouri income
taxation substantially to the effect that:
The assets of the Missouri Trust will consist of debt obligations issued
by or on behalf of the State of Missouri (the "State") or counties,
municipalities, authorities or political subdivisions thereof (the "Missouri
Bonds") or by the Commonwealth of Puerto Rico, Guam and the United States
Virgin Islands (the "Possession Bonds") (collectively, the "Bonds").
-49-
<PAGE>
Neither the Sponsor nor its counsel have independently examined the Bonds
to be deposited in and held in the Missouri Trust. However, although no
opinion is expressed herein regarding such matters, it is assumed that: (i)
the Bonds were validly issued, (ii) the interest thereon is excludable from
gross income for Federal income tax purposes and (iii) interest on the
Missouri Bonds, if received directly by a Unitholder, would be exempt from
the Missouri income tax applicable to individuals and corporations ("Missouri
state income tax"). The opinion set forth below does not address the
taxation of persons other than full time residents of Missouri.
(1) The Missouri Trust is not an association taxable as a corporation
for Missouri income tax purposes, and each Unitholder of the
Missouri Trust will be treated as the owner of a pro rata portion
of the Missouri Trust and the income of such portion of the
Missouri Trust will be treated as the income of the Unitholder for
Missouri state income tax purposes.
(2) Interest paid and original issue discount, if any, on the Bonds
which would be exempt from the Missouri state income tax if
received directly by a Unitholder will be exempt from the Missouri
state income tax when received by the Missouri Trust and
distributed to such Unitholder; however, no opinion is expressed
herein regarding taxation of interest paid and original issue
discount, if any, on the Bonds received by the Missouri Trust and
distributed to Unitholders under any other tax imposed pursuant to
Missouri law, including but not limited to the franchise tax
imposed on financial institutions pursuant to Chapter 148 of the
Missouri Statutes.
(3) To the extent that interest paid and original issue discount, if
any, derived from the Missouri Trust by a Unitholder with respect
to Possession Bonds is excludable from gross income for Federal
income tax purposes pursuant to 48 U.S.C. Section 745, 48 U.S.C.
Section 1423a, and 48 U.S.C. Section 1403, such interest paid and
original issue discount, if any, will not be subject to the
Missouri state income tax; however, no opinion is expressed herein
regarding taxation of interest paid and original issue discount, if
any, on the Bonds received by the Missouri Trust and distributed to
Unitholders under any other tax imposed pursuant to Missouri law,
including but not limited to the franchise tax imposed on financial
institutions pursuant to Chapter 148 of the Missouri Statutes.
(4) Each Unitholder of the Missouri Trust will recognize gain or loss
for Missouri state income tax purposes if the Trustee disposes of a
bond (whether by redemption, sale, or otherwise) or if the
Unitholder redeems or sells Units of the Missouri Trust to the
extent that such a transaction results in a recognized gain or loss
to such Unitholder for Federal income tax purposes. Due to the
amortization of bond premium and other basis adjustments required
by the Internal Revenue Code, a Unitholder under some
circumstances, may realize taxable gain when his or her Units are
sold or redeemed for an amount equal to their original cost.
(5) Any insurance proceeds paid under policies which represent maturing
interest on defaulted obligations which are excludable from gross
income for Federal income tax purposes will be excludable from
Missouri state income tax to the same extent as such interest would
have been paid by the issuer of such Bonds held by the Missouri
Trust; however, no opinion is expressed herein regarding taxation
of interest paid and original issue discount, if any, on the Bonds
received by the Missouri Trust and distributed to Unitholders under
any other tax imposed pursuant to Missouri law, including but not
limited to the franchise tax imposed on financial institutions
pursuant to Chapter 148 of the Missouri Statutes.
(6) The Missouri state income tax does not permit a deduction of
interest paid or incurred on indebtedness incurred or continued to
purchase or carry Units in the Trust, the interest on which is
exempt from such Tax.
(7) The Missouri Trust will not be subject to the Kansas City, Missouri
Earnings and Profits Tax and each Unitholder's share of income of
the Bonds held by the Missouri Trust will not generally be
-50-
<PAGE>
subject to the Kansas City, Missouri Earnings and Profits Tax or
the City of St Louis Earnings Tax (except in the case of certain
Unitholders, including corporations, otherwise subject to the St.
Louis City Earnings Tax).
NEW JERSEY TRUSTS. As described above, the New Jersey Trust consists of
a portfolio of Bonds. The Trust is therefore susceptible to political,
economic or regulatory factors affecting issuers of the Bonds. The following
information provides only a brief summary of some of the complex factors
affecting the financial situation in New Jersey (the "State") and is derived
from sources that are generally available to investors and is believed to be
accurate. It is based in part on information obtained from various State and
local agencies in New Jersey. No independent verification has been made of
any of the following information.
New Jersey is the ninth largest state in population and the fifth smallest
in land area. With an average of 1,062 people per square mile, it is the
most densely populated of all the states. The State's economic base is
diversified, consisting of a variety of manufacturing, construction and
service industries, supplemented by rural areas with selective commercial
agriculture. Historically, New Jersey's average per capita income has been
well above the national average, and in 1993 the State ranked second among
states in per capita personal income ($26,967).
The New Jersey Economic Policy Council, a statutory arm of the New Jersey
Department of Commerce and Economic Development, has reported in New Jersey
Economic Indicators, a monthly publication of the New Jersey Department of
Labor, Division of Labor Market and Demographic Research, that in 1988 and
1989 employment in New Jersey's manufacturing sector failed to benefit from
the export boom experienced by many Midwest states and the State's service
sectors, which had fueled the State's prosperity since 1982, lost momentum.
In the meantime, the prolonged fast growth in the State in the mid 1980s
resulted in a tight labor market situation, which has led to relatively high
wages and housing prices. This means that, while the incomes of New Jersey
residents are relatively high, the State's business sector has become more
vulnerable to competitive pressures.
The onset of the national recession (which officially began in July 1990
according to the National Bureau of Economic Research) caused an acceleration
of New Jersey's job losses in construction and manufacturing. In addition,
the national recession caused an employment downturn in such previously
growing sectors as wholesale trade, retail trade, finance, utilities and
trucking and warehousing. Reflecting the downturn, the rate of unemployment
in the State rose from a low of 3.6% during the first quarter of 1989 to an
estimated 6.6% in November 1994, which is higher than the national average of
5.6% in November 1994. Economic recovery is likely to be slow and uneven in
New Jersey, with unemployment receding at a correspondingly slow pace, due to
the fact that some sectors may lag due to continued excess capacity. In
addition, employers even in rebounding sectors can be expected to remain
cautious about hiring until they become convinced that improved business will
be sustained. Also, certain firms will continue to merge or downsize to
increase profitability.
Debt Service. The primary method for State financing of capital projects
is through the sale of the general obligation bonds of the State. These
bonds are backed by the full faith and credit of the State tax revenues and
certain other fees are pledged to meet the principal and interest payments
and if provided, redemption premium payments, if any, required to repay the
bonds. As of June 30, 1993, there was a total authorized bond indebtedness
of approximately $8.98 billion, of which $3.6 billion was issued and
outstanding, $4.0 billion was retired (including bonds for which provision
for payment has been made through the sale and issuance of refunding bonds)
and $1.38 billion was unissued. The appropriation for the debt service
obligation on such outstanding indebtedness was $103.5 million for fiscal
year 1994.
New Jersey's Budget and Appropriation System. The State operates on a
fiscal year beginning July 1 and ending June 30. At the end of fiscal year
1989, there was a surplus in the State's general fund (the fund into which
all State revenues not otherwise restricted by statute are deposited and from
which appropriations are made) of $411.2 million. At the end of fiscal year
1990, there was a surplus in the general fund of $1 million. At the end of
fiscal year 1991, there was a surplus in the general fund of $1.4 million.
New Jersey closed
-51-
<PAGE>
its fiscal year 1992 with a surplus of $760.8 million. It is estimated that
New Jersey closed its fiscal year 1993 with a surplus of $937.4 million.
In order to provide additional revenues to balance future budgets, to
redistribute school aid and to contain real property taxes, on June 27, 1990,
and July 12, 1990, Governor Florio signed into law legislation which was
estimated to raise approximately $2.8 billion in additional taxes (consisting
of $1.5 billion in sales and use taxes and $1.3 billion in income taxes), the
biggest tax hike in New Jersey history. There can be no assurance that
receipts and collections of such taxes will meet such estimates.
The first part of the tax hike took effect on July 1, 1990, with the
increase in the State's sales and use tax rate from 6% to 7% and the
elimination of exemptions for certain products and services not previously
subject to the tax, such as telephone calls, paper products (which has since
been reinstated), soaps and detergents, janitorial services, alcoholic
beverages and cigarettes. At the time of enactment, it was projected that
these taxes would raise approximately $1.5 billion in additional revenue.
Projections and estimates of receipts from sales and use taxes, however, have
been subject to variance in recent fiscal years.
The second part of the tax hike took effect on January 1, 1991, in the
form of an increased state income tax on individuals. At the time of
enactment, it was projected that this increase would raise approximately $1.3
billion in additional income taxes to fund a new school aid formula, a new
homestead rebate program and state assumption of welfare and social services
costs. Projections and estimates of receipts from income taxes, however,
have also been subject to variance in recent fiscal years. Under the
legislation, income tax rates increased from their previous range of 2% to
3.5% to a new range of 2% to 7%, with the higher rates applying to married
couples with incomes exceeding $70,000 who file joint returns, and to
individuals filing single returns with incomes of more than $35,000.
The Florio administration had contended that the income tax package will
help reduce local property tax increases by providing more state aid to
municipalities. Under the income tax legislation the State will assume
approximately $289 million in social services costs that previously were paid
by counties and municipalities and funded by property taxes. In addition,
under the new formula for funding school aid, an extra $1.1 billion was
proposed to be sent by the State to school districts beginning in 1991, thus
reducing the need for property tax increases to support education programs.
Effective July 1, 1992, the State's sales and use tax rate decreased from
7% to 6%. Effective January 1, 1994, an across-the-board 5% reduction in the
income tax rates was enacted and effective January 1, 1995 further reductions
ranging from 1% up to 10% in income tax rates will take effect.
On June 30, 1994, Governor Whitman signed the New Jersey Legislature's
$15.7 billion budget for Fiscal Year 1995. The balanced budget which
includes $455 million in surplus, is $141 million less than the 1994 budget.
Whether the State can achieve a balanced budget depends on its ability to
enact and implement expenditure reductions and to collect the estimated tax
revenues.
Litigation. The State is a party in numerous legal proceedings pertaining
to matters incidental to the performance of routine governmental operations.
Such litigation includes, but is not limited to, claims asserted against the
State arising from alleged torts, alleged breaches of contracts, condemnation
proceedings and other alleged violations of State and Federal laws. Included
in the State's outstanding litigation are cases challenging the following:
the formula relating to State aid to public schools, the method by which the
State shares with its counties maintenance recoveries and costs for residents
in State institutions, unreasonably low Medicaid payment rates for long-term
facilities in New Jersey, the obligation of counties to maintain Medicaid or
Medicare eligible residents of institutions and facilities for the
developmentally disabled, taxes paid into the Spill Compensation Fund (a fund
established to provide money for use by the State to remediate hazardous
waste sites and to compensate other persons for damages incurred as a result
of hazardous waste discharge) based on Federal preemption, various
provisions, and the constitutionality of the Fair Automobile Insurance Reform
Act of 1990, the State's role in a consent order concerning the construction
of a resource facility in Passaic County, actions taken by the New Jersey
Bureau of Securities against an individual, the State's actions regarding
alleged chromium contamination of State-owned property in Hudson County, the
issuance of
-52-
<PAGE>
emergency redirection orders and a draft permit by the Department of
Environmental Protection and Energy, the adequacy of Medicaid reimbursement
for services rendered by doctors and dentists to Medicaid eligible children,
the Commissioner of Health's calculation of the hospital assessment required
by the Health Care Cost Reduction Act of 1991, refusal of the State to share
with Camden County federal funding the State recently received for
disproportionate share hospital payments made to county psychiatric
facilities, and the constitutionality of annual A-901 hazardous and solid
waste licensure renewal fees collected by the Department of Environmental
Protection and Energy. Adverse judgments in these and other matters could
have the potential for either a significant loss of revenue or a significant
unanticipated expenditure by the State.
At any given time, there are various numbers of claims and cases pending
against the State, State agencies and employees seeking recovery of monetary
damages that are primarily paid out of the fund created pursuant to the New
Jersey Tort Claims Act. In addition, at any given time, there are various
numbers of contract claims against the State and State agencies seeking
recovery of monetary damages. The State is unable to estimate its exposure
for these claims.
Debt Ratings. For many years, both Moody's Investors Service, Inc. and
Standard and Poor's Corporation rated New Jersey general obligation bonds
"Aaa" and "AAA", respectively. On July 3, 1991, however, Standard and Poor's
Corporation downgraded New Jersey general obligation bonds to "AA+." On June
4, 1992, Standard and Poor's Corporation placed New Jersey general obligation
bonds on Credit Watch with negative implications, citing as its principal
reason for its caution the unexpected denial by the federal government of New
Jersey's request for $450 million in retroactive Medicaid payments for
psychiatric hospitals. These funds were critical to closing a $1 billion gap
in the State's $15 billion budget for fiscal year 1992 which ended on June
30, 1992. Under New Jersey state law, the gap in the budget was required to
be closed before the new budget year began on July 1, 1992. Standard and
Poor's suggested the State could close fiscal 1992's budget gap and help fill
fiscal 1993's hole by a reversion of $700 million of pension contributions to
its general fund under a proposal to change the way the State calculates its
pension liability.
On July 6, 1992, Standard and Poor's Corporation reaffirmed its "AA+"
rating for New Jersey general obligation bonds and removed the debt from its
CreditWatch list, although it stated that New Jersey's long-term financial
outlook was negative. Standard and Poor's Corporation was concerned that the
State was entering fiscal 1993 with only a $26 million surplus and remained
concerned about whether the State economy would recover quickly enough to
meet lawmakers' revenue projections. It also remained concerned about the
recent federal ruling leaving in doubt how much the State was due in
retroactive Medicaid reimbursements and a ruling by a federal judge, now on
appeal, of the State's method for paying for uninsured hospital patients.
However, on July 27, 1994, Standard and Poor's announced that it was changing
the State's outlook from negative to stable due to a brightening of the
State's prospects as a result of Governor Whitman's effort to trim spending
and cut taxes, coupled with an improving economy. Standard and Poor's
reaffirmed its "AA+" rating at the same time.
On August 24, 1992, Moody's Investors Service, Inc. downgraded New Jersey
general obligation bonds to "Aal" stating that the reduction reflects a
developing pattern of reliance on nonrecurring measures to achieve budgetary
balance, four years of financial operations marked by revenue shortfalls and
operating deficits, and the likelihood that serious financial pressures will
persist. On August 5, 1994, Moody's reaffirmed its "Aa1" rating, citing on
the positive side New Jersey's broad-based economy, high income levels,
history of maintaining a positive financial position and moderate (albeit
rising) debt ratios, and on the negative side, a continued reliance on one-
time revenue and dependence on pension-related savings to achieve budgetary
balance.
At the time of the closing for each New Jersey Trust Special Counsel to
each New Jersey Trust for New Jersey tax matters rendered an opinion under
then existing New Jersey income tax law applicable to taxpayers whose income
is subject to New Jersey income taxation substantially to the effect that:
(1) Each New Jersey Trust will be recognized as a trust and not an
association taxable as a corporation. Each New Jersey Trust will
not be subject to the New Jersey Corporation Business Tax or the
New Jersey Corporation Income Tax.
-53-
<PAGE>
(2) With respect to the non-corporate Unitholders who are residents of
New Jersey, the income of the New Jersey Trust which is allocated
to each such Unitholder will be treated as the income of such
Unitholder under the New Jersey Gross Income Tax. Interest on the
underlying Bonds which would be exempt from tax under the New
Jersey Gross Income Tax if directly received by such Unitholder
will retain its status as tax-exempt interest when received by the
New Jersey Trust and distributed to such Unitholder. Any proceeds
paid under the insurance policy issued to the Trustee of the New
Jersey Trust with respect to the Bonds or under individual policies
obtained by issuers of Bonds which represent maturing interest on
defaulted obligations held by the Trustee will be exempt from New
Jersey Gross Income Tax if, and to the same extent as, such
interest would have been so exempt if paid by the issuer of the
defaulted obligations.
(3) A non-corporate Unitholder will not be subject to the New Jersey
Gross Income Tax on any gain realized either when a New Jersey
Trust disposes of a Bond (whether by sale, exchange, redemption, or
payment at maturity), when the Unitholder redeems or sells his
Units or upon payment of any proceeds under the insurance policy
issued to the Trustee of a New Jersey Trust with respect to the
Bonds or under individual policies obtained by issuers of Bonds
which represent maturing principal on defaulted obligations held by
the Trustee. Any loss realized on such disposition may not be
utilized to offset gains realized by such Unitholder on the
disposition of assets the gain on which is subject to the New
Jersey Gross Income Tax.
(4) Units of a New Jersey Trust may be taxable on the death of a
Unitholder under the New Jersey Transfer Inheritance Tax Law or the
New Jersey Estate Tax Law.
(5) If a Unitholder is a corporation subject to the New Jersey
Corporation Business Tax or New Jersey Corporation Income Tax,
interest from the Bonds in a New Jersey Trust which is allocable to
such corporation will be includable in its entire net income for
purposes of the New Jersey Corporation Business Tax or New Jersey
Corporation Income Tax, less any interest expense incurred to carry
such investment to the extent such interest expense has not been
deducted in computing Federal taxable income. Net gains derived by
such corporation on the disposition of the Bonds by a New Jersey
Trust or on the disposition of its Units will be included in its
entire net income for purposes of the New Jersey Corporation
Business Tax or New Jersey Corporation Income Tax. Any proceeds
paid under the insurance policy issued to the Trustee of a New
Jersey Trust with respect to the Bonds or under individual policies
obtained by issuers of Bonds which represent maturing interest or
maturing principal on defaulted obligations held by the Trustee
will be included in its entire net income for purposes of the New
Jersey Corporation Business Tax or New Jersey Corporation Income
Tax if, and to the same extent as, such interest or proceeds would
have been so included if paid by the issuer of the defaulted
obligations.
NEW YORK TRUSTS. A resident of New York State (or New York City) will be
subject to New York State (or New York City) personal income tax with respect
to gains realized when New York Obligations held in the New York Trust are
sold, redeemed or paid at maturity or when his Units are sold or redeemed,
such gain will equal the proceeds of sale, redemption or payment less the tax
basis of the New York Obligation or Unit (adjusted to reflect (a) the
amortization of premium or discount, if any, on New York Obligations held in
the Trust, (b) accrued original issue discount, with respect to each New York
Obligation which, at the time New York Obligation was issued had original
issue discount, and (c) the deposit of New York Obligations with accrued
interest in the Trust after the Unitholder's settlement date).
Interest or gain from the New York Trust derived by a Unitholder who is
not a resident of New York State (or New York City) will not be subject to
New York State (or New York City) personal income tax, unless the Units are
property employed in a business, trade, profession or occupation carried on
in New York State (or New York City).
Amount paid on defaulted New York Obligations held by the Trustee under
policies of insurance issued with respect to such New York Obligations will
be excludable from income for New York State and New York
-54-
<PAGE>
City income tax purposes, if and to the same extent as, such interest would
have been excludable if paid by the respective issuer.
For purposes of the New York State and New York City franchise tax on
corporations, Unitholders which are subject to such tax will be required to
include in their entie net income any interest or gains distributed to them
even though distributed in respect of New York obligations.
If borrowed funds are used to purchase Units in the Trust, all (or part)
of the interest on such indebtedness will not be deductible for New York
State and New York City tax purposes. The purchase of Units may be
considered to have been made with borrowed funds even though such funds are
not directly traceable to the purchase of Units in any New York Trust.
The Portfolio of the New York Trust includes obligations issued by New
York State (the "State"), by its various public bodies (the "Agencies"),
and/or by other entities located within the State, including the City of New
York (the "City").
Some of the more significant events relating to the financial situation in
New York are summarized below. This section provides only a brief summary of
the complex factors affecting the financial situation in New York and is
based in part on Official Statements issued by, and on other information
reported by the State, the City and the Agencies in connection with the
issuance of their respective securities.
There can be no assurance that future statewide or regional economic
difficulties, and the resulting impact on State or local government finances
generally, will not adversely affect the market value of New York Municipal
Obligations held in the portfolio of the Trust or the ability of particular
obligors to make timely payments of debt service on (or relating to) those
obligations.
The State has historically been one of the wealthiest states in the
nation. For decades, however, the State economy has grown more slowly than
that of the nation as a whole, gradually eroding the State's relative
economic affluence. Statewide, urban centers have experienced significant
changes involving migration of the more affluent to the suburbs and an influx
of generally less affluent residents. Regionally, the older Northeast cities
have suffered because of the relative success that the South and the West
have had in attracting people and business. The City has also had to face
greater competition as other major cities have developed financial and
business capabilities which make them less dependent on the specialized
services traditionally available almost exclusively in the City.
The State has for many years had a very high State and local tax burden
relative to other states. The burden of State and local taxation, in
combination with the many other causes of regional economic dislocation, has
contributed to the decisions of some businesses and individuals to relocate
outside, or not locate within, the State.
A national recession commenced in mid-1990. The downturn continued
throughout the State's 1990-91 fiscal year and was followed by a period of
weak economic growth during the 1991 calendar year. For calendar year 1992,
the national economy continued to recover, although at a rate below all post-
war recoveries. For calendar year 1993, the economy is expected to grow
faster than 1992, but still at a very moderate rate as compared to other
recoveries. The national recession has been more severe in the State because
of factors such as a significant retrenchment in the financial services
industry, cutbacks in defense spending, and an overbuilt real estate market.
1993-94 Fiscal Year. On April 5, 1993, the State Legislature approval a
$32.08 billion budget. Following enactment of the budget the 1993-94 State
Financial Plan was formulated on April 16, 1993. This Plan projects General
Fund receipts and transfers from other funds at $32.367 billion and
disbursements and transfers to other funds at $32.300 billion. In comparison
to the Governor's recommended Executive Budget for the 1993-94 fiscal year,
as revised on February 18, 1993, the 1993-94 State Financial Plan reflects
increases in both receipts and disbursements in the General Fund of $811
million.
-55-
<PAGE>
While a portion of the increased receipts was the result of a $487 million
increase in the States's 1992-93 positive year-end margin at March 31, 1993
to $671 million, the balance of such increased receipts is based upon (i) a
projected $269 million increase in receipts resulting from improved 1992-93
results and the expectation of an improving economy, (ii) projected
additional payments of $200 million from the Federal government as
reimbursements for indigent medical care, (iii) the early payment of $50
million of personal tax returns in 1992-93 which otherwise would have been
paid in 1993-94; offset by (iv) the State Legislature's failure to enact $195
million of additional revenue-raising recommendations proposed by the
Governor. There can be no assurances that all of the projected receipts
referred to above will be received.
Despite the $811 million increase in disbursements included in the 1993-94
State Financial Plan, a reduction in aid to some local government units can
be expected. To offset a portion of such reductions, the 1993-94 State
Financial Plan contains a package of mandate relief, cost containment and
other proposals to reduce the costs of many programs for which local
governments provide funding. There can be no assurance, however, that
localities that suffer cuts will not be adversely affected, leading to
further requests for State financial assistance.
There can be no assurance that the State will not face substantial
potential budget gaps in the future 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.
1992-93 Fiscal Year. Before giving effect to a 1992-93 year-end deposit
to the refund reserve account of $671 million, General Fund receipts in 1992-
93 would have been $716 million higher than originally projected. This year-
end deposits effectively reduced 1992-93 receipts by $671 million and made
those receipts available for 1993-94.
The State's favorable performance primarily resulted from income tax
collections that were $700 million higher than projected which reflected both
stronger economic activity and tax-induced one-time acceleration of income
into 1992. In other areas larger than projected business tax collections and
unbudgeted receipts offset the loss of $200 million of anticipated Federal
reimbursement and losses of, or shortfalls in, other projected revenue
sources.
For 1992-93, disbursements and transfers to other funds (including the
deposit to the refund reserve account discussed above) totalled $30.829
billion, an increase of $45 million above projections in April 1992.
Fiscal year 1992-93 was the first time in four years that the State did
not incur a cash-basis operating deficit in the General Fund requiring the
issuance of deficit notes or other bonds, spending cuts or other revenue
raising measures.
Indebtedness. As of March 31, 1993, the total amount of long-term State
general obligation debt authorized but unissued stood at $2.4 billion. As of
the same date, the State had approximately $5.4 billion in general obligation
bonds. The State issued $850 million in tax and revenue anticipation notes
("TRANS") on April 28, 1993. The State does not project the need to issue
additional TRANS during the States's 1993-94 fiscal year.
The State projects that its borrowings for capital purposes during the
State's 1993-94 fiscal year will consist of $460 million in general
obligation bonds and $140 million in new commercial paper issuances. In
addition, the State expects to issue $140 million in bonds for the purpose of
redeeming outstanding bond anticipation notes. The Legislature has
authorized the issuance of up to $85 million in certificates of participation
during the State's 1993-94 fiscal year for personal and real property
acquisitions during the State's 1993-94 fiscal year. The projection or the
State regarding its borrowing for the 1993-94 fiscal year may change if
actual receipts fall short of State projections or if other circumstances
require.
In June, 1990, legislation was enacted creating the "New York Local
Government Assistance Corporation" ("LGAC"), a public benefit corporation
empowered to issue long-term obligations to fund certain payments to
-56-
<PAGE>
local governments traditionally funded through the State's annual seasonal
borrowing. To date, LGAC has issued its bonds to provide net proceeds of
$3.28 billion. LGAC has been authorized to issue additional bonds to provide
net proceeds of $703 million during the State's 1993-94 fiscal year.
Ratings. The $850 million in TRANS issued by the State in April 1993 were
rated SP-1-Plus by S&P on April 26, 1993, and MIG-1 by Moody's on April 23,
1993, which represents the highest ratings given by such agencies and the
first time the State's TRANS have received these ratings since its May 1989
TRANS issuance. Both agencies cited the State's improved fiscal position as
a significant factor in the upgrading of the April 1993 TRANS.
Moody's rating of the State's general obligation bonds stood at a A on
April 23, 1993, and S&P's rating stood at A- with a stable outlook on April
26, 1993, an improvement from S&P's negative outlook prior to April 1993.
Previously, Moody's lowered its rating to A on June 6, 1990, its rating
having been A1 since May 27, 1986. S&P lowered its rating from A to A- on
January 13, 1992. S&P's previous ratings were A from March 1990 to January
1992, AA- from August 1987 to March 1990 and A+ from November 1982 to August
1987.
Moody's, in confirming its rating of the State's general obligation bonds,
and S&P, in improving its outlook on such bonds from negative to stable,
noted the State's improved fiscal condition and reasonable revenue
assumptions contained in the 1993-94 State budget.
The City accounts for approximately 41% of the State's population and
personal income, and the City's financial health affects the State in
numerous ways.
In 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 other
actions, the State Legislature (i) created MAC to assist with long-term
financing for the City's short-term debt and other cash requirements and (ii)
created the State Financial Control Board (the "Control Board") to review and
approve the City's budgets and City four-year financial plans (the financial
plans also apply to certain City-related public agencies (the "Covered
Organizations").
In February 1975, the New York State Urban Development Corporation
("UDC"), which had approximately $1 billion of outstanding debt, defaulted on
certain of its short-term notes. Shortly after the UDC default, the City
entered a period of financial crisis. Both the State Legislature and the
United States enacted legislation in response to this crisis. During 1975,
the State Legislature (i) created MAC to assist with long-term financing for
the City's short-term debt and other cash requirements and (ii) created the
State Financial Control Board (the "Control Board") to review and approve the
City's budgets and City four-year financial plans (the financial plans also
apply to certain City-related public agencies (the "Covered Organizations")).
Over the past three years, the rate of economic growth in the City has
slowed substantially, and the City's economy is currently in recession. The
City projects, and its current four-year financial plan assumes, a recovery
early in the 1993 calendar year. The Mayor is responsible for preparing the
City's four-year financial plan, including the City's current financial plan.
The City Comptroller has issued reports concluding that the recession of the
City's economy will be more severe and last longer than is assumed in the
financial plan.
Fiscal Year 1993 and 1993-1996 Financial Plan. The City's 1993 fiscal
year results are projected to be balanced in accordance with generally
accepted accounting principles ("GAAP"). The City was required to close
substantial budget gaps in its 1990, 1991 and 1992 fiscal years in order to
maintain balanced operating results.
The City's modified Financial Plan dated February 9, 1993 covering fiscal
years 1993-1996 projects budget gaps for 1994 through 1996. The Office of
the State Deputy Controller for the City of New York has estimated that under
the modified Financial Plan budget gaps will be $102 million for fiscal year
1994, $196 million for fiscal year 1995 and $354 million for fiscal year
1996, primarily due to anticipated higher spending on labor costs.
-57-
<PAGE>
However, the City's modified Plan is dependent upon a gap-closing program,
certain elements of which the staff of Control Board identified on March 25,
1993 to be at risk due to projected levels of State and Federal aid and
revenue and expenditures estimates which may not be achievable. The Control
Board indicated that the City's modified Financial Plan does not make
progress towards establishing a balanced budget process. The Control Board's
report identified budget gap risks of $1.0 billion, $1.9 billion, $2.3
billion and $2.6 billion in fiscal years 1994 through 1997, respectively.
On June 3, 1993, the Mayor announced that State and federal aid for Fiscal
Year 1993-94 would be $280 million less than projected and that in order to
balance the City's budget $176 million of previously announced contingent
budget cuts would be imposed. The Mayor indicated that further savings would
entail serious reductions in services. The State Comptroller on June 14,
1993 criticized efforts by the Mayor and City Council to balance the City's
budget which rely primarily on one-shot revenues. The Comptroller added
that the City's budget should be based on "recurring revenues that fund
recurring expenditures." Given the foregoing factors, there can be no
assurance that City will continue to maintain a balanced budget, or that it
can maintain a balanced budget without additional tax or other revenue
increases or reductions in City services, which could adversely affect the
City's economic base.
Pursuant to State law, the City prepares a four-year annual financial plan
which is reviewed and revised on a quarterly basis and which includes the
City's capital, revenue and expense projections. The City is required to
submit its financial plans to review bodies, including the Control Board. If
the City were to experience certain adverse financial circumstances,
including the occurrence or the substantial likelihood and imminence of the
occurrence of an annual operating deficit of more than $100 million or the
loss of access to the public credit markets to satisfy the City's capital and
seasonal financial requirements, the Control Board would be required by State
law to exercise certain powers, including prior approval of City financial
plans, proposed borrowings and certain contracts.
The City depends on the State for State aid both to enable the City to
balance its budget and to meet its cash requirements. As a result of the
national and regional economic recession, the State's projections of tax
revenues for its 1991 and 1992 fiscal years were substantially reduced. For
its 1993 fiscal year, the State, before taking any remedial action reflected
in the State budget enacted by the State Legislature on April 2, 1992
reported a potential budget deficit of $4.8 billion. If the State
experiences revenue shortfalls or spending increases beyond its projections
during its 1993 fiscal year or subsequent years, such developments could also
result in reductions in projected State aid to the City. In addition, there
can be no assurance that State budgets in future fiscal years will be adopted
by the April 1 statutory deadline and that there will not be adverse effects
on the City's cash flow and additional City expenditures as a result of such
delays.
The City's projections set forth in the financial plan are based on
various assumptions and contingencies which are uncertain and which may not
materialize. Changes in major assumptions could significantly affect the
City's ability to balance its budget as required by State law and to meet its
annual cash flow and financing requirements. Such assumptions and
contingencies include the timing of any regional and local economic recovery,
the absence of wage increases in excess of the increases assumed in its
financial plan, employment growth, provision of State and Federal aid and
mandate relief, State legislative approval of future State budgets, levels of
education expenditures as may be required by State law, adoption of future
City budgets by the New York City Council, and approval by the Governor or
the State Legislature and the cooperation of MAC with respect to various
other actions proposed in such financial plan.
The City's ability to maintain a balanced operating budget is dependent on
whether it can implement necessary service and personnel reduction programs
successfully. As discussed above, the City must identify additional
expenditure reductions and revenue sources to achieve balanced operating
budgets for fiscal years 1994 and thereafter. Any such proposed expenditure
reductions will be difficult to implement because of their size and the
substantial expenditure reductions already imposed on City operations in the
past two years.
Attaining a balanced budget is also dependent upon the City's ability to
market its securities successfully in the public credit markets. The City's
financing program for fiscal years 1993 through 1996 contemplates issuance of
$15.7 billion of general obligation bonds primarily to reconstruct and
rehabilitate the City's
-58-
<PAGE>
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 terms and success of projected public
sales of City general obligation bonds and notes will be subject to
prevailing market conditions at the time of the sale, and no assurance can be
given that the credit markets will absorb the projected amounts of public
bond and note sales. In addition, future developments concerning the City
and public discussion of such developments, the City's future financial needs
and other issues may affect the market for outstanding City general
obligation bonds and notes. If the City were unable to sell its general
obligation bonds and notes, it would be prevented from meeting its planned
operating and capital expenditures.
The City Comptroller, the staff of the Control Board, the Office of the
State Deputy Comptroller for the City of New York (the "OSDC") and other
agencies and public officials have issued reports and made public statements
which, among other things, state that projected revenues may be less and
future expenditures may be greater than those forecast in the financial plan.
In addition, the Control Board and other agencies have questioned whether the
City has the capacity to generate sufficient revenues in the future to meet
the costs of its expenditure increases and to provide necessary services.
It is reasonable to expect that such reports and statements will continue to
be issued and to engender public comment.
Fiscal Years 1990, 1991 and 1992. The City achieved balanced operating
results as reported in accordance with GAAP for the 1992 fiscal year. During
the 1990 and 1991 fiscal years, the City implemented various actions to
offset a projected budget deficit of $3.2 billion for the 1991 fiscal year,
which resulted from declines in City revenue sources and increased public
assistance needs due to the recession. Such actions included $822 million of
tax increases and substantial expenditure reductions.
The quarterly modification to the City's financial plan submitted to the
Control Board on May 7, 1992 (the "1992 Modification") projected a balanced
budget in accordance with GAAP for the 1992 fiscal year after taking into
account a discretionary transfer of $455 million to the 1993 fiscal year as
the result of a 1992 fiscal year surplus. In order to achieve a balanced
budget for the 1992 fiscal year, during the 1991 fiscal year, the City
proposed various actions for the 1992 fiscal year to close a projected gap of
$3.3 billion in the 1992 fiscal year.
On November 19, 1992 the City submitted to the Control Board the Financial
Plan for the 1993 through 1996 fiscal years, which is a modification to a
financial plan submitted to the Control Board on June 11, 1992 (the "June
Financial Plan"), and which relates to the City, the Board of Education
("BOE") and the City University of New York ("CUNY"). The 1993-1996
Financial Plan projects revenues and expenditures of $29.9 billion each for
the 1993 fiscal year balanced in accordance with GAAP.
During the 1992 fiscal year, the City proposed various actions to close a
previously projected gap of approximately $1.2 billion for the 1993 fiscal
year. The gap-closing actions for the 1993 fiscal year proposed during the
1992 fiscal year and outlined in the City's June Financial Plan included $489
million of discretionary transfers from the 1992 fiscal year. The 1993-1996
City Financial Plan includes additional gap-closing actions to offset an
additional potential $81 million budget gap.
The 1993-1996 Financial Plan also sets forth projections and outlines a
proposed gap-closing program for the 1994 through 1996 fiscal years to close
projected budget gaps of $1.7 billion, $2.0 billion and $2.6 billion,
respectively, in the 1994 through 1996 fiscal years. On February 9, 1993,
the City issued a modification to the 1993-1996 Financial Plan (the "February
Modification"). The February Modification projects budget gaps for the
fiscal years 1994, 1995 and 1996 of $2.1 billion, $3.1 billion and $3.8
billion, respectively.
Various actions proposed in the 1993-1996 Financial Plan are subject to
approval by the Governor and approval by the State Legislature, and the
proposed increase in Federal aid is subject to approval by Congress and the
President. The State Legislature has in the past failed to approve certain
proposals similar to those that the 1993-1996 Financial Plan assumes will be
approved by the State Legislature during the 1993 fiscal year. If these
actions cannot be implemented, the City will be required to take other
actions to decrease expenditures or increase revenues to maintain a balanced
financial plan.
-59-
<PAGE>
On March 9, 1993, OSDC issued a report on the February Modification. The
report expressed concern that the budget gaps projected for fiscal years 1994
through 1996 are the largest the City has faced at this point in the
financial planning cycle in at least a decade, and concluded that the
February Modification represented a step backward in the City's efforts to
bring recurring revenues into line with recurring expenditures.
The City is a defendant in a significant number of lawsuits. Such
litigation includes, but is not limited to, actions commenced and claims
asserted against the City arising out of alleged constitutional violations,
torts, breaches of contracts, and other violations of law and condemnation
proceedings. While the ultimate outcome and fiscal impact, if any, on the
proceedings and claims are not currently predictable, adverse determinations
in certain of them might have a material adverse effect upon the City's
ability to carry out its financial plan. As of June 30, 1992, legal claims
in excess of $341 billion were outstanding against the City for which the
City estimated its potential future liability to be $2.3 billion.
As of the date of this prospectus, Moody's rating of the City's general
obligation bonds stood at Baal and S&P's rating stood at A-. On February 11,
1991, Moody's lowered its rating from A.
On March 30, 1993 in confirming the Baa1 rating, Moody's noted that:
The financial plan for fiscal year 1994 and beyond shows an ongoing
imbalance between the City's expenditures and revenues. The key indication
of this structural imbalance is not necessarily the presence of sizable out-
year budget gaps, but the recurring use of one-shot actions to close gaps.
One-shots constitute a significant share of the proposed gap-closing program
for fiscal year 1994, and they represent an even larger share of those
measures which the City seems reasonably certain to attain. Several major
elements of the program, including certain state actions, federal counter
cyclical aid and part of the city's tax package, remain uncertain. However,
the gap closing plan may be substantially altered when the executive budget
is offered later this spring.
On March 30, 1993, S&P affirmed its A- rating with a negative outlook,
stating that:
The City's key credit factors are marked by a high and growing debt
burden, and taxation levels that are relatively high, but stable. The City's
economy is broad-based and diverse, but currently is in prolonged recession,
with slow growth prospects for the foreseeable future.
The rating outlook is negative, reflecting the continued fiscal pressure
facing the City, driven by continued weakness in the local economy, rising
spending pressures for education and labor costs of city employees, and
increasing costs associated with rising debt for capital construction and
repair.
The current financial plan for the City assumes substantial increases in
aid from national and state governments. Maintenance of the current rating,
and stabilization of the rating outlook, will depend on the City's success in
realizing budgetary aid from these governments, or replacing those revenues
with ongoing revenue-raising measures or spending reductions under the City's
control. However, increased reliance on non-recurring budget balancing
measures that would support current spending, but defer budgetary gaps to
future years, would be viewed by S&P as detrimental to New YorkCity's single-
'A-' rating.
Previously, Moody's had raised its rating to A in May 1988, to Baal in
December 1985, to Baa in November 1983 and to Bal in November 1981. S&P had
raised its rating to A- in November 1987, to BBB+ in July 1985 and to BBB in
March 1981.
On May 9, 1990, Moody's revised downward its rating on outstanding City
revenue anticipation notes from MIG-1 to MIG-2 and rated the $900 million
Notes then being sold MIG-2. On April 30, 1991 Moody's confirmed its MIG-2
rating for the outstanding revenue anticipation notes and for the $1.25
billion in notes then being sold. On April 29, 1991, S&P revised downward
its rating on City revenue anticipation notes from SP-1 to SP-2.
-60-
<PAGE>
As of December 31, 1992, the City and MAC had, respectively, $20.3 billion
and $4.7 billion of outstanding net long-term indebtedness.
Certain Agencies of the State have faced substantial financial
difficulties which could adversely affect the ability of such Agencies to
make payments of interest on, and principal amounts of, their respective
bonds. The difficulties have in certain instances caused the State (under
so-called "moral obligation" provisions which are non-binding statutory
provisions for State appropriations to maintain various debt service reserve
funds) to appropriate funds on behalf of the Agencies. Moreover, it is
expected that the problems faced by these Agencies will continue and will
require increasing amounts of State assistance in future years. Failure of
the State to appropriate necessary amounts or to take other action to permit
those Agencies having financial difficulties to meet their obligations could
result in a default by one or more of the Agencies. Such default, if it were
to occur, would be likely to have a significant adverse effect on investor
confidence in, and therefore the market price of, obligations of the
defaulting Agencies. In addition, any default in payment on any general
obligation of any Agency whose bonds contain a moral obligation provision
could constitute a failure of certain conditions that must be satisfied in
connection with Federal guarantees of City and MAC obligations and could thus
jeopardize the City's long-term financing plans.
As of September 30, 1992, the State reported that there were eighteen
Agencies that each had outstanding debt of $100 million or more. These
eighteen Agencies had an aggregate of $62.2 billion of outstanding debt,
including refunding bonds, of which the State was obligated under lease-
purchase, contractual obligation or moral obligation provisions on $25.3
billion.
The State is a defendant in numerous legal proceedings pertaining to
matters incidental to the performance of routine governmental operations.
Such litigation includes, but is not limited to, claims asserted against the
State arising from alleged torts, alleged breaches of contracts, condemnation
proceedings and other alleged violations of State and Federal laws. Included
in the State's outstanding litigation are a number of cases challenging the
constitutionality or the adequacy and effectiveness of a variety of
significant social welfare programs primarily involving the State's mental
hygiene programs. Adverse judgments in these matters generally could result
in injunctive relief coupled with prospective changes in patient care which
could require substantial increased financing of the litigated programs in
the future.
The State is also engaged in a variety of claims wherein significant
monetary damages are sought. Actions commenced by several Indian nations
claim that significant amounts of land were unconstitutionally taken from the
Indians in violation of various treaties and agreements during the eighteenth
and nineteenth centuries. The claimants seek recovery of approximately six
million acres of land as well as compensatory and punitive damages.
The U.S. Supreme Court on March 30, 1993 referred to a Special Master for
determination of damages on an action by the State of Delaware to recover
certain unclaimed dividends, interest and other distributions made by issuers
of securities held by New York-based brokers incorporated in Delaware.
(State of Delaware v. State of New York.) The State had taken such unclaimed
property under its Abandoned Property Law. The State expects that it may pay
a significant amount in damages during fiscal year 1993-94 but it has
indicated that it has sufficient funds on hand to pay any such award,
including funds held in contingency reserves. The State's 1993-94 Financial
Plan includes the establishment of a $100 million contingency reserve fund
which would be available to fund such an award which some reports have
estimated at $100-$800 million.
In Schulz v. State of New York, commenced May 24, 1993 ("Schulz 1993"),
petitioners have challenged the constitutionality of mass transportation
bonding programs of the New York State Thruway Authority and the Metropolitan
Transportation Authority. On May 24, 1993, the Supreme Court, Albany County,
temporarily enjoined the State from implementing those bonding programs. In
previous actions Mr. Schulz and others have challenged on similar grounds
bonding programs for the New York State Urban Development Corporation and the
New York Local Government Assistance Corporation. While there have been no
decisions on the merits in such previous actions, by an opinion dated May 11,
1993, the New York Court of Appeals held in a proceeding commenced on April
29, 1991 in the Supreme Court, Albany County (Schulz v. State of New York),
that petitioners had standing as voters under the State Constitution to bring
such action.
-61-
<PAGE>
Petitioners in Schulz 1993 have asserted that issuance of bonds by the two
Authorities is subject to approval by statewide referendum. At this time
there can be no forecast of the likelihood of success on the merits by the
petitioners, but a decision upholding this constitutional challenge could
restrict and limit the ability of the State and its instrumentalities to
borrow funds in the future. The State has not indicated that the temporary
injunction issued by the Supreme Court in this action will have any immediate
impact on its financial condition or interfere with projects requiring
immediate action.
Adverse developments in the foregoing proceedings or new proceedings could
adversely affect the financial condition of the State in the future.
Certain localities in addition to New York City could have financial
problems leading to requests for additional State assistance. Both the
Revised 1992-93 State Financial Plan and the recommended 1993-94 State
Financial Plan includes a significant reduction in State aid to localities in
such programs as revenue sharing and aid to education from projected base-
line growth in such programs. It is expected that such reductions will
result in the need for localities to reduce their spending or increase their
revenues. The potential impact on the State of such actions by localities is
not included in projections of State receipts and expenditures in the State's
1993-94 fiscal year.
Fiscal difficulties experienced by the City of Yonkers ("Yonkers")
resulted in the creation of the Financial Control Board for the City of
Yonkers (the "Yonkers Board") by the State in 1984. The Yonkers Board is
charged with oversight of the fiscal affairs of Yonkers. Future actions
taken by the Governor or the State Legislature to assist Yonkers could result
in allocation of State resources in amounts that cannot yet be determined.
Municipalities and school districts have engaged in substantial short-term
and long-term borrowings. In 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). State law requires
the Comptroller to review and make recommendations concerning the budgets of
those local government units other than New York City authorized by State law
to issue debt to finance deficits during the period that such deficit
financing is outstanding. Fifteen localities had outstanding indebtedness
for state financing at the close of their fiscal year ending in 1991. In
1992, an unusually large number of local government units requested
authorization for deficit financings. According to the Comptroller, ten
local government units have been authorized to issue deficit financing in the
aggregate amount of $131.1 million.
Certain proposed Federal expenditure reductions could reduce, or in some
cases eliminate, Federal funding of some local programs and accordingly might
impose substantial increased expenditure requirements on affected localities.
If the State, New York City or any of the Agencies were to suffer serious
financial difficulties jeopardizing their respective access to the public
credit markets, the marketability of notes and bonds issued by localities
within the State, including notes or bonds in the New York Trust, could be
adversely affected. Localities also face anticipated and potential problems
resulting from certain pending litigation, judicial decisions, and long-range
economic trends. The longer-range potential problems of declining urban
population, increasing expenditures, and other economic trends could
adversely affect localities and require increasing State assistance in the
future.
At the time of the closing for each New York Trust, Special Counsel to
each New York Trust for New York tax matters rendered an opinion under then
existing New York income tax law applicable to taxpayers whose income is
subject to New York income taxation substantially to the effect that:
The New York Trust is not an association taxable as a corporation and the
income of the New York Trust will be treated as the income of the Unitholders
under the income tax laws of the State and City of New York. Individuals who
reside in New York State or City will not be subject to State and City tax on
interest income which is exempt from Federal income tax under section 103 of
the Internal Revenue Code of 1986 and derived from obligations of New York
State or a political subdivision thereof, although they will be subject to
New York State and City tax with respect to any gains realized when such
obligations are sold, redeemed or paid at maturity or when any such Units are
sold or redeemed.
-62-
<PAGE>
NORTH CAROLINA TRUSTS. General obligations of a city, town or county in
North Carolina are payable from the general revenues of the entity, including
ad valorem tax revenues on property within the jurisdiction. Revenue bonds
issued by North Carolina political subdivisions include (1) revenue bonds
payable exclusively from revenue-producing governmental enterprises and (2)
industrial revenue bonds, college and hospital revenue bonds and other
"private activity bonds" which are essentially non-governmental debt issues
and which are payable exclusively by private entities such as non-profit
organizations and business concerns of all sizes. State and local
governments have no obligation to provide for payment of such private
activity bonds and in many cases would be legally prohibited from doing so.
The value of such private activity bonds may be affected by a wide variety of
factors relevant to particular localities or industries, including economic
developments outside of North Carolina.
Section 23-48 of the North Carolina General Statutes appears to permit any
city, town, school district, county or other taxing district to avail itself
of the provisions of Chapter 9 of the United States Bankruptcy Code, but only
with the consent of the Local Government Commission of the State and of the
holders of such percentage or percentages of the indebtedness of the issuer
as may be required by the Bankruptcy Code (if any such consent is required).
Thus, although limitations apply, in certain circumstances political
subdivisions might be able to seek the protection of the Bankruptcy Code.
State Budget and Revenues. The North Carolina State Constitution requires
that the total expenditures of the State for the fiscal period covered by
each budget not exceed the total of receipts during the fiscal period and the
surplus remaining in the State Treasury at the beginning of the period. The
State's fiscal year runs from July 1st through June 30th.
In 1990 and 1991, the State had difficulty meeting its budget projections.
Lower than anticipated revenues coupled with increases in State spending
requirements imposed by the federal government led to projected budget
deficits for fiscal 1989-1990 and fiscal 1990-91. Consequently, the Governor
ordered cuts in budgeted State expenditures for both fiscal years.
The State, like the nation, has experienced economic recovery since 1991.
Apparently due to both increased tax and fee revenue and the previously
enacted spending reductions, the State has a budget surplus of approximately
$887 million at the end of the fiscal 1993-94. After review of the 1994-95
continuation budget adopted in 1993, the General Assembly approved spending
expansion funds, in part to restore certain employee salaries to budgeted
levels, which amounts had been deferred to balance the budgets in 1989-1993,
and to authorize funding for new initiatives for economic development,
education, human services and environmental programs. (The cutback in
funding for infrastructure and social development projects had been cited by
agencies rating State obligations, following the 1991 reductions, as cause
for concern about the long-term consequences of those reductions on the
economy of the State and the State's fiscal prospects.)
Based on projected growth in State tax and fee revenues, the General Fund
balance forecast for the end of the 1994-95 fiscal year is approximately $310
million.
It is unclear what effect these developments at the State level may have
on the value of the Debt Obligations in the North Carolina Trust.
The State is subject to claims by classes of plaintiffs asserting a right
to refund of taxes paid under State statutes that allegedly discriminated
against federal retirees and armed services personnel in a manner that was
unconstitutional based on the decision by the United States Supreme court in
a 1989 Michigan case involving a similar law, Davis v. Michigan Department of
Treasury ("Davis"). At the time of that decision, State income tax law
exempted retirement income paid by North Carolina State and local governments
but did not exempt retirement income paid by the federal government to its
former employees. Also, State tax law at the time provided a deduction for
certain income earned by members of the North Carolina National Guard, but
did not provide a similar deduction for members of the federal armed
services.
Following the Davis decision the North Carolina legislature amended the
tax law to provide identical retirement income exclusions for former stat and
federal employees (effective for 1989), and repealed the
-63-
<PAGE>
deduction given to members of the State National Guard. In addition, the
amendments authorized a special tax credit for federal retirees equal to the
taxes paid on their nonexcluded federal pensions in 1988(to be taken over a
three year period beginning with returns for 1990).
Subsequent to Davis, the North Carolina plaintiffs brought an action in
federal court against the North Carolina Department of Revenue and certain
officials of the State alleging that the collection of the taxes under the
prior North Carolina tax statues was prohibited by the state and federal
constitutions, and also violated civil rights protections under 42 U.S.C.
Section 1983, a federal statute prohibiting discriminatory taxation of the
compensation of certain federal employees (4 U.S.C. Section 111), and the
principle of intergovernmental tax immunity. The plaintiffs sought
injunctive relief requiring the State to provide refunds of the illegally
collected taxes paid on federal retirement or military pay for the years
1985-88 (covering the asserted 3 year limitations period), plus interest.
Swanson, et al. v. Powers, et al. (United States District Court for the
Eastern District of North Carolina, No. 89-282-CIV-5-H) ("Swanson Federal").
The individual plaintiffs in Swanson Federal also brought an action in North
Carolina state court seeking refunds of the illegal taxes. Swanson, et al.
v. State of North Carolina, et al. (Wake County, North Carolina Superior
Court, No. 90 CVS 3127) ("Swanson State").
The amounts claimed by federal retirees in the Swanson actions have not
been precisely calculated. Plaintiffs have asserted that the plaintiff class
contains about 100,000 taxpayers; the State estimated that as of June 30,
1994, the claims (including interest) would then aggregate approximately $280
million.
In 1991, the North Carolina Supreme Court in Swanson State affirmed a
decision in favor of the State, holding that the U.S. Supreme Court decision
in Davis was not to have retroactive effect. Review was granted by the
United States Supreme Court and the case subsequently was remanded to the
North Carolina Supreme Court for reconsideration in light of the U.S. Supreme
Court's 1993 holding in Harper v. Virginia Dept. of Taxation ("Harper"). In
Harper, which also involved the disparate income tax treatment of retired
state and federal employees and the question of retroactive application of
Davis, the U.S. Supreme Court held that the Commonwealth of Virginia must
provide "meaningful backward-looking relief" to the plaintiffs if the
Commonwealth did not have a predeprivation process adequate to satisfy due
process requirements. Harper was remanded to the Supreme Court of Virginia
to determine whether a remedy was required and, if so, what form it would
take.
Similarly, Swanson State was remanded for reconsideration of whether the
North Carolina tax laws satisfied the due process requirements of the federal
constitution and, if not, what remedy was to be provided by the State.
On remand, the North Carolina Supreme Court held in early 1994 that the
plaintiffs in Swanson State was procedurally barred from recovering refunds
because they did not comply with the State's statutory postpayment refund
demand procedure. The plaintiffs contended unsuccessfully that the
postpayment demand requirement did not meet the requirements of the federal
constitution, in light of the Harper decision, for "meaningful backward-
looking relief." Plaintiffs in Swanson State have petitioned the U.S.
Supreme Court for review of the most recent North Carolina Supreme Court
decision. In December 1994, the Court denied certiorari to the Swanson State
plaintiffs. At the same time the Court issued a decision in Reich v.
Collins, a Georgia case involving similar claims, finding for the plaintiff
taxpayers, but the effect of the Reich decision on the claims of Swanson
State plaintiffs is uncertain. It is yet undetermined whether North Carolina
offers pre-deprivation procedures (payment and protest within a specified
time period) or post-deprivation remedies (tax credits especially tailored to
these claims) adequate to satisfy constitutional requirements, and
plaintiffs in Swanson State have petitioned the North Carolina Supreme Court
for a rehearing of its last decision in the case.
Following Harper, the plaintiffs in Swanson Federal again requested an
injunction requiring refunds. (Although the federal and state cases are
independent, the refund claims apparently would lead to only a single
recovery of taxes deemed unlawfully collected.) In May 1994, the U.S.
District Court granted the State's motion to dismiss all but one claim made
by the plaintiffs, declaring that those claims were precluded by the 1994
North Carolina Supreme Court decision in Swanson State. Plaintiffs in
Swanson Federal asserted that
-64-
<PAGE>
relief should have been granted because of the effect of the federal District
Court's 1990 opinion in Swanson Federal denying the defendants' motion that
the federal Tax Injunction Act precluded the plaintiffs' claims, in which the
court found that the statutory post-payment remedy for refund of unlawful
taxes was not "plain, speedy and efficient", as required by the law, Swanson
Federal, 1990 WL 545, 761 (E.D.N.C.), rev,d, 937 F.2d 965 (1991), cert
denied, __ U.S. __ , 112 S. Ct. 871 (1992). In its May 1994 decision, the
federal court rejected that assertion and held that its finding regarding the
federal Tax Injunction Act was jurisdictional only and was not a
determination that the statutory remedy violated the due process clause.
The plaintiffs' claim that was not dismissed with prejudice in the recent
District Court order asserts that the State continued an unlawful
discrimination, contrary to the requirements of 4 U.S.C. (S) 111 and the
doctrine of intergovernmental tax immunity, by increasing benefits to State
retirees (in order to offset the effect of the deletion of the preferential
State retirement income exemption) as part of the bill that equalized the
income exclusion of State and federal retirement payments. The claim is
based on a holding of similar effect in Sheehy v. Public Employees Retirement
Div., 864 P. 2d 762 (Mont. 1993). In its May 1994 order, the District Court
allowed the plaintiffs to dismiss the Sheedy claim without prejudice.
Therefore, plaintiffs could assert those claims in another action;
apparently, the relief would require providing federal retirees with tax
refunds or other payments equal to allegedly discriminatory payments made to
State retirees since 1989. The court noted that those claims will be subject
to the statutory post-deprivation procedural requirements, and that a
challenge to the legality of the remedial statute would be precluded under
the scope of the court's order dismissing the other claims. However, the
court granted plaintiffs' motion to dismiss the Sheedy claims without
prejudice because the record did not show whether the plaintiffs had complied
with statutory requirements. The plaintiffs in Swanson State have appealed
the District Court decision to the United States Court of Appeals and a
hearing is scheduled for March 1995.
Several states involved in similar suits have reached settlements.
Expressions of interest in settlement of the claims in Swanson by both the
plaintiffs and State officials have been reported in the press, but no
prediction can be made of the likelihood or amount of settlement. Although
the recent improvements in the economy and fiscal condition of the State
might better enable the State to satisfy an adverse decision without
significant consequences to the State's fiscal condition or governmental
functions, because the amount of the potential liability has not been fixed
and because of the potential that adverse fiscal or economic developments
could cause a more negative result on the State if a large amount must be
paid, no assurance can be given that the impact of the Swanson cases, if the
plaintiffs ultimately succeed, will not have an adverse impact on the Debt
Obligations.
State and local government retirees also filed a class action suit in 1990
as a result of the repeal of the income tax exemptions for state and local
government retirement benefits. The original suit was dismissed after the
North Carolina Supreme court ruled in 1991 that the plaintiffs had failed to
comply with state law requirements for challenging unconstitutional taxes and
the United States Supreme Court denied review. In 1992, many of the same
plaintiffs filed a new lawsuit alleging essentially the same claims,
including breach of contract, unconstitutional impairment of contract rights
by the State in taxing benefits that were allegedly promised to be tax-exempt
and violation of several state constitutional provisions. The North Carolina
Attorney General's office estimates that the amount in controversy is
approximately $40-45 million annually for the tax years 1989 through 1992.
The case is now pending in state court.
Other litigation against the State include the following. None of the
cases, in the reported opinion of the Department of the Treasurer, would have
a material adverse affect on the State's ability ot meet its obligations.
Leandro et al. v. State of North Carolina and State Board of Education -
In May, 1994 students and boards of education in five counties in the State
filed suit in state court requesting a declaration that the public education
system of North Carolina, including its system of funding, violated the State
constitution by failing to provide adequate or substantially equal
educational opportunities and denying due process of law and violates various
statutes relating to public education. The suit is similar to a number of
suits in other states, some of which resulted in holdings that the respective
systems of public education funding were unconstitutional under the
applicable state law. The defendants in such suit have filed a motion to
dismiss, but no answer to the complaint, and no pretrial discovery has taken
place.
-65-
<PAGE>
Francisco Case - In August, 1994 a class action lawsuit was filed in state
court against the Superintendent of Public Instruction and the State Board of
Education on behalf of a class of parents and their children who are
characterized as limited English proficient. The complaint alleges that the
State has failed to provide funding for the education of these students and
has failed to supervise local school systems in administering programs for
them. The complaint does not allege an amount in controversy, but asks the
Court to order the defendants to fund a comprehensive program to ensure equal
educational opportunities for children with limited English proficiency.
Faulkenburg v. Teachers' and State Employees' Retirement System, Peeve v.
Teachers' and State Employees' Retirement System, and Woodard v. Local
Governmental Employees' Retirement System - Plaintiffs are disability
retirees who brought class actions in state court challenging changes in the
formulas for payment of disability retirement benefits and claiming
impairment of contract rights, breach of fiduciary duty, violation of other
federal constitutional rights, and violation of state constitutional and
statutory rights. The State estimates that the cost in damages and higher
prospective benefit payments to plaintiffs and class members would probably
amount to $50 million or more in Faulkenburg, $50 million or more in Peele,
and $15 million or more in Woodward, all ultimately payable, at least
initially, from the retirement system funds. Upon review in Faulkenburg, the
North Carolina Court of Appeals and Supreme Court have held that claims made
in constitutional rights brought under the federal Civil Rights Act eight do
not state a cause of action or are otherwise barred by the statute of
limitations. In 1994 plaintiffs took voluntary dismissals of their claims
for impairment of contract rights in violation of the United States
Constitution and filed new actions in federal court asserting the same claims
along with claims for violation of constitutional rights in the taxation of
retirement benefits. The remaining state court claims in all cases are
scheduled to be heard in North Carolina in October, 1994.
Fulton Case - The State's intangible personal property tax levied on
certain shares of stock has been challenged by the plaintiff on grounds that
it violates the Commerce Clause of the United States Constitution by
discriminating against stock issued by corporations that do all or part of
their business outside the State. The plaintiff in the action is a North
Carolina corporation that does all or part of its business outside the State.
The plaintiff seeks to invalidate the tax in its entirety and to recover tax
paid on the value of its shares in other corporations. The North Carolina
Court of Appeals invalidated the taxable percentage deduction and excised it
from the statute beginning with the 1994 tax year. The effect of this ruling
is to increase collections by rendering all stock taxable on 100% of its
value. The State and the plaintiff have sought further appellate review, and
the case is pending before the North Carolina Supreme Court. Net collections
from the tax for fiscal year ended June 30, 1993 amounted to $120.6 million.
General. The population of the State has increased 13% from 1980, from
5,880,095 to 6,647,351 as reported by the 1990 federal census and the State
rose from twelfth to tenth in population. The State's estimate of population
as of June 30, 1994 is 7,023,663. Notwithstanding its rank in population
size, North Carolina is primarily a rural state, having only five
municipalities with populations in excess of 100,000.
The labor force has undergone significant change during recent years as
the state has moved from as agricultural to a service and goods producing
economy. Those persons displaced by farm mechanization and farm
consolidations have, in large measure, sought and found employment in other
pursuits. Due to wide dispersion of non-agricultural employment, the people
have been able to maintain, to a large extent, their rural habitation
practices. During the period 1980 to 1994, the State labor force grew about
25% (from 2,855,200 to 3,560,000), and per capita income during the period
1980 to 1993 grew from $7,999 to $18,702, an increase of 133.8%.
The current economic profile of the State consists of a combination of
industry, agriculture and tourism. As of June 1994, the State was reported
to rank tenth among the states in non-agricultural employment and eighth in
manufacturing employment, Employment indicators have fluctuated somewhat in
the annual periods since June of 1990 but have demonstrated an upward trend
since 1991. The following table reflects the fluctuation in certain key
employment categories.
-66-
<PAGE>
<TABLE>
<CAPTION>
CATEGORY (ALL SEASONALLY ADJUSTED) JUNE 1990 JUNE 1991 JUNE 1992 JUNE 1993 JUNE 1994
<S> <C> <C> <C> <C> <C>
CIVILIAN LABOR FORCE 3,312,000 3,228,000 3,495,000 3,504,000 3,560,000
NONAGRICULTURAL EMPLOYMENT 3,129,000 3,059,000 3,135,000 3,203,400 3,359,700
GOODS PRODUCING OCCUPATIONS (MIN- 1,023,100 973,600 980,800 993,600 1,021,500
ING, CONSTRUCTION AND MANUFACTURING)
SERVICE OCCUPATIONS 2,106,300 2,085,400 2,154,200 2,209,800 2,337,200
WHOLESALE/RETAIL OCCUPATIONS 732,500 704,100 715,100 723,200 749,000
GOVERNMENT EMPLOYEES 496,400 496,700 513,400 515,400 554,600
MISCELLANEOUS SERVICES 587,300 596,300 638,300 676,900 731,900
AGRICULTURAL EMPLOYMENT 58,900 88,700 102,800 88,400 53,000
</TABLE>
The seasonally adjusted unemployment rate in January 1995 was estimated to
be 3.8% of the labor force (down from 4.0% in January 1994), as compared with
5.7% nationwide (down from 6.7% in January 1994).
As of 1993, the State was tenth in the nation in gross agricultural income
of which nearly the entire amount (approximately $5.3 billion) was from
commodities. According to the State Commissioner of Agriculture, in 1993,
the State ranked first in the nation in the production of flue-cured tobacco,
turkeys and sweet potatoes; second in the value of poultry and eggs, hog
production, trout and the production of cucumbers for pickles; fourth in
commercial broilers, blueberries and peanuts; sixth in burley tobacco and net
farm income.
The diversity of agriculture in North Carolina and a continuing push in
marketing efforts have protected farm income from some of the wide variations
that have been experienced in other states where most of the agricultural
economy is dependent on a small number of agricultural commodities. North
Carolina is the third most diversified agricultural state in the nation.
Tobacco production is the leading source of agricultural income in the
State, accounting for 20% of gross agricultural income. Tobacco farming in
North Carolina has been and is expected to continue to be affected by major
Federal legislation and regulatory measures regarding tobacco production and
marketing and by international competition. Measures adverse to tobacco
farming could have negative effects on farm income and the North Carolina
economy generally. The poultry industry provides nearly 34% of gross
agricultural income. The pork industry has been expanding and accounted for
17% of gross agricultural income in 1993.
The number of farms has been decreasing; in 1994 there were approximately
58,000 farms in the State (down from approximately 72,000 in 1987, a decrease
of about 19% in seven years). However, a strong agribusiness sector also
supports farmers with inputs (fertilizer, insecticide, pesticide and farm
machinery) and processing of commodities produced by farmers (vegetable
canning and cigarette manufacturing).
The State Department of Commerce, Travel and Tourism Division reports that
in 1993 more than $803 billion was spent on tourism in the State. The
Department estimates that two-thirds of total expenditures came from out-of-
state travelers, and that approximately 250,000 people were employed in
tourism-related jobs.
Bond Ratings. Currently, Moody's rates North Carolina general obligation
bonds as Aaa and Standard & Poor's rates such bonds as AAA. Standard &
Poor's also reaffirmed its stable outlook for the State in January 1994.
Standard & Poor's reports that North Carolina's rating reflects the
State's strong economic characteristics, sound financial performance, and low
debt levels.
The Sponsor believes the information summarized above describes some of
the more significant events relating to the North Carolina Trust. The
sources of this information are the official statements of issuers located in
North Carolina, State agencies, publicly available documents, publications of
rating agencies and statements by, or news reports of statements by State
officials and employees and by rating agencies. The Sponsor and its counsel
have not independently verified any of the information contained in the
official statements and other sources and counsel have not expressed any
opinion regarding the completeness or
-67-
<PAGE>
materiality of any matters contained in this Prospectus other than the tax
opinions set forth below under North Carolina Taxes.
The Sponsor believes the information summarized above describes some of
the more significant events relating to the North Carolina Trust. The
sources of this information are the official statements of issuers located in
North Carolina, State agencies, publicly available documents, publications of
ratings agencies and news reports of statements by State officials and
employees and by rating agencies. The Sponsor and its counsel have not
independently verified any of the information contained in the official
statements and other sources and counsel have not expressed any opinion
regarding the completeness or materiality of any contained in this Prospectus
other than the tax opinions set forth below under North Carolina Taxes.
At the time of the closing for each North Carolina Trust, Special Counsel
to the fund for North Carolina tax matters rendered an opinion under then
existing North Carolina income tax law applicable to taxpayers whose income
is subject to North Carolina income taxation substantially to the effect
that:
Upon the establishing of the North Carolina Trust and the Units
thereunder:
(1) The North Carolina Trust is not an "association" taxable as a
corporation under North Carolina law with the result that income
of the North Carolina Trust will be deemed to be income of the
Unitholders.
(2) Interest on the Bonds that is exempt from North Carolina income
tax when received by the North Carolina Trust will retain its tax-
exempt status when received by the Unitholders.
(3) Unitholders will realize a taxable event when the North Carolina
Trust disposes of a Bond (whether by sale, exchange, redemption or
payment at maturity) or when a Unitholder redeems or sells his
Units (or any of them), and taxable gains for Federal income tax
purposes may result in gain taxable as ordinary income for North
Carolina income tax purposes. However, when a Bond had been issued
under an act of the North Carolina General Assembly that provides
that all income from such Bond, including any profit made from the
sale thereof, shall be free from all taxation by the State of North
Carolina, any such profit received by the North Carolina Trust will
retain its tax-exempt status in the hands of the Unitholders.
(4) Unitholders must authorize their proportionate share of any premium
on a Bond. Amortization for each taxable year is accomplished by
lowering the Unitholder's basis (as adjusted) in his Units with no
deduction against gross income for the year.
(5) The Units are exempt from the North Carolina tax on intangible
personal property so long as the corpus of the North Carolina Trust
remains composed entirely of Bonds or, pending distribution,
amounts received on the sale, redemption or maturity of the Bonds
and the Trustee periodically supplies to the North Carolina
Department of Revenue at such times required by the Department of
Revenue a complete description of the North Carolina Trust and also
the name, description and value of the obligations held in the
corpus of the North Carolina Trust.
OHIO TRUSTS. As described above, the Ohio Trust will invest substantially
all of its net assets in securities issued by or on behalf of (or in
certificates of participation in lease purchase obligations of) the State of
Ohio, political subdivisions of the State or agencies or instrumentalities of
the State or its political subdivisions ("Ohio Obligations"). The Ohio Trust
is therefore susceptible to general or particular political, economic or
regulatory factors that may affect issuers of Ohio Obligations. The following
information constitutes only a brief summary of some of the complex factors
that may have an effect. This information does not apply to "conduit"
obligations on which the public issuer itself has no financial
responsibility. This information is derived from official statements
published in connection with their issuance of securities of certain Ohio
issuers and from other publicly available information, and is believed to be
accurate. No independent verification has been made of any of the following
information.
-68-
<PAGE>
Generally, creditworthiness of Ohio Obligations of local issuers is
unrelated to that of obligations of the State itself, and the State has no
responsibility to make payments on those local obligations. There may be
specific factors that at particular times apply in connection with investment
in particular Ohio Obligations or in those obligations of particular Ohio
issuers. It is possible that the investment may be in particular Ohio
Obligations, or in those of particular issuers as to which those factors
apply. However, the information below is intended only as a general summary
and is not intended as a discussion of any specific factors that may affect
any particular obligation or issuer.
The timely payment of principal of and interest on Ohio Obligations has
been guaranteed by the bond insurance purchased by the issuers, the Ohio or
other parties. Ohio Obligations may not be subject to the factors referred
to in this section of the Prospectus.
Ohio is the seventh most populous state; The 1990 Census count of
10,847,000 indicates a 0.5% population increase from 1980. The Census
estimate for 1993 is 11.091.000.
While diversifying more into the service and other non-manufacturing
areas, the Ohio economy continues to rely in part on durable goods
manufacturing largely concentrated in motor vehicles and equipment, steel,
rubber products and household appliances. As a result, general economic
activity, as in many other industrially-developed states, tends to be more
cyclical than in some other states and in the nation as a whole. Agriculture
also is an important segment of the economy, with over half the State's area
devoted to farming and approximately 15% of total employment is in
agribusiness.
In prior years, the State's overall unemployment rate was commonly
somewhat higher than the national figure. For example, the reported 1990
average monthly State rate was 5.7%, compared to the 5.5% national figure.
However, for the last four years the State rates were below the national
rates (6.5% versus 6.8% in 1993). The unemployment rate and its effects vary
among geographic areas of the State.
There can be no assurance that future national, regional or state-wide
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 Ohio portfolio or the ability of 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 its July
1 to June 30 fiscal year ("FY") or fiscal biennium in a deficit position.
Most State operations are financed through the General Revenue Fund ("GRF"),
for which personal income and sales-use taxes are the major sources. Growth
and depletion of GRF ending fund balances show a consistent pattern related
to national economic conditions, with the ending FY balance reduced during
less favorable and increased during more favorable economic periods. The
State has well-established procedures for, and has timely taken, necessary
actions to ensure resource/expenditure balances during less favorable
economic periods. Those procedures included general and selected reductions
in appropriations spending.
Key biennium ending fund balances at June 30, 1989 were $475.1 million in
the GRF and $353 million in the Budget Stabilization Fund ("BSF", a cash and
budgetary management fund). In the next two fiscal years, necessary
corrective steps were taken to respond to lower receipts and higher
expenditures in certain categories than earlier estimated. Those steps
included selected reductions in appropriations spending and the transfer of
$64 million from the BSF to the GRF. Reported June 30, 1991 ending fund
balances were 35.3 million (GRF) and $300 million (BSF).
To allow time to resolve certain budget differences for the latest
complete biennium, an interim appropriations act was enacted effective July
1, 1991; it included GRF debt service and lease rental appropriations for the
entire 1992-93 biennium, while continuing most other appropriations for a
month. Pursuant to the general appropriations act for the entire biennium
passed on July 11, 1991, $200 million was transferred from the BSF to the
GRF in FY 1992.
-69-
<PAGE>
Based on updated results and forecasts in the course of FY 1992, both in
light of the continuing uncertain nationwide economic situation, there was
projected and then timely addressed an FY 1992 imbalance in GRF resources and
expenditures. GRF receipts significantly below original forecasts resulted
primarily from lower collections of certain taxes, particularly sales, use
and personal income taxes. Higher expenditure levels came in certain areas,
particularly human services including Medicaid. The Governor ordered most
State agencies to reduce GRF spending in the last six months of the FY 1992
by a total of approximately $184 million. As authorized by the General
Assembly the $100.4 million BSF balance, and additional amounts from certain
other funds were transferred late in the FY to the GRF, and adjustments made
in the timing of certain tax payments. Other administrative revenue and
spending actions resolved the remaining imbalance.
A significant GRF shortfall (approximately $520 million) was then
projected for the next year, FY 1993. It was addressed by appropriate
legislative and administrative actions. The Governor ordered, effective July
1, 1992, $300 million in selected GRF spending reductions. Subsequent
executive and legislative action in December 1992 -- a combination of tax
revisions and additional spending reductions -- resulted in a balance of GRF
resources and expenditures in the 1992-93 biennium. The June 30, 1993 ending
GRF fund balance was approximately $111 million, of which, as a first step to
BSF replenishment, $21 million was deposited in the BSF. (Based on June 30,
1994 balances, an additional $260 million has been deposited in the BSF,
which has a current balance of $281 million.)
No spending reductions were applied to appropriations needed for debt
service on or lease rentals relating to any State obligations.
The GRF appropriations act for the current 1994-95 biennium was passed and
signed by the Governor on July 1, 1993. It includes all necessary GRF
appropriations for State debt services and lease rental payments then
projected for the biennium.
The State's incurrence or assumption of debt without a vote of the people
is, with limited exceptions, prohibited by current State Constitution
provisions. The State may incur debt, limited in amount to $750,000, to
cover casual deficits or failures in revenues or to meet expenses not
otherwise provided for. The Constitution expressly precludes the State from
assuming the debts of any local government or corporation. (An exception is
made in both cases for any debt incurred to repel invasion, suppress
insurrection or defend the State in war.)
By 13 constitutional amendments, the last adopted in 1993, Ohio voters
have authorized the incurrence of State debt and the pledge to taxes or
excises to its payment. At January 25, 1995, $794.4 million (excluding
certain highway bonds payable primarily from highway use charges) of this
debt was outstanding or awaiting delivery. The only such State debt then
still authorized to be incurred are portions of the highway bonds, and the
following: (a) up to $100 million of obligations for coal research and
development may be outstanding at any one time ($38.9 million outstanding);
(b) $360 million of obligations authorized for local infrastructure
improvements, no more than $120 million may be issued in any calendar year
($728 million outstanding or awaiting delivery); and (c) up to $200 million
in general obligation bonds for parks, recreation and natural resources which
may be outstanding at any one time (no more than $50 million to be issued in
any one year).
The Constitution also authorizes the issuance of State obligations for
certain purposes, the owners of which do not have the right to have excises
or taxes levied to pay debt service. Those special obligations include
obligations issued by the Ohio Public Facilities Commission and the Ohio
Building Authority, and certain obligations issued by the State Treasurer,
over $4.5 billion of which were outstanding or awaiting delivery at January
25, 1995.
A 1990 constitutional amendment authorizes greater State and political
subdivision participation (including financing) in the provision of housing.
The General Assembly may for that purpose authorize the issuance of State
obligations secured by a pledge of all or such portion as it authorizes of
State revenues or receipts (but not by a pledge of the State's full faith and
credit).
-70-
<PAGE>
A 1994 constitutional amendment pledges the full faith and credit and
taxing power of the State to meeting certain guarantees under the State's
tuition credit program which provides for purchases of tuition credits, for
the benefit of State residents, guaranteed to cover a specified amount when
applied to the cost of higher education tuition. (A 1965 constitutional
provision that authorized student loan guarantees payable from available
State moneys has never been implemented, apart from a "guarantee fund"
approach funded especially from program revenues.)
State and local agencies issue obligations that are payable from revenues
from or relating to certain facilities (but not from taxes). By judicial
interpretation, these obligations are not "debt" within constitution
provisions. In general, payment obligations under lease-purchase agreements
of Ohio public agencies (in which certificates of participation may be
issued) are limited in duration to the agency's fiscal period, and are
renewable only upon appropriations being made available for the subsequent
fiscal period.
Local school districts in Ohio receive a major portion (state-wide
aggregate in the range of 46% in recent years) of their operating moneys from
State subsidies, but are dependent on local property taxes, and in 107
districts from voter-authorized income taxes, for significant portions of
their budgets. Litigation, similar to that in other states, is pending
questioning the constitutionality of Ohio's system of school funding. The
trial court recently concluded that aspects of the system (including basic
operating assistance) are unconstitutional and ordered the State to provide
for and fund a system complying with the Ohio Constitution. The State has
appealed. A small number of the State's 612 local school districts have in
any year required special assistance to avoid year-end deficits. A current
program provides for school district cash need borrowing directly from
commercial lenders, with diversion of State subsidy distributions to
repayment if needed. Borrowings under this program totalled $68.6 million
for 44 districts (including $46.6 million for one district) in FY 1992, $94.5
million for 27 districts (including $75 million for one) in FY 1993, and
$15.6 million for 28 districts in FY 1994.
Ohio's 943 incorporated cities and villages rely primarily on property and
municipal income taxes for their operations. With other subdivisions, they
also receive local government support and property tax relief moneys
distributed by the State. For those few municipalities that on occasion have
faced significant financial problems, there are statutory procedures for a
joint State/local commission to monitor the municipality's fiscal affairs and
for development of a financial plan to eliminate deficits and cure any
defaults. Since inception in 1979, these procedures have been applied to 23
cities and villages; for 18 of them the fiscal situation was 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 to
1% of true value in money the amount of the aggregate levy (including a levy
for unvoted general obligations) of property taxes by all overlapping
subdivisions, without a vote of the electors or a municipal charter
provision, and statutes limit the amount of that aggregate levy to 10 mills
per $1 of assessed valuation (commonly referred to as the "ten-mill
limitation"). Voted general obligations of subdivisions are payable from
property taxes that are unlimited as to amount or rate.
Commencing in 1985 Ohio municipalities may be permitted under Ohio law to
subject interest on certain of the obligations held by the Ohio Trust to
income taxes imposed on their residents and entities doing business therein.
At the time of the closing for each Ohio Trust, Special Counsel to each
Ohio Trust for Ohio tax matters rendered an opinion under then existing Ohio
income tax law applicable to taxpayers whose income is subject to Ohio income
taxation substantially to the effect that:
(1) The Ohio Trust is not taxable as a corporation or otherwise for
purposes of the Ohio personal income tax, the school district
income taxes in Ohio, the Ohio corporation franchise tax, or the
Ohio dealers in intangibles tax.
-71-
<PAGE>
(2) Distributions with respect to Units of the Ohio Trust
("Distributions") will be treated as the income of the Unitholders
for purposes of the Ohio personal income tax, and school district
and municipal income taxes in Ohio, and the Ohio corporation
franchise tax in proportion to the respective interest therein of
each Unitholder.
(3) Distributions properly attributable to interest on obligations
issued by or on behalf of the State of Ohio, political subdivisions
thereof, or agencies or instrumentalities thereof ("Ohio
Obligations"), or by the governments of Puerto Rico, the Virgin
Islands or Guam ("Territorial Obligations") held by the Trust are
exempt from the Ohio personal income tax, school district and
municipal income taxes, and are excluded from the net income base
of the Ohio corporation franchise tax when distributed or deemed
distributed to Unitholders.
(4) Distributions properly attributable to proceeds of insurance paid
to the Ohio Trust that represent maturing or matured interest on
defaulted obligations held by the Ohio Trust and that are excluded
from gross income for federal income tax purposes will be exempt
from Ohio personal income tax, and school district municipal income
taxes in Ohio and the net income base of the Ohio corporation
franchise tax.
(5) Distributions of profit made on the sale, exchange or other
disposition by the Ohio Trust of Ohio Obligations including
Distributions of "capital gain dividends" as defined in Section 852
(b) (3) (C) of the Code, properly attributable to the sale,
exchange or other disposition of Ohio Obligations are exempt from
Ohio personal income tax, and school district and municipal income
taxes in Ohio, and are excluded from the net income base of the
Ohio corporation franchise tax.
PENNSYLVANIA TRUSTS. Investors should be aware of certain factors that
might affect the financial conditions of the Commonwealth of Pennsylvania.
Pennsylvania historically has been identified as a heavy industry state
although that reputation has changed recently as the industrial composition
of the Commonwealth diversified when the coal, steel and railroad industries
began to decline. A more diversified economy was necessary as the
traditionally strong industries in the Commonwealth declined due to a long-
term shift in jobs, investment and workers away from the northeast part of
the nation. The major sources of growth in Pennsylvania are in the service
sector, including trade, medical and the health services, education and
financial institutions. Pennsylvania's agricultural industries are also an
important component of the Commonwealth's economic structure, accounting for
more than $3.6 billion in crop and livestock products annually, while
agribusiness and food related industries support $38 billion in economic
activity annually.
Non-agricultural employment in the Commonwealth declined by 5.1 percent
during the recessionary period from 1980 to 1983. In 1984, the declining
trend was reversed as employment grew by 2.9 percent over 1983 levels. From
1983 to 1990, Commonwealth employment continued to grow each year, increasing
an additional 14.3 percent. For the last three years, unemployment in the
Commonwealth has declined 1.2 percent. The growth in employment experienced
in Pennsylvania is comparable to the growth in employment in the Middle
Atlantic Region which has occurred during this period.
Back to back recessions in the early 1980s reduced the manufacturing
sector's employment levels moderately during 1980 and 1981, sharply during
1982, and even further in 1983. Non-manufacturing employment has increased
steadily since 1980 to its 1993 level of 81.6 percent of total Commonwealth
employment. Consequently, manufacturing employment constitutes a diminished
share of total employment within the Commonwealth. Manufacturing,
contributing 18.4 percent of 1993 non-agricultural employment, has fallen
behind both the services sector and the trade sector as the largest single
source of employment within the Commonwealth. In 1993 the services sector
accounted for 29.9 percent of all non-agricultural employment while the trade
sector accounted for 22.4 percent.
From 1983 to 1989, Pennsylvania's annual average unemployment rate dropped
from 11.8 percent to 4.5 percent, falling below the national rate in 1986 for
the first time in over a decade. Pennsylvania's annual average unemployment
rate remained below the national average from 1986 until 1990. Slower
economic
-72-
<PAGE>
growth caused the unemployment rate in the Commonwealth to rise to 6.9
percent in 1991 and 7.5 percent in 1992. The resumption of faster economic
growth resulted in a decrease in the Commonwealth's unemployment rate to 7.1
percent in 1993. As of July 1994, the seasonally adjusted unemployment rate
for the Commonwealth was 6.5 percent compared to 6.1 percent for the United
States.
The five year period from fiscal 1989 through fiscal 1993 was marked by
public health and welfare costs growing at a rate double the growth rate for
all the state expenditures. Rising caseloads, increased utilization of
services and rising prices joined to produce the rapid rise of public health
and welfare costs at a time when a national recession caused tax revenues to
stagnate and even decline. During the period from fiscal 1989 through fiscal
1993, public health and welfare costs rose by an average annual rate of 10.9
percent while tax revenues were growing at an average annual rate of 5.5
percent. Consequently, spending on other budget programs was restrained to a
growth rate below 5.0 percent and sources of revenues other than taxes became
larger components of fund revenues. Among those sources are transfers from
other funds and hospital and nursing home pooling of contributions to use as
federal matching funds.
Tax revenues declined in fiscal 1991 as a result of the recession in the
economy. A $2.7 billion tax increase enacted for fiscal 1992 brought
financial stability to the General Fund. That tax increase included several
taxes with retroactive effective dates which generated some one-time revenues
during fiscal 1992. The absence of those revenues in fiscal 1993 contributed
to the decline in tax revenues shown for fiscal 1993.
It should be noted that the creditworthiness of obligations issued by
local Pennsylvania issuers may be unrelated to the creditworthiness of
obligations issued by the Commonwealth of Pennsylvania, and there is no
obligation on the part of the Commonwealth to make payment on such local
obligations in the event of default.
Financial information for the General Fund is maintained on a budgetary
basis of accounting. A budgetary basis of accounting is used for the purpose
of ensuring compliance with the enacted operating budget and is governed by
applicable statutes of the Commonwealth and by administrative procedures.
The Commonwealth also prepares annual financial statements in accordance with
generally accepted accounting principles ("GAAP"). The budgetary basis
financial information maintained by the Commonwealth to monitor and enforce
budgetary control is adjusted at fiscal year-end to reflect appropriate
accruals for financial reporting in conformity with GAAP.
Fiscal 1991 Financial Results. GAAP Basis: During fiscal 1991 the General
Fund experienced an $861.2 million operating deficit resulting in a fund
balance deficit of $980.9 million at June 30, 1991. The operating deficit
was a consequence of the effect of a national recession that restrained
budget revenues and pushed expenditures above budgeted levels. At June 30,
1991, a negative unreserved-undesignated balance of $1,146.2 million was
reported. During fiscal 1991 the balance in the Tax Stabilization Reserve
Fund was used to maintain vital state spending and only a minimal balance
remains in that fund.
Budgetary Basis: A deficit of $453.6 million was recorded by the General
Fund at June 30, 1991. The deficit was a consequence of higher-than-budgeted
expenditures and lower-than-estimated revenues during the fiscal year brought
about by the national economic recession that began during the fiscal year.
The budgetary basis deficit at June 30, 1991 was carried into the 1992 fiscal
year and funded in the 1992 budget. A number of actions were taken
throughout the fiscal year by the Commonwealth to mitigate the effects of the
recession on budget revenues and expenditures. Actions taken, together with
normal appropriation lapses, produced $871 million in expenditure reductions
and increases in revenues and other transfers for the fiscal year. The most
significant of these actions were a $214 million transfer from the
Pennsylvania Industrial Development Authority, a $134 million transfer from
the Tax Stabilization Reserve Fund, and a pooled financing program to match
federal Medicaid funds replacing $145 million of state funds.
Fiscal 1992 Financial Results. GAAP Basis: During fiscal 1992 the General
Fund reported a $1.1 billion operating surplus. This operating surplus was
achieved through legislated tax rate increases and tax base broadening
measures enacted in August 1991 and by controlling expenditures through
numerous cost reduction measures implemented throughout the fiscal year. As
a result of the fiscal 1992 operating surplus, the fund
-73-
<PAGE>
balance has increased to $87.5 million and the unreserved-undesignated
deficit has dropped to $138.6 million from its fiscal 1991 level of $1,146.2
million.
Budgetary Basis: Eliminating the budget deficit carried into fiscal 1992
from fiscal 1991 and providing revenues for fiscal 1992 budgeted expenditures
required tax revisions that are estimated to have increased receipts for the
1992 fiscal year by over $2.7 billion. Total revenues for the fiscal year
were $14,516.8 million, a $2,654.5 million increase over cash revenues during
fiscal 1991. Originally based on forecasts for an economic recovery, the
budget revenue estimates were revised downward during the fiscal year to
reflect continued recessionary economic activity. Largely due to the tax
revisions enacted for the budget, corporate tax receipts totalled $3,761.2
million, up from $2,656.3 million in fiscal 1991, sales tax receipts
increased by $302 million to $4,499.7 million, and personal income tax
receipts totalled $4,807.4 million, an increase of $1,443.8 million over
receipts in fiscal 1991.
As a result of the lowered revenue estimate during the fiscal year,
increased emphasis was placed on restraining expenditure growth and reducing
expenditure levels. A number of cost reductions were implemented during the
fiscal year and contributed to $296.8 million of appropriation lapses. These
appropriation lapses were responsible for the $8.8 million surplus at fiscal
year-end, after accounting for the required ten percent transfer of the
surplus to the Tax Stabilization Reserve Fund.
Spending increases in the fiscal 1992 budget were largely accounted for by
increases for education, social services and corrections programs.
Commonwealth funds for the support of public schools were increased by 9.8
percent to provide a $438 million increase to $4.9 billion for fiscal 1992.
The fiscal 1992 budget provided additional funds for basic and special
education and included provisions designed to help restrain the annual
increase of special education costs, an area of recent rapid cost increases.
Child welfare appropriations supporting county operated child welfare
programs were increased $67 million, more than 31.5 percent over fiscal 1991.
Other social service areas such as medical and cash assistance also received
significant funding increases as costs rose quickly as a result of the
economic recession and high inflation rates of medical care costs. The costs
of corrections programs, reflecting the marked increase in the prisoner
population, increased by 12 percent. Economic development efforts, largely
funded from bond proceeds in fiscal 1991, were continued with General Fund
appropriations for fiscal 1992.
The budget included the use of several Medicaid pooled financing
transactions. These pooling transactions replaced $135 million of
Commonwealth funds, allowing total spending under the budget to increase by
an equal amount.
Fiscal 1993 Financial Results. GAAP Basis: The fund balance of the
General Fund increased by $611.4 million during the fiscal year, led by an
increase in the unreserved balance of $576.8 million over the prior fiscal
year balance. At June 30, 1993, the fund balance totalled $698.9 and the
unreserved/undesignated balance totalled $64.4 million. A continuing
recovery of the Commonwealth's financial condition from the effects of the
national economic recession of 1990 and 1991 is demonstrated by this increase
in the balance was recorded in the budgetary basis unappropriated surplus
during the fiscal year.
Budgetary Basis: The 1993 fiscal year closed with revenues higher than
anticipated and expenditures about as projected, resulting in an ending
unappropriated balance surplus (prior to the ten percent transfer to the Tax
Stabilization Reserve Fund) of $242.3 million, slightly higher than estimated
in May 1993. Cash revenues were $41.5 million above the budget estimate and
totalled $14.633 billion represented less than a one percent increase over
revenues for the 1992 fiscal year. A reduction in the personal income tax
rate in July 1992 and the one-time receipt of revenues from retroactive
corporate tax increases in fiscal 1992 were responsible, in part, for the low
revenue growth in fiscal 1993.
Appropriations less lapses totalled $13.870 billion representing a 1.1
percent increase over expenditures during fiscal 1992. The low growth in
spending is a consequence of a low rate of revenue growth, significant one-
time expenses during fiscal 1992, increased tax refund reserves to cushion
against adverse decisions on pending litigations, and the receipt of federal
funds for expenditures previously paid out of Commonwealth funds.
-74-
<PAGE>
By the statue, ten percent of the budgetary basis unappropriated surplus
at the end of a fiscal year is to be transferred to the Tax Stabilization
Reserve Fund. The transfer for the fiscal 1993 balance was $24.2 million.
The remaining unappropriated surplus of $218.0 million was carried forward
into the 1994 fiscal year.
Fiscal 1994 Financial Results (Budgetary Basis). Commonwealth revenues
during the fiscal year totalled $15,210.7 million, $38.6 million above the
fiscal year estimate, and 3.9 percent over Commonwealth revenues during the
previous fiscal year. The sales tax was an important contributor to the
higher than estimated revenues. Collections from the sales tax were $5.124
billion, a 6.1 percent increase from the prior fiscal year and $81.3 million
above estimate. The strength of collections from the sales tax offset the
lower than budgeted performance of the personal income tax which ended the
fiscal year $74.4 million below estimate. The shortfall in the personal
income tax was largely substantially below the $530 million amount provided
in fiscal 1993. The higher fiscal 1993 amount and the reduced fiscal 1994
amount occurred because reserves of approximately $160 million were added to
fiscal 1993 tax refunds to cover potential payments if the Commonwealth lost
litigation known as Philadelphia Suburban Corp. v. Commonwealth. Those
reserves were carried into fiscal 1994 until the litigation was decided in
the Commonwealth's favor in December 1993 and $147.3 million of reserves for
tax refunds were released.
Expenditures, excluding pooled financing expenditures and net of all
fiscal 1994 appropriation lapses, totalled $14,934.4 million representing a
7.2 percent increase over fiscal 1993 expenditures. Medical assistance and
corrections spending contributed to the rate of spending growth for the
fiscal year.
The Commonwealth maintained an operating balance on a budgetary basis for
fiscal 1994 producing a fiscal year ending unappropriated surplus of $335.8
million. By state statute, ten percent ($33.6 million) of that surplus will
be transferred to the Tax Stabilization Reserve Fund and the remaining
balance will be carried over into the fiscal 1995 fiscal year.
Fiscal 1995 Budget. The fiscal 1995 budget was approved by the Governor
on June 16, 1994 and provided for $15,652.9 million of appropriations from
the Commonwealth funds, an increase of 3.9 percent over appropriations,
including supplemental appropriations, for fiscal 1994. Medical assistance
expenditures represent the largest single increase in the budget ($221
million) representing a nine percent increase over the prior fiscal year.
The budget includes a reform of the state-funded public assistance program
that added certain categories of eligibility to the program but also limited
the availability of such assistance to other eligible persons. Education
subsidies to local school districts were increased by $132.2 million to
continue the increased funding for the poorest school districts in the state.
The budget also includes tax reductions totalling an $166.4 million. Low
income working families will benefit from an increase of the dependent
exemption to $3,000 from $1,500 for the first dependent and from $1000 for
all additional dependents. A reduction to the corporate net income tax rate
from 12.25 percent to be phased in over a period of four years was enacted.
A net operating loss provision has been added to the corporate net income tax
and will be phased in over three years with a $500,000 per firm annual cap on
losses used to offset profits. Several other tax changes to the sales tax,
the inheritance tax and the capital stock and franchise tax were also
enacted.
The fiscal 1995 budget projects a $4 million fiscal year-end
unappropriated surplus. No assumption as to appropriation lapses in fiscal
1995 has been made.
All outstanding general obligation bonds of the Commonwealth are rated AA-
by S&P and A1 by Moody.
Any explanation concerning the significance of such ratings must be
obtained from the rating agencies. There is no assurance that any ratings
will continue for any period of time or that they will not be revised or
withdrawn.
-75-
<PAGE>
The City of Philadelphia is the largest city in the Commonwealth with an
estimated population of 1,585,577 according to the 1990 Census. Philadelphia
functions both as a city of the first-class county for the purpose of
administering various governmental programs.
For the fiscal year ending June 30, 1991, Philadelphia experienced a
cumulative General Fund balance deficit of $153.5 million. The audit
findings for the fiscal year ending June 30, 1992, place the Cumulative
General fund balance deficit at $224.9.
Legislation providing for the establishment of the Pennsylvania
Intergovernmental Cooperation Authority ("PICA") to assist first class cities
in remedying fiscal emergencies was enacted by the General Assembly and
approved by the Governor in June, 1991. PICA is designed to provide
assistance through the issuance of funding debt to liquidate budget deficits
and to make factual findings and recommendations to the assisted city
concerning its budgetary and fiscal affairs. An intergovernmental
cooperation agreement between Philadelphia and PICA was approved by City
Counsel on January 3, 1992, and approved by the PICA Board and signed by the
Mayor on January 8, 1992. At this time, Philadelphia is operating under a
five year fiscal plan approved by PICA 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. The terms of the new labor contracts are
estimated to cost approximately $144.0 million more than what was budgeted in
the original five year plan. An amended five year plan was approved by PICA
in May 1993. The audit findings show a surplus of approximately $3 million
for the fiscal year ending June 30, 1993. The fiscal 1994 budget projects no
deficit and a balanced budget for the year ending June 30, 1994. The Mayor's
latest update of the five year financial plan was approved by PICA on May 2,
1994.
In June 1992, PICA issued $474,555,000 of its Special Tax Revenue Bonds to
provide financial assistance to Philadelphia and to liquidate the cumulative
General Fund balance deficit. PICA issued $643,430,000 in July 1993 and
$178,675,000 in August 1993 of Special Tax Revenue Bonds to refund certain
general obligation bonds of the city and to fund additional capital projects.
As of the date hereof, the ratings on the City's long-term obligations
supported by payments from the City's General Fund are rated Ba by Moody's
and BB by S&P. Any explanation concerning the significance of such ratings
must be obtained from the rating agencies. There is no assurance that any
ratings will continue for any period of time or that they will not be revised
or withdrawn.
The foregoing information constitutes only a brief summary of some of the
financial difficulties 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 the Bonds in the Pennsylvania 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 Bonds, could have an adverse impact on the financial condition
of the State and various agencies and political subdivisions located in the
State. The Sponsor is unable to predict whether or to what extent such
factors or other factors may affect the issuers of Bonds, the market value or
marketability of the Bonds or the ability of the respective issuers of the
Bonds acquired by the Pennsylvania Trust to pay interest on or principal of
the Bonds.
At the time of the closing for each Pennsylvania Trust, Special Counsel to
each Pennsylvania Trust for Pennsylvania tax matters rendered an opinion
under then existing Pennsylvania income tax law applicable to taxpayers whose
income is subject to Pennsylvania income taxation substantially to the effect
that:
(1) Units evidencing fractional undivided interest in a Pennsylvania
Trust, which are represented by obligations issued by the
Commonwealth of Pennsylvania, any public authority, commission,
board or other agency created by the Commonwealth of Pennsylvania,
any political subdivision of the Commonwealth of Pennsylvania or
any public authority created by any such political subdivision are
not taxable under any of the personal property taxes presently in
effect in Pennsylvania;
(2) distributions of interest income to Unitholders that would not be
taxable if received directly by a Pennsylvania resident are not
subject to personal income tax under the Pennsylvania Tax Reform
-76-
<PAGE>
Code of 1971; nor will such interest be taxable under the
Philadelphia School District Investment Income Tax imposed on
Philadelphia resident individuals;
(3) a Unitholder may have a taxable event under the Pennsylvania state
and local income taxes referred to in the preceding paragraph upon
the redemption or sale of his Units; Units will be taxable under
the Pennsylvania inheritance and estate taxes;
(4) a Unitholder which is a corporation may have a taxable event under
the Pennsylvania Corporate Net Income Tax when it redeems or sells
its Units. Interest income distributed to Unitholders which are
corporations is not subject to Pennsylvania Corporate Net Income
Tax or Mutual Thrift Institutions Tax. However, banks, title
insurance companies and trust companies may be required to take the
value of the Units into account in determining the taxable value of
their shares subject to the Shares Tax;
(5) under Act No. 68 of December 3, 1993, gains derived by the Fund
from the sale, exchange or other disposition of Bonds may be
subject to Pennsylvania personal or corporate income taxes. Those
gains which are distributed by the Fund to Unitholders who are
individuals may be subject to Pennsylvania Personal Income Tax.
For Unitholders which are corporations, the disputed gains may be
subject to Corporate Net Income Tax or Mutual Thrift Institutions
Tax. Gains which are not distributed by the Fund may nevertheless
be taxable to Unitholders if derived by the Fund from the sale,
exchange or other disposition of Bonds issued on or after
February 1, 1994. Gains which are not distributed by the Fund will
remain nontaxable to Unitholders if derived by the Fund from the
sale, exchange or other disposition of Bond issued prior to
February 1, 1994;
(6) any proceeds paid under insurance policies issued to the Trustee or
obtained by issuers of the Bonds with respect to the Bonds which
represent maturing interest on defaulted obligations held by the
Trustee will be excludable from Pennsylvania gross income if, and
to the same extent as, such interest would have been so excludable
if paid by the issuer of the defaulted obligations; and;
(7) the Fund is not taxable as a corporation under Pennsylvania tax
laws applicable to corporations.
On December 3, 1993, changes to Pennsylvania laws affecting taxation of
income and gains from the sale of Commonwealth of Pennsylvania and local
obligations were enacted. Among these changes was the repeal of the
exemption from tax of gains realized upon the sale or other disposition of
such obligations. The Pennsylvania Department of Revenue has issued proposed
regulations concerning these changes. The opinions expressed above are based
on our analysis of the law and proposed regulations but are subject to
modification upon review of final regulations or other guidance that may be
issued by the Department of Revenue or future court decisions.
In rendering its opinion, Special Counsel has not, for timing reasons,
made an independent review of proceedings related to the issuance of the
Bonds. It has relied on the Sponsor for assurance that the Bonds have been
issued by the Commonwealth of Pennsylvania or by or on behalf of
municipalities or other governmental agencies within the Commonwealth.
TEXAS TRUSTS. Historically, the primary sources of the State's revenues
have been sales taxes, mineral severance taxes and federal grants. Due to
the collapse of oil and gas prices in 1986 and a resulting enactment by
recent legislatures 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 revenue in any year. Due to the State's
expansion in Medicaid spending and other Health and Human Services programs
requiring federal matching revenues, federal receipts became the State's
number one source of income in fiscal 1993. Sales tax, which had been the
main source of revenue for the previous 12 years, dropped to second,
accounting for 27% of total revenues in fiscal 1993. Interest and investment
income is now the third largest revenue source contributing 6.4% of total
revenues in
-77-
<PAGE>
fiscal 1993. The motor fuels tax is now the State's fourth largest revenue
source and the second largest tax, accounting for approximately 6.2% of total
revenue in fiscal year 1993. Licenses, fees and permits, the State's fifth
largest revenue source, accounted for 6.3% of the total revenue in fiscal
year 1993. The remainder of the State's revenues are derived primarily from
other excess taxes. The State currently has no personal or corporate income
tax. The State does, however, impose a corporate franchise tax based in
certain circumstances in part on a corporation's profits.
Heavy reliance on the energy and agricultural sectors for jobs and income
resulted in a general downturn in the Texas economy beginning in 1982 as
those industries suffered significantly. The effects of this downturn
continue to adversely affect the State's real estate industry and its
financial institutions for several years. As a result of these problems, the
general revenue fund had a $231 million cash deficit at the beginning of the
1987 fiscal year and ended the 1987 fiscal year with a $745 million cash
deficit. In 1987, the Texas economy began to move toward a period of
recovery. The expansion continued in 1988 and 1989. In fiscal year 1993,
the State ended the year with a general revenue fund cash surplus of $1,163
million. This was the sixth consecutive year that Texas ended a fiscal with
a positive balance.
The 73rd Legislature meeting in 1993 passed the 1994-1995 biennial all
funds budget of $71.2 billion without increasing state taxes. This was
accomplished by cutting spending in certain areas and increasing federal
funding. The state Comptroller has estimated that total state revenues from
all sources would total $65.3 billion for the 1994-1995 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 $8.49 billion of general obligation
bonds have been authorized in Texas and almost $4.18 billion of such bonds
are currently outstanding. Of these, approximately 76% were issued by the
Veterans' Land Board and the Texas Public Finance Authority.
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.
Pursuant to Article 717k-2, Texas Revised Civil Statutes, as presently
amended, the net effective interest rate for any issue or series of Bonds in
the Texas Trust is limited to 15%.
From the time Standard & Poor's Corporation began rating Texas general
obligation bonds in 1956 until early 1986, that 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
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.
-78-
<PAGE>
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.
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 March 1993, the
Legislature passed a proposed constitutional amendment which would allow a
limited amount of money to be "recaptured" from wealthy school districts and
redistributed to property-poor school districts. However, the amendment was
rejected by the voters on May 1, 1993, requiring the Legislature to develop a
new school finance plan. At the end of May 1993, the legislature passed a
new school finance bill that provides school districts with certain choices
to achieve funding equalization. Although a number of both poor and wealthy
school districts have challenged the new funding law, the trial judge has
stated that the new law shall be implemented for at least the 1993-1994
school year before considering any constitutional challenges.
The Comptroller has estimated that total revenues for fiscal 1994 will be
$33.59 billion, compared to actual revenues of $33.79 billion for fiscal
1993. The revenue estimate for fiscal 1994 is based on an assumption that
the Texas economy will show a gradual but steady growth.
A wide variety of Texas laws, rules and regulations affect, directly, or
indirectly, the payment of interest on, or the repayment of the principal of,
Bonds in the Texas Trust. The impact of such laws and regulations on
particular Bonds may vary depending upon numerous factors including, among
others, the particular type of Bonds involved, the public purpose funded by
the Bonds and the nature and extent of insurance or other security for
payment of principal and interest on the Bonds. For example, Bonds in the
Texas Trust which are payable only from the revenues derived from a
particular facility may be adversely affected by Texas laws or regulations
which make it more difficult for the particular facility to generate revenues
sufficient to pay such interest and principal, including, among others, laws
and regulations which limit the amount of fees, rates or other charges which
may be imposed for use of the facility or which increase competition among
facilities of that type or which limit or otherwise have the effect of
reducing the use of such facilities generally, thereby reducing the revenues
generated by the particular facility. Bonds in the Texas Trust, the payment
of interest and principal on which is payable from annual appropriations, may
be adversely affected by local laws or regulations that restrict the
availability of monies with which to make such appropriations. Similarly,
Bonds in the Texas Trust, the payment of interest and principal on which is
secured, in whole or in part, by an interest in real property may be
adversely affected by declines in real estate values and by Texas laws that
limit the availability of remedies or the scope of remedies available in the
event of a default on such Bonds. Because of the diverse nature of such laws
and regulations and the impossibility of predicting the nature or extent of
future changes in existing laws or regulations or the future enactment or
adoption of additional laws or regulations, it is not presently possible to
determine the impact of such laws and regulations on the Bonds in the Texas
Trust and, therefore, on the Units.
The foregoing information constitutes only a brief summary of some of the
financial difficulties which may impact certain issuers of Bonds in the Texas
Trust and does not purport to be a complete or exhaustive description of all
adverse conditions to which the issuers in the Texas Trust are subject.
Additionally, many
-79-
<PAGE>
factors including national economic, social and environmental policies and
conditions, which are not within the control of the issuers of Bonds, could
affect or could have an adverse impact on the financial condition of the
State and various agencies and political subdivisions located in the State.
The Sponsor is unable to predict whether or to what extent such factors or
other factors may affect the issuers of the Bond, the market value or
marketability of the Bonds or the ability of the respective issuers of the
Bonds acquired by the Texas Trust to pay interest on or principal of the
Bonds.
For a discussion of the Federal tax status of income earned on Texas Trust
Units, see "Other Matters--Federal Tax Status."
At the time of closing for each Texas Trust, Special Counsel to the Fund
for Texas tax matters rendered an opinion under then existing Texas law
substantially to the effect that:
(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 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).
The opinion set forth in clause (2) above, is limited to the extent that
Units of the Trust may be subject to property taxes levied in the State if
held on the relevant date: (i) by a transportation business described in
V.T.C.A., Tax Code, Subchapter A, Chapter 24; (ii) by a savings and loan
association formed under the laws of the State (but only to the extent
described in section 11.09 of the Texas Savings and Loan Act, Vernon's Ann.
Civ. St. art. 852a); or (iii), by an insurance company incorporated under the
laws of the State (but only to the extent described in V.A.T.S., Insurance
Code, Art. 4.01). Each Unitholder described in the preceding sentence should
consult its own tax advisor with respect to such matters.
Corporations subject to the State franchise tax should be aware that in
its first called 1991 session, the Texas Legislature adopted, and the
Governor has signed into law, certain substantial amendments to the State
corporate franchise tax, the effect of which may be to subject to taxation
all or a portion of any gains realized by such a corporate Unitholder upon
the sale, exchange or other disposition of a Unit. The amendments are
applicable to taxable periods commencing January 1991, and to each taxable
period thereafter. Because no authoritative judicial, legislative or
administrative interpretation of these amendments has issued, and there
remain many unresolved questions regarding its potential effect on corporate
franchise taxpayers, each corporation which is subject to the State franchise
tax and which is considering the purchase of Units should consult its tax
advisor regarding the effect of these amendments.
PUBLIC OFFERING OF UNITS
PUBLIC OFFERING PRICE. Units of each State Trust are offered at the
Public Offering Price thereof. The Public Offering Price per Unit is equal
to the aggregate bid side evaluation of the Municipal Bonds in the State
Trust's portfolio (as determined pursuant to the terms of a contract with the
Evaluator, by Muller Data
-80-
<PAGE>
Corporation, a non-affiliated firm regularly engaged in the business of
evaluating, quoting or appraising comparable securities), plus or minus cash,
if any, in the Principal Account, held or owned by the State Trust, plus
accrued interest to the settlement date (which in the case of Kemper Defined
Funds consists of Purchased Interest and Daily Accrued Interest) divided by
the number of outstanding Units of the State Trust, plus the sales charge
applicable to a Unit of such State Trust. Investors who purchase Units
through brokers or dealers pursuant to a current management agreement which
by contract or operation of law does not allow such broker or dealer to earn
an additional commission (other than any fee or commission paid for
maintenance of such investor's account under the management agreement) on
such transactions may purchase such Units at the current Public Offering
Price net of the applicable broker or dealer concession. See "Public
Distribution of Units" below. The sales charge is based upon the dollar
weighted average maturity of the State Trust and is determined in accordance
with the table set forth below. For purposes of this computation, Municipal
Bonds will be deemed to mature on their expressed maturity dates unless: (a)
the Municipal Bonds have been called for redemption or funds or securities
have been placed in escrow to redeem them on an earlier call date, in which
case such call date will be deemed to be the date upon which they mature; or
(b) such Municipal Bonds are subject to a "mandatory tender", in which case
such mandatory tender will be deemed to be the date upon which they mature.
The effect of this method of sales charge computation will be that different
sales charge rates will be applied to the State Trust based upon the dollar
weighted average maturity of such State Trust's portfolio, in accordance with
the following schedule:
<TABLE>
<CAPTION>
PERCENT OF PERCENT OF NET
DOLLAR WEIGHTED AVERAGE PUBLIC OFFERING AMOUNT
YEARS TO MATURITY PRICE INVESTED
----------------- --------------- -------------
<S> <C>
0 to .99 years...................... 0.00% 0.000%
1 to 3.99 years..................... 2.00 2.041
4 to 7.99 years..................... 3.50 3.627
8 to 14.99 years.................... 4.50 4.712
15 or more years.................... 5.50 5.820
</TABLE>
The sales charge per Unit will be reduced as set forth below:
<TABLE>
<CAPTION>
DOLLAR WEIGHTED AVERAGE YEARS TO MATURITY*
4 TO 7.99 8 TO 14.99 15 OR MORE
--------------------------------------
AMOUNT OF INVESTMENT SALES CHARGE (% OF PUBLIC OFFERING PRICE)
- -------------------- -----------------------------------------
<S> <C> <C> <C>
$1 to $99,999...................... 3.50% 4.50% 5.50%
$100,000 to $499,999............... 3.25 4.25 5.00
$500,000 to $999,999............... 3.00 4.00 4.50
$1,000,000 or more................. 2.75 3.75 4.00
</TABLE>
----------
* If the dollar weighted average maturity of a State Trust is from 1 to 3.99
years, the sales charge is 2% and 1.5% of the Public Offering Price for
purchases of $1,000 to $249,999 and $250,000 or more, respectively.
The reduced sales charges as shown on the preceding charts will apply to
all purchases of Units on any one day by the same person from the same
Underwriter or dealer and for this purpose, purchases of Units of a State
Trust will be aggregated with concurrent purchases of Units as any other unit
investment trust that may be offered by the Sponsor. Additionally, Units
purchased in the name of a spouse or child (under 21) of such purchaser will
be deemed to be additional purchases by such purchaser. The reduced sales
charges will also be applicable to a trust or other fiduciary purchasing for
a single trust estate or single fiduciary account.
The Sponsor intends to permit officers, directors and employees of the
Sponsor and Evaluator, and at the discretion of the Sponsor, registered
representatives of selling firms to purchase Units of the Trust without a
sales charge, although a transaction processing fee may be imposed on such
trades.
-81-
<PAGE>
The Public Offering Price per Unit of a State Trust on the date shown on
the cover page of Part Two of the Prospectus or on any subsequent date will
vary from the amounts stated under "Essential Information" in Part Two in
accordance with fluctuations in the prices of the underlying Municipal Bonds
and the amount of accrued interest on the Units. The aggregate bid side
evaluation of the Municipal Bonds shall be determined (a) on the basis of
current bid prices of the Municipal Bonds, (b) if bid prices are not
available for any particular Municipal Bonds, on the basis of current bid
prices for comparable bonds, (c) by determining the value of the Municipal
Bonds on the bid side of the market by appraisal, or (d) by any combination
of the above. Except as described in "Insurance on the Portfolios" above,
the Evaluator will not attribute any value to the insurance obtained by a
State Trust. On the other hand, the value of insurance obtained by an issuer
of Municipal Bonds is reflected and included in the market value of such
Municipal Bonds.
In any case, the Evaluator will consider the ability of an insurer to meet
its commitments under the Trust's insurance policy (if any). For example, if
a State Trust were to hold a municipality's Municipal Bonds which had
significantly deteriorated in credit quality, the Evaluator would first
consider in its evaluation the market price of the Municipal Bonds at their
lower credit rating. The Evaluator would also attribute a value to the
insurance feature of the Municipal Bonds which would be equal to the
difference between the market value of such Municipal Bonds and the market
value of bonds of a similar nature which were of investment grade rating. It
is the position of the Sponsor that this is a fair method of valuing insured
Municipal Bonds and reflects a proper valuation method in accordance with the
provisions of the Investment Company Act of 1940. For a description of the
circumstances under which a full or partial suspension of the right of
Unitholders to redeem their Units may occur, see "Redemption" below.
The foregoing evaluations and computations shall be made as of the
Evaluation Time stated under "Essential Information" in Part Two, on each
business day effective for all sales made during the preceding 24-hour
period.
The interest on the Municipal Bonds in each State Trust, less the related
estimated fees and expenses, is estimated to accrue in the annual amounts per
Unit set forth under "Essential Information" in Part Two. The amount of net
interest income which accrues per Unit may change as Municipal Bonds mature
or are redeemed, exchanged or sold, or as the expenses of a State Trust
change or as the number of outstanding Units of such State Trust changes.
Payment for Units must be made on or before the third business day
following the order for purchase (the "settlement date"). A purchaser
becomes the owner of Units on the settlement date. Cash, if any, made
available to the Sponsor prior to the date of settlement for the purchase of
Units may be used in the Sponsor's business and may be deemed to be a benefit
to the Sponsor, subject to the limitations of the Securities Exchange Act of
1934. If a Unitholder desires to have certificates representing Units
purchased, such certificates will be delivered as soon as possible following
a written request therefor, or shortly thereafter. For information with
respect to redemption of Units purchased, but as to which certificates
requested have not been received, see "Redemption" below.
The following section entitled "Accrued Interest" applies only to series
of Kemper Tax-Exempt Insured Income Trust, Multi-State Series and Ohio Tax-
Exempt Bond Trust Series 11-22.
ACCRUED INTEREST. Accrued interest consist of two elements. The first
element arises as a result of accrued interest which is the accumulation of
unpaid interest on a bond from the last day on which interest thereon was
paid. Interest on Bonds in the State Trusts is actually paid either monthly
or semi-annually to the State Trust. However, interest on the bonds in the
State Trusts is accounted for daily on an accrual basis. Because of this, a
State Trust always has an amount of interest earned but not yet collected by
the Trustee because of coupons that are not yet due. For this reason, the
Public Offering Price of Units will have added to it the proportionate share
of accrued and undistributed interest to the date of settlement.
The Trustee advanced the amount of accrued interest as of the First
Settlement Date (which is five business days following the Date of Deposit of
the applicable State Trust) and the same was distributed to the Sponsor.
Such advance was repaid to the Trustee through the first receipts of interest
received on the Municipal Bonds.
-82-
<PAGE>
Consequently, the amount of accrued interest added to the Public Offering
Price of Units included only accrued interest arising after the First
Settlement Date of a State Trust, less any distributions from the Interest
Account subsequent to this First Settlement Date. Since the First Settlement
Date was the date of settlement for anyone who ordered Units on the Date of
Deposit, no accrued interest was added to the Public Offering Price of Units
ordered on the Date of Deposit.
The second element of accrued interest arises because of the structure of
the Interest Account. The Trustee has no cash for distribution to
Unitholders until it receives interest payments on the Bonds in a State
Trust. The Trustee is obligated to provide its own funds, at times, in order
to advance interest distributions. The Trustee will recover these
advancements when such interest is received. Interest Account balances are
established so that it will not be necessary on a regular basis for the
Trustee to advance its own funds in connection with such interest
distributions. The Interest Account balances are also structured so that
there will generally be positive cash balances and since the funds held by
the Trustee will be used by it to earn interest thereon, it benefits thereby
(see "Expenses of the Trust").
Accrued interest is computed as of the initial Record Date of the State
Trusts. On the date of the first distribution of interest to Unitholders
after the First Settlement Date, the interest collected by the Trustee will
be sufficient to repay its advances, to allow for accrued interest under the
monthly, quarterly and semi-annual plans of distribution and to generate
enough cash to commence distributions to Unitholders. If a Unitholder sells
or redeems all or a portion of his Units or if the Bonds in a State Trust are
sold or otherwise removed or if a State Trust is liquidated, he will receive
at that time his proportionate share of the accrued interest computed to the
settlement date in the case of sale or liquidation and to the date of tender
in the case of redemption in such State Trust.
The following section entitled "Purchased and Daily Accrued Interest"
applies only to series of Kemper Defined Funds.
PURCHASED AND DAILY ACCRUED INTEREST. In the case of a State Trust in any
series of Kemper Defined Funds, accrued interest consists of two elements.
The first element arises as a result of accrued interest which is the
accumulation of unpaid interest on a bond from the later of the last day on
which interest thereon was paid or the date of original issuance of the bond.
Interest on the coupon Bonds in a State Trust is paid semi-annually to the
State Trust. A portion of the aggregate amount of such accrued interest on
the Bonds in the Trust to the First Settlement Date (which is five business
days following the Date of Deposit of the applicable State Trust) of the
State Trust is referred to herein as "Purchased Interest." Included in the
Public Offering Price of the State Trust Units is the Purchased Interest. In
an effort to reduce the amount of Purchased Interest which would otherwise
have to be paid by Unitholders, the Trustee may have advanced a portion of
the accrued interest to the Sponsor as the Unitholder of record as of the
First Settlement Date. The second element of accrued interest arises because
the estimated net interest on the Units in the State Trust is accounted for
daily on an accrual basis (herein referred to as "Daily Accrued Interest").
Because of this, the Units always have an amount of interest earned but not
yet paid or reserved for payment. For this reason, the Public Offering Price
of Units in any series of Kemper Defined Funds will include the proportionate
share of Daily Accrued Interest to the date of settlement.
If a Unitholder in any series of Kemper Defined Funds sells or redeems all
or a portion of his Units or if the bonds are sold or otherwise removed or if
the State Trust is liquidated, he will receive at that time his proportionate
share of the Purchased Interest and Daily Accrued Interest computed to the
settlement date in the case of sale or liquidation and to the date of tender
in the case of redemption in the State Trust.
PUBLIC DISTRIBUTION OF UNITS. The Sponsor has qualified Units of each
State Trust for sale in the State for which such State Trust is named. Units
will be sold through the Underwriters, through dealers who are members of the
National Association of Securities Dealers, Inc. and through others. Sales
may be made to or through dealers at prices which represent discounts from
the Public Offering Price as set forth in the table below. Certain
commercial banks are making Units of the Trust available to their customers
on an agency basis. A portion of the sales charge paid by their customers is
retained by or remitted to the banks, in the amounts shown in the table
below. Under the Glass-Steagall Act, banks are prohibited from underwriting
Trust
-83-
<PAGE>
Units; however, the Glass-Steagall Act does permit certain agency
transactions and the banking regulators have indicated that these particular
agency transactions are permitted under such Act. In addition, state
securities laws on this issue may differ from the interpretations of federal
law expressed herein and banks and financial institutions may be required to
register as dealers pursuant to State law.
<TABLE>
<CAPTION>
DOLLAR WEIGHTED AVERAGE YEARS TO MATURITY*
4 TO 7.99 8 TO 14.99 15 OR MORE
-------------------------------------------
DISCOUNT PER UNIT
AMOUNT OF INVESTMENT (% OF PUBLIC OFFERING PRICE)
- --------------------- -------------------------------
<S> <C> <C> <C>
$1 to $99,999.......... 2.00% 3.00% 4.00%
- -------------------------- ---- ---- ----
$100,000 to $499,999... 1.75 2.75 3.50
$500,000 to $999,999... 1.50 2.50 3.00
$1,000,000 or more..... 1.25 2.25 2.50
---- ---- ----
</TABLE>
----------
* If the dollar weighted average maturity of a Trust is from 1 to 3.99 years,
the concession or agency commission is 1.00% of the Public Offering Price.
In addition to such discounts, the Sponsor may, from time to time, pay or
allow an additional discount, in the form of cash or other compensation, to
dealers employing registered representatives who sell, during a specified
time period, a minimum dollar amount of Units of the Trust and other unit
investment trusts underwritten by the Sponsor. The Sponsor reserves the
right to change the levels of discounts at any time. The difference between
the discount allowed to firms and the sales charge will be retained by the
Sponsor. The Sponsor reserves the right to reject, in whole or in part, any
order for the purchase of Units.
PROFITS OF SPONSOR. The Sponsor will retain a portion of the sales charge
on each Unit sold representing the difference between the Public Offering
Price of the Units and the discounts allowed to firms selling such Units.
The Sponsor may realize additional profit or loss as a result of the possible
change in the daily evaluation of the Municipal Bonds in the State Trusts,
since the value of its inventory of Units may increase or decrease.
MARKET FOR UNITS
While not obligated to do so, the Sponsor intends to, subject to change at
any time, maintain a market for Units of the State Trusts offered hereby and
to offer to purchase said Units at prices, as determined by the Evaluator,
based on the aggregate bid prices of the underlying Municipal Bonds of such
State Trusts, together with accrued interest to the expected date of
settlement (which, in the case of Kemper Defined Funds, consists of Purchased
Interest and Daily Accrued Interest). Accordingly, Unitholders who wish to
dispose of their Units should inquire of their broker or bank as to current
market prices of the Units in order to determine whether there is in
existence any price in excess of the redemption price and, if so, the amount
there of prior to making a tender for redemption to the Trustee.
The offering price of any Units resold by the Sponsor will be in accord
with that described in the currently effective Prospectus describing such
Units. Any profit or loss resulting from the resale of such Units will
belong to the Sponsor. The Sponsor may suspend or discontinue purchase of
Units of any State Trust if the supply of Units exceeds demand, or for other
business reasons.
REDEMPTION
A Unitholder who does not dispose of Units in the secondary market
described above may cause their Units to be redeemed by the Trustee by making
a written request to the Trustee, Investors Fiduciary Trust Company, P.O. Box
419430, Kansas City, Missouri 64173-0216 and, in the case of Units evidenced
by a certificate, by tendering such certificate to the Trustee, properly
endorsed or accompanied by a written
-84-
<PAGE>
instrument or instruments of transfer in a form satisfactory to the Trustee.
Unitholders must sign such written request, and such certificate or transfer
instrument, exactly as their names appear on the records of the Trustee and
on any certificate representing the Units to be redeemed. If the amount of
the redemption is $25,000 or less and the proceeds are payable to the
Unitholder(s) of record at the address of record, no signature guarantee is
necessary for redemptions by individual account owners (including joint
owners). Additional documentation may be requested, and a signature
guarantee is always required, from corporation, executors, administrators,
trustees, guardians or associations. The signatures must be guaranteed by a
participant in the Securities Transfer Agents Medallion Program ("STAMP") or
such other guarantee program in addition to, or in substitution for, STAMP,
as may be acceptable to the Trustee. A certificate should only be sent by
registered or certified mail for the protection of the Unitholder. Since
tender of the certificate is required for redemption when one has been
issued, Units represented by a certificate cannot be redeemed until the
certificate representing the Units has been received by the purchaser.
Redemption shall be made by the Trustee on the third business calendar day
following the day on which a tender for redemption is received (the
"Redemption Date"), by payment of cash equivalent to the Redemption Price for
such State Trust, determined as set forth below under "Computation of
Redemption Price," as of the Evaluation Time stated under "Essential
Information" in Part Two, next following such tender, multiplied by the
number of Units being redeemed. The price received upon redemption might be
more or less than the amount paid by the Unitholder depending on the value of
the Municipal Bonds in the State Trust's portfolio at the time of redemption.
Any Units redeemed shall be cancelled and any undivided fractional interest
in the State Trust will be extinguished.
Under regulations issued by the Internal Revenue Service, the Trustee is
required to withhold a specified percentage of the principal amount of a Unit
redemption if the Trustee has not been furnishing the redeeming Unitholder's
tax identification number in the manner required by such regulations. Any
amount so withheld is transmitted to the Internal Revenue Service and may be
recovered by the Unitholder only when filing a tax return. Under normal
circumstances the Trustee obtains the Unitholder's tax identification number
from the selling broker. However, any time a Unitholder elects to tender
Units for redemption, such Unitholder should make sure that the Trustee has
been provided a certified tax identification number in order to avoid this
possible "back-up withholding." In the event the Trustee has not been
previously provided such number, one must be provided at the time redemption
is requested.
Any amounts paid on redemption representing interest shall be withdrawn
from the Interest Account of such State Trust to the extent that funds are
available for such purpose. All other amounts paid on redemption shall be
withdrawn from the Principal Account for such State Trust. The Trustee is
empowered to sell Municipal Bonds from the portfolio of a State Trust in
order to make funds available for the redemption of Units of such State
Trust. Such sale may be required when Municipal Bonds would not otherwise be
sold and might result in lower prices than might otherwise be realized. To
the extent Municipal Bonds are sold, the size and diversity of such State
Trust will be reduced.
The Trustee is irrevocably authorized in its discretion, if the Sponsor
does not elect to purchase any Units tendered for redemption, in lieu of
redeeming such Units, to sell such Units in over-the-counter market for the
account of tendering Unitholders at prices which will return to such
Unitholders amounts in cash, net after brokerage commissions, transfer taxes
and other charges, equal to or in excess of the Redemption Price for such
Units. In the event of any such sale, the Trustee shall pay the net proceeds
thereof to the Unitholders on the day they would otherwise be entitled to
receive payment of the Redemption Price.
The right of redemption may be suspended and payment postponed (1) for any
period during which the New York Stock Exchange is closed, other than
customary weekend and holiday closings, or during which (as determined by the
Securities and Exchange Commission) trading on the New York Stock Exchange is
restricted; (2) for any period during which an emergency exists as a result
of which disposal by the Trustee of Municipal Bonds is not reasonably
practicable or it is not reasonably practicable to fairly determine the value
of the underlying Municipal Bonds in accordance with the Agreement; or (3)
for such other period as the Securities and Exchange Commission may by order
permit. The Trustee is not liable to any person in any way for any loss or
damage which may result from any such suspension or postponement.
-85-
<PAGE>
COMPUTATION OF REDEMPTION PRICE. The Redemption Price for Units of each
State Trust is computed by the Evaluator as of the Evaluation Time stated
under "Essential Information" on Part Two next occurring after the tendering
of a Unit for redemption and on any other business day desired by it, by:
A. adding (1) the principal cash on hand held or owed by the State
Trust; (2) the aggregate value of the Municipal Bonds held in the State
Trust, as determined by the Evaluator on the basis of bid prices
therefor; (3) interest accrued and unpaid on the Municipal Bonds in the
State Trust as of the date of computation; and
B. deducting therefrom (1) amounts representing any applicable taxes
or governmental charges payable out of the State Trust and for which no
deductions have been previously made for the purpose of additions to
the Reserve Account described under "Expenses of the Trust"; (2)
amounts representing estimated accrued expenses of the State Trust
including, but not limited to, unpaid fees and expenses of the Trustee
(including legal and auditing fees and insurance costs), the Evaluator,
the Sponsor and bond counsel, if any; (3) cash held for distribution to
Unitholders of record as of the business day prior to the evaluation
being made; and (4) other liabilities incurred by the State Trust; and
C. finally, dividing the results of such computation by the number
of Units of the State Trust outstanding as of the date thereof.
UNITHOLDERS
OWNERSHIP OF UNITS. Ownership of Units of any State Trust will not be
evidenced by a certificate unless a Unitholder or the Unitholder's registered
broker/dealer or the clearing agent for such broker/dealer makes a written
request to the Trustee. Certificates, if issued, will be so noted on the
confirmation statement sent to the Underwriter and broker. Non-receipt of
such certificate(s) must be reported to the Trustee within one year;
otherwise, a 2% surety bond fee will be required for replacement.
Units are transferable by making a written request to the Trustee and, in
the case of Units evidenced by a certificate, presenting and surrendering
such certificate to the Trustee properly endorsed or accompanied by a written
instrument or instruments of transfer. Unitholders must sign such written
request, and such certificate or transfer instrument, exactly as their names
appear on the records of the Trustee and on any certificate representing the
Units to be transferred. Such signatures must be guaranteed by a participant
in the Securities Transfer Agents Medallion Program ("STAMP") or such other
signature guarantee program in addition to, or in substitution for, STAMP, as
may be acceptable to the Trustee.
Units may be purchased and certificates, if requested, will be issued in
denominations of one Unit or any multiple thereof subject to any minimum
investment requirement established by the Sponsor from time to time. Any
certificate issued will be numbered serially for identification, issued in
fully registered form and will be transferable only on the books of the
Trustee. The Trustee may require a Unitholder to pay a fee for each
certificate reissued or transferred, and to pay any governmental charge that
may be imposed in connection with each such transfer or interchange. The
Trustee at the present time does not intend to charge for the normal transfer
or interchange of certificates. Destroyed, stolen, mutilated or lost
certificates will be replaced upon delivery to the Trustee of satisfactory
indemnity (generally amounting to not more than 3% of the market value of the
Units), affidavit of loss, evidence of ownership and payment of expenses
incurred.
DISTRIBUTIONS TO UNITHOLDERS. Interest Distributions: Interest received
by each State Trust, including any portion of the proceeds (including
insurance proceeds) from a disposition of Municipal Bonds which represents
accrued interest, is credited by the Trustee to the Interest Account for such
State Trust. All other receipts are credited by the Trustee to a separate
Principal Account for the State Trust. The Trustee normally has no cash for
distribution to Unitholders until it receives interest payments on the Bonds
in the State Trust. Since municipal interest usually is paid semi-annually,
during the initial months of the Trust, the Interest Account of each State
Trust, consisting of accrued but uncollected interest and collected interest
(cash), will be predominantly the uncollected accrued interest that is not
available for distribution. On the dates set forth
-86-
<PAGE>
under "Essential Information" for each State Trust in Part Two the Trustee
will commence distributions, in part from funds advanced by the Trustee.
Thereafter, assuming the State Trust retains its original size and
composition, after deduction of the fees and expenses of the Trustee, the
Sponsor and Evaluator and reimbursements (without interest) to the Trustee
for any amount advanced to a State Trust, the Trustee will normally
distribute on each Interest Distribution Date (the fifteenth of the month) or
shortly thereafter to Unitholders of record of such State Trust on the
preceding Record Date. Unitholders of the State Trusts will receive an
amount substantially equal to one-twelfth, one-fourth or one-half (depending
on the distribution option selected except in series of Kemper Defined Funds
in which case only monthly distributions are available) of such Unitholders'
pro rata share of the estimated net annual interest income to the Interest
Account of such State Trust. However, interest earned at any point in time
will be greater than the amount actually received by the Trustee and
distributed to the Unitholders. Therefore, there will always remain an item
of accrued interest that is added to the daily value of the Units. If
Unitholders of a State Trust sell or redeem all or a portion of their Units,
they will be paid their proportionate share of the accrued interest of such
State Trust to, but not including, the fifth business day after the date of a
sale or to the date of tender in the case of a redemption.
In order to equalize distributions and keep the undistributed interest
income of the Trusts at a low level, all Unitholders of record in such State
Trust on the first Record Date received and interest distribution on the
first Interest Distribution Date. Because the period of time between the
first Interest Distribution Date and the regular distribution dates may not
have been a full period, the first regular distributions may have been
partial distributions.
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. Since interest on Municipal Bonds in the
State Trusts is payable at varying intervals, usually in semi-annual
installments, and distributions of income are made to Unitholders at
different intervals from receipt of interest, the interest accruing to a
State Trust may not be equal to the amount of money received and available
for distribution from the Interest Account. Therefore, on each Distribution
Date the amount of interest actually deposited in the Interest Account of a
State Trust and available for distribution may be slightly more or less than
the interest distribution made. In order to eliminate fluctuations in
interest distributions resulting from variances, the Trustee is authorized by
the Trust Agreements to advance such amounts as may be necessary to provide
interest distributions of approximately equal amounts. The Trustee will be
reimbursed, without interest, for any such advances from funds available in
the Interest Account for such State Trust.
Unitholders of any series of Kemper Tax-Exempt Income Trust, Multi-State
Series or Ohio Tax-Exempt Bond Trust, Series 11-22 who desire to receive
distributions on a quarterly or semi-annual basis may elect to do so,
however, only monthly distributions are available for series of Kemper
Defined Funds. Record Dates for monthly distributions will be the first day
of each month; Record Dates for quarterly distributions will be the first day
of January, April, July and October; and Record Dates for semi-annual
distributions will be the first day of January and July. The distribution
option selected by a Unitholder of any series of Kemper Tax-Exempt Income
Trust, Multi-State Series or Ohio Tax-Exempt Bond Trust, Series 1-10 will
remain in effect until changed by written notice to the Trustee.
Unitholders of any series of Kemper Tax-Exempt Insured Income Trust,
Multi-State Series or Ohio Tax-Exempt Bond Trust, Series 11-22 purchasing
Units of the State Trusts in the secondary market will initially receive
distributions in accordance with the election of the prior owner.
Unitholders of such Trusts desiring to change their distribution option may
do so by sending written notice to the Trustee, together with their
certificate (if one was issued). Certificates should only be sent by
registered or certified mail to minimize the possibility of loss. If written
notice and any certificate are received by the Trustee not later than January
1 or July 1 of a year, the change will become effective for distributions
commencing with February 15 or August 15, respectively, of that year. If
notice is not received by the Trustee, the Unitholder will be deemed to have
elected to continue with the same option.
-87-
<PAGE>
Principal Distributions. The Trustee will distribute on each semi-annual
Distribution Date (or, in the case of Kemper Defined Funds, on each
Distribution Date) or shortly thereafter, to each Unitholder of record of the
State Trust of the preceding Record Date, an amount substantially equal to
such Unitholder's pro rata share of the cash balance, if any, in the
Principal Account of such State Trust computed as of the close of business on
the preceding Record Date. However, no distribution will be required if the
balance in the Principal Account is less than $1.00 per Unit (or $.001 per
Unit for certain Series). Except for Series of Kemper Defined Funds, if such
balance is between $5.00 and $10.00 per Unit, distributions will be made on
each quarterly Distribution Date; and if such balance exceeds $10.00 per
Unit, such amounts will be distributed on the next monthly Distribution Date.
STATEMENTS TO UNITHOLDERS. With each distribution, the Trustee will
furnish each Unitholder a statement of the amount of interest and the amount
of other receipts, if any, which are being distributed, expressed in each
case as a dollar amount per Unit.
The accounts of each State Trust are required to be audited annually by
independent certified public accountants designated by the Sponsor, unless
the Trustee determines that such an audit would not be in the best interest
of the Unitholders of such State Trust. The accountants' report will be
furnished by the Trustee to any Unitholder of such State Trust upon written
request.
Within a reasonable period of time after the end of each calendar year,
the Trustee shall furnish to each person who at any time during the calendar
year was a Unitholder of a State Trust a statement covering the calendar
year, setting forth:
A. As to the Interest Account:
1. The amount of interest received on the Municipal Bonds in such
State Trust, and the percentage of such amount by states and
territories in which the issuers of such Municipal Bonds are located;
2. The amount paid from the Interest Account of such State Trust
representing accrued interest of any Units redeemed;
3. The deductions from the Interest Account of such State Trust for
applicable taxes, if any, fees and expenses (including insurance costs
and auditing fees) of the Trustee, the Evaluator, the Sponsor and of
bond counsel, if any;
4. Any amounts credited by the Trustee to a Reserve Account for such
State Trust described under "Expenses of the Trust"; and
5. The net amount remaining after such payments and deductions,
expressed both as a total dollar amount and a dollar amount per Unit
outstanding on the last business day of such calendar year.
B. As to the Principal Account:
1. The dates of the maturity, liquidation or redemption of any of the
Municipal Bonds in such State Trust and the net proceeds received
therefrom excluding any portion credited to the Interest Account;
2. The amount paid from the Principal Account of such Series
representing the principal of any Units redeemed;
3. The deductions from the Principal Account of such Series for
payment of applicable taxes, if any, fees and expenses (including
insurance costs and auditing expenses) of the Trustee, the Evaluator,
the Sponsor and of bond counsel, if any;
-88-
<PAGE>
4. Any amounts credited by the Trustee to a Reserve Account for such
Series described under "Expenses of the Trust"; and
5. The net amount remaining after distributions of principal and
deductions, expressed both as a dollar amount and as a dollar amount
per Unit outstanding on the last business day of such calendar year.
C. The following information:
1. A list of the Municipal Bonds in such State Trust as of the last
business day of such calendar year;
2. The number of Units of such State Trust outstanding on the last
business day of such calendar year;
3. The Redemption Price of such State Trust based on the last Trust
Fund Evaluation made during such calendar year; and
4. The amount actually distributed during such calendar year from the
Interest and Principal Accounts of such State Trust separately stated,
expressed both as total dollar amounts and as dollar amounts per Unit
of such State Trust outstanding on the Record Date for each such
distribution.
RIGHTS OF UNITHOLDERS. A Unitholder may at any time tender Units to the
Trustee for redemption. No Unitholder of a State Trust shall have the right
to control the operation and management of the Trust or such State Trust in
any manner, except to vote with respect to amendment of the Agreement or
termination of the Trust or such State Trust. The death or incapacity of any
Unitholder will not operate to terminate the Trust or any State Trust nor
entitle legal representatives or heirs to claim an accounting or to bring any
action or proceeding in any court for partition or winding up of the Trust or
any State Trust.
INVESTMENT SUPERVISION
The Sponsor may not alter the portfolio of the State Trusts by the
purchase, sale or substitution of Municipal Bonds, except in the special
circumstances noted below. Thus, with the exception of the redemption or
maturity of Municipal Bonds in accordance with their terms, and/or the sale
of Municipal Bonds to meet redemption requests, the assets of the State
Trusts will remain unchanged under normal circumstances.
The Sponsor may direct the Trustee to dispose of Municipal Bonds the value
of which has been affected by certain adverse events, including institution
of certain legal proceedings, a decline in their price or the occurrence of
other market factors, including advance refunding, so that in the opinion of
the Sponsor the retention of such Municipal Bonds in a State Trust would be
detrimental to the interest of its Unitholders. The proceeds from any such
sales, exclusive of any portion which represents accrued interest, will be
credited to the Principal Account of such Trust Fund for distribution to its
Unitholders.
The Trustee is permitted to utilize the option to obtain Permanent
Insurance only in circumstances where the value added to the Municipal Bonds
exceeds the costs of acquiring such Permanent Insurance. Unless such
Permanent Insurance may be obtained at an acceptable price, the Sponsor will
not direct the Trustee to dispose of Municipal Bonds which are in default or
imminent danger of default but to retain such Municipal Bonds in the
portfolio so that the Trust may realize the benefits of the insurance on the
portfolio.
The Sponsor is required to instruct the Trustee to reject any offer made
by an issuer of the Municipal Bonds to issue new obligations in exchange or
substitution for any of such Municipal Bonds pursuant to a refunding
financing plan except that the Sponsor may instruct the Trustee to accept or
reject such an offer or to take any other action with respect thereto as the
Sponsor may deem proper if (1) the issuer is in default with respect to such
Bonds or (2) in the written opinion of the Sponsor the issuer will probably
default with respect
-89-
<PAGE>
to such Bonds in the reasonably foreseeable future. Any obligation so
received in exchange or substitution will be held by the Trustee subject to
the terms and conditions of the Trust Agreement to the same extent as Bonds
originally deposited thereunder. Within five days after the deposit of
obligations in exchange or substitution for underlying Bonds, the Trustee is
required to give notice thereof to each Unitholder, identifying the Bonds
eliminated and the Bonds substituted therefor.
The Trustee may sell Municipal Bonds, designated by the Sponsor, from a
State Trust for the purpose of redeeming Units of such State Trust tendered
for redemption and the payment of expenses. To the extent that Municipal
Bonds are sold which are current in payment of principal and interest by one
of the Insured Trust Funds in order to meet redemption requests and defaulted
Municipal Bonds are retained in the portfolio of an Insured Trust Fund in
order to preserve the related insurance protection applicable to said
Municipal Bonds, the overall quality of the Municipal Bonds remaining in such
Insured Trust Fund's portfolio will tend to diminish. Because of such
restrictions on the Trustee, under certain circumstances the Sponsor may seek
a full or partial suspension of the right of Unitholders to redeem their
Units. See "Redemption."
ADMINISTRATION OF THE TRUST
THE TRUSTEE. The Trustee, Investors Fiduciary Trust Company, is a trust
company specializing in investment related services, organized and existing
under the laws of Missouri, having its trust office at 127 West 10th Street,
Kansas City, Missouri 64105. The Trustee is subject to supervision and
examination by the Division of Finance of the State of Missouri and the
Federal Deposit Insurance Corporation. Investors Fiduciary Trust Company is
owned by State Street Boston Corporation.
The Trustee, whose duties are ministerial in nature, has not participated
in selecting the portfolio of any Trust Fund. For information relating to
the responsibilities of the Trustee under the Agreements, reference is made
to the material set forth under "Unitholders."
In accordance with the Agreements, the Trustee shall keep proper books of
record and account of all transactions at its office. Such records shall
include the name and address of, and the number of Units held by, every
Unitholder of each Trust Fund. Such books and records shall be open to
inspection by any Unitholder of such Trust Fund at all reasonable times
during usual business hours. The Trustee shall make such annual or other
reports as may from time to time be required under any applicable State or
Federal statute, rule or regulation. The Trustee shall keep a certified copy
or duplicate original of the Agreement on file in its office available for
inspection at all reasonable times during usual business hours by any
Unitholder, together with a current list of the Municipal Bonds held in the
State Trust. Pursuant to the Agreement, the Trustee may employ one or more
agents for the purpose of custody and safeguarding of Municipal Bonds
comprising the portfolios.
Under the Agreement, the Trustee or any successor trustee may resign and
be discharged of the trust created by the Agreement by executing an
instrument in writing and filing the same with the Sponsor.
The Trustee or successor trustee must mail a copy of the notice of
resignation to all Unitholders then of record, not less than sixty days
before the date specified in such notice when such resignation is to take
effect. The Sponsor upon receiving notice of such resignation is obligated
to appoint a successor trustee promptly. If, upon such resignation, no
successor trustee has been appointed and has accepted the appointment within
thirty days after notification, the retiring Trustee may apply to a court of
competent jurisdiction for the appointment of a successor. The Sponsor may
at any time remove the Trustee with or without cause and appoint a successor
trustee as provided in the Agreement. Notice of such removal and appointment
shall be mailed to each Unitholder by the Sponsor. Upon execution of a
written acceptance of such appointment by a successor trustee, all the
rights, powers, duties and obligations of the original Trustee shall vest in
the successor.
-90-
<PAGE>
The Trustee shall be a corporation organized under the laws of the United
States or any state thereof, which is authorized under such laws to exercise
trust powers. The Trustee shall have at all times an aggregate capital,
surplus and undivided profits of not less than $5,000,000.
THE EVALUATOR. Kemper Unit Investment Trusts, a service of Kemper
Securities, Inc., the Sponsor, also serves as Evaluator. The Evaluator may
resign or be removed by the Trustee, which is to use its best efforts to
appoint a satisfactory successor. Such resignation or removal shall become
effective upon acceptance of appointment by the successor evaluator. If,
upon resignation of the Evaluator no successor has accepted appointment
within thirty days after notice of resignation, the Evaluator may apply to a
court of competent jurisdiction for the appointment of a successor. Notice
of such resignation or removal and appointment shall be mailed by the Trustee
to each Unitholder. At the present time, pursuant to a contract with the
Evaluator, Muller Data Corporation, a non-affiliated firm regularly engaged
in the business of evaluating, quoting or appraising comparable securities,
provides portfolio evaluations of the Municipal Bonds in the State Trusts
which are then reviewed by the Evaluator. In the event the Sponsor is unable
to obtain current evaluations from Muller Data Corporation, it may make its
own evaluations or it may utilize the services of any other non-affiliated
evaluator or evaluators it deems appropriate.
AMENDMENT AND TERMINATION. The Agreement may be amended by the Trustee
and the Sponsor without the consent of any of the Unitholders: (1) to cure
any ambiguity or to correct or supplement any provision which may be
defective or inconsistent; (2) to change any provision thereof as may be
required by the Securities and Exchange Commission or any successor
governmental agency; or (3) to make such provisions as shall not adversely
affect the interests of the Unitholders. The Agreement with respect to any
State Trust may also be amended in any respect by the Sponsor and the
Trustee, or any of the provisions thereof may be waived, with the written
consent of the holders of Units representing 66-2/3% of the Units then
outstanding of such State Trust, provided that no such amendment or waiver
will reduce the interest in the State Trust of any Unitholder thereof without
the consent of such Unitholder or reduce the percentage of Units required to
consent to any such amendment or waiver without the consent of all
Unitholders of such State Trust. In no event shall the Agreement be amended
to increase the number of Units of a State Trust issuable thereunder or to
permit, except in accordance with the provisions of the Agreement, the
acquisition of any Municipal Bonds in addition to or in substitution for
those in a State Trust. The Trustee shall promptly notify Unitholders of the
substance of any such amendment.
The Agreement provides that each State Trust shall terminate upon the
maturity, redemption or other disposition, as the case may be, of the last of
the Municipal Bonds held in such State Trust. If the value of the State
Trust shall be less than the applicable minimum value stated under "Essential
Information" in Part Two the Trustee may, in its discretion, and shall, when
so directed by the Sponsor, terminate the State Trust. A State Trust may be
terminated at any time by the holders of Units representing 66-2/3% of the
Units thereof then outstanding. Notwithstanding the foregoing, in no event
shall any State Trust continue beyond the mandatory termination date shown
in Part Two under "Essential Information." In the event of termination of a
State Trust, written notice thereof will be sent by the Trustee to all
Unitholders of such State Trust. Within a reasonable period after
termination, the Trust will sell any Municipal Bonds remaining in the State
Trust and, after paying all expenses and charges incurred by the State Trust,
will distribute to Unitholders thereof (upon surrender for cancellation of
certificates for Units, if issued) their pro rata share of the balances
remaining in the Interest and Principal Accounts of such State Trust.
LIMITATIONS ON LIABILITY. The Sponsor: The Sponsor is liable for the
performance of its obligations arising from its responsibilities under the
Agreement, but will be under no liability to the Unitholders for taking any
action or refraining from any action in good faith pursuant to the Agreement
or for errors in judgment, except in cases of its own gross negligence, bad
faith or willful misconduct. The Sponsor shall not be liable or responsible
in any way for depreciation or loss incurred by reason of the sale of any
Municipal Bonds.
The Trustee: The Agreement provides that the Trustee shall be under no
liability for any action taken in good faith in reliance upon prima facie
properly executed documents or for the disposition of monies, Municipal
Bonds, or Certificates except by reason of its own gross negligence, bad
faith or willful misconduct, nor shall the Trustee be liable or responsible
in any way for depreciation or loss incurred by reason of the sale
-91-
<PAGE>
by the Trustee of any Municipal Bonds. In the event that the Sponsor shall
fail to act, the Trustee may act and shall not be liable for any such action
taken by it in good faith. The Trustee shall not be personally liable for
any taxes or other governmental charges imposed upon or in respect of the
Municipal Bonds or upon the interest thereon. In addition, the Agreement
contains other customary provisions limiting the liability of the Trustee.
The Trustee, whose duties are ministerial, did not participate in the
selection of Municipal Bonds for the State Trusts.
The Evaluator: The Trustee and Unitholders may rely on any evaluation
furnished by the Evaluator and shall have no responsibility for the accuracy
thereof. The Agreement provides that the determinations made by the
Evaluator shall be made in good faith upon the basis of the best information
available to it; provided, however, that the Evaluator shall be under no
liability to the Trustee or Unitholders for errors in judgment, but shall be
liable only for its gross negligence, lack of good faith or willful
misconduct.
EXPENSES OF THE TRUST
Except with respect to those series indicated in the next sentence, the
Sponsor will not charge the Trust an advisory fee and will receive no fee
from the Trust for services performed as Sponsor. The Sponsor will charge
Kemper Tax-Exempt Income Trust, Multi-State Series 45 and subsequent series
an annual surveillance fee for services performed for such Trust Funds in an
amount not to exceed the amount shown under "Essential Information" in Part
Two, but in no event will such compensation when combined with all
compensation received from other unit investment trusts for which the Sponsor
acts as sponsor and provides portfolio surveillance, exceed the aggregate
cost to the Sponsor for providing such services. Such fee shall be based on
the total number of Units of such State Trust Fund outstanding as of the
January Record Date for any annual period. The Sponsor and other
Underwriters paid all the expenses of creating and establishing the Trust,
including the cost of the initial preparation, printing and execution of the
Prospectus, Agreement and the certificates, legal and accounting expenses,
advertising and selling expenses, payment of closing fees, expenses of the
Trustee, initial evaluation fees during the initial public offering and other
out-of-pocket expenses.
The Trustee receives for its services a fee calculated on the basis of the
annual rate set forth under "Essential Information" in Part Two per $1,000
principal amount of Municipal Bonds in each State Trust, based on the largest
aggregate principal amount of Municipal Bonds in the State Trust at any time
during the monthly, quarterly or semi-annual period, as appropriate. In no
event shall the Trustee receive less than $2000 annual compensation in any
single year for any Trust. The Trustee also receives indirect benefits to
the extent that it holds funds on deposit in the various non-interest bearing
accounts created pursuant to the Agreement; however, the Trustee is also
authorized by the Agreement to make from time to time certain non-interest
bearing advances to the State Trusts. See "Unitholders - Distributions to
Unitholders."
For evaluation of Municipal Bonds in the State Trusts, the Evaluator
receives a fee, calculated on an annual rate as set forth under "Essential
Information" in Part Two, based upon the largest aggregate principal amount
of Municipal Bonds in such State Trust at any time during such monthly
period.
The Trustee's, Sponsor's (if any) and Evaluator's fees for the State
Trusts are payable monthly on or before each Distribution Date by deductions
from the Interest Accounts thereof to the extent funds are available and then
from the Principal Accounts. Such fees may be increased without approval of
the Unitholders by amounts not exceeding a proportionate increase in the
Consumer Price Index entitled "All Services Less Rent of Shelter," published
by the United States Department of Labor, or any equivalent index
substituted therefor.
The following additional charges are or may be incurred by a State Trust:
(a) fees for the Trustee's extraordinary services; (b) expenses of the
Trustee (including legal and auditing expenses and insurance costs, but not
including any fees and expenses charged by any agent for custody and
safeguarding of Municipal Bonds) and of bond counsel, if any; (c) various
governmental charges; (d) expenses and costs of any action taken by the
Trustee to protect the Trust or such State Trust, or the rights and interest
of the Unitholders; (e) indemnification of the Trustee for any loss,
liability or expense incurred by it in the administration of the
-92-
<PAGE>
Trust or such State Trust without gross negligence, bad faith or willful
misconduct on its part; (f) indemnification of the Sponsor for any loss,
liability or expense incurred in acting as Sponsor of the State Trust without
gross negligence, bad faith or willful misconduct; and (g) expenditures
incurred in contacting Unitholders upon termination of the State Trust. The
fees and expenses set forth herein are payable out of the appropriate State
Trust and, when owed to the Trustee, are secured by a lien on such State
Trust.
Fees and expenses of a State Trust shall be deducted from the Interest
Account thereof, or, to the extent funds are not available in such Account,
from the Principal Account. The Trustee may withdraw from the Principal
Account or the Interest Account of any State Trust such amounts, if any, as
it deems necessary to establish a reserve for any taxes or other governmental
charges or other extraordinary expenses payable out of the State Trust.
Amounts so withdrawn shall be credited to a separate account maintained for
the State Trust known as the Reserve Account and shall not be considered a
part of the State Trust when determining the value of the Units until such
time as the Trustee shall return all or any part of such amounts to the
appropriate account.
THE SPONSOR
The Sponsor, Kemper Unit Investment Trusts, with an office at 77 W. Wacker
Drive, 29th Floor, Chicago, Illinois 60601, (800) 621-5024, is a service of
Kemper Securities, Inc., which is a wholly owned subsidiary of Kemper
Financial Companies, Inc., a financial services holding company which, in
turn, is a wholly owned subsidiary of Kemper Corporation. The Sponsor acts
as underwriter of a number of other Kemper unit investment trusts and will
act as underwriter of any other unit investment trust products created by the
Sponsor in the future. As of December 31, 1994, the total stockholders'
equity of Kemper Securities, Inc. was approximately $252,676,937 (unaudited).
If at any time the Sponsor shall fail to perform any of its duties under
the Agreement or shall become incapable of acting or shall be adjudged a
bankrupt or insolvent or its affairs are taken over by public authorities,
then the Trustee may (a) appoint a successor sponsor at rates of
compensation deemed by the Trustee to be reasonable and not exceeding such
reasonable amounts as may be prescribed by the Securities and Exchange
Commission, or (b) terminate the Agreement and liquidate the Trust or any
State Trust as provided therein or (c) continue to act as Trustee without
terminating the Agreement.
The foregoing financial information with regard to the Sponsor relates to
the Sponsor only and not to this Trust or any State Trust. Such information
is included in this Prospectus only for the purpose of informing investors as
to the financial responsibility of the Sponsor and its ability to carry out
its contractual obligations with respect to the State Trusts. More
comprehensive financial information can be obtained upon request from the
Sponsor.
LEGAL OPINIONS
The legality of the Units offered hereby and certain matters relating to
federal tax law were originally passed upon by Chapman and Cutler, 111 West
Monroe Street, Chicago, Illinois 60603, as counsel for the Sponsor.
AUDITORS
The statement of net assets, including the Schedule of Investments,
appearing in Part Two of this Prospectus and Registration Statement, with
information pertaining to the specific Series of the Trust to which such
statement relates, has been audited by Ernst & Young LLP, independent
auditors, as set forth in their report appearing in Part Two and is included
in reliance upon such report given upon the authority of such firm as experts
in accounting and auditing.
-93-
<PAGE>
DESCRIPTION OF SECURITIES RATINGS/2/
STANDARD & POOR'S. - A brief description of the applicable Standard &
Poor's rating symbols and their meanings follows:
A Standard & Poor's corporate or municipal bond rating is a current
assessment of the creditworthiness of an obligor with respect to a specific
debt obligation. This assessment may take into consideration obligors such
as guarantors, insurers, or lessees.
The bond rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability
for a particular investor.
The ratings are based on current information furnished by the issuer and
obtained by Standard & Poor's from other sources it considers reliable.
Standard & Poor's does not perform an audit in connection with any rating and
may, on occasion, rely on unaudited financial information. The ratings may
be changed, suspended, or withdrawn as a result of changes in, or
unavailability of, such information, or for other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
I. Likelihood of default - capacity and willingness of the obligor
as to the timely payment of interest and repayment of principal in
accordance with the terms of the obligation;
II. Nature of and provisions of the obligation; 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.
AAA - Bonds rated AAA have the highest rating assigned by Standard &
Poor's to a debt obligation. Capacity to pay interest and repay principal is
extremely strong.
AA - Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in small degree.
A - Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than bonds in higher
rated categories.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for bonds in this category than for bonds in higher rated
categories.
Plus (+) or Minus (-): The ratings from "AA" to "A" may be modified by
the addition of a plus or minus sign to show relative standing within the
major rating categories.
Provisional Ratings: The letter "p" indicates the rating is provisional.
A provisional rating assumes the successful completion of the project being
financed by the bonds being rated and indicates that payment of debt service
requirements is largely or entirely dependent upon the successful and timely
completion of the project. This rating, however, while addressing credit
quality subsequent to completion of the project, makes no comment on the
likelihood of, or the risk of default upon failure of, such completion. The
investor should exercise his own judgment with respect to such likelihood and
risk.
----------
/2/ As published by the rating companies.
-94-
<PAGE>
MOODY'S INVESTORS SERVICE, INC. - A brief description of the applicable
Moody's Investors Service, Inc. rating symbols and their meanings follow:
Aaa - Bonds which are rated Aaa are judged to be the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such issues.
Their safety is so absolute that with the occasional exception of oversupply
in a few specific instances, characteristically, their market value is
affected solely by money market fluctuations.
Aa - Bonds which are rated Aa are judged to be the high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or
fluctuations of protective elements may be of greater amplitude or there may
be other elements present which make the long term risks appear somewhat
larger than in Aaa securities. Their market value is virtually immune to all
but money market influences, with the occasional exception of oversupply in a
few specific instances.
A - Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may
be present which suggest a susceptibility to impairment sometime in the
future. The market value of A-rated bonds may be influenced to some degree
by economic performance during a sustained period of depressed business
conditions, but, during periods of normalcy, A-rated bonds frequently move in
parallel with Aaa and Aa obligations, with the occasional exception of
oversupply in a few specific instances.
A1 - Bonds which are rated A1 offer the maximum in security within their
quality group, can be bought for possible upgrading in quality, and
additionally, afford the investor an opportunity to gauge more precisely the
relative attractiveness of offerings in the marketplace.
Baa - Bonds which are rated Baa are considered as lower medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and, in fact, have speculative characteristics as
well. The market value of Baa-rated bonds is more sensitive to changes in
economic circumstances and, aside from occasional speculative factors
applying to some bonds of this class, Baa market valuations move in parallel
with Aaa, Aa and A obligations during periods of economic normalcy, expect in
instances of oversupply.
Conditional Ratings: Bonds rated "Con(-)" are ones for which the security
depends upon the completion of some act or the fulfillment of some
condition. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation experience,
(c) rentals which begin when facilities are completed, or (d) payments to
which some other limiting condition attaches. Parenthetical ratings denote
probable credit stature upon completion of construction or elimination of
basis of condition.
NOTE: Moody's applies numerical modifiers, 1, 2, and 3 in each generic
rating classification from Aa through B in certain areas of its bond rating
system. The modifier 1 indicates that the security ranks in the higher end
of its generic rating category; the modifier 2 indicates a mid-range ranking;
and the modifier 3 indicates that the issue ranks in the lower end of its
generic rating category.
-95-
<PAGE>
Kemper Tax-Exempt Insured Income Trust
Multi-State Series 17
Ohio Trust
Part Two
Dated September 28, 1995
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY
IS A CRIMINAL OFFENSE.
NOTE: Part Two of this Prospectus May Not Be Distributed unless
Accompanied by
Part One.
<PAGE>
Kemper Tax-Exempt Insured Income Trust
Multi-State Series 17
Ohio Trust
Essential Information
As of August 15, 1995
Sponsor and Evaluator: Kemper Unit Investment
Trusts
Trustee: Investors Fiduciary Trust
Company
<TABLE>
<CAPTION>
General Information
<S>
<C>
Principal Amount of Municipal Bonds
$2,835,000
Number of Units
2,833
Fractional Undivided Interest in the Trust per Unit
1/2,833
Principal Amount of Municipal Bonds per Unit
$1,000.71
Public Offering Price:
Aggregate Bid Price of Municipal Bonds in the Portfolio
$2,921,103
Aggregate Bid Price of Municipal Bonds per Unit
$1,031.10
Cash per Unit (1)
$(.30)
Sales Charge 4.712% (4.5% of Public Offering Price)
$48.57
Public Offering Price per Unit (exclusive of accrued
interest) (2)
$1,079.37
Redemption Price per Unit (exclusive of accrued interest)
$1,030.80
Excess of Public Offering Price per Unit Over Redemption
Price per Unit
$48.57
Minimum Value of the Trust under which Trust Agreement
may be terminated
$600,000
</TABLE>
Date of Trust
June 15, 1989
Mandatory Termination Date
December 31, 2039
Annual Evaluation Fee: $.30 per $1,000 principal amount of
Municipal Bonds.
Evaluations for purpose of sale, purchase or redemption of Units
are made as
of the close of business of the Sponsor next following receipt of
an order for
a sale or purchase of Units or receipt by Investors Fiduciary
Trust Company of
Units tendered for redemption.
[FN]
1. This amount, if any, represents principal cash or overdraft
which is an
asset or liability of the Trust and is included in the Public
Offering Price.
2. Units are offered at the Public Offering Price plus accrued
interest to
the date of settlement (three business days after purchase). On
August 15,
1995, there was added to the Public Offering Price of $1,079.37,
accrued
interest to the settlement date of August 18, 1995 of $11.79,
$17.49 and
$17.59 for a total price of $1,091.16, $1,096.86 and $1,096.96
for the
monthly, quarterly and semiannual distribution options,
respectively.
<PAGE>
Kemper Tax-Exempt Insured Income Trust
Multi-State Series 17
Ohio Trust
Essential Information (continued)
As of August 15, 1995
Sponsor and Evaluator: Kemper Unit Investment
Trusts(4)
Trustee: Investors Fiduciary Trust
Company
<TABLE>
<CAPTION>
Special Information Based on Various Distribution Options
Monthly Quarterly
Semiannual
<S> <C> <C>
<C>
-------- --------
--------
Calculation of Estimated Net Annual
Interest Income per Unit (3):
Estimated Annual Interest Income $69.2839 $69.2839
$69.2839
Less: Estimated Annual Expense 2.2991 1.9381
1.5920
-------- --------
--------
Estimated Net Annual Interest Income $66.9848 $67.3458
$67.6919
======== ========
========
Calculation of Interest Distribution
per Unit:
Estimated Net Annual Interest Income $66.9848 $67.3458
$67.6919
Divided by 12, 4 and 2, respectively $5.5821 $16.8365
$33.8460
Estimated Daily Rate of Net Interest
Accrual per Unit $.1861 $.1871
$.1880
Estimated Current Return Based on Public
Offering Price (3) 6.21% 6.24%
6.27%
Estimated Long-Term Return (3) 5.57% 5.60%
5.64%
</TABLE>
Trustee's Annual Fees and Expenses (including Evaluator's Fee):
$2.2991,
$1.9381 and $1.5920 ($.9209, $.8407 and $.8264 of which represent
expenses)
per Unit under the monthly, quarterly and semiannual distribution
options,
respectively.
Record and Computation Dates: First day of the month, as
follows: monthly -
each month; quarterly - January, April, July and October;
semiannual - January
and July.
Distribution Dates: Fifteenth day of the month, as follows:
monthly - each
month; quarterly - January, April, July and October; semiannual -
January and
July.
[FN]
3. The Estimated Long-Term Return and Estimated Current Return
will vary.
For detailed explanation, see Part One of this prospectus.
4. See Note 6 to the accompanying financial statements of the
Trust regarding
a change in ownership of Kemper Unit Investment Trusts and Kemper
Securities,
Inc.
<PAGE>
Report of Independent Auditors
Unitholders
Kemper Tax-Exempt Insured Income Trust
Multi-State Series 17 Ohio Trust
We have audited the accompanying statement of assets and
liabilities of Kemper
Tax-Exempt Insured Income Trust Multi-State Series 17 Ohio Trust,
including
the schedule of investments, as of May 31, 1995, and the related
statements of
operations and changes in net assets for each of the three years
in the period
then ended. These financial statements are the responsibility of
the Trust's
sponsor. Our responsibility is to express an opinion on these
financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing
standards. Those standards require that we plan and perform the
audit to
obtain reasonable assurance about whether the financial
statements are free of
material misstatement. An audit includes examining, on a test
basis, evidence
supporting the amounts and disclosures in the financial
statements. Our
procedures included confirmation of investments owned as of May
31, 1995, by
correspondence with the custodial bank. An audit also includes
assessing the
accounting principles used and significant estimates made by the
sponsor, as
well as evaluating the overall financial statement presentation.
We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in
all material respects, the financial position of Kemper
Tax-Exempt Insured
Income Trust Multi-State Series 17 Ohio Trust at May 31, 1995,
and the results
of its operations and the changes in its net assets for the
periods indicated
above in conformity with generally accepted accounting
principles.
Ernst & Young LLP
Kansas City, Missouri
September 14, 1995, except for Note 6, as
to which the date is September 26, 1995
<PAGE>
Kemper Tax-Exempt Insured Income Trust
Multi-State Series 17
Ohio Trust
Statement of Assets and Liabilities
May 31, 1995
<TABLE>
<CAPTION>
<S> <C>
<C>
Assets
Municipal Bonds, at value (cost $2,801,875)
$2,933,827
Interest receivable
70,241
----------
3,004,068
Liabilities and net assets
Cash overdraft
9,639
Accrued liabilities
1,243
----------
10,882
Net assets, applicable to 2,833 Units outstanding:
Cost of Trust assets, exclusive of interest $2,801,875
Unrealized appreciation 131,952
Distributable funds 59,359
----------
----------
Net assets
$2,993,186
==========
</TABLE>
[FN]
See accompanying notes to financial statements.
<PAGE>
Kemper Tax-Exempt Insured Income Trust
Multi-State Series 17
Ohio Trust
Statements of Operations
<TABLE>
<CAPTION>
Year ended
May 31
1995 1994
1993
<S> <C> <C>
<C>
-------- ---------
--------
Investment income - interest $197,205 $202,997
$204,663
Expenses:
Trustee's fees and related expenses 4,799 4,652
4,660
Evaluator's fees 855 879
885
-------- ---------
--------
Total expenses 5,654 5,531
5,545
-------- ---------
--------
Net investment income 191,551 197,466
199,118
Realized and unrealized gain (loss)
on investments:
Realized gain 448 8,459
-
Unrealized appreciation
(depreciation) during the year (84,815) (120,198)
216,909
-------- ---------
--------
Net gain (loss) on investments (84,367) (111,739)
216,909
-------- ---------
--------
Net increase in net assets resulting
from operations $107,184 $85,727
$416,027
======== =========
========
</TABLE>
[FN]
See accompanying notes to financial statements.
<PAGE>
Kemper Tax-Exempt Insured Income Trust
Multi-State Series 17
Ohio Trust
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Year ended
May 31
1995 1994
1993
<S> <C> <C>
<C>
---------- ----------
- ----------
Operations:
Net investment income $191,551 $197,466
$199,118
Realized gain on investments 448 8,459
-
Unrealized appreciation (depreciation)
on investments during the year (84,815) (120,198)
216,909
---------- ----------
- ----------
Net increase in net assets resulting
from operations 107,184 85,727
416,027
Distributions to Unitholders:
Net investment income (194,178) (199,444)
(199,177)
Capital transactions:
Redemption of Units (31,541) (95,121)
-
---------- ----------
- ----------
Total increase (decrease) in net assets (118,535) (208,838)
216,850
Net assets:
At the beginning of the year 3,111,721 3,320,559
3,103,709
---------- ----------
- ----------
At the end of the year (including
distributable funds applicable to
Trust Units of $59,359, $61,375
and $63,365 at May 31, 1995, 1994
and 1993, respectively) $2,993,186 $3,111,721
$3,320,559
========== ==========
==========
Trust Units outstanding at the end
of the year 2,833 2,863
2,948
========== ==========
==========
</TABLE>
[FN]
See accompanying notes to financial statements.
<PAGE>
<TABLE>
Kemper Tax-Exempt
Insured Income Trust
Multi-State
Series 17
Ohio
Trust
Schedule of
Investments
May 31,
1995
<CAPTION>
Coupon
Maturity Redemption Principal
Name of Issuer and Title of Bond(5)(6) Rate
Date Provisions(2) Rating(1) Amount(4) Value(3)
<S> <C> <C>
<C> <C> <C> <C>
-------
- ---------- -------------- --------- ---------- ----------
+County of Clermont, Ohio, Hospital Facilities 7.50%
9/01/2019 1999 @ 102 AAA $500,000 $542,505
Revenue Bonds, Mercy Health System, Province of
Cincinnati, Series 1989 A. Insured by AMBAC
Indemnity Corporation (AMBAC).
+Columbus, Ohio, City School District General 7.05
12/01/2008 1999 @ 102 AAA 350,000 375,441
Obligation Bonds, Series 1989. Insured by AMBAC.
County of Cuyahoga, Ohio, Hospital Facilities 6.00
2/15/2019 1998 @ 102 AAA 100,000 96,339
Revenue Bonds, The Metrohealth System Project,
Series 1989. Insured by Municipal Bond Investors
Assurance Corporation (MBIA).
+Dublin City School District, Franklin, Delaware 7.00
12/01/2005 1999 @ 102 AAA 100,000 107,700
and Union Counties, Ohio, General Obligation
Bonds. Insured by AMBAC.
County of Mahoning, Ohio, Sanitary Sewerage System 7.50
2/01/2019 2010 @ 100 S.F. AAA 350,000 373,037
Revenue Bonds, Series 1989. Insured by Bond
2000 @ 102
Investors Guaranty Insurance Company.
+Massillon City School District, Ohio School 7.10
12/01/2011 1999 @ 102 AAA 300,000 323,637
Improvement Bonds, Series 1989-1, General
Obligation Unlimited Tax Bonds. Insured
by AMBAC.
State of Ohio, Ohio Building Authority, State 5.00
9/01/2012 1996 @ 100 AAA 475,000 420,275
Correctional Facilities Refunding Revenue
Bonds, 1986 Series B. Insured by MBIA.
+State of Ohio, Water Development Revenue Bonds, 7.75
12/01/2004 1996 @ 103 AAA 445,000 473,329
Series 1986 A. Insured by AMBAC.
City of Parma, Ohio, Hospital Refunding Bonds, 7.125
11/15/2013 1998 @ 102 AAA 215,000 221,564
The Parma Community General Hospital Association,
---------- ----------
Series 1989A. Insured by MBIA.
$2,835,000 $2,933,827
========== ==========
</TABLE>
[FN]
See accompanying notes to Schedule of Investments.
<PAGE>
Kemper Tax-Exempt Insured Income Trust
Multi-State Series 17
Ohio Trust
Notes to Schedule of Investments
1. All ratings are by Standard & Poor's Corporation, unless
marked with the
symbol "*", in which case the rating is by Moody's Investors
Service, Inc.
The symbol "NR" indicates Bonds for which no rating is available.
2. There is shown under this heading the year in which each
issue of Bonds is
initially redeemable and the redemption price for that year or,
if currently
redeemable, the redemption price currently in effect; unless
otherwise
indicated, each issue continues to be redeemable at declining
prices
thereafter, but not below par value. In addition, certain Bonds
in the
Portfolio may be redeemed in whole or in part other than by
operation of the
stated redemption or sinking fund provisions under certain
unusual or
extraordinary circumstances specified in the instruments setting
forth the
terms and provisions of such Bonds. "S.F." indicates a sinking
fund is
established with respect to an issue of Bonds. Redemption
pursuant to call
provisions generally will, and redemption pursuant to sinking
fund provisions
may, occur at times when the redeemed Bonds have a valuation
which represents
a premium over the call price or par.
To the extent that the Bonds were deposited in the Trust at a
price higher
than the price at which they are redeemed, this will represent a
loss of
capital when compared with the original Public Offering Price of
the Units.
To the extent that the Bonds were acquired at a price lower than
the
redemption price, this may represent an increase in capital when
compared with
the original Public Offering Price of the Units. Distributions
of net income
will generally be reduced by the amount of the income which would
otherwise
have been paid with respect to redeemed Bonds and, unless
utilized to pay for
Units tendered for redemption, there will be distributed to
Unitholders the
principal amount and any premium received on such redemption. In
this event
the estimated current return and estimated long-term return may
be affected by
such redemptions.
3. See Note 1 to the accompanying financial statements for a
description of
the method of determining cost and value.
<PAGE>
Kemper Tax-Exempt Insured Income Trust
Multi-State Series 17
Ohio Trust
Notes to Schedule of Investments
(continued)
4. At May 31, 1995, the Portfolio of the Trust consists of 9
obligations
issued by entities located in Ohio. Six issues, representing
$2,085,000 of
the aggregate principal amount, are payable from the income of a
specific
project or authority and are not supported by an issuer's power
to levy taxes.
Three issues, representing $750,000 of the aggregate principal
amount, are
general obligations of governmental entities and are backed by
the taxing
powers of such entities. The sources of payment for the revenue
bonds are
divided as follows: Hospitals and Health Care, 3; Sewer, 1;
Water, 1;
Miscellaneous, 1. Approximately 29% of the aggregate principal
amount of
Bonds in the Trust are hospital revenue bonds. All of the Bonds
in the Trust
are subject to call by the issuers within five years after May
31, 1995.
5. Insurance on the Bonds in the Trust was obtained by the
issuers of such
Bonds.
6. Those securities preceded by (+) are secured by, and payable
from,
escrowed U.S. Government securities.
[FN]
See accompanying notes to financial statements.
<PAGE>
Kemper Tax-Exempt Insured Income Trust
Multi-State Series 17
Ohio Trust
Notes to Financial Statements
1. Significant Accounting Policies
Valuation of Municipal Bonds
Municipal Bonds (Bonds) are stated at bid prices as determined by
Kemper Unit
Investment Trusts (A Service of Kemper Securities, Inc.), the
"Evaluator" and
sponsor of the Trust. The aggregate bid prices of the Bonds are
determined by
the Evaluator based on (a) current bid prices of the Bonds, (b)
current bid
prices for comparable bonds, (c) appraisal, or (d) any
combination of the
above. (See Note 5 - Insurance.)
Cost of Municipal Bonds
Cost of the Trust's Bonds was based on the offering prices of the
Bonds on
June 15, 1989 (Date of Deposit). The premium or discount
(including any
original issue discount) existing at June 15, 1989, is not being
amortized.
Realized gain (loss) from Bond transactions is reported on an
identified cost
basis.
2. Unrealized Appreciation and Depreciation
Following is an analysis of net unrealized appreciation at May
31, 1995:
<TABLE>
<CAPTION>
<S>
<C>
Gross unrealized depreciation
$-
Gross unrealized appreciation
131,952
--------
Net unrealized appreciation
$131,952
========
</TABLE>
3. Transactions with Affiliates
From the inception of the Trust through January 31, 1995, the
Trustee,
Investors Fiduciary Trust Company (IFTC), was 50% owned by Kemper
Financial
Services, Inc., an affiliate of Kemper Unit Investment Trusts.
On that date,
State Street Boston Corporation acquired IFTC. Prior to January
1, 1995, the
Trustee's fee (not including the reimbursement of out-of-pocket
expenses),
calculated monthly, was at the annual rate of $1.1982, $.9584 and
$.6627 under
the monthly, quarterly and semiannual distribution options,
respectively, per
$1,000 principal amount of Bonds in the Trust, based on the
largest aggregate
principal amount of Bonds in the Trust at any time during such
monthly,
quarterly or semiannual periods. Effective January 1, 1995, such
fees were
revised to $1.3772, $1.0966 and $.7651 under the monthly,
quarterly and
semiannual distribution options, respectively. The Evaluator
received a fee,
payable monthly, at an annual rate of $.30 per $1,000 principal
amount of
Bonds, based on the largest aggregate principal amount of Bonds
in the Trust
at any time during such monthly period.
<PAGE>
Kemper Tax-Exempt Insured Income Trust
Multi-State Series 17
Ohio Trust
Notes to Financial Statements (continued)
4. Federal Income Taxes
The Trust is not an association taxable as a corporation for
federal income
tax purposes. Each Unitholder is considered to be the owner of a
pro rata
portion of the Trust under Subpart E, Subchapter J of Chapter 1
of the
Internal Revenue Code of 1986, as amended. Accordingly, no
provision has been
made for federal income taxes.
5. Other Information
Cost to Investors
The cost to initial investors of Units of the Trust was based on
the aggregate
offering price of the Bonds on the date of an investor's
purchase, plus a
sales charge of 4.9% of the Public Offering Price (equivalent to
5.152% of the
net amount invested). The Public Offering Price for secondary
market
transactions is based on the aggregate bid price of the Bonds
plus or minus a
pro rata share of cash or overdraft in the Principal Account, if
any, on the
date of an investor's purchase, plus a sales charge of 4.5% of
the Public
Offering Price (equivalent to 4.712% of the net amount invested).
Insurance
Insurance guaranteeing the payment of all principal and interest
on the Bonds
in the portfolio has been obtained from independent companies by
the
respective issuers of such Bonds. Insurance obtained by a Bond
issuer is
effective as long as such Bonds are outstanding. As a result of
such
insurance, the Units of the Trust have received a rating of "AAA"
by Standard
& Poor's Corporation. No representation is made as to any
insurer's ability
to meet its commitments.
Distributions
Distributions of net investment income to Unitholders are
declared and paid in
accordance with the option (monthly, quarterly or semiannual)
selected by the
investor. Such income distributions, on a record date basis, are
as follows:
<TABLE>
<CAPTION>
Year ended Year ended
Year ended
Distribution May 31, 1995 May 31, 1994
May 31, 1993
Plan Per Unit Total Per Unit Total Per
Unit Total
<S> <C> <C> <C> <C> <C>
<C>
-------- -------- -------- --------
- -------- --------
Monthly $67.52 $113,135 $67.31 $114,867
$67.09 $113,855
Quarterly 67.87 28,641 67.63 29,185
67.41 29,187
Semiannual 68.25 51,660 67.95 54,090
67.71 56,135
-------- --------
--------
$193,436 $198,142
$199,177
======== ========
========
</TABLE>
<PAGE>
Kemper Tax-Exempt Insured Income Trust
Multi-State Series 17
Ohio Trust
Notes to Financial Statements (continued)
5. Other Information (continued)
In addition, the Trust redeemed Units with proceeds from the sale
of Bonds as
follows:
<TABLE>
<CAPTION>
Year
ended May 31
1995
1994
<S> <C>
<C>
-------
-------
Principal portion $31,541
$95,121
Net interest accrued 742
1,302
-------
-------
$32,283
$96,423
=======
=======
Units 30
85
=======
=======
</TABLE>
<PAGE>
<TABLE>
Kemper Tax-Exempt
Insured Income Trust
Multi-State
Series 17
Ohio
Trust
Notes to Financial
Statements (continued)
5. Other Information (continued)
Selected data for a Unit of the Trust outstanding throughout each
year -
<CAPTION>
Monthly
Quarterly Semiannual
Year ended May 31
Year ended May 31 Year ended May 31
1995 1994 1993
1995 1994 1993 1995 1994 1993
<S> <C> <C> <C>
<C> <C> <C> <C> <C> <C>
--------- --------- ---------
- --------- --------- --------- --------- --------- ---------
Investment income - interest $69.32 $69.47 $69.42
$69.32 $69.47 $69.42 $69.32 $69.47 $69.42
Expenses 2.21 2.10 2.10
1.87 1.79 1.78 1.54 1.47 1.48
--------- --------- ---------
- --------- --------- --------- --------- --------- ---------
Net investment income 67.11 67.37 67.32
67.45 67.68 67.64 67.78 68.00 67.94
Distributions to Unitholders:
Net investment income (67.52) (67.31) (67.09)
(67.87) (67.63) (67.41) (68.25) (67.95) (67.71)
Net gain (loss) on investments (29.64) (39.52) 73.76
(29.64) (39.52) 73.76 (29.64) (39.52) 73.76
--------- --------- ---------
- --------- --------- --------- --------- --------- ---------
Change in net asset value (30.05) (39.46) 73.99
(30.06) (39.47) 73.99 (30.11) (39.47) 73.99
Net asset value:
Beginning of the year 1,079.90 1,119.36 1,045.37
1,085.64 1,125.11 1,051.12 1,102.75 1,142.22 1,068.23
--------- --------- ---------
- --------- --------- --------- --------- --------- ---------
End of the year, including
distributable funds $1,049.85 $1,079.90 $1,119.36
$1,055.58 $1,085.64 $1,125.11 $1,072.64 $1,102.75 $1,142.22
========= ========= =========
========= ========= ========= ========= ========= =========
</TABLE>
<PAGE>
Kemper Tax-Exempt Insured Income Trust
Multi-State Series 17
Ohio Trust
Notes to Financial Statements (continued)
6. Subsequent Event
Effective September 14, 1995, through an ESOP, the members of
certain Kemper
Corporation operating units have acquired ownership of certain
Kemper
Corporation operating units, which included Kemper Securities,
Inc., the
Trust's sponsor and evaluator. In connection with the
acquisition, Kemper
Securities, Inc. changed its name to EVEREN Securities, Inc., and
Kemper Unit
Investment Trusts is now a Service of EVEREN Securities, Inc.
Subsequent to
the date of acquisition, neither EVEREN Securities, Inc. nor
Kemper Unit
Investment Trusts is affiliated with Kemper Financial Services,
Inc. or Kemper
Corporation. On September 26, 1995, Kemper Unit Investment
Trusts changed its
name to EVEREN Unit Investment Trusts.
<PAGE>
Consent of Independent Auditors
We consent to the reference to our firm under the caption
"Independent
Auditors" and to the use of our report dated September 14, 1995,
in this Post-
Effective Amendment to the Registration Statement (Form S-6) and
related
Prospectus of Kemper Tax-Exempt Insured Income Trust Multi-State
Series 17
Ohio Trust dated September 28, 1995.
Ernst & Young LLP
Kansas City, Missouri
September 28, 1995
KEMPER TAX-EXEMPT INCOME TRUST
NATIONAL SERIES
INTERMEDIATE TERM SERIES
SHORT-INTERMEDIATE TERM SERIES
PART ONE
The date of this Part One is that datewhich is set forth in Part
Twoof the Prospectus
Each Series of Kemper Tax-Exempt Income Trust (the "Trust"
or the "National Trust") was formed for the purpose of gaining
interest income free from Federal income taxes while conserving
capital and diversifying risks by investing in a fixed portfolio
of Municipal Bonds consisting of obligations of states of the
United States and political subdivisions and authorities thereof.
The portfolios of the Intermediate Term Series and the
Short-Intermediate Term Series of the Trust are similar to the
National Series, except that the Intermediate Term Series consist
of obligations having a dollar-weighted average maturity of 10
years or less and the Short-Intermediate Term Series have a
dollar-weighted average maturity of 5 years or less.
Units of the Trust are not deposits or obligations of, or
guaranteed by, any bank, and Units are not federally insured or
otherwise protected by the Federal Deposit Insurance Corporation
and involve investment risk including loss of principal.
This Prospectus is in two parts. Read and retain both parts
for future reference.
SPONSOR: KEMPER UNIT INVESTMENT TRUSTS,a service of Kemper
Securities, Inc.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
<S> <C>
SUMMARY 3
The Trust 3
Public Offering Price 3
Interest and Principal Distributions 3
Reinvestment 4
Estimated Current Return and Estimated Long-Term
Return 4
Market for Units 4
Risk Factors 4
THE TRUST 5
PORTFOLIO 6
RISK FACTORS 7
DISTRIBUTION REINVESTMENT 13
INTEREST AND ESTIMATED LONG-TERM AND CURRENT RETURNS
13
TAX STATUS OF THE TRUST 14
PUBLIC OFFERING OF UNITS 18
Public Offering Price 18
Accrued Interest 20
Public Distribution of Units 21
Profits of Sponsor 22
MARKET FOR UNITS 22
REDEMPTION 23
Computation of Redemption Price 24
UNITHOLDERS 25
Ownership of Units 25
Distributions to Unitholders 25
Statements to Unitholders 26
Rights of Unitholders 28
INVESTMENT SUPERVISION 28
ADMINISTRATION OF THE TRUST 29
The Trustee 29
The Evaluator 30
Amendment and Termination 30
Limitations on Liability 31
EXPENSES OF THE TRUST 32
THE SPONSOR 33
LEGAL OPINIONS 33
INDEPENDENT AUDITORS 34
DESCRIPTION OF SECURITIES RATINGS 34
Essential Information*
Report of Independent Auditors*
Statement of Net Assets and Liabilities*
Statement of Operations*
Statement of Changes in Net Assets*
Schedule of Investments*
Notes to Schedule Investments*
Notes to Financial Statements*
*Information on these items appears in Part Two
</TABLE>
KEMPER TAX-EXEMPT INCOME TRUSTNATIONAL SERIESINTERMEDIATE TERM
SERIESSHORT-INTERMEDIATE TERM SERIES
SUMMARY
The Trust. Each Series of the Kemper Tax-Exempt Income
Trust (the "Trust" or the "National Trust") is one of a series of
investment companies each of which is a unit investment trust
consisting of a diversified portfolio of obligations of states of
the United States and political subdivisions and authorities
thereof ("Municipal Bonds" or "Securities"). The portfolios of
the Intermediate Term Series and Short-Intermediate Term Series
of the Trust are similar to the National Series, except that the
Intermediate Term Series consist of obligations having a
dollar-weighted average maturity of 10 years or less and the
Short-Intermediate Term Series have a dollar-weighted average
maturity of 5 years or less. Municipal Bonds in the portfolio
were rated as of the Date of Deposit in the category "A" or
better by Standard & Poor's Ratings Group ("Standard & Poor's")
or Moody's Investors Service, Inc. Ratings of the Municipal
Bonds may have changed since the Date of Deposit. See
"Description of Securities Ratings" herein and the "Schedule of
Investments" in Part Two.
The objective of each Series of the Trust is tax-exempt
income and conservation of capital with diversification of risk
through investment in a fixed portfolio of Municipal Bonds.
Interest on certain Municipal Bonds in certain of the National
Series will be a preference item for purposes of the alternative
minimum tax. Accordingly, such National Series may be
appropriate only for investors who are not subject to the
alternative minimum tax. There is, of course, no guarantee that
the Trust's objectives will be achieved.
The Units, each of which represents a pro rata undivided
fractional interest in the Municipal Bonds deposited in the
appropriate Series of the Trust, are issued and outstanding Units
which have been reacquired by the Sponsor either by purchase or
Units tendered to the Trustee for redemption or by purchase in
the open market. No offering is being made on behalf of the
Trust and any profit or loss realized on the sale of Units will
accrue to the Sponsor and/or the firm reselling such Units.
Public Offering Price. The Public Offering Price per
Unit of a Series of the Trust is equal to a pro rata share of the
aggregate bid prices of the Municipal Bonds in such Series (plus
or minus a pro rata share of cash, if any, in the Principal
Account, held or owned by the Series) plus a sales charge in the
amount shown under "Public Offering of Units." In addition,
there will be added to each transaction an amount equal to the
accrued interest from the last Record Date of such Series to the
date of settlement (five business days after order). The sales
charge is reduced on a graduated scale as indicated under "Public
Offering of Units_Public Offering Price."
Interest and Principal Distributions. Distributions of
the estimated annual interest income received by a National
Series or an Intermediate Term Series, after deduction of
estimated expenses, will be made monthly unless the Unitholder
elects to receive such distributions quarterly or semi-annually.
Distributions will be paid on the Distribution Dates to
Unitholders of Record of each such Series on the Record Dates set
forth for the applicable option. Distributions of the estimated
annual interest income to be received by a Short-Intermediate
Term Series of the Trust, after deduction of estimated expenses,
will be made semi-annually on January 15 and July 15 to
Unitholders of record on January 1 and July 1, respectively, of
each year. (See "Essential Information" in Part Two.)
The distribution of funds, if any, in the Principal Account
of each Series, will be made semi-annually to Unitholders of
Record on the appropriate dates. See "Essential Information" in
Part Two.
Reinvestment. Distributions of interest and principal,
including capital gains, if any, made by a Series of the Trust
will be paid in cash unless a Unitholder elects to reinvest such
distributions. Each Unitholder of a Trust Fund offered herein
may elect to have distributions of principal or interest or both
automatically invested without charge in shares of certain mutual
funds sponsored by Kemper Financial Services, Inc. See
"Distribution Reinvestment."
Estimated Current Return and Estimated Long-Term
Return. The Estimated Current Return is calculated by dividing
the estimated net annual interest income per Unit by the Public
Offering Price of such Trust. The estimated net annual interest
income per Unit will vary with changes in fees and expenses of
the Trustee, the Sponsor and Evaluator and with the principal
prepayment, redemption, maturity, exchange or sale of Securities
while the Public Offering Price will vary with changes in the bid
price of the underlying Securities; therefore, there is no
assurance that the present Estimated Current Returns will be
realized in the future. Estimated Long-Term Return is calculated
using a formula which (1) takes into consideration, and
determines and factors in the relative weightings of, the market
values, yields (which takes into account the amortization of
premiums and the accretion of discounts) and estimated
retirements of all of the Securities in the Trust and (2) takes
into account the expenses and sales charge associated with each
Trust Unit. Since the market values and estimated retirements of
the Securities and the expenses of the Trust will change, there
is no assurance that the present Estimated Long-Term Return will
be realized in the future. Estimated Current Return and
Estimated Long-Term Return are expected to differ because the
calculation of Estimated Long-Term Return reflects the estimated
date and amount of principal returned while Estimated Current
Return calculations include only net annual interest income and
Public Offering Price.
Market for Units. While under no obligation to do so,
the Sponsor intends, subject to change at any time, to maintain a
market for the Units of each Series of the Trust and to
continuously offer to repurchase such Units at prices which are
based on the aggregate bid side evaluation of the Municipal Bonds
in such Series of the Trust. If such a market is not maintained
and no other over-the-counter market is available, Unitholders
will still be able to dispose of their Units through redemption
by the Trustee at prices based upon the aggregate bid price of
the Municipal Bonds in such Series of the Trust. See
"Redemption."
Risk Factors. An investment in the Trusts should be
made with an understanding of the risks associated therewith,
including, among other factors, the inability of the issuer to
pay the principal of or interest on a bond when due, volatile
interest rates, early call provisions, and changes to the tax
status of the Municipal Bonds. See "Portfolio_Risk Factors."
KEMPER TAX-EXEMPT INCOME TRUST
NATIONAL SERIES
INTERMEDIATE-TERM SERIES
SHORT-INTERMEDIATE TERM SERIES
THE TRUST
Each Series of the Trust is one of a Series of unit
investment trusts created by the Sponsor under the name Kemper
Tax-Exempt Income Trust, all of which are similar, and each of
which was created under the laws of the State of Missouri
pursuant to a Trust Agreement* (the "Agreement"). Kemper Unit
Investment Trusts, a service of Kemper Securities, Inc. acts as
Sponsor and Evaluator and Investors Fiduciary Trust Company acts
as Trustee.
A Series of the Trust may be an appropriate investment
vehicle for investors who desire to participate in a portfolio of
tax-exempt, fixed income securities with greater diversification
than they might be able to acquire individually. In addition,
Municipal Bonds of the type deposited in the Trust are often not
available in small amounts.
Each Series of the Trust contains a portfolio of interest
bearing obligations issued by or on behalf of states of the
United States and political subdivisions and authorities thereof
the interest on which is, in the opinion of bond counsel to the
issuing authorities, exempt from all Federal income taxes under
existing law, but may be subject to state and local taxes. The
portfolios of the Intermediate Term Series and the
Short-Intermediate Term Series of the Trust are similar to the
National Series, except that the Intermediate Term Series consist
of obligations having a dollar-weighted average maturity of 10
years or less and the Short-Intermediate Series consist of
obligations having a dollar-weighted average maturity of 5 years
or less.
Proceeds of the maturity, redemption or sale of the
Municipal Bonds in a Series of the Trust, unless used to pay for
Units tendered for redemption, will be distributed to Unitholders
of such Series and will not be utilized to purchase replacement
or additional Municipal Bonds for such Series.
The Units, each of which represents a pro rata undivided
fractional interest in the principal amount of Municipal Bonds
deposited in a Series of the Trust, are issued and outstanding
Units which have been reacquired by the Sponsor either by
purchase of Units tendered to the Trustee for redemption or by
purchase in the open market. No offering is being made on behalf
of the Trust or any Series thereof and any profit or loss
realized on the sale of Units will accrue to the Sponsor and/or
the firm reselling such Units.
To the extent that Units of a Series of the Trust are
redeemed, the principal amount of Municipal Bonds in such Series
will be reduced and the undivided fractional interest represented
by each outstanding Unit of that Series will increase. See
"Redemption."
The objective of the Trust is tax-exempt income and
conservation of capital with diversification of risk through
investment in a fixed portfolio of Municipal Bonds. There is, of
course, no guarantee that the Trust's objectives will be
achieved.
PORTFOLIO
In selecting the Municipal Bonds which comprise the
portfolio of a Series of the Trust the following requirements,
among others, were deemed to be of primary importance: (a) a
minimum rating of "A" by either Standard & Poor's or Moody's
Investors Service, Inc. (See "Description of Securities
Ratings"); (b) the price of the Municipal Bonds relative to other
issues of similar quality and maturity; (c) the diversification
of the Municipal Bonds as to purpose of issue; (d) the dates of
maturity of the Municipal Bonds and (e) the income to the
Unitholders of the Series of the Trust. A Municipal Bond may
cease to be rated or its rating may be reduced below the minimum
required as of the Date of Deposit. Neither event requires the
elimination of such investment from the portfolio of a Series of
the Trust, but may be considered in the Sponsor's determination
to direct the Trustee to dispose of the investment. See
"Investment Supervision" herein and "Schedule of Investments" in
Part Two.
Interest on certain Municipal Bonds in certain of the
National Series will be a preference item for purposes of the
alternative minimum tax. Accordingly, such National Series may
be appropriate only for investors who are not subject to the
alternative minimum tax.
The Sponsor may not alter the portfolio of a Series of the
Trust, except that certain of the Municipal Bonds may be sold
upon the happening of certain extraordinary circumstances. See
"Investment Supervision."
Certain of the Municipal Bonds in the Series of the Trust
may be subject to redemption prior to their stated maturity date
pursuant to sinking fund provisions, call provisions or
extraordinary optional or mandatory redemption provisions or
otherwise. A sinking fund is a reserve fund accumulated over a
period of time for retirement of debt. A callable debt
obligation is one which is subject to redemption or refunding
prior to maturity at the option of the issuer. A refunding is a
method by which a debt obligation is redeemed at or before
maturity, by the proceeds of a new debt obligation. In general,
call provisions are more likely to be exercised when the offering
side valuation is at a premium over par than when it is at a
discount from par. Accordingly, any such call, redemption, sale
or maturity will reduce the size and diversity of such Series,
and the net annual interest income of the Series and may reduce
the Estimated Long-Term Return and/or Estimated Current Return.
See "Interest and Estimated Long-Term and Current Returns." Each
Trust portfolio contains a listing of the sinking fund and call
provisions, if any, with respect to each of the debt obligations.
Extraordinary optional redemptions and mandatory redemptions
result from the happening of certain events. Generally, events
that may permit the extraordinary optional redemption of
Municipal Bonds or may require the mandatory redemption of
Municipal Bonds include, among others: a final determination
that the interest on the Municipal Bonds is taxable; the
substantial damage or destruction by fire or other casualty of
the project for which the proceeds of the Municipal Bonds were
used; an exercise by a local, state or Federal governmental unit
of its power of eminent domain to take all or substantially all
of the project for which the proceeds of the Municipal Bonds were
used; changes in the economic availability of raw materials,
operating supplies or facilities or technological or other
changes which render the operation of the project for which the
proceeds of the Municipal Bonds were used uneconomic; changes in
law or an administrative or judicial decree which renders the
performance of the agreement under which the proceeds of the
Municipal Bonds were made available to finance the project
impossible or which creates unreasonable burdens or which imposes
excessive liabilities, such as taxes not imposed on the date the
Municipal Bonds are issued on the issuer of the Municipal Bonds
or the user of the proceeds of the Municipal Bonds; an
administrative or judicial decree which requires the cessation of
a substantial part of the operations of the project financed with
the proceeds of the Municipal Bonds; an overestimate of the costs
of the project to be financed with the proceeds of the Municipal
Bonds resulting in excess proceeds of the Municipal Bonds which
may be applied to redeem Municipal Bonds; or an underestimate of
a source of funds securing the Municipal Bonds resulting in
excess funds which may be applied to redeem Municipal Bonds. The
Sponsor is unable to predict all of the circumstances which may
result in such redemption of an issue of Municipal Bonds.
The Sponsor, and the Trustee shall not be liable in any way
for any default, failure or defect in any Municipal Bond.
Risk Factors. An investment in Units of a Series of the
Trust should be made with an understanding of the risks which an
investment in fixed rate debt obligations may entail, including
the risk that the value of the portfolio and hence of the Units
will decline with increases in interest rates. The value of the
underlying Municipal Bonds will fluctuate inversely with changes
in interest rates. The uncertain economic conditions of recent
years, together with the fiscal measures adopted to attempt to
deal with them, have resulted in wide fluctuations in interest
rates and, thus, in the value of fixed rate debt obligations
generally and long term obligations in particular. The Sponsor
cannot predict whether such fluctuations will continue in the
future.
Certain of the Municipal Bonds in some Series of the Trust
may be general obligations of a governmental entity that are
backed by the taxing power of such entity. All other Municipal
Bonds in such Trusts are revenue bonds payable from the income of
a specific project or authority and are not supported by the
issuer's power to levy taxes. General obligation bonds are
secured by the issuer's pledge of its faith, credit and taxing
power for the payment of principal and interest. Revenue bonds,
on the other hand, are payable only from the revenues derived
from a particular facility or class of facilities or, in some
cases, from the proceeds of a special excise or other specific
revenue source. There are, of course, variations in the security
of the different Municipal Bonds in the Trusts, both within a
particular classification and between classifications, depending
on numerous factors.
Certain of the Municipal Bonds in some Series of the Trust
may be obligations of issuers whose revenues are derived from
services provided by hospitals and other health care facilities,
including nursing homes. In view of this an investment in such
Series should be made with an understanding of the
characteristics of such issuers and the risks that such an
investment may entail. Ratings of bonds issued for health care
facilities are often based on feasibility studies that contain
projections of occupancy levels, revenues and expenses. A
facility's gross receipts and net income available for debt
service will be affected by future events and conditions
including, among other things, demand for services and the
ability of the facility to provide the services required,
physicians' confidence in the facility, management capabilities,
economic developments in the service area, competition, efforts
by insurers and governmental agencies to limit rates, legislation
establishing state rate-setting agencies, expenses, the cost and
possible unavailability of malpractice insurance, the funding of
Medicare, Medicaid and other similar third party payor programs,
and government regulation. Federal legislation has been enacted
which implemented a system of prospective Medicare reimbursement
which may restrict the flow of revenues to hospitals and other
facilities which are reimbursed for services provided under the
Medicare program. Future legislation or changes in the areas
noted above, among other things, would affect all hospitals to
varying degrees and, accordingly, any adverse changes in these
areas may adversely affect the ability of such issuers to make
payment of principal and interest on Municipal Bonds held in such
Series. Such adverse changes also may adversely affect the
ratings of the Municipal Bonds held in such Series of the Trust.
Certain of the Municipal Bonds in some Series of the Trust
may be single family mortgage revenue bonds, which are issued for
the purpose of acquiring from originating financial institutions
notes secured by mortgages on residences located within the
issuer's boundaries and owned by persons of low or moderate
income. Mortgage loans are generally partially or completely
prepaid prior to their final maturities as a result of events
such as sale of the mortgaged premises, default, condemnation or
casualty loss. Because these Municipal Bonds are subject to
extraordinary mandatory redemption in whole or in part from such
prepayments of mortgage loans, a substantial portion of such
Municipal Bonds will probably be redeemed prior to their
scheduled maturities or even prior to their ordinary call dates.
The redemption price of such issues may be more or less than the
offering price of such Municipal Bonds. Extraordinary mandatory
redemption without premium could also result from the failure of
the originating financial institutions to make mortgage loans in
sufficient amounts within a specified time period or, in some
cases, from the sale by the Municipal Bond issuer of the mortgage
loans. Failure of the originating financial institutions to make
mortgage loans would be due principally to the interest rates on
mortgage loans funded from other sources becoming competitive
with the interest rates on the mortgage loans funded with the
proceeds of the single family mortgage revenue bonds.
Additionally, unusually high rates of default on the underlying
mortgage loans may reduce revenues available for the payment of
principal of or interest on such mortgage revenue bonds. Single
family mortgage revenue bonds issued after December 31, 1980 were
issued under Section 103A of the Internal Revenue Code of 1954,
which Section contains certain ongoing requirements relating to
the use of the proceeds of such Bonds in order for the interest
on such Municipal Bonds to retain its tax-exempt status. In each
case, the issuer of the Municipal Bonds has covenanted to comply
with applicable ongoing requirements and bond counsel to such
issuer has issued an opinion that the interest on the Municipal
Bonds is exempt from Federal income tax under existing laws and
regulations. There can be no assurances that the ongoing
requirements will be met. The failure to meet these requirements
could cause the interest on the Municipal Bonds to become
taxable, possibly retroactively from the date of issuance.
Certain of the Municipal Bonds in some Series of the Trust
may be obligations of issuers whose revenues are primarily
derived from mortgage loans to housing projects for low to
moderate income families. The ability of such issuers to make
debt service payments will be affected by events and conditions
affecting financed projects, including, among other things, the
achievement and maintenance of sufficient occupancy levels and
adequate rental income, increases in taxes, employment and income
conditions prevailing in local labor markets, utility costs and
other operating expenses, the managerial ability of project
managers, changes in laws and governmental regulations, the
appropriation of subsidies and social and economic trends
affecting the localities in which the projects are located. The
occupancy of housing projects may be adversely affected by high
rent levels and income limitations imposed under Federal and
state programs. Like single family mortgage revenue bonds,
multi-family mortgage revenue bonds are subject to redemption and
call features, including extraordinary mandatory redemption
features, upon prepayment, sale or non-origination of mortgage
loans as well as upon the occurrence of other events. Certain
issuers of single or multi-family housing bonds have considered
various ways to redeem bonds they have issued prior to the stated
first redemption dates for such bonds. In connection with the
housing Municipal Bonds held by the Trust, the Sponsor has not
had any direct communications with any of the issuers thereof,
but at the initial Date of Deposit it was not aware that any of
the respective issuers of such Municipal Bonds were actively
considering the redemption of such Municipal Bonds prior to their
respective stated initial call dates. However, there can be no
assurance that an issuer of a Municipal Bond in a Trust will not
attempt to so redeem a Municipal Bond in such Trust.
Certain of the Municipal Bonds in some Series of the Trust
may be obligations of issuers whose revenues are derived from the
sale of water and/or sewerage services. Water and sewerage bonds
are generally payable from user fees. Problems faced by such
issuers include the ability to obtain timely and adequate rate
increases, a decline in population resulting in decreased user
fees, the difficulty of financing large construction programs,
the limitations on operations and increased costs and delays
attributable to environmental considerations, the increasing
difficulty of obtaining or discovering new supplies of fresh
water, the effect of conservation programs and the impact of
"no-growth" zoning ordinances. Issuers may have experienced
these problems in varying degrees.
Certain of the Municipal Bonds in some Series of the Trust
may be obligations of issuers whose revenues are primarily
derived from the sale of electric energy or natural gas.
Utilities are generally subject to extensive regulation by state
utility commissions which, among other things, establish the
rates which may be charged and the appropriate rate of return on
an approved asset base. The problems faced by such issuers
include the difficulty in obtaining approval for timely and
adequate rate increases from the governing public utility
commission, the difficulty in financing large construction
programs, the limitations on operations and increased costs and
delays attributable to environmental considerations, increased
competition, recent reductions in estimates of future demand for
electricity in certain areas of the county, the difficulty of the
capital market in absorbing utility debt, the difficulty in
obtaining fuel at reasonable prices and the effect of energy
conservation. Issuers may have experienced these problems in
varying degrees. In addition, Federal, state and municipal
governmental authorities may from time to time review existing
and impose additional regulations governing the licensing,
construction and operation of nuclear power plants, which may
adversely affect the ability of the issuers of such Municipal
Bonds to make payments of principal and/or interest on such
Municipal Bonds. The ability of state and local joint action
power agencies to make payments on bonds they have issued is
dependent in large part on payments made to them pursuant to
power supply or similar agreements. Courts in Washington and
Idaho have held that certain agreements between the Washington
Public Power Supply System ("WPPSS") and the WPPSS participants
are unenforceable because the participants did not have the
authority to enter into the agreements. While these decisions
are not specifically applicable to agreements entered into by
public entities in other states, they may cause a reexamination
of the legal structure and economic viability of certain projects
financed by joint action power agencies, which might exacerbate
some of the problems referred to above and possibly lead to legal
proceedings questioning the enforceability of agreements upon
which payment of these bonds may depend.
Certain of the Municipal Bonds in some Series of the Trust
may be industrial revenue bonds ("IRBs"), including pollution
control revenue bonds, which are tax-exempt securities issued by
states, municipalities, public authorities or similar entities to
finance the cost of acquiring, constructing or improving various
industrial projects. These projects are usually operated by
corporate entities. Issuers are obligated only to pay amounts
due on the IRBs to the extent that funds are available from the
unexpended proceeds of the IRBs or receipts or revenues of the
issuer under an arrangement between the issuer and the corporate
operator of a project. The arrangement may be in the form of a
lease, installment sale agreement, conditional sale agreement or
loan agreement, but in each case the payments to the issuer are
designed to be sufficient to meet the payments of amounts due on
the IRBs. Regardless of the structure, payment of IRBs is solely
dependent upon the creditworthiness of the corporate operator of
the project or corporate guarantor. Corporate operators or
guarantors may be affected by many factors which may have an
adverse impact on the credit quality of the particular company or
industry. These include cyclicality of revenues and earnings,
regulatory and environmental restrictions, litigation resulting
from accidents or environmentally-caused illnesses, extensive
competition and financial deterioration resulting from leveraged
buy-outs or takeovers. The IRBs in the Series of the Trust may
be subject to special or extraordinary redemption provisions
which may provide for redemption at par or, with respect to
original issue discount bonds, at issue price plus the amount of
original issue discount accreted to the redemption date plus, if
applicable, a premium. The Sponsor cannot predict the causes or
likelihood of the redemption of IRBs or other Municipal Bonds in
the Series of the Trust prior to the stated maturity of such
Municipal Bonds.
Certain of the Municipal Bonds in some Series of the Trust
may be obligations which are payable from and secured by revenues
derived from the ownership and operation of facilities such as
airports, bridges, turnpikes, port authorities, convention
centers and arenas. The major portion of an airport's gross
operating income is generally derived from fees received from
signatory airlines pursuant to use agreements which consist of
annual payments for leases, occupancy of certain terminal space
and service fees. Airport operating income may therefore be
affected by the ability of the airlines to meet their obligations
under the use agreements. The air transport industry is
experiencing significant variations in earnings and traffic, due
to increased competition, excess capacity, increased costs,
deregulation, traffic constraints and other factors, and several
airlines are experiencing severe financial difficulties. The
Sponsor cannot predict what effect these industry conditions may
have on airport revenues which are dependent for payment on the
financial condition of the airlines and their usage of the
particular airport facility. Similarly, payment on Municipal
Bonds related to other facilities is dependent on revenues from
the projects, such as user fees from ports, tolls on turnpikes
and bridges and rents from buildings. Therefore, payment may be
adversely affected by reduction in revenues due to such factors
as increased cost of maintenance, decreased use of a facility,
lower cost of alternative modes of transportation, scarcity of
fuel and reduction or loss of rents.
Certain of the Municipal Bonds in some Series of the Trust
may be obligations of issuers which are, or which govern the
operation of, schools, colleges and universities and whose
revenues are derived mainly from ad valorem taxes, or for higher
education systems, from tuition, dormitory revenues, grants and
endowments. General problems relating to school bonds include
litigation contesting the state constitutionality of financing
public education in part from ad valorem taxes, thereby creating
a disparity in educational funds available to schools in wealthy
areas and schools in poor areas. Litigation or legislation on
this issue may affect the sources of funds available for the
payment of school bonds in the Trusts. General problems relating
to college and university obligations would include the prospect
of a declining percentage of the population consisting of
"college" age individuals, possible inability to raise tuition
and fees sufficiently to cover increased operating costs, the
uncertainty of continued receipt of Federal grants and state
funding and new government legislation or regulations which may
adversely affect the revenues or costs of such issuers. All of
such issuers have been experiencing certain of these problems in
varying degrees.
Certain of the Municipal Bonds in some Series of the Trust
may be Urban Redevelopment Bonds ("URBs"). URBs have generally
been issued under bond resolutions pursuant to which the revenues
and receipts payable under the arrangements with the operator of
a particular project have been assigned and pledged to
purchasers. In some cases, a mortgage on the underlying project
may have been granted as security for the URBs. Regardless of
the structure, payment of the URBs is solely dependent upon the
creditworthiness of the operator of the project.
Certain of the Municipal Bonds in the Trust may be lease
revenue bonds whose revenues are derived from lease payments made
by a municipality or other political subdivision which is leasing
equipment or property for use in its operation. The risks
associated with owning Municipal Bonds of this nature include the
possibility that appropriation of funds for a particular project
or equipment may be discontinued. The Sponsor cannot predict the
likelihood of non-appropriation of funds for these types of lease
revenue Municipal Bonds.
Certain of the Municipal Bonds in some Series of the Trust
may be "zero coupon" bonds, i.e., an original issue discount bond
that does not provide for the payment of current interest. Zero
coupon bonds are purchased at a deep discount because the buyer
obtains only the right to receive a final payment at the maturity
of the bond and does not receive any periodic interest payments.
The effect of owning deep discount bonds which do not make
current interest payments (such as the zero coupon bonds) is that
a fixed yield is earned not only on the original investment but
also, in effect, on all discount earned during the life of such
obligation. This implicit reinvestment of earnings at the same
rate eliminates the risk of being unable to reinvest the income
on such obligation at a rate as high as the implicit yield on the
discount obligation, but at the same time eliminates the holder's
ability to reinvest at higher rates in the future. For this
reason, zero coupon bonds are subject to substantially greater
price fluctuations during periods of changing market interest
rates than are securities of comparable quality which pay
interest currently. For the Federal tax consequences of original
issue discount bonds such as the zero coupon bonds, see "Tax
Status of the Trust."
Investors should be aware that many of the Municipal Bonds
in some Series of the Trust are subject to continuing
requirements such as the actual use of Municipal Bond proceeds or
manner of operation of the project financed from Municipal Bond
proceeds that may affect the exemption of interest on such
Municipal Bonds from Federal income taxation. Although at the
time of issuance of each of the Municipal Bonds in the Trusts an
opinion of bond counsel was rendered as to the exemption of
interest on such obligations from Federal income taxation, there
can be no assurance that the respective issuers or other obligors
on such obligations will fulfill the various continuing
requirements established upon issuance of the Municipal Bonds. A
failure to comply with such requirements may cause a
determination that interest on such obligations is subject to
Federal income taxation, perhaps even retroactively from the date
of issuance of such Municipal Bonds, thereby reducing the value
of the Municipal Bonds and subjecting Unitholders to
unanticipated tax liabilities.
Federal bankruptcy statutes relating to the adjustment of
debts of political subdivisions and authorities of states of the
United States provide that, in certain circumstances, such
subdivisions or authorities may be authorized to initiate
bankruptcy proceedings without prior notice to or consent of
creditors, which proceedings could result in material and adverse
modification or alteration of the rights of holders of
obligations issued by such subdivisions or authorities.
Certain of the Municipal Bonds in some Series of the Trust
represent "moral obligations" of another governmental entity
other than the issuer. In the event that the issuer of the
Municipal Bond defaults in the repayment thereof, such other
governmental entity lawfully may, but is not obligated to,
discharge the obligation of the issuer to repay such Municipal
Bond.
To the best of the Sponsor's knowledge, as of the date of
the Prospectus, there is no litigation pending with respect to
any Municipal Bonds which might reasonably be expected to have a
material adverse effect on the Trust or any Series thereof.
Although the Sponsor is unable to predict whether any litigation
may be instituted, or if instituted, whether such litigation
might have a material adverse effect on the Trust or any Series,
the Trust received copies of the opinions of bond counsel given
to the issuing authorities at the time of original delivery of
each of the Municipal Bonds to the effect that the Municipal
Bonds had been validly issued and that the interest thereon is
exempt from Federal income taxes.
DISTRIBUTION REINVESTMENT
Each Unitholder of the Trust may elect to have distributions
of principal (including capital gains, if any) or interest or
both automatically invested without charge in shares of any
mutual fund registered in such Unitholder's state of residence
which is underwritten or advised by KFS (the "Kemper Funds"),
other than those Kemper Funds sold with a contingent deferred
sales charge. Since the portfolio securities and investment
objectives of such Kemper Funds may differ significantly from
that of the Trust, Unitholders should carefully consider the
consequences, before selecting such Kemper Funds for
reinvestment. Detailed information with respect to the
investment objectives and the management of the Kemper Funds is
contained in their respective prospectuses, which can be obtained
from the Sponsor, and many investment firms, upon request. An
investor should read the appropriate prospectus prior to making
the election to reinvest. Unitholders who desire to have such
distributions automatically reinvested should inform their broker
at the time of purchase or should file with the Program Agent
referred to below a written notice of election.
Unitholders who are receiving distributions in cash may
elect to participate in distribution reinvestment by filing with
the Program Agent an election to have such distributions
reinvested without charge. Such election must be received by the
Program Agent at least ten days prior to the Record Date
applicable to any distribution in order to be in effect for such
Record Date. Any such election shall remain in effect until a
subsequent notice is received by the Program Agent. See
"Distributions to Unitholders."
The Program Agent is Investors Fiduciary Trust Company. All
inquiries concerning participation in distribution reinvestment
should be directed to Kemper Service Company, service agent for
the Program Agent at P.O. Box 419430, Kansas City, Missouri
64173-0216, telephone (800) 422-2848.
INTEREST AND ESTIMATED LONG-TERM AND CURRENT RETURNS
As of the opening of business on the date indicated therein,
the Estimated Current Returns and the Estimated Long-Term Returns
for the Trust were as set forth under "Essential Information" in
Part Two of this Prospectus. Unitholders choosing distributions
quarterly or semi-annually will receive a slightly higher rate
because of the lower Trustee's fees and expenses under such
plans. Estimated Current Returns are calculated by dividing the
estimated net annual interest income per Unit by the Public
Offering Price. The estimated net annual interest income per
Unit will vary with changes in fees and expenses of the Trustee,
the sponsor and the Evaluator and with the principal prepayment,
redemption, maturity, exchange or sale of Securities while the
Public Offering Price will vary with changes in the offering
price of the underlying Securities; therefore, there is no
assurance that the present Estimated Current Returns will be
realized in the future. Estimated Long-Term Returns are
calculated using a formula which (1) takes into consideration,
and determines and factors in the relative weightings of, the
market values, yields (which takes into account the amortization
of premiums and the accretion of discounts) and estimated
retirements of all of the Securities in the Trust and (2) takes
into account the expenses and sales charge associated with the
Trust Unit. Since the market values and estimated retirements of
the Securities and the expenses of the Trust will change, there
is no assurance that the present Estimated Long-Term Returns will
be realized in the future. Estimated Current Returns and
Estimated Long-Term Returns are expected to differ because the
calculation of Estimated Long-Term Returns reflects the estimated
date and amount of principal returned while Estimated Current
Returns calculations include only net annual interest income and
Public Offering Price.
TAX STATUS OF THE TRUST
All Municipal Bonds in the Series of the Trust Fund were
accompanied by copies of opinions of bond counsel given to the
issuers thereof at the time of original delivery of the Municipal
Bonds to the effect that the interest thereon is exempt from all
Federal income taxes. In connection with the offering of Units
of the Trust Funds, neither the Sponsor, the Trustee, the
auditors nor their respective counsel have made any review of the
proceedings relating to the issuance of the Municipal Bonds or
the basis for such opinions. Gain realized on the sale or
redemption of the Municipal Bonds by the Trustee or of a Unit by
a Unitholder is, however, includable in gross income for Federal
income tax purposes. Such gain does not include any amounts
received in respect of accrued interest or earned original issue
discount. It should be noted that under recently enacted
legislation described below that subjects accretion of market
discount on tax-exempt bonds to taxation as ordinary income, gain
realized on the sale or redemption of Municipal Bonds by the
Trustee or of Units by a Unitholder that would have been treated
as capital gain under prior law is treated as ordinary income to
the extent it is attributable to accretion of market discount.
Market discount can arise based on the price a Trust Fund pays
for Municipal Bonds or the price a Unitholder pays for his or her
Units. In addition, bond counsel to the issuing authorities
rendered opinions as to the exemption of interest on such Bonds,
when held by residents of the state in which the issuers of such
bonds are located, from state income taxes and, where applicable,
local income taxes.
Neither the Sponsor, the Trustee, the Independent Auditors
nor their respective counsel have made any review of the
proceedings relating to the issuance of the Municipal Bonds or
the bases for such opinions.
In the opinion of Chapman and Cutler, counsel for the
Sponsor.
Each Series of the Trust Fund is not an
association taxable as a corporation for Federal income
tax purposes and interest and accrued original issue
discount on Bonds which is excludable from gross income
under the Internal Revenue Code of 1986 (the "Code")
will retain its status when distributed to Unitholders,
except to the extent such interest is subject to the
alternative minimum tax, an additional tax on branches
of foreign corporations and the environmental tax (the
"Superfund Tax"), as noted below.
Exemption of interest and accrued original issue
discount on any Municipal Bonds for Federal income tax
purposes does not necessarily result in tax-exemption
under the laws of the several states as such laws vary
with respect to the taxation of such securities and in
many states all or part of such interest accrued
original issue discount may be subject to tax.
Each Unitholder is considered to be the owner of a
pro rata portion of each asset of the respective Trust
Fund in the proportion that the number of Units of such
Trust Fund held by him bears to the total number of
Units outstanding of such Trust Fund under Subpart E,
Subchapter J of Chapter 1 of the Code and will have a
taxable event when such Trust Fund disposes of a
Municipal Bond, or when the Unitholder redeems or sells
his Units. Unitholders must reduce the tax basis of
their Units for their share of accrued interest
received by a Trust Fund, if any, on Municipal Bonds
delivered after the Unitholders pay for their Units to
the extent that such interest accrued on such Municipal
Bonds during the period from the Unitholder's
settlement date to the date such Municipal Bonds are
delivered to a Trust Fund and, consequently, such
Unitholders may have an increase in taxable gain or
reduction in capital loss upon the disposition of such
Units. Gain or loss upon the sale or redemption of
Units is measured by comparing the proceeds of such
sale or redemption with the adjusted basis of the
Units. If the Trustee disposes of Municipal Bonds
(whether by sale, payment on maturity, redemption or
otherwise), gain or loss is recognized to the
Unitholder. The amount of any such gain or loss is
measured by comparing the Unitholder's pro rata share
of the total proceeds from such disposition with the
Unitholder's basis for his or her fractional interest
in the asset disposed of. In the case of a Unitholder
who purchases Units, such basis (before adjustment for
earned original issue discount and amortized bond
premium, if any) is determined by apportioning the cost
of the Units among each of the Trust Fund's assets
ratably according to value as of the date of
acquisition of the Units. The basis of each Unit and
of each Municipal Bond which was issued with original
issue discount must be increased by the amount of the
accrued original issue discount and the basis of each
Unit and of the Unitholder's interest in each Municipal
Bond which was acquired by such Unitholder at a premium
must be reduced by the annual amortization of Municipal
Bond premium. The tax cost reduction requirements of
the Code relating to amortization of bond premium may,
under some circumstances, result in the Unitholder
realizing a taxable gain when his Units are sold or
redeemed for an amount equal to his original cost.
Sections 1288 and 1272 of the Internal Revenue Code of 1986
(the "Code") provide a complex set of rules governing the accrual
of original issue discount. These rules provide that original
issue discount accrues either on the basis of a constant compound
interest rate or ratably over the term of the Municipal Bond,
depending on the date the Municipal Bond was issued. In
addition, special rules apply if the purchase price of a
Municipal Bond exceeds the original issue price plus the amount
of original issue discount which would have previously accrued
based upon its issue price (its "adjusted issue price"). The
application of these rules will also vary depending on the value
of the Municipal Bond on the date a Unitholder acquires his
Units, and the price the Unitholder pays for his Units.
Investors with questions regarding these Code sections should
consult with their tax advisers.
"The Revenue Reconciliation Act of 1993" (the "Tax Act")
subjects tax-exempt bonds to the market discount rules of the
Code effective for bonds purchased after April 30, 1993. In
general, market discount is the amount (if any) by which the
stated redemption price at maturity exceeds an investor's
purchase price (except to the extent that such difference, if
any, is attributable to original issue discount not yet accrued)
subject to a statutory "de minimis" rule. Market discount can
arise based on the price a Trust pay for Municipal Bonds or the
price a Unitholder pays for his or her Units. Under the Tax Act,
accretion of market discount is taxable as ordinary income; under
prior law the accretion had been treated as capital gain. Market
discount that accretes while a Trust Fund holds a Municipal Bond
would be recognized as ordinary income by the Unitholders when
principal payments are received on the Municipal Bond, upon sale
or at redemption (including early redemption), or upon the sale
or redemption of his or her Units, unless a Unitholder elects to
include market discount in taxable income as it accrues. The
market discount rules are complex and Unitholders should consult
their tax advisers regarding these rules and their application.
In the case of all Unitholders (both individuals and
corporations), interest on all or certain Bonds held by certain
Series of the Trust may be treated as an item of tax preference
for purposes of computing the alternative minimum tax.
Accordingly, investments in Units may subject Unitholders to (or
result in increased liability under) the alternative minimum tax.
Due to the complexity of the alternative minimum tax, Unitholders
are urged to consult their tax advisers regarding the impact, if
any, of the alternative minimum tax.
In addition, in the case of certain corporations, the
alternative minimum tax and the Superfund Tax depend upon the
corporation's alternative minimum taxable income, which is the
corporation's taxable income with certain adjustments. One of
the adjustment items used in computing the alternative minimum
taxable income and the Superfund Tax of a corporation (other than
an S Corporation, Regulated Investment Company, Real Estate
Investment Trust, or REMIC) is an amount equal to 75% of the
excess of such corporation's "adjusted current earnings" over an
amount equal to its alternative minimum taxable income (before
such adjustment item and the alternative tax net operating loss
deduction). "Adjusted current earnings" includes all tax-exempt
interest, including interest on all of the Municipal Bonds in a
Trust Fund. Unitholders are urged to consult their tax advisers
with respect to the particular tax consequences to them including
the corporate alternative minimum tax, the Superfund Tax and the
branch profit tax imposed by Section 884 of the Code.
Counsel for the Sponsor has also advised that under
Section 265 of the Code, interest on indebtedness incurred or
continued to purchase or carry Units of a Trust Fund is not
deductible for Federal income tax purposes. The Internal Revenue
Service has taken the position that such indebtedness need not be
directly traceable to the purchase or carrying of Units (however,
these rules generally do not apply to interest paid on
indebtedness incurred to purchase or improve a personal
residence). Also, under Section 265 of the Code, certain
financial institutions that acquire Units would generally not be
able to deduct any of the interest expense attributable to
ownership of such Units. Investors with questions regarding
these issues should consult with their tax advisers.
In the case of certain Municipal Bonds in the Trust Funds,
the opinions of bond counsel indicate that interest on such
securities received by a "substantial user" of the facilities
being financed with the proceeds of these securities or persons
related thereto, for periods while such securities are held by
such a user or related person, will not be excludable from
Federal gross income, although interest on such securities
received by others would be excludable from Federal gross income.
"Substantial user" and "related person" are defined under U.S.
Treasury Regulations. Any person who believes that he or she may
be a "substantial user" or a "related person" as so defined
should contact his or her tax adviser.
In the case of corporations, the alternative tax rate
applicable to long-term capital gains is 35% effective for
long-term capital gains realized in taxable years beginning on or
after January 1, 1993. For taxpayers other than corporations,
net capital gains are subject to a maximum marginal stated tax
rate of 28%. However, it should be noted that legislative
proposals are introduced from time to time that affect tax rates
and could affect relative differences at which ordinary income
and capital gains are taxed. Under the Code, taxpayers must
disclose to the Internal Revenue Service the amount of tax-exempt
interest earned during the year.
Under existing law, the Trust Funds are not associations
taxable as a corporation and the income of the Trust Funds will
be treated as the income of the Unitholders under the income tax
laws of the State of Missouri.
All statements of law in the Prospectus concerning exclusion
from gross income for Federal, state or other tax purposes are
the opinions of counsel and are to be so construed.
At the respective times of issuances of the Bonds, opinions
relating to the validity thereof and to the exclusion of interest
thereon from Federal gross income are rendered by bond counsel to
the respective issuing authorities. Neither the Sponsor nor
Chapman and Cutler has made any special review for the Trust
Funds of the proceedings relating to the issuance of the Bonds or
of the basis for such opinions.
Section 86 of the Code, in general, provides that fifty
percent of Social Security benefits are includable in gross
income to the extent that the sum of "modified adjusted gross
income" plus fifty percent of the Social Security benefits
received exceeds a "base amount". The base amount is $25,000 for
unmarried taxpayers, $32,000 for married taxpayers filing a joint
return and zero for married taxpayers who do not live apart at
all during the taxable year and who file separate returns.
Modified adjusted gross income is adjusted gross income
determined without regard to certain otherwise allowable
deductions and exclusions from gross income and by including tax
exempt interest. To the extent that Social Security benefits are
includable in gross income, they will be treated as any other
item of gross income.
In addition, under the Tax Act, for taxable years beginning
after December 31, 1993, up to 85 percent of Social Security
benefits are includable in gross income to the extent that the
sum of "modified adjusted gross income" plus fifty percent of
Social Security benefits received exceeds an "adjusted base
amount." The adjusted base amount is $34,000 for married
taxpayers, $44,000 for married taxpayers filing a joint return
and zero for married taxpayers who do not live apart at all times
during the taxable year and who file separate returns.
Although tax-exempt interest is included in modified
adjusted gross income solely for the purpose of determining what
portion, if any, of Social Security benefits will be included in
gross income, no tax exempt interest, including that received
from the Trust Fund, will be subject to tax. A taxpayer whose
adjusted gross income already exceeds the base amount or the
adjusted base amount must include fifty percent or eighty-five
percent, respectively of his Social Security benefits in gross
income whether or not he receives any tax-exempt interest. A
taxpayer whose modified adjusted gross income (after inclusion of
tax-exempt interest) does not exceed the base amount need not
include any Social Security benefits in gross income.
The exemption of interest on state and local obligations for
Federal income tax purposes discussed above does not necessarily
result in exemption under the income or other tax laws of any
state or city. The laws of the several states vary with respect
to the taxation of such obligations.
PUBLIC OFFERING OF UNITS
Public Offering Price. Units of each Series of the
Trust are offered at the Public Offering Price, plus accrued
interest to the expected settlement date. The Public Offering
Price per Unit is equal to the aggregate bid side evaluation of
the Municipal Bonds in the Series' portfolio (as determined
pursuant to the terms of a contract with the Evaluator, by Muller
Data Corporation a non-affiliated firm regularly engaged in the
business of evaluating, quoting or appraising comparable
securities), plus or minus cash, if any, in the Principal
Account, held or owned by such Series of the Trust, divided by
the number of outstanding Units of the Series, plus the sales
charge applicable. The sales charge is based upon the dollar
weighted average maturity of the Trust and is determined in
accordance with the table set forth below. Investors who
purchase Units through brokers or dealers pursuant to a current
management agreement which by contract or operation of law does
not allow such broker or dealer to earn an additional commission
(other than any fee or commission paid for maintenance of such
investor's account under the management agreement) on such
transactions may purchase such Units at the current Public
Offering Price net of the applicable broker or dealer connection.
See "Public Distribution of Units" below. For purposes of this
computation, Municipal Bonds will be deemed to mature on their
expressed maturity dates unless: (a) the Municipal Bonds have
been called for redemption or funds or securities have been
placed in escrow to redeem them on an earlier call date, in which
case such call date will be deemed to be the date upon which they
mature; or (b) such Municipal Bonds are subject to a "mandatory
tender," in which case such mandatory tender will be deemed to be
the date upon which they mature. The effect of this method of
sales charge computation will be that different sales charge
rates will be applied to the Trust based upon the dollar weighted
average maturity of such Trust's portfolio, in accordance with
the following schedule:
<TABLE>
<CAPTION>
PERCENT OF PERCENT
PUBLIC OF NET
DOLLAR WEIGHTED AVERAGE OFFERING AMOUNT
YEARS TO MATURITY PRICE INVESTED
<S> <C> <C>
1 to 3.99 years 2.00% 2.041%
4 to 7.99 years 3.50 3.627
8 to 14.99 years 4.50 4.712
15 or more years 5.50 5.820
</TABLE>
The sales charge per Unit will be reduced as set forth
below:
<TABLE>
<CAPTION>
DOLLAR WEIGHTED AVERAGE YEARS TO MATURITY*
4 TO 7.99 8 TO 14.99 15 OR MORE
Amount Of Investment Sales Charge (% Of Public Offering Price)
<S> <C> <C> <C>
$1,000 to $99,999 3.50% 4.50% 5.50%
$100,000 to $499,999 3.25 4.25 5.00
$500,000 to $999,999 3.00 4.00 4.50
$1,000,000 or more 2.75 3.75 4.00
- ----------------
</TABLE>
* If the dollar weighted average maturity of the Trust is from
1 to 3.99 years, the sales charge is 2% and 1.5% of the
Public Offering for purchases of $1 to $249,999 and $250,000
or more, respectively.
The reduced sales charges as shown on the chart above will
apply to all purchases of Units on any one day by the same
purchaser from the same firm and for this purpose purchases of
Units of a Series of the Trust will be aggregated with concurrent
purchases of Units of any other unit investment trust that may be
offered by the Sponsor. Additionally, Units purchased in the
name of a spouse or child (under 21) of such purchaser will be
deemed to be additional purchases by such purchaser. The reduced
sales charges will also be applicable to a trust or other
fiduciary purchasing for a single trust estate or single
fiduciary account.
The Sponsor intends to permit officers, directors and
employees of the Sponsor and, at the discretion of the Sponsor
and Evaluator, registered representatives of selling firms to
purchase Units of the Trust without a sales charge, although a
transaction processing fee may be imposed on such trades.
The Public Offering Price per Unit of a Series of the Trust
on the date shown on the cover page of Part Two of the Prospectus
or on any subsequent date will vary from the amounts stated under
"Essential Information" in Part Two due to fluctuations in the
prices of the underlying Municipal Bonds. The aggregate bid side
evaluation of the Municipal Bonds shall be determined (a) on the
basis of current bid prices of the Municipal Bonds, (b) if bid
prices are not available for any particular Municipal Bond, on
the basis of current bid prices for comparable bonds, (c) by
determining the value of the Municipal Bonds on the bid side of
the market by appraisal, or (d) by any combination of the above.
The foregoing evaluations and computations shall be made as
of the Evaluation Time stated under "Essential Information" in
Part Two, on each business day effective for all sales made
during the preceding 24-hour period, and for purposes of resales
and repurchase of Units.
The interest on the Municipal Bonds in a Series of the
Trust, less the estimated fees and expenses, is estimated to
accrue in the annual amounts per Unit set forth under "Essential
Information" in Part Two. The amount of net interest income
which accrues per Unit may change as Municipal Bonds mature or
are redeemed, exchanged or sold, or as the expenses of such
Series of the Trust change or as the number of outstanding Units
of the Series changes.
Payment for Units must be made on or before the fifth
business day following purchase (the "settlement date"). A
purchaser becomes the owner of Units on the settlement date. If
a Unitholder desires to have certificates representing Units
purchased, such certificates will be delivered as soon as
possible following a written request therefor. For information
with respect to redemption of Units purchased, but as to which
certificates requested have not been received, see "Redemption"
below.
Accrued Interest. Accrued interest consists of two
elements. The first element arises as a result of accrued
interest which is the accumulation of unpaid interest on a bond
from the last day on which interest thereon was paid. Interest
on Bonds in the Trust Fund is actually paid either monthly or
semi-annually to the Trust Fund. However, interest on the Bonds
in the Trust Funds is accounted for daily on an accrual basis.
Because of this, a Trust Fund always has an amount of interest
earned but not yet collected by the Trustee by the Trustee
because of coupons that are not yet due. For this reason, the
Public Offering Price of Units will have added to it the
proportionate share of accrued and undistributed interest to the
date of settlement.
The Trustee advanced the amount of accrued interest as the
First Settlement Date and the same was distributed to the
Sponsor. Such advance was repaid to the Trustee through the
first receipts of interest received on the Municipal Bonds.
Consequently, the amount of accrued interest added to the Public
Offering Price of Units included only accrued interest arising
after the First Settlement Date of a Trust Fund, less any
distributions from the Interest Account subsequent to the First
Settlement Date. Since the First Settlement Date was the date of
settlement for anyone who ordered Units on the Date of Deposit,
no accrued interest was added to the Public Offering Price of
Units ordered on the Date of Deposit.
The second element of accrued interest arises because of the
structure of the Interest Account. The Trustee has no cash for
distribution to Unitholders until it receives interest payments
on the Bonds in a Trust Fund. The Trustee is obligated to
provide its own funds, at times, in order to advance interest
distributions. The Trustee will recover these advancements when
such interest is received. Interest Account balances are
established so that it will not be necessary on a regular basis
for the Trustee to advance its own funds in connection with such
interest distributions and since the funds held by the Trustee
will be used by it to earn interest thereon, it benefits thereby
(see "Expenses of the Trust").
Accrued interest is computed as of the initial Record Date
of the Trust Funds. On the date of the first distribution of
interest to Unitholders after the First Settlement Date, the
interest collected by the Trustee will be sufficient to repay its
advances, to allow for accrued interest under the monthly,
quarterly and semi-annual plans of distribution and to generate
enough cash to commence distributions to Unitholders. If a
Unitholder sells or redeems all or a portion of his Units or if
the Bonds in a Trust Fund are sold or otherwise removed or if a
Trust Fund is liquidated, he will receive at that time his
proportionate share of the accrued interest computed to the
settlement date in the case of sale or liquidation and to the
date of tender in the case of redemption in such Trust Fund.
Public Distribution of Units. The Sponsor has
qualified Units for sale in all states. Units will be sold
through dealers who are members of the National Association of
Securities Dealers, Inc. and through others. Sales may be made
to or through dealers at prices which represent discounts from
the Public Offering Price as set forth below. Certain commercial
banks are making Units of the Trust available to their customers
on an agency basis. A portion of the sales charge paid by their
customers is retained by or remitted to the banks, in an amount
as shown in the tables below. Under the Glass-Steagall Act,
banks are prohibited from underwriting Trust Units; however, the
Glass-Steagall Act does permit certain agency transactions and
the banking regulators have indicated that these particular
agency transactions are permitted under such Act. In addition,
state securities laws on this issue may differ from the
interpretations of federal law expressed herein and banks and
financial institutions may be required to register as dealers
pursuant to state law.
<TABLE>
<CAPTION>
DOLLAR WEIGHTED AVERAGE YEARS TO MATURITY*
AMOUNT OF INVESTMENT 4 TO 7.99 8 TO 14.99 15 OR MORE
Discount Per Unit (% Of Public Offering Price)
<S> <C> <C> <C>
$1,000 to $99,999 2.00% 3.00% 4.00%
$100,000 to $499,999 1.75 2.75 3.50
$500,000 to $999,999 1.50 2.50 3.00
$1,000,000 or more 1.25 2.25 2.50
- -----------------
</TABLE>
* If the dollar weighted average maturity of a Trust is from 1
to 3.99 years, the concession or agency commission is 1.00%
of the Public Offering Price.
The Sponsor reserves the right to change the discounts set
forth above from time to time. In addition to such discounts,
the Sponsor may, from time to time, pay or allow an additional
discount, in the form of cash or other compensation, to dealers
employing registered representatives who sell, during a specified
time period, a minimum dollar amount of Units of the Trust and
other unit investment trusts underwritten by the Sponsor. The
difference between the discount and the sales charge will be
retained by the Sponsor.
The Sponsor reserves the right to reject, in whole or in
part, any order for the purchase of Units.
Profits of Sponsor. The Sponsor will retain a portion
of the sales charge of each Unit sold, representing the
difference between the Public Offering Price of the Units and the
discounts allowed to firms selling such Units. The Sponsor may
realize additional profit or loss as a result of the possible
change in the daily evaluation of the Municipal Bonds in a Series
of the Trust, since the value of its inventory of Units may
increase or decrease.
MARKET FOR UNITS
While not obligated to do so, the Sponsor intends to, and
certain of the Underwriters may, subject to change at any time,
maintain a market for Units of each Series of the Trust offered
hereby and to continuously offer to purchase said Units at
prices, as determined by the Evaluator, based on the aggregate
bid prices of the underlying Municipal Bonds of such Series,
together with accrued interest to the expected date of
settlement. Accordingly, Unitholders who wish to dispose of
their Unit should inquire of their bank or broker as to the
current market price in order to determine whether there is in
existence any price in excess of the Redemption Price and, if so,
the amount thereof.
The offering price of any Units resold by the Sponsor will
be in accord with that described in the currently effective
Prospectus describing such Units. Any profit or loss resulting
from the resale of such Units will belong to the Sponsor. The
Sponsor may suspend or discontinue purchases of Units of any
Trust Fund if the supply of Units exceeds demand, or for other
business reasons.
REDEMPTION
If more favorable terms do not exist in the over-the-counter
market described above, Unitholders of a Series of the Trust may
cause their Units to be redeemed by the Trustee by making a
written request to the Trustee, Investors Fiduciary Trust
Company, P.O. Box 419430, Kansas City, Missouri 64173-0216 and,
in the case of Units evidenced by a certificate, by tendering
such certificate to the Trustee, properly endorsed or accompanied
by a written instrument or instruments of transfer in form
satisfactory to the Trustee. Unitholders must sign such written
request, and such certificate or transfer instrument, exactly as
their names appear on the records of the Trustee and on any
certificate representing the Units to be redeemed. If the amount
of the redemption is $25,000 or less and the proceeds are payable
to the Unitholder(s) of record at the address of record, no
signature guarantee is necessary for redemptions by individual
account owners (including joint owners). Additional
documentation may be requested, and a signature guarantee is
always required, from corporations, executors, administrators,
trustees, guardians or associations. The signatures must be
guaranteed by a participant in the Securities Transfer Agents
Medallion Program ("STAMP") or such other guarantee program in
addition to, or in substitution for, STAMP, as may be accepted by
the Trustee. A certificate should only be sent by registered or
certified mail for the protection of the Unitholder. Since
tender of the certificate is required for redemption when one
has been issued, Units represented by a certificate cannot be
redeemed until the certificate representing the Units has been
received by the purchaser.
Redemption shall be made by the Trustee on the seventh
calendar day following the day on which a tender for redemption
is received, or if the seventh calendar day is not a business
day, on the first business day prior thereto (the "Redemption
Date"), by payment of cash equivalent to the Redemption Price for
such series, determined as set forth below under "Computation of
Redemption Price," as of the evaluation time stated under
"Essential Information" in Part Two, next following such tender,
multiplied by the number of Units being redeemed. The price
received upon redemption might be more or less than the amount
paid by the Unitholder depending on the value of the Municipal
Bonds in the portfolio at the time of redemption. Any Units
redeemed shall be cancelled and any undivided fractional interest
in that Series of the Trust will be extinguished.
Under regulations issued by the Internal Revenue Service,
the Trustee is required to withhold a specified percentage of the
principal amount of a Unit redemption if the Trustee has not been
furnished the redeeming Unitholder's tax identification number
in the manner required by such regulations. Any amount so
withheld is transmitted to the Internal Revenue Service and may
be recovered by the Unitholder only when filing a tax return.
Under normal circumstances the Trustee obtains the Unitholder's
tax identification number from the selling broker. However, any
time a Unitholder elects to tender Units for redemption, such
Unitholder should make sure that the Trustee has been provided a
certified tax identification number in order to avoid this
possible "back-up withholding." In the event the Trustee has not
been previously provided such number, one must be provided at the
time redemption is requested.
Any amounts paid on redemption representing interest shall
be withdrawn from the Interest Account for such Series to the
extent that funds are available for such purpose. All other
amounts paid on redemption shall be withdrawn from the Principal
Account of such Series. The Trustee is empowered to sell
Municipal Bonds from the portfolio of a Series of the Trust in
order to make funds available for the redemption of Units of such
Series. Such sale may be required when Municipal Bonds would not
otherwise be sold and might result in lower prices than might
otherwise be realized. To the extent Municipal Bonds are sold,
the size and diversity of that Series will be reduced.
The Trustee is irrevocably authorized in its discretion, if
an Underwriter does not elect to purchase any Unit tendered for
redemption, in lieu of redeeming such Units, to sell such Units
in the over-the counter market for the account of tendering
Unitholders at prices which will return to such Unitholders
amounts in cash, net after brokerage commissions, transfer taxes
and other charges, equal to or in excess of Redemption Price for
such Units. In the event of any such sale, the Trustee shall pay
the net proceeds thereof to the Unitholders on the day they would
otherwise be entitled to receive payment of the Redemption Price.
The right of redemption may be suspended and payment
postponed (1) for any period during which the New York Stock
Exchange is closed, other than customary weekend and holiday
closings, or during which (as determined by the Securities and
Exchange Commission) trading on the New York Stock Exchange is
restricted; (2) for any period during which an emergency exists
as a result of which disposal by the Trustee of Municipal Bonds
is not reasonably practicable or it is not reasonably practicable
to fairly determine the value of the underlying Municipal Bonds
in accordance with the Trust Agreements; or (3) for such other
period as the Securities and Exchange Commission may by order
permit. The Trustee is not liable to any person or in any way
for any loss or damage which may result from any such suspension
or postponement.
Computation of Redemption Price. The Redemption Price
for Units of each Series of the Trust is computed by the
Evaluator as of the evaluation time stated under "Essential
Information" in Part Two next occurring after the tendering of a
Unit for redemption and on any other business day desired by it,
by
A. adding (1) the cash on hand in such Series of the
Trust; (2) the aggregate value of each issue of the
Municipal Bonds held in such Series of the Trust, as
determined by the Evaluator on the basis of bid prices
therefor; and (3) interest accrued and unpaid on the
Municipal Bonds in such Series of the Trust as of the date
of computation; and
B. deducting therefrom (1) amounts representing any
applicable taxes or governmental charges payable out of the
Series of the Trust and for which no deductions have been
previously made for the purpose of additions to the Reserve
Account described under "Expenses of the Trust"; (2) amounts
representing estimated accrued expenses of such Series
including, but not limited to, fees and expenses of the
Trustee (including legal and auditing fees), the Evaluator,
the Sponsor, and bond counsel, if any; (3) cash held for
distribution to Unitholders of record as of the business day
prior to the evaluation being made; and (4) other
liabilities incurred by such Series; and
C. finally, dividing the results of such computation
by the number of Units of such Series of the Trust
outstanding as of the date thereof.
UNITHOLDERS
Ownership of Units. Ownership of Units of a Series of
the Trust will not be evidenced by a certificate unless a
Unitholder or the Unitholder's registered broker/dealer or the
clearing agent for such broker/dealers makes a written request to
the Trustee. Units are transferable by making a written request
to the Trustee and, in the case of Units evidenced by a
certificate, presenting and surrendering such certificate to the
Trustee properly endorsed or accompanied by a written instrument
or instruments of transfer which should be sent registered or
certified mail for the protection of the Unitholder. Unitholders
must sign such written request, and such certificate or transfer
instrument, exactly as their names appear on the records of the
Trustee and on any certificate representing the Units to be
transferred. Such signatures must be guaranteed by a participant
in the Securities Transfer Agents Medallion Program ("STAMP") or
such other signature guarantee program in addition to, or in
substitution for, STAMP, as may be accepted by the Trustee.
Units may be purchased and certificates, if requested, will
be issued in denominations of one Unit or any whole Unit multiple
thereof subject to any minimum requirement established by the
sponsor from time to time. Any certificate issued will be
numbered serially for identification, issued in fully registered
form and will be transferable only on the books of the trustee.
The Trustee may require a Unitholder to pay a reasonable fee, to
be determined in the sole discretion of the Trustee, for each
certificate re-issued or transferred, and to pay any governmental
charge that may be imposed in connection with each such transfer
or interchange. The Trustee at the present time does not intend
to charge for the normal transfer or interchange of certificates.
Destroyed, stolen, mutilated or lost certificates will be
replaced upon delivery to the Trustee of satisfactory indemnity
(generally amounting to 3% of the market value of the Units),
affidavit of loss, evidence of ownership and payment of expenses
incurred.
Distributions to Unitholders. Interest Distributions:
Interest received by a Series of the Trust, including any portion
of the proceeds from a disposition of Municipal Bonds which
represents accrued interest, is credited by the Trustee to the
Interest Account for such Series. All other receipts are
credited by the Trustee to a separate Principal Account for such
Series. During each year the distributions to the Unitholders of
each Series of the Trust as of each Record Date (see "Essential
Information" in Part Two) will be made on the following
Distribution Date or shortly thereafter and shall consist of an
amount substantially equal to one-twelfth, one-quarter or
one-half (depending on the distribution option selected) of such
Unitholders' pro rata share of the estimated annual income to the
Interest Account for such Series, after deducting estimated
expenses. However, interest to which Unitholders of a Series of
the Trust are entitled will at most times exceed the amount
available for distribution, there will almost always remain an
item of accrued interest that is accounted for daily and is added
to the value of each Unit. If Unitholders sell or redeem all or
a portion of their Units, they will be paid their proportionate
share of the accrued interest of such Series of the Trust to, but
not including, the fifth business day after the date of sale or
to the date of tender in the case of a redemption.
Persons who purchase Units between a Record Date and a
Distribution Date will receive their first distributions on the
second Distribution Date following their purchase of Units.
Since interest on Municipal Bonds in each Series of the Trust is
payable at varying intervals, usually in semi-annual
installments, and distributions of income are made to Unitholders
of the Series of the Trust at what may be different intervals
from receipt of interest, the interest accruing to such Series of
the Trust may not be equal to the amount of money received and
available for distribution from the Interest Account for such
Series. Therefore, on each Distribution Date the amount of
interest actually on deposit in the Interest Account and
available for distribution may be slightly more or less than the
interest distribution made. In order to eliminate fluctuations
in interest distributions resulting from such variances, the
Trustee is authorized by the Trust Agreements to advance such
amounts as may be necessary to provide interest distributions of
approximately equal amounts. The Trustee will be reimbursed,
without interest, for any such advances from funds available in
the Interest Account of such Series.
Unitholders purchasing Units will initially receive
distributions in accordance with the election of the prior owner.
Unitholders desiring to change their distribution option, if
applicable, may do so by sending written notice to the Trustee,
together with their certificate (if one was issued).
Certificates should only be sent by registered or certified mail
to minimize the possibility of loss. If written notice and any
certificate are received by the Trustee not later than January 1
or July 1 of a year, the change will become effective on
January 2 for distributions commencing with February 15 or
August 15, respectively, of that year. If notice is not received
by the Trustee, the Unitholder will be deemed to have elected to
continue with the same option.
Principal Distributions: The Trustee will distribute on
each Distribution Date or shortly thereafter, to each Unitholder
of Record of a Series of the Trust on the preceding Record Date,
an amount substantially equal to such Unitholders' pro rata share
of the cash balance, if any, in the Principal Account of such
Series (but not less than $1.00 per Unit or $.001 per Unit for
certain Series) computed as of the close of business on the
preceding Record Date.
Statements to Unitholders. With each distribution, the
Trustee will furnish or cause to be furnished to each Unitholder
a statement of the amount of interest and the amount of other
receipts, if any, which are being distributed, expressed in each
case as a dollar amount per Unit.
The accounts of each Series of the Trust are required to be
audited annually, at the Series' expense, by independent auditors
designated by the Sponsor, unless the Trustee determines that
such an audit would not be in the best interest of the
Unitholders of such Series of the Trust. The accountants' report
will be furnished by the Trustee to any Unitholder of such Series
of the Trust upon written request.
Within a reasonable period of time after the end of each
calendar year, the Trustee shall furnish to each person who at
any time during calendar year was a Unitholder of such Series of
the Trust a statement covering the calendar year, setting forth
for the applicable series:
A. As to the Interest Account for such Series:
1. The amount of interest received on the
Municipal Bonds and the percentage of such amount by
states and territories in which the issuers of such
Bonds are located;
2. The amount paid from the Interest account
representing accrued interest of any Units redeemed;
3. The deductions from the Interest Account for
applicable taxes, if any, fees and expenses of the
Trustee, the Evaluator, and, if any, of bond counsel;
4. Any amounts credited by the Trustee to a
Reserve Account described under "Expense of the Trust";
and
5. The net amount remaining after such payment
and deductions, expressed both as a total dollar amount
and a dollar amount per Unit outstanding on the last
business day of such calendar year.
B. As to the Principal Account for such Series:
1. The dates of the maturity, liquidation or
redemption of any of the Municipal Bonds and the net
proceeds received therefrom excluding any portion
credited to the Interest Account;
2. The amount paid from the Principal Account
representing the principal of any Units redeemed;
3. The deductions from the Principal Account for
payment of applicable taxes, if any, fees and expenses
(including auditing fees) of the Trustee, the
Evaluator, and, if any, of bond counsel;
4. The amounts credited by the Trustee to a
Reserve Account described under "Expenses of the
Trust"; and
5. The net amount remaining after distributions
of principal and deductions, expressed both as a dollar
amount and as a dollar amount per Unit outstanding on
the last business day of such calendar year.
C. The following information:
1. A list of the Municipal Bonds in such Series
as of the last business day of such calendar year;
2. The number of Units of such
Series
outstanding on the last business day of such calendar
year;
3. The Redemption Price of such Series based on
the last Trust Evaluation made during such calendar
year;
4. The amount actually distributed during such
calendar year from the Interest and Principal Accounts
of such Series separately stated, expressed both as
total dollar amounts and as dollar amounts per Unit
outstanding on the Record Date for each such
distribution.
Rights of Unitholders. A Unitholder may at any time
tender Units to the Trustee for redemption. No Unitholder shall
have the right to control the operation and management of the
Trust or any Series thereof in any manner, except to vote with
respect to amendment of the Trust Agreements or termination of a
Series of the Trust. The death or incapacity of any Unitholder
will not operate to terminate any Series of the Trust nor entitle
legal representatives or heirs to claim an accounting or to bring
any action or proceeding in any court for partition for winding
up of the Trust.
INVESTMENT SUPERVISION
The Sponsor may not alter the portfolio of a Series of the
Trust by the purchase, sale or substitution of Municipal Bonds,
except in the special circumstances noted below. Thus, with the
exception of the redemption or maturity of Municipal Bonds in
accordance with their terms, and/or the sale of Municipal Bonds
to meet redemption requests, the assets of each Series of the
Trust will remain unchanged under normal circumstances.
The Sponsor may direct the Trustee to dispose of Municipal
Bonds the value of which has been affected by certain adverse
events including institution of certain legal proceedings or
decline in price or the occurrence of other market factors,
including advance refunding, so that in the opinion of the
Sponsor the retention of such Bonds in a Series of the Trust
would be detrimental to the interest of the Unitholders. The
proceeds from any such sales, exclusive of any portion which
represents accrued interest, will be credited to the Principal
Account of such Series for distribution to the Unitholders.
The Sponsor is required to instruct the Trustee to reject
any offer made by an issuer of the Municipal Bonds to issue new
obligation in exchange or substitution for any of such Municipal
Bonds pursuant to a refunding financing plan, except that the
Sponsor may instruct the Trustee to accept or reject such an
offer or to take any other action with respect thereto as the
Sponsor may deem proper if (a) the issuer is in default with
respect to such Municipal Bonds; or (b) in the written opinion of
the Sponsor, there is a reasonable basis to believe that the
issuer will default with respect to such Municipal Bonds in the
foreseeable future. Any obligations received in exchange or
substitution will be held by the Trustee subject to the terms and
conditions of the Trust Agreement to the same extent as the
Municipal Bonds originally deposited thereunder. Within five
days after the deposit of obligations in exchange or substitution
for underlying Bonds, the Trustee is required to give notice
thereof to each Unitholder of such Series of such Series of the
Trust registered on the books of the Trustee, identifying the
Municipal Bonds eliminated and the Municipal Bonds substituted
therefor.
ADMINISTRATION OF THE TRUST
The Trustee. The Trustee, Investors Fiduciary Trust
Company, is a trust company specializing in investment related
services, organized and existing under the laws of Missouri,
having its trust office at 127 West 10th Street, Kansas City,
Missouri 64105. The Trustee is subject to supervision and
examination by the Division of Finance of the State of Missouri
and the Federal Deposit Insurance Corporation. Investors
Fiduciary Trust Company is owned by State Street Boston
Corporation.
The Trustee, whose duties are ministerial in nature, has not
participated in selecting the portfolio of any Series of the
Trust. For information relating to the responsibilities of the
Trustee under the Trust Agreements, reference is made to the
material set forth under "Unitholders."
In accordance with the Trust Agreements, the Trustee shall
keep records of all transactions at its office. Such records
shall include the name and address of, and the number of Units
held by, every Unitholder of a Series of the Trust. Such books
and records shall be open to inspection by any Unitholder of such
Series at all reasonable times during the usual business hours.
The Trustee shall make such annual or other reports as may from
time to time be required under any applicable state or Federal
statute, rule or regulation. The Trustee shall keep a certified
copy or duplicate original of the Trust Agreements on file in its
office available for inspection at all reasonable times during
usual business hours by any Unitholder of such Series, together
with a current list of the Municipal Bonds held in such Series of
the Trust. Pursuant to the Trust Agreements, the Trustee may
employ one or more agents for the purpose of custody and
safeguarding of Municipal Bonds comprising the portfolio.
Under the Trust Agreements, the Trustee or any successor
trustee may resign and be discharged of its duties created by the
Trust Agreements by executing an instrument in writing and filing
the same with the Sponsor.
The Trustee or successor trustee must mail a copy of the
notice of resignation to all Unitholders then of record, not
less than sixty days before the date specified in such notice
when such resignation is to take effect. The Sponsor upon
receiving notice of such resignation is obligated to appoint a
successor trustee promptly. If, upon such resignation, no
successor trustee has been appointed and has accepted the
appointment within thirty days after notification, the retiring
Trustee may apply to a court of competent jurisdiction for the
appointment of a successor. In case the Trustee becomes
incapable of acting or is adjudged a bankrupt or is taken over by
public authorities, the Sponsor may remove the Trustee and
appoint a successor trustee as provided in the Trust Agreements.
Notice of such removal and appointment shall be mailed to each
Unitholder by the Sponsor. Upon execution of a written
acceptance of such appointment by a successor trustee, all the
rights, powers, duties and obligations of the original Trustee
shall vest in successor.
The Trustee shall be a corporation organized under the laws
of the United States or any state thereof, which is authorized
under such laws to exercise trust powers. The Trustee shall have
at all times an aggregate capital, surplus and undivided profits
of not less than $5,000,000.
The Evaluator. Kemper Unit Investment Trusts, a
service of Kemper Securities, Inc., the Sponsor, also serves as
Evaluator. The Evaluator may resign or be removed by the Trustee
in which event the Trustee is to use its best efforts to appoint
a satisfactory successor. Such resignation or removal shall
become effective upon acceptance of appointment by the successor
evaluator. If upon resignation of the Evaluator no successor has
accepted appointment within thirty days after notice of
resignation, the Evaluator may apply to a court of competent
jurisdiction for the appointment of a successor. Notice of such
resignation or removal and appointment shall be mailed by the
Trustee to each Unitholder. At the present time, pursuant to a
contract with the Evaluator, Muller Data Corporation, a
non-affiliated firm regularly engaged in the business of
evaluating, quoting or appraising comparable securities, provides
portfolio evaluations of the Municipal Bonds in the Trust which
are then reviewed by the Evaluator. In the event the Sponsor is
unable to obtain current evaluations from Muller Data
Corporation, it may make its own evaluations or it may utilize
the services of any other non-affiliated evaluator or evaluators
it deems appropriate.
Amendment and Termination. The Trust Agreements may be
amended by the Trustee and the Sponsor without the consent of any
of the Unitholders: (1) to cure any ambiguity or to correct or
supplement any provision which may be defective or inconsistent;
(2) to change any provision thereof as may be required by the
Securities and Exchange Commission or any successor governmental
agency; or (3) to make such provisions as shall not adversely
affect the interests of the Unitholders. The Trust Agreements
may also be amended in any respect by the Sponsor and the
Trustee, or any of the provisions thereof may be waived, with the
consent of the holders of Units representing 66-2/3% of the Units
then outstanding of such Series, provided that no such amendment
or waiver will reduce the interest of any Unitholder without the
consent of such Unitholder or reduce the percentage of Units
required to consent to any such amendment or waiver without
consent of all Unitholders of such Series. In no event shall the
Trust Agreements be amended to increase the number of Units of a
Series issuable thereunder or to permit, except in accordance
with the provisions of the Trust Agreements, the acquisition of
any Municipal Bonds in addition to or in substitution for those
in any Series of the Trust. The Trustee shall promptly notify
Unitholders of the substance of any such amendment.
The Trust Agreement provide that each Series of the Trust
shall terminate upon the maturity, redemption or other
disposition, of the last of the Municipal Bonds held in such
Series. If the value of a Series of the Trust shall be less than
the applicable minimum value stated under "Essential Information"
in Part Two the Trustee may, in its discretion, and shall, when
so directed by the Sponsor, terminate such Series of the Trust.
A Series of the Trust may be terminated at any time by the
holders of Units representing 66-2/3% of the Units of such Series
then outstanding. In the event of termination of a Series,
written notice thereof will be sent by the Trustee to all
Unitholders of such Series. Within a reasonable period after
termination, the Trustee will sell any Municipal Bonds remaining
in that Series of the Trust and, after paying all expenses and
charges incurred by the Series, will distribute to Unitholders of
such Series (upon surrender for cancellation of certificates for
Units, if issued) their pro rata share of the balances remaining
in the Interest and Principal Accounts of such Series.
Limitations on Liability. The Sponsor: The Sponsor is
liable for the performance of its obligations arising from the
responsibilities under the Trust Agreements, but will be under no
liability to the Unitholders for taking any action or refraining
from any action in good faith pursuant to the Trust Agreements or
for errors in judgment, except in cases of its own gross
negligence, bad faith or willful misconduct. The Sponsor shall
not be liable or responsible in any way for depreciation or loss
incurred by reason of the sale of any Municipal Bonds.
The Trustee: The Trust Agreements provide that the Trustee
shall be under no liability for any action taken in good faith in
reliance upon prima facie properly executed documents or for the
disposition of monies, Municipal Bonds, or certificates except by
reason of its own gross negligence, bad faith or willful
misconduct, nor shall the Trustee be liable or responsible in any
way for depreciation or loss incurred by reason of the sale by
the Trustee of any Municipal Bonds. In the event that the
Sponsor shall fail to act, the Trustee may act and shall not be
liable for any such action taken in good faith. The Trustee
shall not be personally liable for any taxes or other
governmental charges imposed upon or in respect of the Municipal
Bonds or upon the interest thereon. In addition, the Trust
Agreements contain other customary provisions limiting the
liability of the Trustee.
The Evaluator: The Trustee and Unitholders may rely on any
evaluation furnished by the Evaluator and shall have no
responsibility for the accuracy thereof. The Trust Agreements
provide that the determinations made by the Evaluator shall be
made in good faith upon the basis of the best information
available to it, provided, however, that the Evaluator shall be
under no liability to the Trustee or Unitholders for errors in
judgment, but shall be liable only for its gross negligence, lack
of faith or willful misconduct.
EXPENSES OF THE TRUST
The Sponsor will charge each Series a surveillance fee for
services performed for such Series in an amount not to exceed
that amount set forth in "Essential Information" in Part Two but
in no event will such compensation, when combined with all
compensation received from other unit investment trusts for which
the Sponsor both acts as sponsor and provides portfolio
surveillance, exceed the aggregate cost to the Sponsor for
providing such services. Such fee shall be based on the total
number of Units of each series outstanding as the January Record
Date for any annual period. The Sponsor and other Underwriters
paid all the expenses of creating and establishing the Trust,
including the cost of the initial preparation, printing and
execution of the Prospectus, Trust Agreements and the
certificates, legal and accounting expenses, advertising and
selling expenses, payment of closing fees, expenses of the
Trustee, initial evaluation fees and other out-of-pocket
expenses.
The Trustee receives for its services a fee calculated on
the basis of the annual rate set forth under "Essential
Information" in Part Two based on the largest aggregate principal
amount of Municipal Bonds in such Series of the Trust at any time
during the monthly, quarterly or semi-annual period, as
appropriate. The Trustee also receives indirect benefits to the
extent that it holds funds on deposit in the various non-interest
bearing accounts created pursuant to the Agreement; however, the
Trustee is also authorized by the Agreement to make from time to
time certain non-interest bearing advances to the Series of the
Trust. See "Unitholders-Distributions to Unitholders."
For evaluation of Municipal Bonds in a Series of the Trust,
the Evaluator receives a fee, calculated on an annual rate as
set forth under "Essential Information" in Part Two, based upon
the largest aggregate principal amount of Municipal Bonds in such
Series of the Trust at any time during such monthly period.
The Trustee's and Evaluator's fees are payable monthly on or
before each Distribution Date by deductions from the Interest
Account of such Series to the extent funds are available and then
from the Principal Account of such Series. Both fees may be
increased without approval of Unitholders by amounts not
exceeding a proportionate increase in the Consumer Price Index
entitled "All Services Less Rent of Shelter," published by the
United States Department of Labor, or any equivalent index
substituted therefor.
The following additional charges are or may be incurred by a
Series of the Trust: (a) fees for the Trustee's extraordinary
services; (b) expenses of the Trustee (including legal and
auditing expenses, but not including any fees and expenses
charged by any agent for custody and safeguarding of Municipal
Bonds) and of bond counsel, if any; (c) various governmental
charges; (d) expenses and costs of any action taken by the
Trustee to protect the Trust or any series thereof, or the rights
and interests of the Unitholders; (e) indemnification of the
Trustee for any loss, liability or expense incurred by it in the
administration of the Trust or any Series without gross
negligence, bad faith or willful misconduct on its part; (f)
indemnification of the Sponsor for any loss, liability or expense
incurred in acting as Depositor of a Series of the Trust without
gross negligence, bad faith or willful misconduct; and (g)
expenditures incurred in contacting Unitholders upon termination
of a Series of the Trust. The fees and expenses set forth herein
are payable out of the appropriate Series of the Trust and, when
owed to the Trustee, are secured by a lien on the assets of such
Series.
Fees and expenses of a Series of the Trust shall be deducted
from the Interest Account of such Series, or, to the extent funds
are not available in such Account, from the Principal Interest
Account of such Series. The Trustee may withdraw from the
Principal Account of a Series or the Interest Account of a Series
such amounts, if any, as it deems necessary to establish a
reserve for any taxes or other governmental charges or other
extraordinary expenses payable out of the Trust. Amounts so
withdrawn shall be credited to a separate account maintained for
such Series of the Trust known as the Reserve Account and shall
not be considered a part of such Series of the Trust when
determining the value of the Units until such time as the Trustee
shall return all or any part of such amounts to the appropriate
account.
THE SPONSOR
The Sponsor, Kemper Unit Investment Trusts, with an office
at 77 W. Wacker Drive, 29th Floor, Chicago, Illinois 60601, (800)
621-5024, is a service of Kemper Securities, Inc., which is a
wholly-owned subsidiary of Kemper Financial Companies, Inc.
which, in turn, is a wholly-owned subsidiary of Kemper
Corporation. The Sponsor acts as underwriter of a number of
other Kemper unit investment trusts and will act as underwriter
of any other unit investment trust products developed by the
Sponsor in the future. As of January 31, 1994, the total
stockholder's equity of Kemper Securities, Inc., was
approximately $261,673,436 (unaudited).
If at any time the Sponsor shall fail to perform any of its
duties under the Agreement or shall become incapable of acting or
shall be adjudged a bankrupt or insolvent or its affairs are
taken over by public authorities, then the Trustee may (a)
appoint a successor sponsor at rates of compensation deemed by
the Trustee to be reasonable and not exceeding such reasonable
amounts as may be prescribed by the Securities and Exchange
Commission, or (b) terminate the Agreement and liquidate the
Trust or any Series as provided therein or (c) continue to act as
Trustee without terminating the Agreement.
The foregoing financial information with regard to the
Sponsor relates to the Sponsor only and not to any Series of this
Trust. Such information is included in this Prospectus only for
the purpose of informing investors as to the financial
responsibility of the Sponsor and its ability to carry out its
contractual obligations with respect to the Series of the Trust.
More comprehensive financial information can be obtained upon
request from the Sponsor.
LEGAL OPINIONS
The legality of the Units offered hereby and certain matters
relating to Federal tax law were originally passed upon by
Chapman and Cutler, 111 West Monroe Street, Chicago, Illinois
60603, as counsel for the Sponsor.
INDEPENDENT AUDITORS
The statement of net assets, including the schedule of
investments, appearing in Part Two of this Prospectus and
Registration Statement, with information pertaining to the
specific Series of the Trust to which such statements relate,
have been audited by Ernst & Young LLP, independent auditors, as
set forth in their report appearing in Part Two and is included
in reliance upon such report given upon the authority of such
firm as experts in accounting and auditing.
DESCRIPTION OF SECURITIES RATINGS*
Standard & Poor's Ratings Group. A brief description of
the applicable Standard & Poor's Ratings Group ("Standard &
Poor's") rating symbols and their meanings follows:
A Standard & Poor's corporate or municipal bond rating is a
current assessment of the creditworthiness of an obligor with
respect to a specific debt obligation. This assessment may take
into consideration obligors such as guarantors, insurers, or
lessees.
The bond rating is not a recommendation to purchase, sell or
hold a security, inasmuch as it does not comment as to market
price or suitability for a particular investor.
The ratings are based on current information furnished by
the issuer and obtained by Standard & Poor's from other sources
it considers reliable. Standard & Poor's does not perform an
audit in connection with any rating and may, on occasion, rely on
unaudited financial information. The ratings may be changed,
suspended, or withdrawn as a result of changes in, or
unavailability of, such information, or for other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
I. Likelihood of default - capacity and willingness of the
obligor as to the timely payment of interest and repayment of
principal in accordance with the terms of the obligation;
II. Nature of and provisions of the obligation;
III. Protection afforded by, and relative position
of,
the obligation in the event of bankruptcy, reorganization or
other arrangement, under the laws of bankruptcy and other laws
affecting creditors' rights.
AAA _ Bonds rated AAA have the highest
rating
assigned by Standard & Poor's to a debt obligation. Capacity to
pay interest and repay principal is extremely strong.
AA _ Bonds rated AA have a very strong capacity to pay
interest and repay principal and differ from the highest rated
issues only in small degree.
A _ Bonds rated A have a strong capacity to
pay
interest and repay principal although they are somewhat more
susceptible to the adverse effects of changes in circumstances
and economic conditions than bonds in higher rated categories.
BBB _ Bonds rated BBB are regarded as having
an
adequate capacity to pay interest and repay principal. Whereas
they normally exhibit adequate protection parameters, adverse
economic conditions or changing circumstances are more likely to
lead to a weakened capacity to pay interest and repay principal
for bonds in this category than for bonds in higher rated
categories.
Plus (+) or Minus (-): The ratings from "AA" to "A" may be
modified by the addition of a plus or minus sign to show relative
standing within the major rating categories.
Provisional Ratings: The letter "p" indicates the rating is
provisional. A provisional rating assumes the successful
completion of the project being financed by the bonds being rated
and indicates that payment of debt service requirements is
largely or entirely dependent upon the successful and timely
completion of the project. This rating, however, while
addressing credit quality subsequent to completion of the
project, makes no comment on the likelihood of, or the risk of
default upon failure of, such completion. The investor should
exercise his own judgment with respect to such likelihood and
risk.
Moody's Investors Service, Inc. _ A brief description of the
applicable Moody's Investors Service, Inc. rating symbols and
their meanings follow:
Aaa _ Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and
are generally referred to as "gilt edge." Interest payments are
protected by a large or by an exceptionally stable margin and
principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of such
issues. Their safety is so absolute that with the occasional
exception of oversupply in a few specific instances,
characteristically, their market value is affected solely by
money market fluctuations.
Aa _ Bonds which are rated Aa are judged to be of high
quality by all standards. Together with the Aaa group they
comprise what are generally known as high grade bonds. They are
rated lower than the best bonds because margins of protection may
not be as large as in Aaa securities or fluctuations of
protective elements may be of greater amplitude or there may be
other elements present which make the long term risks appear
somewhat larger than in Aaa securities. Their market value is
virtually immune to all but money market influences, with the
occasional exception of oversupply in a few specific instances.
A _ Bonds which are rated A possess many favorable
investment attributes and are to be considered as upper medium
grade obligations. Factors giving security to principal and
interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the
future. The market value of A-rated bonds may be influenced to
some degree by economic performance during a sustained period of
depressed business conditions, but, during periods of normalcy,
A-rated bonds frequently move in parallel with Aaa and Aa
obligations, with the occasional exception of oversupply in a few
specific instances.
A1 _ Bonds which are rated A1 offer the maximum in security
within their quality group, can be bought for possible upgrading
in quality, and additionally, afford the investor an opportunity
to gauge more precisely the relative attractiveness of offering
in the market place.
Baa _ Bonds which are rated Baa are considered as lower
medium grade obligations, i.e., they are neither highly protected
nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements
may be lacking or may be characteristically unreliable over any
great length of time. Such bonds lack outstanding investment
characteristics and, in fact, have speculative characteristics as
well. The market value of Baa-rated bonds is more sensitive to
changes in economic circumstances and, aside from occasional
speculative factors applying to some bonds of this class, Baa
market valuations move in parallel with Aaa, Aa and A obligations
during periods of economic normalcy, except in instances of
oversupply.
Conditional Ratings: Bonds rated "Con (-)" are ones for
which the security depends upon the completion of some act or the
fulfillment of some condition. These are bonds secured by (a)
earnings of projects under construction. (b) earnings of project
unseasoned in operation experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other
limiting condition attaches. Parenthetical rating denotes
probable credit stature upon completion of construction or
elimination of basis of condition.
Note: Moody's applies numerical modifiers, 1, 2, and 3 in
each generic rating classification from Aa through B in certain
areas of its bond rating system. The modifier 1 indicates that
the security ranks in the higher end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates that the issuer ranks in the lower end of
its generic rating category.
<PAGE>
Kemper Tax-Exempt Income Trust
Series 86 (AMT Bond Trust)
Part Two
Dated September 28, 1995
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY
IS A CRIMINAL OFFENSE.
NOTE: Part Two of this Prospectus May Not Be Distributed unless
Accompanied by
Part One.
<PAGE>
Kemper Tax-Exempt Income Trust
Series 86 (AMT Bond Trust)
Essential Information
As of August 15, 1995
Sponsor and Evaluator: Kemper Unit Investment
Trusts
Trustee: Investors Fiduciary Trust
Company
<TABLE>
<CAPTION>
General Information
<S>
<C>
Principal Amount of Municipal Bonds
$4,390,000
Number of Units
5,077
Fractional Undivided Interest in the Trust per Unit
1/5,077
Principal Amount of Municipal Bonds per Unit
$864.68
Public Offering Price:
Aggregate Bid Price of Municipal Bonds in the Portfolio
$4,362,569
Aggregate Bid Price of Municipal Bonds per Unit
$859.28
Cash per Unit (1)
$-
Sales Charge 5.820% (5.5% of Public Offering Price)
$50.01
Public Offering Price per Unit (exclusive of accrued
interest) (2)
$909.29
Redemption Price per Unit (exclusive of accrued interest)
$859.28
Excess of Public Offering Price per Unit Over Redemption
Price per Unit
$50.01
Minimum Value of the Trust under which Trust Agreement
may be terminated
$985,000
</TABLE>
Date of Trust
June 15, 1989
Mandatory Termination Date
December 31, 2039
Annual Evaluation Fee: $.30 per $1,000 principal amount of
Municipal Bonds.
Evaluations for purpose of sale, purchase or redemption of Units
are made as
of the close of business of the Sponsor next following receipt of
an order for
a sale or purchase of Units or receipt by Investors Fiduciary
Trust Company of
Units tendered for redemption.
[FN]
1. This amount, if any, represents principal cash or overdraft
which is an
asset or liability of the Trust and is included in the Public
Offering Price.
2. Units are offered at the Public Offering Price plus accrued
interest to
the date of settlement (three business days after purchase). On
August 15,
1995, there was added to the Public Offering Price of $909.29,
accrued
interest to the settlement date of August 18, 1995 of $11.83,
$17.05 and
$17.15 for a total price of $921.12, $926.34 and $926.44 for the
monthly,
quarterly and semiannual distribution options, respectively.
<PAGE>
Kemper Tax-Exempt Income Trust
Series 86 (AMT Bond Trust)
Essential Information (continued)
As of August 15, 1995
Sponsor and Evaluator: Kemper Unit Investment
Trusts(4)
Trustee: Investors Fiduciary Trust
Company
<TABLE>
<CAPTION>
Special Information Based on Various Distribution Options
Monthly Quarterly
Semiannual
<S> <C> <C>
<C>
-------- --------
--------
Calculation of Estimated Net Annual
Interest Income per Unit (3):
Estimated Annual Interest Income $63.2842 $63.2842
$63.2842
Less: Estimated Annual Expense 1.8507 1.5859
1.2746
-------- --------
--------
Estimated Net Annual Interest Income $61.4335 $61.6983
$62.0096
======== ========
========
Calculation of Interest Distribution
per Unit:
Estimated Net Annual Interest Income $61.4335 $61.6983
$62.0096
Divided by 12, 4 and 2, respectively $5.1195 $15.4246
$31.0048
Estimated Daily Rate of Net Interest
Accrual per Unit $.1706 $.1714
$.1722
Estimated Current Return Based on Public
Offering Price (3) 6.76% 6.79%
6.82%
Estimated Long-Term Return (3) 6.95% 6.98%
7.02%
</TABLE>
Trustee's Annual Fees and Expenses (including Evaluator's Fee):
$1.8507,
$1.5859 and $1.2746 ($.6599, $.5934 and $.5822 of which represent
expenses)
per Unit under the monthly, quarterly and semiannual distribution
options,
respectively.
Record and Computation Dates: First day of the month, as
follows: monthly -
each month; quarterly - January, April, July and October;
semiannual - January
and July.
Distribution Dates: Fifteenth day of the month, as follows:
monthly - each
month; quarterly - January, April, July and October; semiannual -
January and
July.
[FN]
3. The Estimated Long-Term Return and Estimated Current Return
will vary.
For detailed explanation, see Part One of this prospectus.
4. See Note 6 to the accompanying financial statements of the
Trust regarding
a change in ownership of Kemper Unit Investment Trusts and Kemper
Securities,
Inc.
<PAGE>
Report of Independent Auditors
Unitholders
Kemper Tax-Exempt Income Trust
Series 86 (AMT Bond Trust)
We have audited the accompanying statement of assets and
liabilities of Kemper
Tax-Exempt Income Trust Series 86 (AMT Bond Trust), including the
schedule of
investments, as of May 31, 1995, and the related statements of
operations and
changes in net assets for each of the three years in the period
then ended.
These financial statements are the responsibility of the Trust's
sponsor. Our
responsibility is to express an opinion on these financial
statements based on
our audits.
We conducted our audits in accordance with generally accepted
auditing
standards. Those standards require that we plan and perform the
audit to
obtain reasonable assurance about whether the financial
statements are free of
material misstatement. An audit includes examining, on a test
basis, evidence
supporting the amounts and disclosures in the financial
statements. Our
procedures included confirmation of investments owned as of May
31, 1995, by
correspondence with the custodial bank. An audit also includes
assessing the
accounting principles used and significant estimates made by the
sponsor, as
well as evaluating the overall financial statement presentation.
We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in
all material respects, the financial position of Kemper
Tax-Exempt Income
Trust Series 86 (AMT Bond Trust) at May 31, 1995, and the results
of its
operations and the changes in its net assets for the periods
indicated above
in conformity with generally accepted accounting principles.
Ernst & Young LLP
Kansas City, Missouri
September 14, 1995, except for Note 6, as
to which the date is September 26, 1995
<PAGE>
Kemper Tax-Exempt Income Trust
Series 86 (AMT Bond Trust)
Statement of Assets and Liabilities
May 31, 1995
<TABLE>
<CAPTION>
<S> <C>
<C>
Assets
Municipal Bonds, at value (cost $4,798,227)
$4,891,409
Interest receivable
141,320
----------
5,032,729
Liabilities and net assets
Cash overdraft
26,201
Accrued liabilities
2,151
----------
28,352
Net assets, applicable to 5,077 Units outstanding:
Cost of Trust assets, exclusive of interest $4,798,227
Unrealized appreciation 93,182
Distributable funds 112,968
----------
----------
Net assets
$5,004,377
==========
</TABLE>
[FN]
See accompanying notes to financial statements.
<PAGE>
Kemper Tax-Exempt Income Trust
Series 86 (AMT Bond Trust)
Statements of Operations
<TABLE>
<CAPTION>
Year ended
May 31
1995 1994
1993
<S> <C> <C>
<C>
-------- ---------
--------
Investment income - interest $360,707 $361,088
$362,221
Expenses:
Trustee's fees and related expenses 7,231 6,895
6,890
Evaluator's fees 1,468 1,471
1,475
-------- ---------
--------
Total expenses 8,699 8,366
8,365
-------- ---------
--------
Net investment income 352,008 352,722
353,856
Unrealized appreciation (depreciation)
on investments during the year 5,473 (256,763)
138,110
-------- ---------
--------
Net increase in net assets resulting
from operations $357,481 $95,959
$491,966
======== =========
========
</TABLE>
[FN]
See accompanying notes to financial statements.
<PAGE>
Kemper Tax-Exempt Income Trust
Series 86 (AMT Bond Trust)
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Year ended
May 31
1995 1994
1993
<S> <C> <C>
<C>
---------- ----------
- ----------
Operations:
Net investment income $352,008 $352,722
$353,856
Unrealized appreciation (depreciation)
on investments during the year 5,473 (256,763)
138,110
---------- ----------
- ----------
Net increase in net assets resulting
from operations 357,481 95,959
491,966
Distributions to Unitholders:
Net investment income (352,531) (353,754)
(351,886)
Principal from investment transactions (10,002) (10,002)
-
---------- ----------
- ----------
Total increase (decrease) in net assets (5,052) (267,797)
140,080
Net assets:
At the beginning of the year 5,009,429 5,277,226
5,137,146
---------- ----------
- ----------
At the end of the year (including
distributable funds applicable to
Trust Units of $112,968, $118,493
and $114,527 at May 31, 1995, 1994
and 1993, respectively) $5,004,377 $5,009,429
$5,277,226
========== ==========
==========
Trust Units outstanding at the end
of the year 5,077 5,077
5,077
========== ==========
==========
</TABLE>
[FN]
See accompanying notes to financial statements.
<PAGE>
<TABLE>
Kemper Tax-Exempt
Income Trust
Series 86 (AMT
Bond Trust)
Schedule of
Investments
May 31,
1995
<CAPTION>
Coupon
Maturity Redemption Principal
Name of Issuer and Title of Bond(6)(8)(9) Rate
Date Provisions(2) Rating(1) Amount(4) Value(3)
<S> <C> <C>
<C> <C> <C> <C>
-------
- ---------- -------------- --------- ---------- ----------
Chelan County, Washington, Public Utility District 7.625%
7/01/2026 1997 @ 100 A+ $480,000 $479,098
No. 1, Rocky Reach Hydroelectric Revenue Bonds.
City of Chicago, Illinois, O'Hare International 8.20
1/01/2018 2009 @ 100 S.F. A+ 480,000 491,544
Airport, General Airport Revenue Bonds, Series
1997 @ 102
1988 A.
Clark County, Nevada, Airport Systems Improvement 8.25
7/01/2015 2009 @ 100 S.F. A 500,000 524,430
Revenue Bonds, Series 1988.
1998 @ 102
Intermountain Power Agency, Utah, Power Supply 0.00
7/01/2005 Non-Callable AAA 195,000 108,204
Revenue Refunding Bonds, Series 1989 A.
Insured by Municipal Bond Investors Assurance
Corporation. (5)(7)
Michigan State Housing Development Authority, 7.65
7/01/2015 1999 @ 102 AAA 500,000 500,700
Multifamily Insured Housing Bonds, 1989
Series A. Insured by Financial Guaranty
Insurance Company. (7)
New York State Energy Research and Development 7.75
1/01/2024 1998 @ 101.5 Aa3* 750,000 772,162
Authority Electric Facilities Revenue Bonds,
Consolidated Edison Project, Series 1989 A.
+Orange County, California, John Wayne 6.625
7/01/2017 1997 @ 100 A- 495,000 495,485
International Airport, Airport Revenue Bonds.
#Orange County, California, John Wayne 6.625
7/01/2017 1997 @ 100 A- 5,000 4,583
International Airport, Airport Revenue Bonds.
State Board of Regents of the State of Utah, 7.30
11/01/2004 1999 @ 102 AAA 500,000 520,645
Student Loan Revenue Bonds, 1989 Series D.
Insured by AMBAC Indemnity Corporation. (7)
Vermont Housing Finance Agency, Home Mortgage 7.85
12/01/2029 1999 @ 102 A1* 490,000 491,063
Purchase Revenue Bonds, Series 1989 A.
Virginia Housing Development Authority, 7.80
7/01/2028 2018 @ 100 S.F. AA+ 500,000 503,495
Commonwealth Mortgage Revenue Bonds, Series
2000 @ 102 ---------- ----------
1988 A.
$4,895,000 $4,891,409
========== ==========
</TABLE>
[FN]
See accompanying notes to Schedule of Investments.
<PAGE>
Kemper Tax-Exempt Income Trust
Series 86 (AMT Bond Trust)
Notes to Schedule of Investments
1. All ratings are by Standard & Poor's Corporation, unless
marked with the
symbol "*", in which case the rating is by Moody's Investors
Service, Inc.
The symbol "NR" indicates Bonds for which no rating is available.
2. There is shown under this heading the year in which each
issue of Bonds is
initially redeemable and the redemption price for that year or,
if currently
redeemable, the redemption price currently in effect; unless
otherwise
indicated, each issue continues to be redeemable at declining
prices
thereafter, but not below par value. In addition, certain Bonds
in the
Portfolio may be redeemed in whole or in part other than by
operation of the
stated redemption or sinking fund provisions under certain
unusual or
extraordinary circumstances specified in the instruments setting
forth the
terms and provisions of such Bonds. "S.F." indicates a sinking
fund is
established with respect to an issue of Bonds. Redemption
pursuant to call
provisions generally will, and redemption pursuant to sinking
fund provisions
may, occur at times when the redeemed Bonds have a valuation
which represents
a premium over the call price or par.
To the extent that the Bonds were deposited in the Trust at a
price higher
than the price at which they are redeemed, this will represent a
loss of
capital when compared with the original Public Offering Price of
the Units.
To the extent that the Bonds were acquired at a price lower than
the
redemption price, this may represent an increase in capital when
compared with
the original Public Offering Price of the Units. Distributions
of net income
will generally be reduced by the amount of the income which would
otherwise
have been paid with respect to redeemed Bonds and, unless
utilized to pay for
Units tendered for redemption, there will be distributed to
Unitholders the
principal amount and any premium received on such redemption. In
this event
the estimated current return and estimated long-term return may
be affected by
such redemptions.
3. See Note 1 to the accompanying financial statements for a
description of
the method of determining cost and value.
<PAGE>
Kemper Tax-Exempt Income Trust
Series 86 (AMT Bond Trust)
Notes to Schedule of Investments
(continued)
4. At May 31, 1995, the Portfolio of the Trust consists of 11
obligations
issued by 10 entities located in 9 states. All of the issues are
payable from
the income of a specific project or authority and are not
supported by an
issuer's power to levy taxes. The sources of payment for the
revenue bonds
are divided as follows: Airport, 4; Electric Systems, 3;
Housing, 3;
Miscellaneous, 1. Approximately 30% of the aggregate principal
amount of
Bonds in the Trust are obligations of issuers whose revenues are
derived
primarily from housing bonds. Approximately 29% of the aggregate
principal
amount of Bonds in the Trust are obligations of issuers whose
revenues are
derived primarily from the sale of electric energy.
Approximately 30% of the
aggregate principal amount of Bonds in the Trust are obligations
of airport
issuers. Approximately 96% of the aggregate principal amount of
Bonds in the
Trust are subject to call by the issuers within five years after
May 31, 1995.
5. This Bond has been purchased at a discount from the par value
because
there is no stated interest income thereon. Such Bond is
normally described
as a "zero coupon" Bond. Over the life of the Bond the value
increases, so
that upon maturity, the holders of the Bond will receive 100% of
the principal
amount thereof.
6. Interest income on substantially all of the Bonds in the AMT
Bond Trust
will be considered an item of "preference" for alternative
minimum tax
purposes.
7. Insurance on these Bonds was obtained by the issuers of such
Bonds. No
representation is made as to any insurer's ability to meet its
commitments.
8. The security preceded by (+) is secured by, and payable from,
escrowed
U.S. Government securities.
9. The security preceded by (#) is of the same issue as another
Bond in the
Trust.
[FN]
See accompanying notes to financial statements.
<PAGE>
Kemper Tax-Exempt Income Trust
Series 86 (AMT Bond Trust)
Notes to Financial Statements
1. Significant Accounting Policies
Valuation of Municipal Bonds
Municipal Bonds (Bonds) are stated at bid prices as determined by
Kemper Unit
Investment Trusts (A Service of Kemper Securities, Inc.), the
"Evaluator" and
sponsor of the Trust. The aggregate bid prices of the Bonds are
determined by
the Evaluator based on (a) current bid prices of the Bonds, (b)
current bid
prices for comparable bonds, (c) appraisal, or (d) any
combination of the
above.
Cost of Municipal Bonds
Cost of the Trust's Bonds was based on the offering prices of the
Bonds on
June 15, 1989 (Date of Deposit). The premium or discount
(including any
original issue discount) existing at June 15, 1989, is not being
amortized.
Realized gain (loss) from Bond transactions is reported on an
identified cost
basis.
2. Unrealized Appreciation and Depreciation
Following is an analysis of net unrealized appreciation at May
31, 1995:
<TABLE>
<CAPTION>
<S>
<C>
Gross unrealized depreciation
$(8,730)
Gross unrealized appreciation
101,912
--------
Net unrealized appreciation
$93,182
========
</TABLE>
3. Transactions with Affiliates
From the inception of the Trust through January 31, 1995, the
Trustee,
Investors Fiduciary Trust Company (IFTC), was 50% owned by Kemper
Financial
Services, Inc., an affiliate of Kemper Unit Investment Trusts.
On that date,
State Street Boston Corporation acquired IFTC. Prior to January
1, 1995, the
Trustee's fee (not including the reimbursement of out-of-pocket
expenses),
calculated monthly, was at the annual rate of $1.22, $.9655 and
$.6654 under
the monthly, quarterly and semiannual distribution options,
respectively, per
$1,000 principal amount of Bonds in the Trust, based on the
largest aggregate
principal amount of Bonds in the Trust at any time during such
monthly,
quarterly or semiannual periods. Effective January 1, 1995, such
fees were
revised to $1.3772, $1.0966 and $.7651 under the monthly,
quarterly and
semiannual distribution options, respectively. The Evaluator
received a fee,
payable monthly, at an annual rate of $.30 per $1,000 principal
amount of
Bonds, based on the largest aggregate principal amount of Bonds
in the Trust
at any time during such monthly period.
<PAGE>
Kemper Tax-Exempt Income Trust
Series 86 (AMT Bond Trust)
Notes to Financial Statements (continued)
4. Federal Income Taxes
The Trust is not an association taxable as a corporation for
federal income
tax purposes. Each Unitholder is considered to be the owner of a
pro rata
portion of the Trust under Subpart E, Subchapter J of Chapter 1
of the
Internal Revenue Code of 1986, as amended. Accordingly, no
provision has been
made for federal income taxes.
5. Other Information
Cost to Investors
The cost to initial investors of Units of the Trust was based on
the aggregate
offering price of the Bonds on the date of an investor's
purchase, plus a
sales charge of 4.9% of the Public Offering Price (equivalent to
5.152% of the
net amount invested). The Public Offering Price for secondary
market
transactions is based on the aggregate bid price of the Bonds
plus or minus a
pro rata share of cash or overdraft in the Principal Account, if
any, on the
date of an investor's purchase, plus a sales charge of 5.5% of
the Public
Offering Price (equivalent to 5.820% of the net amount invested).
Distributions
Distributions of net investment income to Unitholders are
declared and paid in
accordance with the option (monthly, quarterly or semiannual)
selected by the
investor. Such income distributions, on a record date basis, are
as follows:
<TABLE>
<CAPTION>
Year ended Year ended
Year ended
Distribution May 31, 1995 May 31, 1994
May 31, 1993
Plan Per Unit Total Per Unit Total Per
Unit Total
<S> <C> <C> <C> <C> <C>
<C>
-------- -------- -------- --------
- -------- --------
Monthly $69.15 $205,988 $69.30 $204,302
$69.05 $201,424
Quarterly 69.48 42,072 69.63 43,695
69.36 43,809
Semiannual 69.83 104,471 69.99 105,757
69.66 106,653
-------- --------
--------
$352,531 $353,754
$351,886
======== ========
========
</TABLE>
<PAGE>
<TABLE>
Kemper Tax-Exempt
Income Trust
Series 86 (AMT
Bond Trust)
Notes to Financial
Statements (continued)
5. Other Information (continued)
Selected data for a Unit of the Trust outstanding throughout each
year -
<CAPTION>
Monthly
Quarterly Semiannual
Year ended May 31
Year ended May 31 Year ended May 31
1995 1994 1993
1995 1994 1993 1995 1994 1993
<S> <C> <C> <C>
<C> <C> <C> <C> <C> <C>
------- -------- ---------
- ------- -------- --------- --------- --------- ---------
Investment income - interest $71.05 $71.12 $71.35
$71.05 $71.12 $71.35 $71.05 $71.12 $71.35
Expenses 1.94 1.87 1.87
1.62 1.56 1.56 1.31 1.26 1.26
------- -------- ---------
- ------- -------- --------- --------- --------- ---------
Net investment income 69.11 69.25 69.48
69.43 69.56 69.79 69.74 69.86 70.09
Distributions to Unitholders:
Net investment income (69.15) (69.30) (69.05)
(69.48) (69.63) (69.36) (69.83) (69.99) (69.66)
Principal from investment
transactions (1.97) (1.97) -
(1.97) (1.97) - (1.97) (1.97) -
Net gain (loss) on investments 1.08 (50.57) 27.20
1.08 (50.57) 27.20 1.08 (50.57) 27.20
------- -------- ---------
- ------- -------- --------- --------- --------- ---------
Change in net asset value (.93) (52.59) 27.63
(.94) (52.61) 27.63 (.98) (52.67) 27.63
Net asset value:
Beginning of the year 979.03 1,031.62 1,003.99
984.94 1,037.55 1,009.92 1,002.53 1,055.20 1,027.57
------- -------- ---------
- ------- -------- --------- --------- --------- ---------
End of the year, including
distributable funds $978.10 $979.03 $1,031.62
$984.00 $984.94 $1,037.55 $1,001.55 $1,002.53 $1,055.20
======= ======== =========
======= ======== ========= ========= ========= =========
</TABLE>
<PAGE>
Kemper Tax-Exempt Income Trust
Series 86 (AMT Bond Trust)
Notes to Financial Statements (continued)
6. Subsequent Event
Effective September 14, 1995, through an ESOP, the members of
certain Kemper
Corporation operating units have acquired ownership of certain
Kemper
Corporation operating units, which included Kemper Securities,
Inc., the
Trust's sponsor and evaluator. In connection with the
acquisition, Kemper
Securities, Inc. changed its name to EVEREN Securities, Inc., and
Kemper Unit
Investment Trusts is now a Service of EVEREN Securities, Inc.
Subsequent to
the date of acquisition, neither EVEREN Securities, Inc. nor
Kemper Unit
Investment Trusts is affiliated with Kemper Financial Services,
Inc. or Kemper
Corporation. On September 26, 1995, Kemper Unit Investment
Trusts changed its
name to EVEREN Unit Investment Trusts.
<PAGE>
Consent of Independent Auditors
We consent to the reference to our firm under the caption
"Independent
Auditors" and to the use of our report dated September 14, 1995,
in this Post-
Effective Amendment to the Registration Statement (Form S-6) and
related
Prospectus of Kemper Tax-Exempt Income Trust Series 86 (AMT Bond
Trust) dated
September 28, 1995.
Ernst & Young LLP
Kansas City, Missouri
September 28, 1995
KEMPER TAX-EXEMPT INCOME TRUST
MULTI-STATE SERIES
OHIO TAX-EXEMPT BOND TRUST
SERIES 1-10
KEMPER DEFINED FUNDS
(TAX-EXEMPT PORTFOLIO)
PART ONE
THE DATE OF THIS PART ONE IS THAT DATE
WHICH IS SET FORTH IN PART TWO
OF THE PROSPECTUS
Each State Trust of the Kemper Tax-Exempt Income Trust, Multi-State Series,
Ohio Tax-Exempt Bond Trust, Series 1-10 and Kemper Defined Funds (Tax-Exempt
Portfolio) was formed for the purpose of gaining interest income free from
Federal, State and, where applicable, local income taxes and/or property taxes
while conserving capital and diversifying risks by investing in fixed portfolios
of Municipal Bonds consisting of obligations issued primarily by or on behalf of
the State for which such Trust is named or counties, municipalities, authorities
or political subdivisions thereof.
Units of the Trust are not deposits or obligations of, or guaranteed by, any
bank, and Units are not federally insured or otherwise protected by the Federal
Deposit Insurance Corporation and involve investment risk including loss of
principal.
This Prospectus is in two parts. Read and retain both parts for future
reference.
----------------------------------------
SPONSOR: KEMPER UNIT INVESTMENT TRUSTS,
A SERVICE OF KEMPER SECURITIES, INC.
----------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
<PAGE>
TABLE OF CONTENTS
------------------
<TABLE>
<CAPTION>
PAGE NO
-------
<S> <C>
SUMMARY................................ 3
The Trust.............................. 3
Public Offering Price.................. 4
Interest and Principal Distributions... 4
Reinvestment........................... 4
Estimated Current Return and
Estimated Long-Term Return............ 4
Market for Units....................... 5
Risk Factors........................... 5
THE TRUST.............................. 6
PORTFOLIOS............................. 7
Risk Factors........................... 8
DISTRIBUTION REINVESTMENT.............. 14
INTEREST, ESTIMATED LONG-TERM RETURN
AND ESTIMATED CURRENT RETURN.......... 15
FEDERAL TAX STATUS OF THE STATE
TRUSTS................................. 15
DESCRIPTION AND STATE TAX STATUS OF
THE STATE TRUSTS....................... 19
Arizona Trusts........................ 19
Arkansas Trusts....................... 22
California Trusts..................... 25
Colorado Trusts....................... 33
Kansas Trusts......................... 37
Kentucky Trusts....................... 39
Michigan Trusts....................... 40
Minnesota Trusts...................... 43
Missouri Trusts....................... 45
New Jersey Trusts..................... 48
New York Trusts....................... 53
North Carolina Trusts................. 64
Ohio Trusts........................... 71
South Carolina Trusts................. 75
Virginia Trusts....................... 78
PUBLIC OFFERING OF UNITS............... 81
Public Offering Price.................. 81
Accrued Interest....................... 83
Purchased and Daily Accrued Interest... 83
Public Distribution of Units........... 84
Profits of Sponsor..................... 84
</TABLE>
<TABLE>
<CAPTION>
PAGE NO
-------
<S> <C>
MARKET FOR UNITS....................... 85
REDEMPTION............................. 85
Computation of Redemption Price........ 86
UNITHOLDERS............................ 87
Ownership of Units..................... 87
Distributions to Unitholders........... 87
Statements to Unitholders.............. 89
Rights of Unitholders.................. 90
INVESTMENT SUPERVISION................. 90
ADMINISTRATION OF THE TRUST............ 91
The Trustee............................ 91
The Evaluator.......................... 92
Amendment and Termination.............. 92
Limitations on Liability............... 92
EXPENSES OF THE TRUST.................. 93
THE SPONSOR............................ 94
LEGAL OPINIONS......................... 94
INDEPENDENT AUDITORS................... 95
DESCRIPTION OF SECURITIES
RATINGS................................ 95
</TABLE>
- ------------------------------------
Essential Information*
Report of Independent Auditors*
Statement of Assets and Liabilities*
Statement of Operations*
Statement of Changes in Net Assets*
Schedule of Investments*
Notes to Schedule of Investments*
Notes to Financial Statements*
*INFORMATION ON THESE ITEMS APPEARS IN PART TWO FOR THE APPROPRIATE STATE TRUST
<PAGE>
KEMPER TAX-EXEMPT INCOME TRUST
MULTI-STATE SERIES
OHIO TAX-EXEMPT BOND TRUST
SERIES 1-10
KEMPER DEFINED FUNDS
(TAX-EXEMPT PORTFOLIO)
SUMMARY
THE TRUST. Kemper Tax-Exempt Income Trust, Multi-State Series, Ohio Tax-
Exempt Bond Trust, Series 1-10 and Kemper Defined Funds (Tax-Exempt Portfolio)
(collectively, the "Trust") are each a unit investment trust consisting of a
number of diversified portfolios designated as the State Trusts. Each State
Trust consists of obligations ("Municipal Bonds", "Securities" or "Bonds")
issued primarily by or on behalf of the State for which such State Trust is
named or counties, municipalities, authorities or political subdivisions
thereof.
Each State Trust's investment objective is interest income which is exempt
from Federal, State and, where applicable, local income taxes and/or property
taxes, while conserving capital and diversifying risks by investing in fixed
portfolios of Municipal Bonds consisting of obligations issued primarily by or
on behalf of the State for which such State Trust is named or counties,
municipalities, authorities or political subdivisions thereof. There is, of
course, no guarantee that the State Trusts' objective will be achieved.
All of the Municipal Bonds in the State Trust portfolios were rated in the
category "BBB" or better by Standard & Poor's Ratings Group ("Standard &
Poor's") or "Baa" or better by Moody's Investors Service, Inc. ("Moody's") on
the Date of Deposit or were unrated. However, if any Municipal Bonds were
unrated on the Date of Deposit, they must have had, in the opinion of the
Sponsor, credit characteristics equivalent to Bonds rated at least "BBB" or
"Baa." Municipal Bonds which are rated "BBB" or "Baa" are regarded as having an
adequate capacity to pay interest and repay principal but may lack outstanding
credit characteristics and, in fact, have speculative characteristics as well.
Ratings of the Municipal Bonds may have changed since the Date of Deposit. See
"Description of Securities Ratings" herein and the "Schedule of Investments" in
Part Two.
The Units, each of which represents a pro rata undivided fractional interest
in the principal amount of Municipal Bonds deposited in the appropriate Trust,
are issued and outstanding Units which have been reacquired by the Sponsor
either by purchase of Units tendered to the Trustee for redemption or by
purchase in the open market. No offering is being made on behalf of a State
Trust and any profit or loss realized on the sale of Units will accrue to the
Sponsor and/or the firm reselling such Units. Offerees in the States of
Indiana, Virginia and Washington may only purchase Units of an Indiana, Virginia
or Washington Trust, respectively.
3
<PAGE>
PUBLIC OFFERING PRICE. The Public Offering Price per Unit of each State Trust
is equal to a pro rata share of the aggregate bid prices of the Municipal Bonds
in such State Trust plus or minus a pro rata share of cash, if any, in the
Principal Account, held or owned by the State Trust plus, in the case of Kemper
Defined Funds, Purchased Interest, plus a sales charge shown under "Public
Offering of Units." In addition, there will be added to each transaction in a
State Trust an amount equal to the accrued interest ("Daily Accrued Interest" in
the case of Kemper Defined Funds) from the last Record Date of such State Trust
to the date of settlement (five business days after order). The sales charge is
reduced on a graduated scale as indicated under "Public Offering of Units -
Public Offering Price."
INTEREST AND PRINCIPAL DISTRIBUTIONS. Distributions of the estimated annual
interest income to be received by each State Trust, after deduction of estimated
expenses, will be made monthly unless the Unitholder elects to receive such
distributions quarterly or semi-annually. In the case of Kemper Defined Funds,
distributions of the estimated annual interest income to be received by each
State Trust will be made monthly. Distributions will be paid on the
Distribution Dates to Unitholders of record of such State Trust on the Record
Dates set forth for the applicable option. See "Essential Information" in Part
Two. Only monthly distributions of estimated annual interest income will be
available of Kemper Defined Funds Unitholders.
The distribution of funds, if any, in the Principal Account of each State
Trust, will be made as provided in "Unitholders - Distribution to Unitholders."
REINVESTMENT. Each Unitholder of a Trust Fund offered herein may elect to
have distributions of principal or interest or both automatically invested
without charge in shares of certain mutual funds sponsored by Kemper Financial
Services, Inc. See "Distribution Reinvestment."
ESTIMATED CURRENT RETURN AND ESTIMATED LONG-TERM RETURN. The Estimated
Current Return is calculated by dividing the estimated net annual interest
income per Unit by the Public Offering Price of such State Trust. The estimated
net annual interest income per Unit will vary with changes in fees and expenses
of such State Trust and with the principal prepayment, redemption, maturity,
exchange or sale of Securities while the Public Offering Price will vary with
changes in the bid price of the underlying Securities and with changes in
Purchased Interest for Kemper Defined Funds; therefore, there is no assurance
that the present Estimated Current Returns will be realized in the future.
Estimated Long-Term Return is calculated using a formula which (1) takes into
consideration, and determines and factors in the relative weightings of, the
market values, yields (which takes into account the amortization of premiums and
the accretion of discounts) and estimated retirements of all of the Securities
in the State Trust and (2) takes into account the expenses and sales charge
associated with each State Trust Unit. Since the market values and estimated
retirements of the Securities and the expenses of the State Trust will change,
there is no assurance that the present Estimated Long-Term Return will be
realized in the future. Estimated Current Return and Estimated Long-Term Return
are expected to differ because the calculation of Estimated Long-Term Return
reflects the estimated date and amount of principal returned while Estimated
Current Return calculations include only net annual interest income and Public
Offering Price.
4
<PAGE>
MARKET FOR UNITS. While under no obligation to do so, the Sponsor intends to
and certain of the other Underwriters may, subject to change at any time,
maintain a market for the Units of each State Trust and to continuously offer to
repurchase such Units at prices which are based on the aggregate bid side
evaluation of the Municipal Bonds in each State Trust plus accrued interest
(which, in the case of Kemper Defined Funds, consists of Purchased Interest and
Daily Accrued Interest). If such a market is not maintained and no other over-
the-counter market is available, Unitholders will still be able to dispose of
their Units through redemption by the Trustee at prices based upon the aggregate
bid price of the Municipal Bonds in such State Trust. See "Redemption."
RISK FACTORS. An investment in the Trusts should be made with an
understanding of the risks associated therewith, including, among other factors,
the inability of the issuer to pay the principal of or interest on a bond when
due, volatile interest rates, early call provisions, and changes to the tax
status of the Securities. See "Portfolios - Risk Factors."
5
<PAGE>
KEMPER TAX-EXEMPT INCOME TRUST
MULTI-STATE SERIES
OHIO TAX-EXEMPT BOND TRUST
SERIES 1-10
KEMPER DEFINED FUNDS
(TAX-EXEMPT PORTFOLIO)
THE TRUST
Each State Trust Fund is one of a series of unit investment trusts created by
the Sponsor under the name Ohio Tax-Exempt Bond Trust, or under the name Kemper
Tax-Exempt Income Trust, Multi-State Series or under the name Kemper Defined
Funds (Tax-Exempt Portfolio), all of which are similar, and each of which was
created under the laws of the State of Missouri pursuant to a Trust Agreement/1/
(the "Agreement") (such "State Trusts" being collectively referred to herein as
the "Trust"). Kemper Unit Investment Trusts, a service of Kemper Securities,
Inc., acts as Sponsor and Evaluator and Investors Fiduciary Trust Company acts
as Trustee.
The State Trusts may be an appropriate investment vehicle for investors who
desire to participate in a portfolio of tax-exempt, fixed income securities with
greater diversification than they might be able to acquire individually. In
addition, Municipal Bonds of the type deposited in the State Trusts are often
not available in small amounts.
Each State Trust's investment objective is interest income which is exempt
from Federal, State and, where applicable, local income and/or property taxes,
while conserving capital and diversifying risks by investing in fixed portfolios
of Municipal Bonds consisting of obligations issued primarily by or on behalf of
the State for which such State Trust is named or counties, municipalities,
authorities or political subdivisions thereof. There is, of course, no
guarantee that the State Trusts' objective will be achieved.
All of the Municipal Bonds in the State Trust portfolios were rated in the
category "BBB" or better by either Standard & Poor's Ratings Group ("Standard &
Poor's") or "Baa" or better by Moody's Investors Service, Inc. ("Moody's") on
the Date of Deposit or were unrated. However, if any Municipal Bonds were
unrated on the Date of Deposit, they must have had, in the opinion of the
Sponsor, credit characteristics equivalent to Municipal Bonds rated at least
"BBB" or "Baa". Municipal Bonds which are rated "BBB" or "Baa" are regarded as
having an adequate capacity to pay interest and repay principal but may lack
outstanding credit characteristics and, in fact, have speculative
characteristics as well. Ratings of the Municipal Bonds may have changed since
the Date of Deposit. See "Description of Securities Ratings" herein and the
"Schedule of Investments" in Part Two.
- -------------------------
/1/ Reference is hereby made to said Trust Agreement, and any statements
contained herein are qualified in their entirety by the provisions of said Trust
Agreement.
6
<PAGE>
Proceeds of the maturity, redemption or sale of the Municipal Bonds in a State
Trust, unless used to pay for Units tendered for redemption, will be distributed
to Unitholders thereof and will not be utilized to purchase additional Municipal
Bonds.
The Units, each of which represents a pro rata undivided fractional interest
in the principal amount of Municipal Bonds deposited in the appropriate State
Trust, are issued and outstanding Units which have been reacquired by the
Sponsor either by purchase of Units tendered to the Trustee for redemption or by
purchase in the open market. No offering is being made on behalf of the State
Trusts and any profit or loss realized on the sale of Units will accrue to the
Sponsor and/or the firm reselling such Units. To the extent that Units of any
State Trust are redeemed, the principal amount of Municipal Bonds in such State
Trust will be reduced and the undivided fractional interest represented by each
outstanding Unit of such State Trust will increase. See "Redemption."
PORTFOLIOS
The selection of Municipal Bonds for each State Trust was based largely upon
the experience and judgment of the Sponsor. In making such selections the
Sponsor considered the following factors, among others, to be of primary
importance: (a) Standard & Poor's or Moody's ratings of the Municipal Bonds;
(b) the price of the Municipal Bonds relative to other issues of similar quality
and maturity; (c) the diversification of the Municipal Bonds as to purpose of
issue; (d) the income to the Unitholders of the State Trust; and (e) the dates
of maturity of the Bonds. Subsequent to the Date of Deposit, a Municipal Bond
may have ceased to be rated or its rating may have been reduced below the
minimum required as of the Date of Deposit. Neither event requires the
elimination of such investment from a State Trust, but may be considered in the
Sponsor's determination to direct the Trustee to dispose of such investment.
See "Investment Supervision" herein and the "Schedule of Investments" in Part
Two.
The Sponsor may not alter the portfolio of a State Trust except that certain
of the Municipal Bonds may be sold upon the happening of certain extraordinary
circumstances described under "Investment Supervision." Certain of the
Municipal Bonds in the State Trusts are subject to redemption prior to their
stated maturity date, call or redemption pursuant to sinking fund provisions,
call provisions or extraordinary optional or mandatory redemption provisions or
otherwise. A sinking fund is a reserve fund accumulated over a period of time
for retirement of debt. A callable debt obligation is one which is subject to
redemption or refunding prior to maturity at the option of the issuer. A
refunding is a method by which a debt obligation is redeemed, at or before
maturity, by the proceeds of a new debt obligation. In general, call provisions
are more likely to be exercised when the offering side valuation is at a premium
over par than when it is at a discount from par. Accordingly, any such call,
redemption, sale or maturity will reduce the size and diversity of such Series,
and the net annual interest income of the Series and may reduce the Estimated
Long-Term Return and/or Estimated Current Return. See "Interest and Estimated
Long-Term and Current Returns." Each Trust portfolio contains a listing of the
sinking fund and call provisions, if any, with respect to each of the debt
obligations. Extraordinary optional redemptions and mandatory redemptions
result from the happening of certain events. Generally, events that may permit
the extraordinary optional redemption of Municipal Bonds or may require the
mandatory redemption of Municipal Bonds include, among others: a final
determination that the interest on the Municipal Bonds is taxable; the
substantial damage or destruction by fire or other casualty of the project
7
<PAGE>
for which the proceeds of the Municipal Bonds were used; an exercise by a local,
State or Federal governmental unit of its power of eminent domain to take all or
substantially all of the project for which the proceeds of the Municipal Bonds
were used; changes in the economic availability of raw materials, operating
supplies or facilities or technological or other changes which render the
operation of the project for which the proceeds of the Municipal Bonds were used
uneconomic; changes in law or an administrative or judicial decree which renders
the performance of the agreement under which the proceeds of the Municipal Bonds
were made available to finance the project impossible or which creates
unreasonable burdens or which imposes excessive liabilities, such as taxes, not
imposed on the date the Municipal Bonds are issued on the issuer of the
Municipal Bonds or the user of the proceeds of the Municipal Bonds; an
administrative or judicial decree which requires the cessation of a substantial
part of the operations of the project financed with the proceeds of the
Municipal Bonds; an overestimate of the costs of the project to be financed with
the proceeds of the Municipal Bonds resulting in excess proceeds of the
Municipal Bonds which may be applied to redeem Municipal Bonds; or an
underestimate of a source of funds securing the Municipal Bonds resulting in
excess funds which may be applied to redeem Municipal Bonds. The Sponsor is
unable to predict all of the circumstances which may result in such redemption
of an issue of Municipal Bonds.
The Sponsor and the Trustee shall not be liable in any way for any default,
failure or defect in any Municipal Bond.
RISK FACTORS. An investment in Units of a Series of the State Trusts should
be made with an understanding of the risks which an investment in fixed rate
debt obligations may entail, including the risk that the value of the portfolio
and hence of the Units will decline with increases in interest rates. The value
of the underlying Municipal Bonds will fluctuate inversely with changes in
interest rates. The uncertain economic conditions of recent years, together
with the fiscal measures adopted to attempt to deal with them, have resulted in
wide fluctuations in interest rates and, thus, in the value of fixed rate debt
obligations generally and long-term obligations in particular. The Sponsor
cannot predict whether such fluctuations will continue in the future.
Certain of the Municipal Bonds in the State Trusts may be general obligations
of a governmental entity that are backed by the taxing power of such entity.
All other Municipal Bonds in the State Trusts are revenue bonds payable from the
income of a specific project or authority and are not supported by the issuer's
power to levy taxes. General obligation bonds are secured by the issuer's
pledge of its faith, credit and taxing power for the payment of principal and
interest. Revenue bonds, on the other hand, are payable only from the revenues
derived from a particular facility or class of facilities or, in some cases,
from the proceeds of a special excise or other specific revenue source. There
are, of course, variations in the security of the different Municipal Bonds in
the State Trusts, both within a particular classification and between
classifications, depending on numerous factors.
Certain Series of the State Trusts contain Municipal Bonds which are
obligations of issuers whose revenues are derived from services provided by
hospitals and other health care facilities, including nursing homes. In view of
this an investment in such Series should be made with an understanding of the
characteristics of such issuers and the risks that such an investment may
entail. Ratings of bonds issued for health care facilities are often based on
feasibility studies that contain projections of occupancy levels, revenues and
expenses. A facility's gross receipts and net income available for debt service
will be affected by future events and
8
<PAGE>
conditions including, among other things, demand for services and the ability of
the facility to provide the services required, physicians' confidence in the
facility, management capabilities, economic developments in the service area,
competition, efforts by insurers and governmental agencies to limit rates,
legislation establishing state rate-setting agencies, expenses, the cost and
possible unavailability of malpractice insurance, the funding of Medicare,
Medicaid and other similar third party payor programs, and government
regulation. Federal legislation has been enacted which implemented a system of
prospective Medicare reimbursement which may restrict the flow of revenues to
hospitals and other facilities which are reimbursed for services provided under
the Medicare program. Future legislation or changes in the areas noted above,
among other things, would affect all hospitals to varying degrees and,
accordingly, any adverse changes in these areas may adversely affect the ability
of such issuers to make payment of principal and interest on Municipal Bonds
held in such Series. Such adverse changes also may adversely affect the ratings
of the Municipal Bonds held in such State Trusts. Hospitals and other health
care facilities are subject to claims and legal actions by patients and others
in the ordinary course of business. Although these claims are generally covered
by insurance, there can be no assurance that a claim will not exceed the
insurance coverage of a health care facility or that insurance coverage will be
available to a facility. In addition, a substantial increase in the cost of
insurance could adversely affect the results of operations of a hospital or
other health care facility. Certain hospital bonds may provide for redemption
at par at any time upon the sale by the issuer of the hospital facilities to a
non-affiliated entity or in other circumstances. For example, certain hospitals
may have the right to call bonds at par if the hospital may legally be required
because of the bonds to perform procedures against specified religious
principles. Certain FHA-insured bonds may provide that all or a portion of
those bonds, otherwise callable at a premium, can be called at par in certain
circumstances. If a hospital defaults upon a bond obligation, the realization
of Medicare and Medicaid receivables may be uncertain and, if the bond
obligation is secured by the hospital facilities, legal restrictions on the
ability to foreclose upon the facilities and the limited alternative uses to
which a hospital can be put may reduce severely its collateral value.
Certain of the Municipal Bonds in the State Trusts may be single family
mortgage revenue bonds, which are issued for the purpose of acquiring from
originating financial institutions notes secured by mortgages on residences
located within the issuer's boundaries and owned by persons of low or moderate
income. Mortgage loans are generally partially or completely prepaid prior to
their final maturities as a result of events such as sale of the mortgaged
premises, default, condemnation or casualty loss. Because these Municipal Bonds
are subject to extraordinary mandatory redemption in whole or in part from such
prepayments of mortgage loans, a substantial portion of such Municipal Bonds
will probably be redeemed prior to their scheduled maturities or even prior to
their ordinary call dates. The redemption price of such issues may be more or
less than the offering price of such Municipal Bonds. Extraordinary mandatory
redemption without premium could also result from the failure of the originating
financial institutions to make mortgage loans in sufficient amounts within a
specified time period or, in some cases, from the sale by the Municipal Bond
issuer of the mortgage loans. Failure of the originating financial institutions
to make mortgage loans would be due principally to the interest rates on
mortgage loans funded from other sources becoming competitive with the interest
rates on the mortgage loans funded with the proceeds of the single family
mortgage revenue bonds. Additionally, unusually high rates of default on the
underlying mortgage loans may reduce revenues available for the payment of
principal of or interest on such mortgage revenue bonds. Single family
mortgage revenue bonds issued after December 31, 1980 were issued under Section
103A of the Internal Revenue Code, which Section contains certain ongoing
requirements relating to the use of the proceeds of such Municipal Bonds in
order for the interest on such Municipal Bonds to retain its tax-exempt status.
In each case, the issuer of the Municipal
9
<PAGE>
Bonds has covenanted to comply with applicable ongoing requirements and bond
counsel to such issuer has issued an opinion that the interest on the Municipal
Bonds is exempt from Federal income tax under existing laws and regulations.
There can be no assurances that the ongoing requirements will be met. The
failure to meet these requirements could cause the interest on the Municipal
Bonds to become taxable, possibly retroactively from the date of issuance.
Certain of the Municipal Bonds in the State Trusts may be obligations of
issuers whose revenues are primarily derived from mortgage loans to housing
projects for low to moderate income families. The ability of such issuers to
make debt service payments will be affected by events and conditions affecting
financed projects, including, among other things, the achievement and
maintenance of sufficient occupancy levels and adequate rental income, increases
in taxes, employment and income conditions prevailing in local labor markets,
utility costs and other operating expenses, the managerial ability of project
managers, changes in laws and governmental regulations, the appropriation of
subsidies and social economic trends affecting the localities in which the
projects are located. The occupancy of housing projects may be adversely
affected by high rent levels and income limitations imposed under Federal and
state programs. Like single family mortgage revenue bonds, multi-family
mortgage revenue bonds are subject to redemption and call features, including
extraordinary mandatory redemption features, upon prepayment, sale or non-
origination of mortgage loans as well as upon the occurrence of other events.
Certain issuers of single or multi-family housing bonds have considered various
ways to redeem bonds they have issued prior to the stated first redemption dates
for such bonds. In connection with the housing Municipal Bonds held by the
State Trusts, the Sponsor has not had any direct communications with any of the
issuers thereof, but at the initial Date of Deposit it was not aware that any of
the respective issuers of such Municipal Bonds were actively considering the
redemption of such Municipal Bonds prior to their respective stated initial call
dates. However, there can be no assurance that an issuer of a Municipal Bond in
the State Trusts will not attempt to so redeem a Municipal Bond in the State
Trusts.
Certain of the Municipal Bonds in the State Trusts may be obligations of
issuers whose revenues are derived from the sale of water and/or sewerage
services. Water and sewerage bonds are generally payable from user fees.
Problems faced by such issuers include the ability to obtain timely and adequate
rate increases, a decline in population resulting in decreased user fees, the
difficulty of financing large construction programs, the limitations on
operations and increased costs and delays attributable to environmental
considerations, the increasing difficulty of obtaining or discovering new
supplies of fresh water, the effect of conservation programs and the impact of
"no-growth" zoning ordinances. Issuers may have experienced these problems in
varying degrees. Because of the relatively short history of solid waste
disposal bond financing, there may be technological risks involved in the
satisfactory construction or operation of the projects exceeding those
associated with most municipal enterprise projects. Increasing environmental
regulation on the Federal, State and local level has a significant impact on
waste disposal facilities. While regulation requires more waste producers to
use waste disposal facilities, it also imposes significant costs on the
facilities. These costs include compliance with frequently changing and complex
regulatory requirements, the cost of obtaining construction and operating
permits, the cost of conforming to prescribed and changing equipment standards
and required methods of operation and the cost of disposing of the waste residue
that remains after the disposal process in an environmentally safe manner. In
addition, waste disposal facilities frequently face substantial opposition by
environmental groups and officials to their location and operation, to the
possible adverse effects upon the public health and the environment that may be
caused by wastes disposed of at the facilities and to alleged improper operating
procedures. Waste disposal facilities benefit from laws which require waste to
be disposed
10
<PAGE>
of in a certain manner but any relaxation of these laws could cause a decline in
demand for the facilities' services. Finally, waste disposal facilities are
concerned with many of the same issues facing utilities insofar as they derive
revenues from the sale of energy to local power utilities.
Certain of the Municipal Bonds in the State Trusts may be obligations of
issuers whose revenues are primarily derived from the sale of electric energy or
natural gas. Utilities are generally subject to extensive regulation by state
utility commissions which, among other things, establish the rates which may be
charged and the appropriate rate of return on an approved asset base. The
problems faced by such issuers include the difficulty in obtaining approval for
timely and adequate rate increases from the governing public utility commission,
the difficulty in financing large construction programs, the limitations on
operations and increased costs and delays attributable to environmental
considerations, increased competition, recent reductions in estimates of future
demand for electricity in certain areas of the country, the difficulty of the
capital market in absorbing utility debt, the difficulty in obtaining fuel at
reasonable prices and the effect of energy conservation. Issuers may have
experienced these problems in varying degrees. In addition, Federal, State and
municipal governmental authorities may from time to time review existing and
impose additional regulations governing the licensing, construction and
operation of nuclear power plants, which may adversely affect the ability of the
issuers of such Municipal Bonds to make payments of principal and/or interest on
such Municipal Bonds. The ability of State and local joint action power
agencies to make payments on bonds they have issued is dependent in large part
on payments made to them pursuant to power supply or similar agreements.
Courts in Washington and Idaho have held that certain agreements between the
Washington Public Power Supply System ("WPPSS") and the WPPSS participants are
unenforceable because the participants did not have the authority to enter into
the agreements. While these decisions are not specifically applicable to
agreements entered into by public entities in other states, they may cause a
reexamination of the legal structure and economic viability of certain projects
financed by joint action power agencies, which might exacerbate some of the
problems referred to above and possibly lead to legal proceedings questioning
the enforceability of agreements upon which payment of these bonds may depend.
Certain of the Municipal Bonds in the State Trusts may be industrial revenue
bonds ("IRBs"), including pollution control revenue bonds, which are tax-exempt
securities issued by states, municipalities, public authorities or similar
entities to finance the cost of acquiring, constructing or improving various
industrial projects. These projects are usually operated by corporate entities.
Issuers are obligated only to pay amounts due on the IRBs to the extent that
funds are available from the unexpended proceeds of the IRBs or receipts or
revenues of the issuer under an arrangement between the issuer and the corporate
operator of a project. The arrangement may be in the form of a lease,
installment sale agreement, conditional sale agreement or loan agreement, but in
each case the payments to the issuer are designed to be sufficient to meet the
payments of amounts due on the IRBs. Regardless of the structure, payment of
IRBs is solely dependent upon the creditworthiness of the corporate operator of
the project or corporate guarantor. Corporate operators or guarantors may be
affected by many factors which may have an adverse impact on the credit quality
of the particular company or industry. These include cyclicality of revenues
and earnings, regulatory and environmental restrictions, litigation resulting
from accidents or environmentally-caused illnesses, extensive competition and
financial deterioration resulting from leveraged buy-outs or takeovers. The
IRBs in the State Trusts may be subject to special or extraordinary redemption
provisions which may provide for redemption at par or, with respect to original
issue discount bonds, at issue price plus the amount of original issue discount
accreted to the redemption date plus, if applicable, a premium. The Sponsor
cannot predict the causes or
11
<PAGE>
likelihood of the redemption of IRBs or other Municipal Bonds in the State
Trusts prior to the stated maturity of such Municipal Bonds.
Certain of the Municipal Bonds in the State Trusts may be obligations which
are payable from and secured by revenues derived from the ownership and
operation of facilities such as airports, bridges, turnpikes, port authorities,
convention centers and arenas. The major portion of an airport's gross
operating income is generally derived from fees received from signatory airlines
pursuant to use agreements which consist of annual payments for leases,
occupancy of certain terminal space and service fees. Airport operating income
may therefore be affected by the ability of the airlines to meet their
obligations under the use agreements. The air transport industry is
experiencing significant variations in earnings and traffic, due to increased
competition, excess capacity, increased costs, deregulation, traffic constraints
and other factors, and several airlines are experiencing severe financial
difficulties. The Sponsor cannot predict what effect these industry conditions
may have on airport revenues which are dependent for payment on the financial
condition of the airlines and their usage of the particular airport facility.
Similarly, payment on Municipal Bonds related to other facilities is dependent
on revenues from the projects, such as user fees from ports, tolls on turnpikes
and bridges and rents from buildings. Therefore, payment may be adversely
affected by reduction in revenues due to such factors as increased cost of
maintenance, decreased use of a facility, lower cost of alternative modes of
transportation, scarcity of fuel and reduction or loss of rents.
Certain of the Municipal Bonds in the State Trusts may be obligations of
issuers which are, or which govern the operation of, schools, colleges and
universities and whose revenues are derived mainly from ad valorem taxes, or for
higher education systems, from tuition, dormitory revenues, grants and
endowments. General problems relating to school bonds include litigation
contesting the state constitutionality of financing public education in part
from ad valorem taxes, thereby creating a disparity in educational funds
available to schools in wealthy areas and schools in poor areas. Litigation or
legislation on this issue may affect the sources of funds available for the
payment of school bonds in the Trusts. General problems relating to college and
university obligations would include the prospect of a declining percentage of
the population consisting of "college" age individuals, possible inability to
raise tuition and fees sufficiently to cover increased operating costs, the
uncertainty of continued receipt of Federal grants and state funding and new
government legislation or regulations which may adversely affect the revenues or
costs of such issuers. All of such issuers have been experiencing certain of
these problems in varying degrees. In addition, the ability of universities and
colleges to meet their obligations is dependent upon various factors, including
the size and diversity of their sources of revenues, enrollment, reputation,
management expertise, the availability and restrictions on the use of endowments
and other funds, the quality and maintenance costs of campus facilities, and, in
the case of public institutions, the financial condition of the relevant state
or other governmental entity and its policies with respect to education. The
institution's ability to maintain enrollment levels will depend on such factors
as tuition costs, geographic location, geographic diversity and quality of
student body, quality of the faculty and the diversity of program offerings.
Certain of the Municipal Bonds in the State Trusts may be Urban Redevelopment
Bonds ("URBs"). URBs have generally been issued under bond resolutions pursuant
to which the revenues and receipts payable under the arrangements with the
operator of a particular project have been assigned and pledged to purchasers.
In some cases, a mortgage on the underlying project may have been granted as
security for the URBs. Regardless
12
<PAGE>
of the structure, payment of the URBs is solely dependent upon the
creditworthiness of the operator of the project.
Certain of the Municipal Bonds in the State Trusts may be lease revenue bonds
whose revenues are derived from lease payments made by a municipality or other
political subdivision which is leasing equipment or property for use in its
operation. The risks associated with owning Municipal Bonds of this nature
include the possibility that appropriation of funds for a particular project or
equipment may be discontinued. The Sponsor cannot predict the likelihood of
nonappropriation of funds for these types of lease revenue Municipal Bonds.
Lease revenue Municipal Bonds may also be subject to the risk of abatement in
many states -- rental obligations cease in the event that damage, destruction or
condemnation of the project prevents its use by the lessee. (In these cases,
insurance provisions designed to alleviate this risk become important credit
factors.) In the event of default by the lessee government, there may be
significant legal and/or practical difficulties involved in the re-letting or
sale of the project. Some of these issues, particularly those for equipment
purchase, contain the so-called "substitution safeguard", which bars the lessee
government, in the event its defaults on its rental payments, from the purchase
or use of similar equipment for a certain period of time. This safeguard is
designed to insure that the lessee government will appropriate even though it is
not legally obligated to do so, but its legality remains untested in most, if
not all, states.
Certain of the Municipal Bonds in the State Trusts may be "zero coupon" bonds,
i.e., an original issue discount bond that does not provide for the payment of
current interest. Zero coupon bonds are purchased at a deep discount because
the buyer receives only the right to receive a final payment at the maturity of
the bond and does not receive any periodic interest payments. The effect of
owning deep discount bonds which do not make current interest payments (such as
the zero coupon bonds) is that a fixed yield is earned not only on the original
investment but also, in effect, on all discount earned during the life of such
obligation. This implicit reinvestment of earning at the same rate eliminates
the risk of being unable to reinvest the income on such obligation at a rate as
high as the implicit yield on the discount obligation, but at the same time
eliminates the holder's ability to reinvest at higher rates in the future. For
this reason, zero coupon bonds are subject to substantially greater price
fluctuations during periods of changing market interest rates than are
securities of comparable quality which pay interest currently. For the Federal
tax consequences of original issue discount bonds such as the zero coupon bonds,
see "Federal Tax Status of the State Trusts."
Investors should be aware that many of the Municipal Bonds in the State Trusts
are subject to continuing requirements such as the actual use of Municipal Bond
proceeds or manner of operation of the project financed from Municipal Bond
proceeds that may affect the exemption of interest on such Municipal Bonds from
Federal income taxation. Although at the time of issuance of each of the
Municipal Bonds in the State Trusts an opinion of bond counsel was rendered as
to the exemption of interest on such obligations from Federal income taxation,
there can be no assurance that the respective issuers or other obligors on such
obligations will fulfill the various continuing requirements established upon
issuance of the Municipal Bonds. A failure to comply with such requirements may
cause a determination that interest on such obligations is subject to Federal
income taxation, perhaps even retroactively from the date of issuance of such
Municipal Bonds, thereby reducing the value of the Municipal Bonds and
subjecting Unitholders to unanticipated tax liabilities.
Federal bankruptcy statutes relating to the adjustment of debts of political
subdivisions and authorities of states of the United States provide that, in
certain circumstances, such subdivisions or authorities may be
13
<PAGE>
authorized to initiate bankruptcy proceedings without prior notice to or consent
of creditors, which proceedings could result in material and adverse
modification or alteration of the rights of holders of obligations issued by
such subdivision or authorities.
Certain issues of the Municipal Bonds in the State Trusts represent "moral
obligations" of a governmental entity. In the event that the issuer of the
Municipal Bond defaults in the repayment thereof, the governmental entity
lawfully may, but is not obligated to, discharge the obligation of the issuer to
repay such Municipal Bond. If an issuer of moral obligation bonds is unable to
meet its obligations, the repayment of such Municipal Bonds becomes a moral
commitment but not a legal obligation of the State or municipality in question.
Even though the State may be called on to restore any deficits in capital
reserve funds of the agencies or authorities which issued the bonds, any
restoration generally requires appropriation by the State legislature and
accordingly does not constitute a legally enforceable obligation or debt of the
State. The agencies or authorities generally have no taxing power.
To the best of the Sponsor's knowledge, as of the date of this Prospectus,
there is no litigation pending with respect to any Municipal Bond which might
reasonably be expected to have a material adverse effect on the Trust or any
State Trust. Although the Sponsor is unable to predict whether any other
litigation may be instituted, or if instituted, whether such litigation might
have a material adverse effect on the Trust, the Trust received copies of the
opinions of bond counsel given to the issuing authorities at the time of
original delivery of each of the Municipal Bonds to the effect that the
Municipal Bonds had been validly issued and that the interest thereon is exempt
from Federal income taxes.
DISTRIBUTION REINVESTMENT
Each Unitholder of a Trust Fund may elect to have distributions of principal
(including capital gains, if any) or interest or both automatically invested
without charge in shares of any mutual fund underwritten or advised by Kemper
Financial Services, Inc., an affiliate of the Sponsor, (the "Kemper Funds")
which are registered in the Unitholder's state of residence, other than those
Kemper Funds sold with a contingent deferred sales charge. Since the portfolio
securities and investment objectives of such Kemper Funds may differ
significantly from that of the Trust, Unitholders should carefully consider the
consequences, including the fact that distributions from such Kemper Funds may
be taxable, before selecting such Kemper Funds for reinvestment. Detailed
information with respect to the investment objectives and the management of the
Kemper Funds is contained in their respective prospectuses, which can be
obtained from the Sponsor upon request. An investor should read the appropriate
prospectus prior to making the election to reinvest.
Unitholders who are receiving distributions in cash may elect to participate
in distribution reinvestment by filing with the Program Agent an election to
have such distributions reinvested without charge. Such election must be
received by the Program Agent at least ten days prior to the Record Date
applicable to any distribution in order to be in effect for such Record Date.
Any such election shall remain in effect until a subsequent notice is received
by the Program Agent. See "Unitholders - Distributions to Unitholders."
14
<PAGE>
The Program Agent is Investors Fiduciary Trust Company. All inquiries
concerning participation in distribution reinvestment should be directed to the
Kemper Service Company, a service agent for the Program Agent at P.O. Box
419430, Kansas City, Missouri 64173-0216, telephone (800) 422-2848.
INTEREST, ESTIMATED LONG-TERM RETURN AND ESTIMATED CURRENT RETURN
As of the opening of business on the date indicated therein, the Estimated
Current Returns and the Estimated Long-Term Returns for each State Trust were as
set forth under "Essential Information" for the applicable State Trust in Part
Two of this Prospectus. Estimated Current Returns are calculated by dividing
the estimated net annual interest income per Unit by the Public Offering Price.
The estimated net annual interest income per Unit will vary with changes in fees
and expenses of the Trustee, the Sponsor and the Evaluator and with the
principal prepayment, redemption, maturity, exchange or sale of Securities while
the Public Offering Price will vary with changes in the offering price of the
underlying Securities and with the changes in Purchased Interest in the case of
Kemper Defined Funds; therefore, there is no assurance that the present
Estimated Current Returns will be realized in the future. Estimated Long-Term
Returns are calculated using a formula which (1) takes into consideration, and
determines and factors in the relative weightings of, the market values, yields
(which takes into account the amortization of premiums and the accretion of
discounts) and estimated retirements of all of the Securities in the State Trust
and (2) takes into account the expenses and sales charge associated with each
State Trust Unit. Since the market values and estimated retirements of the
Securities and the expenses of the State Trust will change, there is no
assurance that the present Estimated Long-Term Returns will be realized in the
future. Estimated Current Returns and Estimated Long-Term Returns are expected
to differ because the calculation of Estimated Long-Term Returns reflects the
estimated date and amount of principal returned while Estimated Current Returns
calculations include only net annual interest income and Public Offering Price.
FEDERAL TAX STATUS OF THE STATE TRUSTS
All Municipal Bonds deposited in the State Trusts were accompanied by copies
of opinions of bond counsel to the issuers thereof, given at the time of
original delivery of the Municipal Bonds, to the effect that the interest
thereon is excludable from gross income for Federal income tax purposes. In
addition, bond counsel to the issuing authorities rendered opinions as to the
exemption of interest on such Municipal Bonds, when held by residents of the
State in which the issuers of such Municipal Bonds are located, from State
income taxes and, where applicable, local income taxes. Gain realized on the
sale or redemption of the Municipal Bonds by the Trustee or of a Unit by a
Unitholder is, however, includable in gross income for Federal income tax
purposes. Such gain does not include any amounts received in respect of accrued
interest or earned original issue discount. It should be noted that under
legislation described below that subjects accretion of market discount on tax-
exempt bonds to taxation as ordinary income, gain realized on the sale or
redemption of Municipal Bonds by the Trustee or of Units by a Unitholder that
would have been treated as capital gain under prior law is treated as ordinary
income to the extent it is attributable to accretion of market discount. Market
discount can arise based on the price a Trust Fund pays for Municipal Bonds or
the price a Unitholder pays for his or her Units.
15
<PAGE>
In connection with the offering of Units of the State Trusts, neither the
Sponsor, the Trustee, the Auditors nor their respective counsel have made any
review of the proceedings relating to the issuance of the Municipal Bonds or the
bases for such opinions.
At the time of the closing for each Trust, except with respect to the various
series of Ohio Tax-Exempt Bond Trust, Chapman and Cutler, counsel for the
Sponsor, rendered an opinion under then existing law substantially to the
effect that:
Each State Trust is not an association taxable as a corporation for Federal
income tax purposes and interest and accrued original issue discount on Bonds
which is excludable from gross income under the Internal Revenue Code of 1986
(the "Code") will retain its status when distributed to Unitholders, except to
the extent such interest is subject to the alternative minimum tax, an
additional tax on branches of foreign corporations and the environmental tax
(the "Superfund Tax"), as noted below.
Exemption of interest and accrued original issue discount on any Municipal
Bonds for Federal income tax purposes does not necessarily result in tax-
exemption under the laws of the several states as such laws vary with respect
to the taxation of such securities and in many states all or part of such
interest and accrued issue discount may be subject to tax.
Each Unitholder is considered to be the owner of a pro rata portion of each
asset of the respective State Trust in the proportion that the number of
Units of such Trust held by him bears to the total number of Units
outstanding of such State Trust under subpart E, subchapter J of chapter 1 of
the Code and will have a taxable event when such State Trust disposes of a
Bond, or when the Unitholder redeems or sells his Units. Unitholders must
reduce the tax basis of their Units for their share of accrued interest
received by a State Trust, if any, on Bonds delivered after the Unitholders
pay for their Units to the extent that such interest accrued on such Bonds
during the period from the Unitholder's settlement date to the date such Bonds
are delivered to a State Trust and, consequently, such Unitholders may have an
increase in taxable gain or reduction in capital loss upon the disposition of
such Units. Gain or loss upon the sale or redemption of Units is measured by
comparing the proceeds of such sale or redemption with the adjusted basis of
the Units. If the Trustee disposes of Bonds (whether by sale, payment on
maturity, redemption or otherwise), gain or loss is recognized to the
Unitholder. The amount of any such gain or loss is measured by comparing the
Unitholder's pro rata share of the total proceeds from such disposition with
the Unitholder's basis for his or her fractional interest in the asset
disposed of. In the case of a Unitholder who purchases Units, such basis
(before adjustment for earned original issue discount and amortized bond
premium, if any) is determined by apportioning the cost of the Units among
each of the State Trust's assets ratably according to the value as of the date
of acquisition of the Units. The basis of each Unit and of each Municipal
Bond which was issued with original issue discount must be increased by the
amount of the accrued original issue discount and the basis of each Unit and
of the Unitholder's interest in each Municipal Bond which was acquired by such
Unitholder at a premium must be reduced by the annual amortization of
Municipal Bond premium. The tax cost reduction requirements of the Code
relating to amortization of bond premium may,
16
<PAGE>
under some circumstances, result in the Unitholder realizing a taxable gain
when his Units are sold or redeemed for an amount equal to his original cost.
Sections 1288 and 1272 of the Internal Revenue Code of 1986 (the "Code")
provide a complex set of rules governing the accrual of original issue discount.
These rules provide that original issue discount accrues either on the basis of
a constant compound interest rate or ratably over the term of the Municipal
Bond, depending on the date the Municipal Bond was issued. In addition, special
rules apply if the purchase price of a Municipal Bond exceeds the original issue
price plus the amount of original issue discount which would have previously
accrued based upon its issue price (its "adjusted issue price"). The
application of these rules will also vary depending on the value of the
Municipal Bond on the date a Unitholder acquires his Units, and the price the
Unitholder pays for his Units. Investors with questions regarding these Code
sections should consult with their tax advisers.
"The Revenue Reconciliation Act of 1993" (the "Tax Act") subjects tax-exempt
bonds to the market discount rules of the Code effective for bonds purchased
after April 30, 1993. In general, market discount is the amount (if any) by
which the stated redemption price at maturity exceeds an investor's purchase
price (except to the extent that such difference, if any, is attributable to
original issue discount not yet accrued) subject to a statutory "de minimis
rule". Market discount can arise based on the price a Trust pays for Municipal
Bonds or the price a Unitholder pays for his or her Units. Under the Tax Act,
accretion of market discount is taxable as ordinary income; under prior law the
accretion had been treated as capital gain. Market discount that accretes while
a Trust Fund holds a Municipal Bond would be recognized as ordinary income by
the Unitholders when principal payments are received on the Municipal Bond, upon
sale or at redemption (including early redemption), or upon the sale or
redemption of his or her Units, unless a Unitholder elects to include market
discount in taxable income as it accrues. The market discount rules are complex
and Unitholders should consult their tax advisers regarding these rules and
their application.
In the case of certain corporations, the alternative minimum tax and the
Superfund Tax depend upon the corporation's alternative minimum taxable income,
which is the corporation's taxable income with certain adjustments. One of the
adjustment items used in computing the alternative minimum taxable income and
the Superfund Tax of a corporation (other than an S Corporation, Regulated
Investment Company, Real Estate Investment Trust, or REMIC) is an amount equal
to 75% of the excess of such corporation's "adjusted current earnings" over an
amount equal to its alternative minimum taxable income (before such adjustment
item and the alternative tax net operating loss deduction). "Adjusted current
earnings" includes all tax-exempt interest, including interest on all the
Municipal Bonds in a State Trust. Unitholders are urged to consult their tax
advisers with respect to the particular tax consequences to them including the
corporate alternative minimum tax, the Superfund Tax and the branch profits tax
imposed by Section 884 of the Code.
Counsel for the Sponsor has also advised that under Section 265 of the Code,
interest on indebtedness incurred or continued to purchase or carry Units of a
State Trust is not deductible for Federal income tax purposes. The Internal
Revenue Service has taken the position that such indebtedness need not be
directly traceable to the purchase or carrying of Units (however, these rules
generally do not apply to interest paid on indebtedness incurred to purchase or
improve a personal residence or to purchase goods or services for personal
consumption). Also, under Section 265 of the Code, certain financial
institutions that acquire Units would
17
<PAGE>
generally not be able to deduct any of the interest expense attributable to
ownership of such Units. Investors with questions regarding these issues should
consult with their tax advisers.
In the case of certain Municipal Bonds in the State Trusts, the opinions of
bond counsel indicate that interest on such securities received by a
"substantial user" of the facilities being financed with the proceeds of these
securities or persons related thereto, for periods while such securities are
held by such a user or related person, will not be excludable from Federal gross
income, although interest on such securities received by others would be
excludable from Federal gross income. "Substantial user" and "related person"
are defined under U.S. Treasury Regulations. Any person who believes that he or
she may be a "substantial user" or a "related person" as so defined should
contact his or her tax adviser.
In the case of corporations, the alternative tax rate applicable to long-term
capital gains is 35% effective for long-term capital gains realized in taxable
years beginning on or after January 1, 1993. For taxpayers other than
corporations, net capital gains are subject to a maximum marginal stated tax
rate of 28%. However, it should be noted that legislative proposals are
introduced from time to time that affect tax rates and could affect relative
differences at which ordinary income and capital gains are taxed. Under the
Code, taxpayers must disclose to the Internal Revenue Service the amount of tax-
exempt interest earned during the year.
With respect to the various series of Ohio Tax-Exempt Bond Trust, Squire,
Sanders & Dempsey rendered an opinion at the time of each closing for each Ohio
Trust which was substantially similar to the foregoing.
Under existing law, the State Trusts are not associations taxable as a
corporation and the income of the Trust Funds will be treated as the income of
the Unitholders under the income tax laws of the State of Missouri.
All statements of law in the Prospectus concerning exclusion from gross income
for Federal, State or other tax purposes are the opinions of counsel and are to
be so construed.
At the respective times of issuance of the Municipal Bonds, opinions relating
to the validity thereof and to the exclusion of interest thereon from Federal
gross income are rendered by bond counsel to the respective issuing authorities.
Neither the Sponsor nor Chapman and Cutler has made any special review for the
State Trusts of the proceedings relating to the issuance of the Municipal Bonds
or of the basis for such opinions.
Section 86 of the Code, in general, provides that fifty percent of Social
Security benefits are includable in gross income to the extent that the sum of
"modified adjusted gross income" plus fifty percent of the Social Security
benefits received exceeds a "base amount." The base amount is $25,000 for
unmarried taxpayers, $32,000 for married taxpayers filing a joint return and
zero for married taxpayers who do not live apart at all times during the taxable
year and who file separate returns. Modified adjusted gross income is adjusted
gross income determined without regard to certain otherwise allowable deductions
and exclusions from gross income and by including tax exempt interest. To the
extent that Social Security benefits are includable in gross income, they will
be treated as any other item of gross income.
In addition, under the Tax Act, for taxable years beginning after December 31,
1993, up to 85 percent of Social Security benefits are includable in gross
income to the extent that the sum of "modified adjusted gross
18
<PAGE>
income" plus fifty percent of Social Security benefits received exceeds an
"adjusted base amount." The adjusted base amount is $34,000 for married
taxpayers, $44,000 for married taxpayers filing a joint return and zero for
married taxpayers who do not live apart at all times during the taxable year and
who file separate returns.
Although tax-exempt interest is included in modified adjusted gross income
solely for the purpose of determining what portion, if any, of Social Security
benefits will be included in gross income, no tax-exempt interest, including
that received from the Trust Fund, will be subject to tax. A taxpayer whose
adjusted gross income already exceeds the base amount or the adjusted base
amount must include fifty percent or eighty-five percent, respectively of his
Social Security benefits in gross income whether or not he receives any tax-
exempt interest. A taxpayer whose modified adjusted gross income (after
inclusion of tax-exempt interest) does not exceed the base amount need not
include any Social Security benefits in gross income.
For a discussion of the State tax status of income earned on Units of a State
Trust, see the discussion of tax status for the applicable trust. Except as
noted therein, the exemption of interest on State and local obligations for
Federal income tax purposes discussed above does not necessarily result in
exemption under the income or other tax laws of any state or city. The laws of
the several states vary with respect to the taxation of such obligations.
All statements in the Prospectus concerning exemption from Federal, state or
other taxes are the opinions of counsel and are to be so construed.
DESCRIPTION AND STATE TAX STATUS OF THE STATE TRUSTS
ARIZONA TRUSTS. The following brief summary regarding the economy of Arizona
is based upon information drawn from publicly available sources and is included
for the purpose of providing the information about general economic conditions
that may or may not affect issuers of the Arizona Bonds. The Sponsor has not
independently verified any of the information contained in such publicly
available documents.
Arizona is the nation's sixth largest state in terms of area. Arizona's main
economic sectors include services, tourism and manufacturing. Mining and
agriculture are also significant, although they tend to be more capital than
labor intensive. Services is the single largest economic sector. Many of these
jobs are directly related to tourism.
The unemployment rate in Arizona for 1993 was 6.2% and for 1992 was 7.4%
compared to a national rate of 6.8% in 1993 and 7.4% in 1992. Job growth may be
adversely affected by the closing of a major air force base near Phoenix and the
bankruptcy of several major employers, including America West Airlines.
In 1986, the value of Arizona real estate began a steady decline, reflecting a
market which had been overbuilt in the previous decade with a resulting surplus
of completed inventory. This decline adversely affected both the construction
industry and those Arizona financial institutions which had aggressively pursued
many facets of real estate lending. In the neat future, Arizona's financial
institutions are likely to continue to experience problems until the excess
inventories of commercial and residential properties are absorbed. The
19
<PAGE>
problems of the financial institutions have adversely affected employment and
economic activity. Longer prospects are brighter. Arizona has been, and is
projected to continue to be, one of the fastest growing areas in the United
States. Over the last several decades the State has outpaced most other regions
of the country in virtually every major category of growth, including
population, personal income, gross state product and job creation.
The state operates on a fiscal year beginning July 1 and ending June 30.
Fiscal year 1995 refers to the year ending June 30, 1995.
General Fund revenues of $4.3 billion are expected during fiscal year 1995.
Approximately 44.5% of this budgeted revenue comes from sales and use taxes,
44.4% from income taxes (both individual and corporate) and 4.4% from property
taxes. All taxes total approximately $4.0 billion, or 93% of General Funds
revenues. Non-tax revenue includes items such as income from the state lottery,
licenses, fees and permits, and interest.
For fiscal year 1994 the budget called for expenditures of approximately $4.1
billion. These expenditures fell into the following major categories: education
(47.4%), health and welfare (26.3%), protection and safety (4.0%), general
government (15.5%) and inspection and regulation, natural resources and
transportation (6.8%). The States's general fund expenditures for fiscal year
1995 are budgeted at approximately $4.7 billion.
Most or all of the Bonds of the Arizona Trust are not obligations of the State
of Arizona, and are not supported by the State's taxing powers. The particular
source of payment and security for each of the Bonds is detailed in the
instruments themselves and in related offering materials. There can be no
assurances, however, with respect to whether the market value of marketability
of any of the Bonds issued by an entity other than the State of Arizona will be
affected by the financial or other condition of the State or of any entity
located within the State. In addition, it should be noted that the State of
Arizona, as well as counties, municipalities, political subdivisions and other
public authorities of the state, are subject to limitations imposed by Arizona's
constitution with respect to ad valorem taxation, bonded indebtedness and other
matters. For example, the legislature cannot appropriate revenues in excess of
7% of the total personal income of the state in any fiscal year. These
limitations may affect the ability of the issuers to generate revenues to
satisfy their debt obligations.
On July 21, 1994, the Arizona Supreme Court rendered its opinion in Roosevelt
Elementary School District Number 66, et al. v. Dianne Bishop, et al. (the
"Roosevelt Opinion"). In this opinion, the Arizona Supreme Court held that the
present statutory financing scheme for public education in the State of Arizona
does not comply with the Arizona constitution. Subsequently, the Arizona School
Boards Association, with the approval of the appellants and the appellees to the
Roosevelt Opinion, and certain Arizona school districts, filed with the Arizona
Supreme Court motions for clarification of the Roosevelt Opinion, specifically
with respect to seeking prospective application of the Roosevelt Opinion. On
July 29, 1994, the Arizona Supreme Court clarified the Roosevelt Opinion to hold
that such opinion will have prospective effect only.
Certain other circumstances are relevant to the market value, marketability
and payment of any hospital and health care revenue bonds in the Arizona Trust.
The Arizona Legislature has in the past sought to enact health care cost
control legislation. Certain other health care regulatory laws have expired.
It is expected that the Arizona legislature will at future sessions continue to
attempt to adopt legislation concerning health care
20
<PAGE>
cost control and related regulatory matters. The effect of any such legislation
or of the continued absence of any legislation restricting hospital bed
increased and limiting new hospital construction on the ability of Arizona
hospitals and other health care providers to pay debt service on their revenue
bonds cannot be determined at this time.
Arizona does not participate in the federally administered Medicaid program.
Instead, the state administers an alternative program, Arizona Health Care Cost
Containment System ("AHCCCS"), which provides health care to indigent persons
meeting certain financial eligibility requirements, through managed care
programs. In fiscal year 1994, AHCCCS was financed approximately 60% by federal
funds, 29% by state funds, and 11% by county funds.
Under state law, hospitals retain the authority to raise with notification and
review by, but not approval from, the Department of Health Services. Hospitals
in Arizona have experienced profitability problems along with those in other
states. At least two Phoenix based hospitals have defaulted on or reported
difficulties in meeting their bond obligations in recent years.
Insofar as tax-exempt Arizona public utility pollution control revenue bonds
are concerned, the issuance of such bonds and the periodic rate increases needed
to cover operating costs and debt service are subject to regulation by the
Arizona Corporation Commission, the only significant exception being the Salt
River Project Agricultural Improvement and Power District which, as a Federal
instrumentality, is exempt from rate regulation. On July 15, 1991, several
creditors of Tucson Electric Power Company ("Tucson Electric") filed involuntary
petitions under Chapter 11 of the U.S. Bankruptcy Code to force Tucson Power to
reorganize under the supervision of the bankruptcy court. On December 31, 1991,
the Bankruptcy Court approved the utility's motion to dismiss the July petition
after five months of negotiations between Tucson Electric and its creditors to
restructure the utility's debts and other obligations. In December 1992, Tucson
Electric announced that it had completed its financial restructuring. In
January 1993, Tucson Electric asked the Arizona Corporation Commission for a
9.3% average rate. Tucson Electric serves approximately 270,000 customers,
primarily in the Tucson area. Inability of any regulated public utility to
secure necessary rate increases could adversely affect, to an indeterminable
extent, its ability to pay debt service on its pollution control revenue bonds.
Based on a recent U.S. Supreme Court ruling, the State has determined to
refund $197 million, including statutory interest, in State income taxes
previously collected from Federal retirees on their pensions. This payment will
be made over a four-year period beginning with approximately $14.6 million in
tax refunds in fiscal year 1994. A combination of tax refunds and tax credits
will be used to satisfy this liability.
At the time of the closing for each Arizona Trust, Special Counsel to the Fund
for Arizona tax matters rendered an opinion under then existing Arizona income
tax law applicable to taxpayers whose income is subject to Arizona income
taxation substantially to the effect that:
For Arizona income tax purposes, each Unitholder will be treated as the
owner of a pro rata portion of the Arizona Trust, and the income of the Trust
therefore will be treated as the income of the Unitholder under State law.
21
<PAGE>
For Arizona income tax purposes, interest on the Bonds which is excludable
from Federal gross income and which is exempt from Arizona income taxes when
received by the Arizona Trust, and which would be excludable from Federal
gross income and exempt from Arizona income taxes if received directly by a
Unitholder, will retain its status as tax-exempt interest when received by the
Arizona Trust and distributed to the Unitholders.
To the extent that interest derived from the Arizona Trust by a Unitholder
with respect to the Bonds is excludable from Federal gross income, such
interest will not be subject to Arizona income taxes;
Each Unitholder will receive taxable gain or loss for Arizona income tax
purposes when Bonds held in the Arizona Trust are sold, exchanged, redeemed or
paid at maturity, or when the Unitholder redeems or sells Units, at a price
that differs from original cost as adjusted for amortization of Bond discount
or premium and other basis adjustments, including any basis reduction that may
be required to reflect a Unitholder's share of interest, if any, accruing on
Bonds during the interval between the Unitholder's settlement date and the
date such Bonds are delivered to the Arizona Trust, if later.
Amounts paid by the Insurer under an insurance policy or policies issued to
the Trust, if any, with respect to the Bonds in the Trust with represent
maturing interest on defaulted obligations held by the Trustee will be exempt
from State income taxes if, and to the same extent as, such interest would
have been so exempt if paid by the issuer of the defaulted obligations
provided that, at the time such policies are purchased, the amounts paid for
such policies are reasonable, customary and consistent with the reasonable
expectation tat the issuer of the obligations, rather that the insurer, will
pay debt service on the obligations.
Arizona law does not permit a deduction for interest paid or incurred on
indebtedness incurred or continued to purchase or carry Units in the Arizona
Trust, the interest on which is exempt from Arizona income taxes.
Neither the Bonds nor the Units will be subject to Arizona property taxes,
sales tax or use tax.
ARKANSAS TRUSTS. The Constitution of Arkansas specifically prohibits the
creation of any State general obligation debt unless authorized in a Statewide
general election. Although the State of Arkansas defaulted on some of its
general obligation debt during the depression in the later 1930's, it has not
failed to pay the principal and interest on any of its general obligations when
due since that time.
Act 496 of 1981, as amended, the "Arkansas Water Resources Development Act of
1981" ("Act 496"), authorized the issuance of State Water Resources Development
General Obligation Bonds by the State of Arkansas, acting by and through the
Arkansas Soil and Water Conservation Commission. The issuance of bonds pursuant
to Act 496 was approved by the electors of the State at the general election on
November 2, 1982. The total principal amount of bonds issued during any fiscal
biennium may not exceed $15,000,000, and the total principal of all bonds issued
under Act 496 may not exceed $100,000,000. All Bonds to be issued under Act 496
shall be direct general obligations of the State, the principal and interest of
which are payable from the general revenues of the State. Pursuant to Act 496,
the State of Arkansas has issued and outstanding two series of bonds in the
aggregate principal amount of $36,645,000 under Act 496 as of June 30, 1993.
22
<PAGE>
Act 686 of 1987, the "Arkansas Waste Disposal and Pollution Abatement
Facilities Financing Act of 1987" ("Act 686"), authorizes the issuance of
Arkansas Waste Disposal and Pollution Abatement Facilities General Obligation
Bonds by the State of Arkansas, acting by and through the Arkansas Soil and
Water Conservation Commission. The issuance of bonds pursuant to Act 686 was
approved by the electors of the State at the general election on November 8,
1988. The total principal amount of bonds issued during any fiscal biennium may
not exceed $50,000,000, and the total principal of all bonds issued under Act
686 may not exceed $250,000,000. All bonds to be issued under Act 686 shall be
direct general obligations of the State, the principal and interest of which are
payable from the general revenues of the State. The State of Arkansas has
outstanding two series of bonds in the aggregate principal amount of
approximately $25,100,000 under Act 686 as of June 30, 1993.
Act 683 of 1989, the "Arkansas College Saving Bond Act of 1989" ("Act 683"),
authorizes the issuance of Arkansas College Savings General Obligation Bonds by
the State of Arkansas, acting by and through the Arkansas Development Finance
Authority. The issuance of bonds pursuant to Act 683 was approved by the
electors of the State at the general election on November 6, 1990. The total
principal amount of bonds issued during any fiscal biennium may not exceed
$100,000,000, and the total principal of all bonds issued under Act 683 may not
exceed $300,000,000. All bonds to be issued under Act 683 shall be direct
general obligations of the State, the principal and interest of which are
payable from the general revenues of the State. The State of Arkansas has
outstanding four series of bonds in the aggregate principal amount of
approximately $161,751,000 under Act 683 as of April 1, 1994.
Deficit spending has been prohibited by statute in Arkansas since 1945. The
Revenue Stabilization Law requires that before any State spending can take
place, there must be an appropriation by the General Assembly and there must be
funds available in the fund from which the appropriation has been made. The
State is prohibited from borrowing money to put into any State fund from which
appropriations can be paid.
Information regarding the financial condition of the State is included for the
purpose of providing information about general economic conditions that may
affect issuers of the Bonds in Arkansas. The Arkansas economy represents
approximately 2.0% of the total United States' economy. Its small size causes
the Arkansas economy to follow the national economy. Fluctuations in the
national economy are often mirrored by coinciding or delayed fluctuations in the
Arkansas economy.
Arkansas' economy is both agricultural and manufacturing based. Thus, the
State of Arkansas feels the full force of the business cycle and also sees the
growth swing from positive to negative as conditions in agriculture change.
Agriculture has had a depressant effect on the Arkansas economy regardless of
the phase the business cycle was in. In recent years, agricultural employment
in Arkansas has been on the decline. From 1988 to 1989 and from 1989 to 1990,
agricultural employment declined by 1.6%.
Employment in Arkansas' construction industry decreased by 1.8% from 1989 to
1990 and by 4.4% from 1990 to 1991. This followed a 2.3% decline from 1988 to
1989.
23
<PAGE>
During the past two decades, Arkansas' economic base has shifted from
agriculture to light manufacturing. Manufacturing employment in Arkansas grew by
0.56% from 1990 to 1991 versus 3.7% at the national level. The diversification
of economic interests has lessened Arkansas' cyclical sensitivity to impact by
any single sector. From 1990 to 1991, total employment decreased by 1.9% and
total nonagricultural wage and salary employment increased by 1.4%. Total
employment growth in Arkansas exceeded the growth rate of total employment in
the United States. The average unemployment rate decreased from 7.2% in 1992 to
6.2% in 1993. Total personal income increased by 7.2% from 1988 to 1989, 6.7%
from 1989 to 1990 and by 5.2% from 1990 to 1991. Per capita personal income
increased by 7.1% from 1988 to 1989, 6.4% from 1989 to 1990 and by 4.3% from
1990 to 1991. Retail sales increased by 1.3% from 1990 to 1991.
Counties and municipalities may issue general obligation bonds (pledging an ad
valorem tax), special obligation bonds (pledging other specific tax revenues)
and revenue bonds (pledging only specific revenues from sources other than tax
revenues). School districts may issue general obligation bonds (pledging ad
valorem taxes). Revenue bonds may also be issued by agencies and
instrumentalities of counties, municipalities and the State of Arkansas but as
in all cases of revenue bonds, neither the full faith and credit nor the taxing
power of the State of Arkansas or any municipality or county thereof is pledged
to the repayment of those bonds. Revenue bonds can be issued only for public
purposes, including, but not limited to, industry, housing, health care
facilities, airports, port facilities and water and sewer projects.
The foregoing information constitutes only a brief summary of some of the
financial difficulties which may impact certain issuers of Bonds and does not
purport to be a complete description of all adverse conditions to which the
issuers in the Arkansas 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 Bonds, could affect or could have an
adverse impact on the financial condition of the State, various agencies and
political subdivisions and private businesses located in the State. The Sponsor
is unable to predict whether or to what extent such factors or other factors may
affect the issuers of Bonds, the market value or marketability of the Bonds or
the ability of the respective issuers of the Bonds acquired by the Arkansas
Trust to pay interest on or principal of the Bonds.
At the time of the closing for each Arkansas Trust Special Counsel to each
Arkansas Trust for Arkansas tax matters rendered an opinion under then existing
Arkansas income tax law applicable to taxpayers whose income is subject to
Arkansas income taxation substantially to the effect that:
The Arkansas Trust is not an association taxable as a corporation or otherwise
for purposes of Arkansas income taxation;
Each Arkansas Unitholder will be treated as the owner of a pro rata portion of
the Arkansas Trust for Arkansas income tax purposes, and will have a taxable
event when the Arkansas Trust disposes of a Bond or when the Unitholder sells,
exchanges, redeems or otherwise disposes of his Units;
Any gains realized upon the sale, exchange, maturity, redemption or other
disposition of Bonds held by the Arkansas Trust resulting in the distribution
of income to Arkansas Unitholders will be subject to Arkansas income taxation
if the Bonds were held, sold, exchanged, redeemed or otherwise disposed of by
the Arkansas Unitholders; and
24
<PAGE>
Interest on Bonds, issued by the State of Arkansas, or by or on behalf of
political subdivisions, thereof, that would be exempt from Federal income
taxation when paid directly to an Arkansas Unitholder will be exempt from
Arkansas income taxation when received by the Arkansas Trust and attributed to
such Arkansas Unitholder and when distributed to such Arkansas Unitholder.
CALIFORNIA TRUSTS. The Trust will invest substantially all of its assets in
California Municipal Obligations. The Trust is therefore susceptible to
political, economic or regulatory factors affecting issuers of California
Municipal Obligations. These include the possible adverse effects of certain
California constitutional amendments, legislative measures, voter initiatives
and other matters that are described below. The following information provides
only a brief summary of the complex factors affecting the financial situation in
California (the "State") and is derived from sources that are generally
available to investors and are believed to be accurate. No independent
verification has been made of the accuracy or completeness of any of the
following information. It is based in part on information obtained from various
State and local agencies in California or contained in official statements for
various California Municipal Obligations.
There can be no assurance that future statewide or regional economic
difficulties, and the resulting impact on State or local governmental finances
generally, will not adversely affect the market value of California Municipal
Obligations held in the portfolio of the Fund or the ability of particular
obligors to make timely payments of debt service on (or relating to) those
obligations.
California's economy is the largest among the 50 states and one of the largest
in the world. The State's population of over 30 million represents 12% of the
total United States population and grew by 27% in the 1980s. Total personal
income in the State, at an estimated $662 billion in 1991, accounts for 13% of
all personal income in the nation. Total employment is almost 14 million, the
majority of which is in the service, trade and manufacturing sectors.
Reports issued by the State Department of Finance and other sources indicate
that the State's economy is suffering its worst recession since the 1930s, with
prospects for recovery slower than for the nation as a whole. The State has
lost over 800,000 jobs since the start of the recession in mid 1990 and
additional job losses are expected before an upturn begins. The largest job
losses have been in Southern California, led by declines in the aerospace and
construction industries. Weaknesses statewide occurred in manufacturing,
construction, services and trade and will be hurt in the next few years by
continued cuts in federal defense spending and base closures. Unemployment is
expected to remain well above the national average in 1994. The State's economy
is only expected to pull out of the recession slowly, following the national
recovery which has begun. Delay in recovery will exacerbate shortfalls in State
revenues.
Certain California Municipal Obligations may be obligations of issuers which
rely in whole or in part, directly or indirectly, on ad valorem property taxes
as a source of revenue. The taxing powers of California local governments and
districts are limited by Article XIIIA of the California Constitution, enacted
by the voters in 1978 and commonly known as "Proposition 13." Briefly, Article
XIIIA limits to 1% of full cash value the rate of ad valorem property taxes on
real property and generally restricts the reassessment of property to 2% per
year, except upon new construction or change of ownership (subject to a number
of exemptions).
25
<PAGE>
Taxing entities may, however, raise ad valorem taxes above the 1% limit to pay
debt service on voter-approved bonded indebtedness.
Under Article XIIIA, the basic 1% ad valorem tax levy is applied against the
assessed value of property as of the owner's date of acquisition (or as of March
1, 1975, if acquired earlier), subject to certain adjustments. This system has
resulted in widely varying amounts of tax on similarly situated properties.
Several lawsuits have been filed challenging the acquisition-based assessment
system of Proposition 13, and on June 18, 1992 the U.S. Supreme Court announced
a decision upholding Proposition 13.
Article XIIIA prohibits local governments from raising revenues through ad
valorem property taxes above the 1% limit; it also requires voters of any
governmental unit to give two-thirds approval to levy any "special tax."
However, court decisions allowed non-voter approved levy of "general taxes"
which were not dedicated to a specific use. In response to these decisions, the
voters of the State in 1986 adopted an initiative statute which imposed
significant new limits on the ability of local entities to raise or levy general
taxes, except by receiving majority local voter approval. Significant elements
of this initiative, "Proposition 62", have been overturned in recent court
cases. An initiative proposed to reenact the provisions of Proposition 62 as a
constitutional amendment was defeated by the voters in November 1990, but such a
proposal may be renewed in the future.
California and its local governments are subject to an annual "appropriations
limit" imposed by Article XIIIB of the California Constitution, enacted by the
voters in 1979 and significantly amended by Propositions 98 and 111 in 1988 and
1990, respectively. Article XIIIB prohibits the State or any covered local
government from spending "appropriations subject to limitation" in excess of the
appropriations limit imposed. "Appropriations subject to limitation" are
authorizations to spend" proceeds of taxes," which consists of tax revenues and
certain other funds, including proceeds from regulatory licenses, user charges
or other fees to the extent that such proceeds exceed the cost of providing the
product or service, but "proceeds of taxes" excludes most State subventions to
local governments. No limit is imposed on appropriations or funds which are not
"proceeds of taxes," such as reasonable user charges or fees and certain other
non-tax funds, including bond proceeds.
Among the expenditures not included in the Article XIIIB appropriations limit
are (1) the debt service cost of bonds issued or authorized prior to January 1,
1979, or subsequently authorized by the voters, (2) appropriations arising from
certain emergencies declared by the Governor, (3) appropriations for certain
capital outlay projects, (4) appropriations by the State of post-1989 increases
in gasoline taxes and vehicle weight fees, and (5) appropriations made in
certain cases of emergency.
The appropriations limit for each year is adjusted annually to reflect changes
in cost of living and population, and any transfers of service responsibilities
between government units. The definitions for such adjustments were liberalized
in 1990 by Proposition 111 to follow more closely growth in California's
economy.
"Excess" revenues are measured over a two-year cycle. Local governments must
return any excess to taxpayers by rate reduction. The State must refund 50% of
any excess, with the other 50% paid to schools and community colleges. With
more liberal annual adjustment factors since 1988, and depressed revenues since
1990 because of the recession, few governments are currently operating near
their spending limits, but this
26
<PAGE>
condition may change over time. Local governments may by voter approval exceed
their spending limits for up to four years.
During fiscal year 1986-87, State receipts from proceeds of taxes exceeded its
appropriations limit by $1.1 billion, which was returned to taxpayers. Since
that year, appropriations subject to limitation have been under the State limit.
State appropriations are expected to be $3.7 billion under the limit for Fiscal
Year 1993-94.
Because of the complex nature of Articles XIIIA and XIIIB of the California
Constitution, the ambiguities and possible inconsistencies in their terms, and
the impossibility of predicting future appropriations or changes in population
and cost of living, and the probability of continuing legal challenges, it is
not currently possible to determine fully the impact of Article XIIIA or Article
XIIIB on California Municipal Obligations or on the ability of the State or
local governments to pay debt service on such California Municipal Obligations.
It is not presently possible to predict the outcome of any pending litigation
with respect to the ultimate scope, impact or constitutionality of either
Article XIIIA or Article XIIIB, or the impact of any such determinations upon
State agencies or local governments, or upon their ability to pay debt service
on their obligations. Future initiative or legislative changes in laws or the
California Constitution may also affect the ability of the State or local
issuers to repay their obligations.
As of April 1, 1994, California had approximately $18.1 billion of general
obligation bonds outstanding, and $5.6 billion remained authorized but unissued.
In addition, at June 30, 1993, the State had lease-purchase obligations, payable
from the State's General Fund, of approximately $4.0 billion. Of the States's
outstanding general obligation debt, approximately 28% os presently self-
liquidating (for which program revenues are anticipated to be sufficient to
reimburse the General Fund for debt service payments). Four general obligation
bond propositions, totalling $5.9 billion, will be on the June, 1994 ballot. In
Fiscal Year 1992-93, debt service on general obligation bonds and lease-purchase
debt was approximately 4.1% of General Fund revenues. The State has paid the
principal of and interest on its general obligation bonds, lease-purchase debt
and short-term obligations when due.
The principal sources of General Fund revenues in 1992 - 93 were the
California personal income tax (44% of total revenues), the sales tax (38%),
bank and corporation taxes (12%), and the gross premium tax on insurance (3%).
California maintains a Special Fund for Economic Uncertainties (the "Economic
Uncertainties Fund"), derived from General Fund revenues, as a reserve to meet
cash needs of the General Fund, but which is required to be replenished as soon
as sufficient revenues are available. Year-end balances in the Economic
Uncertainties Fund are included for financial reporting purposes in the General
Fund balance. In recent years, California has budgeted to maintain the Economic
Uncertainties Fund at around 3% of General Fund expenditures but essentially no
reserve is budgeted in 1992-93 or 1993-94 because reserves have been reduced by
the recession.
Throughout the 1980s, State spending increased rapidly as the State population
and economy also grew rapidly, including increased spending for many assistance
programs to local governments, which were constrained by Proposition 13 and
other laws. The largest State program is assistance to local public school
districts. In 1988, an initiative (Proposition 98) was enacted which (subject
to suspension by a two-thirds vote of the Legislature and the Governor)
guarantees local school districts and community college districts a minimum
share of State General Fund revenues (currently about 34%).
27
<PAGE>
Since the start of 1990-91 Fiscal Year, the State has faced adverse economic,
fiscal and budget conditions. The economic recession seriously affected State
tax revenues. It also caused increased expenditures for health and welfare
programs. The State is also facing a structural imbalance in its budget with
the largest programs supported by the General Fund (K-14 education, health,
welfare and corrections) growing at rates significantly higher than the growth
rates for the principal revenue sources of the General Fund. As a result, the
State entered a period of budget imbalance, with expenditures exceeding revenues
for four of the last five fiscal years through 1991-92.
As the State fell into a deep recession in the summer of 1990, the State
budget fell sharply out of balance in the 1990-91 and 1991-92 fiscal years,
despite significant expenditure cuts and tax increases. The State has
accumulated a $2.8 billion budget deficit by June 30, 1992. This deficit also
severely reduced the State's cash resources, so that it had to rely on external
borrowing in the short-term markets to meet its cash needs.
With the failure to enact a budget by July 1, 1992, the State had no legal
authority to pay many of its vendors until the budget was passed; nevertheless,
certain obligations (such as debt service, school apportionments, welfare
payments and employee salaries) were payable because of continuing or special
appropriations or court orders. However, the State Controller did not have
enough cash to pay all of these ongoing obligations as they came due, as well as
valid obligations incurred in the prior fiscal year.
Starting on July 1, 1992, the Controller was required to issue "registered
warrants" in lieu of normal warrants backed by cash to pay many State
obligations. Available cash was used to pay constitutionally mandated and
priority obligations. Between July 1 and September 3, 1992, the Controller
issued an aggregate of approximately $3.8 billion of registered warrants, all of
which were called for redemption by September 4, 1992 following enactment of the
1992-93 Budget Act and issuance by the State of $3.3 billion of Interim Notes.
The 1992-93 Budget Act, when finally adopted, was projected to eliminate the
State's accumulation deficit, with additional expenditure cuts and a $1.3
billion transfer of State education funding costs to local governments by
shifting local property taxes to school districts. However, as the recession
continued longer and deeper than expected, revenues once again were far below
projections, and only reached a level just equal to the amount of expenditures.
Thus, the State continued to carry its $2.8 billion budget deficit at June 30,
1993.
The 1993-94 Budget Act was similar to the prior year in reliance on
expenditure cuts and an additional $2.6 billion transfer of costs to local
government, particularly counties. A major feature of the budget was a two-year
plan to eliminate the accumulated deficit by borrowing into the 1994-95 fiscal
year. With the recession still continuing longer than expected, the 1994-95
Governor's Budget now projects that in the 1993-94 Fiscal Year, the General Fund
will have $900 million less revenue and $800 million higher expenditures than
budgeted. As a result revenues will only exceed expenditures by about $400
million. If this projection is met, it will be the first operating surplus in
four years; however, some budget analysts outside the Department of Finance
project revenues in the balance of 1993-94 will not even meet the revised, lower
projection. In addition, the General Fund may have some unplanned costs for
relief related to the January 17, 1994 Northward earthquake.
28
<PAGE>
The State has implemented its short-term borrowing as part of the deficit
elimination plan, and has also borrowed additional sums to cover cash flow
shortfalls in the spring of 1994, for a total of $3.2 billion, coming due in
July and December, 1994. Repayment of these short-term notes will require
additional borrowing, as the State's cash position continues to be adversely
affected.
The Governor's 1994-95 Budget proposal recognizes the need to bridge a gap of
around $5 billion by June 30, 1995. Over $3.1 billion of this amount is being
requested from the federal government as increased aid, particularly for costs
associated with incarcerating, educating and providing health and welfare
services to undocumented immigrants. However, President Clinton has not
included these costs in his proposed Fiscal 1995 Budget. The rest of the budget
gap is proposed to be closed with expenditure cuts and projected $600 million of
new revenue assuming the State wins a tax case presently pending in the U.S.
Supreme Court. Thus the State will once again face significant uncertainties
and very difficult choices in the 1994-95 budget, as tax increases are unlikely
and many cuts and budget adjustments have been made in the past three years.
The State's severe financial difficulties for the current and upcoming budget
years will result in continued pressure upon various local governments,
particularly school districts and counties which depend on State aid. Despite
efforts in recent years to increase taxes and reduce governmental expenditures,
there can be no assurance that the State will not face budget gaps in the
future.
State general obligation bonds are currently rated "A1" by Moody's and "A" by
S&P. Both of these ratings were recently reduced from "Aa" and "A+" levels,
respectively. There can be no assurance that such ratings will be maintained in
the future. It should be noted that the creditworthiness of obligations issued
by local California issuers may be unrelated to the creditworthiness of
obligations issued by the State of California, and that there is no obligation
on the part of the State to make payment on such local obligations in the event
of default.
The State is involved in certain legal proceedings (described in the State's
recent financial statements) that, if decided against the State, may require the
State to make significant future expenditures or may substantially impair
revenues.
On December 7, 1994, Orange County, California (the "County"), together with
its pooled investment fund (the "Fund") filed for protection under Chapter 9 of
the federal Bankruptcy Code, after reports that the Fund had suffered
significant market losses in its investments which caused a liquidity crisis for
the Fund and the County. Approximately 180 other public entities, most but
not all located in the County, were also depositors in the Fund. As of December
13, 1994, the County indicated that the Fund had lost about 27% of its initial
deposits of approximately $7.4 billion. There County may suffer further losses
as it sells investments to restructure the Fund. Many of the entities which kept
moneys in the Fund, including the County, are facing cash flow difficulties
because of the bankruptcy filing and may be required to reduce programs or
capital projects.
The State of California has no obligations with respect to any bonds or other
securities of the County or any of the other participating entities, although
under existing legal precedents, the State may be obligated to ensure that
school districts have sufficient funds to operate.
29
<PAGE>
Property tax revenues received by local governments declined more than 50%
following passage of Proposition 13. Subsequently, the California Legislature
enacted measures to provide for the redistribution of the State's General Fund
surplus to local agencies, the reallocation of certain State revenues to local
agencies and the assumption of certain governmental functions by the State to
assist municipal issuers to raise revenues. Total local assistance from the
State's General Fund was budgeted at approximately 75% of General Fund
expenditures in recent years, including the effect of implementing reductions in
certain aid programs. To reduce State General Fund support school districts,
the 1992-93 and 1993-94 Budget Acts caused local governments to transfer $3.9
billion of property tax revenues to school districts, representing loss of the
post-Proposition 13 "bailout" aid. Local governments have in return received
greater revenues and greater flexibility to operate health and welfare programs.
To the extent the State should be constrained by its Article XIIIB
appropriations limit, or its obligation to conform to Proposition 98, or other
fiscal considerations, the absolute level, or the rate of growth, of State
assistance to local governments may be reduced. Any such reductions in State
aid could compound the serious fiscal constraints already experienced by many
local governments, particularly counties. The Richmond United School District
(Contra Costa County) entered bankruptcy proceedings in May 1991, but the
proceedings have been dismissed.
California Municipal Obligations which are assessment bonds may be adversely
affected by a general decline in real estate values or a slowdown in real estate
sales activity. In many cases, such bonds are secured by land which is
undeveloped at the time of issuance but anticipated to be developed within a few
years after issuance. In the event of such reduction or slowdown, such
development may not occur or may be delayed, thereby increasing the risk of a
default on the bonds. Because the special assessments or taxes securing these
bonds are not the personal liability of the owners of the property assessed, the
lien on the property is the only security for the bonds. Moreover, in most
cases the issuer of these bonds is not required to make payments on the bonds in
the event of delinquency in the payment of assessments or taxes, except from
amounts, if any, in a reserve fund established for the bonds.
Certain California long-term lease obligations, though typically payable from
the general fund of the municipality, are subject to "abatement" in the event
the facility being leased is unavailable for beneficial use and occupancy by the
municipality during the term of the lease. Abatement is not a default, and
there may be no remedies available to the holders of the certificates evidencing
the lease obligation in the event abatement occurs. The most common causes of
abatement are failure to complete construction of the facility before the end of
the period during which lease payments have been capitalized and uninsured
casualty losses to the facility (e.g., due to earthquake). In the event
abatement occurs with respect to a lease obligation, lease payments may be
interrupted (if all available insurance proceeds and reserves are exhausted) and
the certificates may not be paid when due.
Several years ago the Richmond United School District (the "District") entered
into a lease transaction in which certain existing properties of the District
were sold and leased back in order to obtain funds to cover operating deficits.
Following a fiscal crisis in which the District's finances were taken over by a
State receiver (including a brief period under bankruptcy court protection), the
District failed to make rental payments on this lease, resulting in a lawsuit by
the Trustee for the Certificate of Participation holders, in which the State was
a named defendant (on the grounds that it controlled the District's finances).
One of the defenses raised in answer to this lawsuit was the invalidity of the
original lease transaction. The trial court has upheld the validity of the
District's lease, and the case has been settled. Any judgment in any future
case against the position
30
<PAGE>
asserted by the Trustee in the Richmond case may have adverse implications for
lease transactions of a similar nature by other California entities.
The repayment of Industrial Development Securities secured by real property
may be affected by California laws limiting foreclosure rights of creditors.
Securities backed by health care and hospital revenues may be affected by
changes in State regulations governing cost reimbursements to health care
providers under Medi-Cal (the State's Medicaid program), including risks related
to the policy of awarding exclusive contracts to certain hospitals.
Limitations on ad valorem property taxes may particularly affect "tax
allocation" bonds issued by California redevelopment agencies. Such bonds are
secured solely by the increase in assessed valuation of a redevelopment project
area after the start of redevelopment activity. In the event that assessed
values in the redevelopment project decline (e.g., because of a major natural
disaster such as an earthquake), the tax increment revenue may be insufficient
to make principal and interest payments on these bonds. Both Moody's and S&P
suspended ratings on California tax allocation bonds after the enactment of
Articles XIIIA and XIIIB, and only resumed such ratings on a selective basis.
Proposition 87, approved by California voters in 1988, requires that all
revenues produced by a tax rate increase go directly to the taxing entity which
increased such tax rate to repay that entity's general obligation indebtedness.
As a result, redevelopment agencies (which, typically, are the Issuers of tax
allocation securities) no longer receive an increase in tax increment when taxes
on property in the project area are increased to repay voter-approved bonded
indebtedness.
The effect of these various constitutional and statutory changes upon the
ability of California municipal securities issuers to pay interest and principal
on their obligations remains unclear. Furthermore. other measures affecting the
taxing or spending authority of California or its political subdivisions may be
approved or enacted in the future. Legislation has been or may be introduced
which would modify existing taxes or other revenue-raising measures or which
either would further limit or, alternatively, would increase the abilities of
state and local governments to impose new taxes or increase existing taxes. It
is not presently possible to determine the impact of any such legislation on
California Municipal Obligations in which the Fund may invest, future
allocations of state revenues to local governments or the abilities of state or
local governments to pay the interest on, or repay the principal of, such
California Municipal Obligations.
Substantially all of California is within an active geologic region subject to
major seismic activity. Any California Municipal Obligation in the Portfolio
could be affected by an interruption of revenues because of damaged facilities,
or, consequently, income tax deductions for casualty losses or property tax
assessment reductions. Compensatory financial assistance could be constrained
by the inability of (i) an issuer to have obtained earthquake insurance coverage
at reasonable rates; (ii) an insurer to perform on its contracts of insurance in
the event of widespread losses; or (iii) the Federal or State government to
appropriate sufficient funds within their respective budget limitations.
At the time of the closing for each California Trust, Special Counsel to each
California Trust for California tax matters, rendered an opinion under then
existing California income tax law applicable to taxpayers whose income is
subject to California income taxation substantially to the effect that:
31
<PAGE>
(1) the California Trust is not an association taxable as a corporation and
the income of the California Trust will be treated as the income of the
Unitholders under the income tax laws of California;
(2) amounts treated as interest on the underlying Securities in the
California Trust which are exempt from tax under California personal
income tax and property tax laws when received by the California Trust
will, under such laws, retain their status as tax-exempt interest when
distributed to Unitholders. However, interest on the underlying
Securities attributed to a Unitholder which is a corporation subject to
the California franchise tax laws may be includable in its gross income
for purposes of determining its California franchise tax. Further,
certain interest which is attributable to a Unitholder subject to the
California personal income tax and which is treated as an item of tax
preference for purposes of the federal alternative minimum tax pursuant
to Section 57(a)(5) of the Internal Revenue Code of 1986 may also be
treated as an item of tax preference that must be taken into account in
computing such Unitholder's alternative minimum taxable income for
purposes of the California alternative minimum tax enacted by 1987
California Statutes, chapter 1138. However, because of the provisions of
the California Constitution exempting the interest on bonds issued by the
State of California, or by local governments within the state, from taxes
levied on income, the application of the new California alternative
minimum tax to interest otherwise exempt from the California personal
income tax in some cases may be unclear;
(3) under California income tax law, each Unitholder in the California Trust
will have a taxable event when the California Trust disposes of a
Security (whether by sale, exchange, redemption, or payment at maturity)
or when the Unitholder redeems or sells Units. Because of the requirement
that tax cost basis be reduced to reflect amortization of bond premium,
under some circumstances a Unitholder may realize taxable gains when
Units are sold or redeemed for an amount equal to, or less than, their
original cost. The total cost of each Unit in the California Trust to a
Unitholder is allocated among each of the Bond issues held in the
California Trust (in accordance with the proportion of the California
Trust comprised by each Bond issue) in order to determine his per Unit
tax cost for each Bond issue; and the tax cost reduction requirements
relating to amortization of bond premium will apply separately to the per
Unit tax cost of each Bond issue. Unitholders' bases in their units, and
the bases for their fractional interest in each Trust asset, may have to
be adjusted for their pro rata share of accrued interest received, if
any, on Securities delivered after the Unitholders' respective settlement
dates;
(4) under the California personal property tax laws, bonds (including the
Securities in the California Trust) or any interest therein is exempt
from such tax;
(5) any proceeds paid under the insurance policy issued to the California
Trust with respect to the Securities which represent maturing interest on
defaulted obligations held by the Trustee will be exempt from California
personal income tax if, and to the same extent as, such interest would
have been so exempt if paid by the issuer of the defaulted obligations;
and
(6) under Section 17280(b)(2) of the California Revenue and Taxation Code,
interest on indebtedness incurred or continued to purchase or carry Units
of the California Trust is not deductible for the purposes of the
California personal income tax. While there presently is no California
authority
32
<PAGE>
interpreting this provision, Section 17280(b)(2) directs the California
Franchise Tax Board to prescribe regulations determining the proper
allocation and apportionment of interest costs for this purpose. The
Franchise Tax Board has not yet proposed or prescribed such regulations.
In interpreting the generally similar Federal provision, the Internal
Revenue Service has taken the position that such indebtedness need not be
directly traceable to the purchase or carrying of Units (although the
Service has not contended that a deduction for interest on indebtedness
incurred to purchase or improve a personal residence or to purchase goods
or services for personal consumption will be disallowed). In the absence
of conflicting regulations or other California authority, the California
Franchise Tax Board generally has interpreted California statutory tax
provisions in accord with Internal Revenue Service interpretations of
similar Federal provisions.
At the respective times of issuance of the Securities, opinions relating to
the validity thereof and to the exemption of interest thereon from Federal
income tax and California personal income tax are rendered by bond counsel to
the respective issuing authorities. Except in certain instances in which
Special Counsel acted as bond counsel to issuers of Securities, and as such made
a review of proceedings relating to the issuance of certain Securities at the
time of their issuance, Special Counsel has not made any special review for the
California Trust of the proceedings relating to the issuance of the Securities
or of the basis for such opinions.
COLORADO TRUST. The State Constitution requires that expenditures for any
fiscal year not exceed revenues for such fiscal year. By statute, the amount of
General Fund revenues available for appropriation is based upon revenue
estimates which, together with other available resources, must exceed annual
appropriations by the amount of the unappropriated reserve (the "Unappropriated
Reserve"). The Unappropriated Reserve requirement for fiscal years 1991, 1992
and 1993 was set at 3% of total appropriations from the General Fund. For
fiscal years 1994 and thereafter, the Unappropriated Reserve requirement is set
at 4%. In addition to the Unappropriated Reserve, a constitutional amendment
approved by Colorado voters in 1992 requires the State and each local government
to reserve a certain percentage of its fiscal year spending (excluding bonded
debt service) for emergency use (the "Emergency Reserve"). The minimum
Emergency Reserve is set at 2% for 1994 and 3% for 1995 and later years. For
fiscal year 1992 and thereafter, General Fund appropriations are also limited to
an amount equal to the cost of performing certain required reappraisals of
taxable property plus an amount equal to the lesser of (i) five percent of
Colorado personal income or (ii) 106% of the total General Fund appropriations
for the previous fiscal year. This restriction does not apply to any General
Fund appropriations which are required as a result of a new federal law, a final
state or federal court order or moneys derived from the increase in the rate or
amount of any tax or fee approved by a majority of the registered electors of
the State voting at any general election. In addition, the statutory limit on
the level of General Fund appropriations may be exceeded for a given fiscal year
upon the declaration of a State fiscal emergency by the State General Assembly.
The 1992 General Fund balance was $133.3 million, which was $49.1 million
below the Unappropriated Reserve requirement. The 1993 fiscal year ending
General Fund balance was $326.6 million, or $196.7 million over the required
Unappropriated Reserve and Emergency Reserve. Based on June 20, 1994 estimates,
the 1994 fiscal year ending General Fund balance is expected to be $337.7
million, or $224.3 million over the required Unappropriated Reserve and
Emergency Reserve.
33
<PAGE>
On November 3, 1992 voters in Colorado approved a constitutional amendment
(the "Amendment") which, in general, became effective December 31, 1992, and
which could restrict the ability of the State and local governments to increase
revenues and impose taxes. The Amendment applies to the State and all local
governments, including home rule entities ("Districts"). Enterprises, defend as
government-owned businesses authorized to issue revenue bonds and receiving
under 10% of annual revenue in grants from all Colorado state and local
governments combined, are excluded from the provisions of the Amendment.
The provisions of the Amendment are unclear and will probably require judicial
interpretation. Among other provisions, beginning November 4, 1992, the
Amendment requires voter approval prior to tax increases, creation of debt, or
mill levy or valuation for assessment ratio increases. The Amendment also
limits increases in government spending and property tax revenues to specified
percentages. The Amendment requires that District property tax revenues yield
no more than the prior year's revenues adjusted for inflation, voter approved
changes and (except with regard to school districts) local growth in property
values according to a formula set forth in the Amendment. School districts are
allowed to adjust tax levies for changes in student enrollment. Pursuant to the
Amendment, local government spending is to be limited by the same formula as the
limitation for property tax revenues. The Amendment limits increases in
expenditures from the State General Fund and program revenues (cash funds) to
the growth in inflation plus the percentage change in State population in the
prior calendar year. The bases for initial spending and revenue limits are
fiscal year 1992 spending and 1991 property taxes collected in 1992. The bases
for spending and revenue limits for fiscal year 1994 and later years will be the
prior fiscal year's spending and property taxes collected in the prior calendar
year. Debt service changes, reductions and voter-approved revenue changes are
excluded from the calculation bases. The Amendment also prohibits new or
increased real property transfer tax rates, new State real property taxes and
local District income taxes.
Litigation concerning several issues relating to the Amendment is pending in
the Colorado courts. The litigation deals with three principal issues: (i)
whether Districts can increase mill levies to pay debt service on general
obligation bonds without obtaining voter approval; (ii) whether a multi-year
lease purchase agreement subject to annual appropriations is an obligation which
requires voter approval prior to execution of the agreement; and (iii) what
constitutes an "enterprise" which is excluded from the provisions of the
Amendment. In September, 1994, the Colorado Supreme Court held that Districts
can increase mill levies to pay levies to pay debt service on general obligation
bonds issued after the effective date of the Amendment; litigation regarding
mill levy increases to pay general obligation bonds issued prior to the
Amendment is still pending. Various cases addressing the remaining issues are
at different stages in the trial and appellate process. The outcome of such
litigation cannot be predicted at this time.
According to the Colorado Economic Perspective, Fourth Quarter, FY 1993-94,
June 20, 1994 (the "Economic Report"), inflation for 1992 was 3.8% and
population grew at the rate of 2.8% in Colorado. Accordingly, under the
Amendment, increases in State expenditures during the 1994 fiscal year will be
limited to 6.6% over expenditures during the 1993 fiscal year. The 1993 fiscal
year is the base year for calculating the limitation for the 1994 fiscal year.
The limitation for the 1995 fiscal year is projected to be 7.1%, based on
projected inflation of 4.2% for 1993 and projected population growth of 2.9%
during 1993. For the 1993 fiscal year, the General Fund revenues totalled
$3,443.3 million and program revenues (cash funds) totalled $1,617.6 million,
resulting in total estimated base revenues of $5,060.9 million. Expenditures
for the 1994
34
<PAGE>
fiscal year, therefore, cannot exceed $5,394.9 million. However, the 1994
fiscal year General Fund and program revenues (cash funds) are projected to be
only $5,242.8 million, or $152.1 million less than expenditures allowed under
the spending limitation.
There is also a statutory restriction on the amount of annual increases in
taxes that the various taxing jurisdictions in Colorado can levy without
electoral approval. This restriction does not apply to taxes levied to pay
general obligation debt.
As the State experienced revenue shortfalls in the mid-1980s, it adopted
various measures, including impoundment of funds by the Governor, reduction of
appropriations by the General Assembly, a temporary increase in the sales tax,
deferral of certain tax reductions and inter-fund borrowings. On a GAAP basis,
the State had unrestricted General Fund balances at June 30 of approximately
$100.3 million in fiscal year 1988, $134.8 million in fiscal year 1989 $116.6
million in fiscal year 1990, $16.3 million in fiscal year 1991 and $133.3
million in fiscal year 1992 and $326.6 million in fiscal year 1993. The fiscal
year 1994 unrestricted General Fund is currently projected to be $337.7 million.
For fiscal year 1993, the following tax categories generated the following
respective revenue percentages of the States's $3,443.3 million total gross
receipts: individual taxes represented 51.1% of gross fiscal year 1993
receipts; sales, use and excise taxes represented 31.3% of gross fiscal year
1993 receipts; and corporate income taxes represented 4.0% of gross fiscal year
1993 receipts. The final budget for fiscal year 1994 projects general fund
revenues of approximately $3,570.8 million and appropriations of approximately
$3,556.8 million. The percentages of general fund revenue generated by type of
tax for fiscal year 1994 are not expected to be significantly different from
fiscal year 1993 percentages.
Under its constitution, the State of Colorado is not permitted to issue
general obligation bonds secured by the full faith and credit of the State.
However, certain agencies and instrumentalities of the State are authorized to
issue bonds secured by revenues from specific projects and activities. The
State enters into certain lease transactions which are subject to annual renewal
at the option of the State. In addition, the State is authorized to issue
short-term revenue anticipation notes. Local governmental units in the State
are also authorized to incur indebtedness. The major source of financing for
such local government indebtedness is an ad valorem property tax. In addition,
in order to finance public projects, local governments in the State can issue
revenue bonds payable from the revenues of a utility or enterprise or from the
proceeds of an excise tax, or assessment bonds payable from special assessments.
Colorado local governments can also finance public projects through leases which
are subject to annual appropriation at the option of the local government.
Local governments in Colorado also issue tax anticipation notes. The Amendment
requires prior voter approval for the creation of any multiple fiscal year debt
or other financial obligation whatsoever, except for refundings at a lower rate
or obligations of an enterprise.
Based on data published by the State of Colorado, Office of State Planning and
Budgeting as presented in the Economic Report, over 50% of non-agricultural
employment in Colorado in 1993 was concentrated in the retail and wholesale
trade and service sectors, reflecting the importance of tourism to the State's
economy and of Denver as a regional economic and transportation hub. The
government and manufacturing sectors followed as the fourth and fifth largest
employment sectors in the State, representing approximately 17.8% and 11.3%,
respectively, of non-agricultural employment in the State in 1993.
35
<PAGE>
According to the Economic Report, the unemployment rate improved slightly from
an average of 5.9% during 1992 to 5.2% during 1993. Total retail sales
increased by 9.7% during 1993. Colorado continued to surpass the job growth
rate of the U.S. with a 3.4% rate of growth projected for Colorado in 1994, as
compared with 2.2% for the nation as a whole. However, the rate of job growth
in Colorado is expected to decline in 1995, primarily due to the completion in
1994 of large public works projects such as Denver International Airport, Coors
Baseball Field, and the Denver public Library renovation project.
Personal income rose 6.6% in Colorado during 1992 and 5.5% in 1991. In 1992,
Colorado was the twelfth fastest growing state in terms of personal income
growth. However, because of heavy migration into the state and a large increase
in low-paying retail sector jobs, per capita personal income in Colorado
increased by only 3.8% in 1992, 0.1% below the increase in per capita personal
income for the nation as a whole.
Economic conditions in the State may have continuing effects on other
governmental units within the State (including issuers of the Bonds in the
Colorado Trust), which, to varying degrees, have also experienced reduced
revenues as a result of recessionary conditions and other factors.
At the time of the closing for each Colorado Trust, Special Counsel to the
Fund for Colorado tax matters rendered an opinion under then existing Colorado
income tax law applicable to taxpayers whose income is subject to Colorado
income taxation substantially to the effect that:
Because Colorado income tax law is based upon the Federal law, the Colorado
Trust is not an association taxable as a corporation for purposes of Colorado
income taxation.
With respect to Colorado Unitholders, in view of the relationship between
Federal and Colorado tax computations described above:
(1) Each Colorado Unitholder will be treated as owning a pro rata share of
each asset of the Colorado Trust for Colorado income tax purposes in the
proportion that the number of Units of such Trust held by the Unitholder
bears to the total number of outstanding Units of the Colorado Trust, and
the income of the Colorado Trust will therefore be treated as the income
of each Colorado Unitholder under Colorado law in the proportion
described;
(2) Interest on Bonds that would not be includable in income for income tax
purposes when paid directly to a Colorado Unitholder will be exempt from
Colorado income taxation when received by the Colorado Trust and
attributed to such Colorado Unitholder and when distributed to such
Colorado Unitholder;
(3) Any proceeds paid under an insurance policy or policies issued to the
Colorado Trust with respect to the Bonds in the Colorado Trust which
represent maturing interest on defaulted obligations held by the Trustee
will be excludable from Colorado adjusted gross income if, and to the
same extent as, such interest would have been so excludable if paid in
the normal cause by the issuer of the defaulted obligations;
36
<PAGE>
(4) Any proceeds paid under individual policies obtained by issuers of Bonds
in the Colorado Trust which represent maturing interest on defaulted
obligations held by the Trustee will not be includable in income for
Colorado income tax purposes if, and to the same extent as, such interest
would have been so excludable if paid in the normal course by the issuer
of the defaulted obligations;
(5) Each Colorado Unitholder will realize taxable gain or loss when the
Colorado Trust disposes of a Bond (whether by sale, exchange, redemption,
or payment at maturity) or when the Colorado Unitholder redeems or sells
Units at a price that differs from original cost as adjusted for
amortization of bond discount or premium and other basis adjustments
(including any basis reduction that may be required to reflect a Colorado
Unitholder's share of interest, if any, accruing on Bonds during the
interval between the Colorado Unitholder's settlement date and the date
such Bonds are delivered to the Colorado Trust, if later);
(6) Tax cost reduction requirements relating to amortization of bond premium
may, under some circumstances, result in Colorado Unitholders realizing
taxable gain when their Units are sold or redeemed for an amount equal to
or less than their original cost; and
(7) if interest on indebtedness incurred or continued by a Colorado
Unitholder to purchase Units in the Colorado Trust is not deductible for
federal income tax purposes, it also will be non-deductible for Colorado
income tax purposes.
Unitholders should be aware that all tax-exempt interest, including their
share of interest on the Bonds paid to the Colorado Trust, is taken into account
for purposes of determining eligibility for the Colorado Property Tax/Rent/Heat
Rebate.
KANSAS TRUSTS. Since the Kansas Trust will invest substantially all of its
assets in Kansas municipal securities, the Kansas Trust is susceptible to
political and economic factors affecting issuers of Kansas municipal securities.
As of 1991, 2,494,566 people lived in Kansas, representing a .69% increase in
population since the 1990 census. Based on these numbers, Kansas ranked thirty-
second in the nation in population size. According to the Kansas Department of
Commerce, in 1991, Kansas ranked twenty-first in the nation in terms of per
capita income. Historically, agriculture and mining according to the Kansas
Department of Commerce, in 1991 constituted the principal industries in Kansas.
Since the 1950s, however, manufacturing, governmental services and the services
industry have steadily grown, and as of 1993 approximately 15.7% of Kansas
workers were in the manufacturing sector, 20.8% in the government sector and
23.3% in the services sector (not including transportation, public utilities,
trade, finance, insurance and real estate), while the farming and mining sectors
combined for approximately 5.0% of the work force. The 1991 unemployment rate
was 4.4%, and the seasonally adjusted rate for December 1992 was 4.2%. By
constitutional mandate, Kansas must operate within a balanced budget and public
debt may only be incurred for extraordinary purposes and then only to a maximum
of $1 million. As of November 12, 1992, Kansas had no general obligation bonds
outstanding.
At the time of the closing for each Kansas Trust, Special Counsel to each
Kansas Trust for Kansas tax matters, rendered an opinion under then existing
Kansas income tax law applicable to taxpayers whose income is subject to Kansas
income taxation substantially to the effect that:
37
<PAGE>
The Trust is not an association taxable as a corporation for Kansas income tax
purposes;
Each Unitholder of the Trust will be treated as the owner of a pro rata
portion of the Trust, and the income and deductions of the Trust will therefore
be treated as income of the Unitholder under Kansas law;
Interest on Bonds issued after December 31, 1987 by the State of Kansas or any
of its political subdivisions will be exempt from income taxation imposed on
individuals, corporations and fiduciaries (other than insurance companies,
banks, trust companies or savings and loan associations) however, interest on
Bonds issued prior to January 1, 1988 by the State of Kansas or any of its
political subdivisions will not be exempt from income taxation imposed on
individuals, corporations and fiduciaries (other than insurance companies,
banks, trust companies or savings and loan associations) unless the laws of the
State of Kansas authorizing the issuance of such Bonds specifically exempt the
interest on the Bonds from income taxation by the State of Kansas;
Interest on Bonds issued by the State of Kansas or any of its political
subdivisions will be subject to the tax imposed on banks, trust companies and
savings and loan associations under Article 11, Chapter 79 of the Kansas
statutes;
Interest on Bonds issued by the State of Kansas or any of its political
subdivisions will be subject to the tax imposed on insurance companies under
Article 40, Chapter 28 of the Kansas statutes unless the laws of the State of
Kansas authorizing the issuance of such Bonds specifically exempt the interest
on the Bonds from income taxation by the State of Kansas; interest on the Bonds
which is exempt from Kansas income taxation when received by the Trust will
continue to be exempt when distributed to a Unitholder (other than a bank, trust
company or savings and loan association);
Each Unitholder of the Trust will recognize gain or loss for Kansas income tax
purposes if the Trustee disposes of a Bond (whether by sale, exchange, payment
on maturity, retirement or otherwise) or if the Unitholder redeems or sells
Units of the Trust to the extent that such transaction results in a recognized
gain or loss for federal income tax purposes;
Interest received by the Trust on the Bonds is exempt from intangibles
taxation imposed by any counties, cities and townships pursuant to present
Kansas law; and
No opinion is expressed regarding whether the gross earnings derived from the
Units is subject to intangibles taxation imposed by any counties, cities and
townships pursuant to present Kansas law.
KENTUCKY TRUSTS. The Commonwealth of Kentucky leads the nation in total
tonnage of coal produced and ranks among the top 10 states in the value of all
minerals produced. Tobacco is the dominant agricultural crop and Kentucky ranks
second among the states in the total cash value of tobacco raised. The
manufacturing mix in the state reflects a significant diversification. In
addition to the traditional concentration of tobacco processing plants and
bourbon distilleries, there is considerable durable goods production, such as
automobiles, heavy machinery, consumer appliances and office equipment. The
State's parks system and the horse breeding and racing industry, symbolized by
the Kentucky Derby, play an important role in an expanding tourist business in
the state.
38
<PAGE>
Current economic problems, including particularly the continuing high
unemployment rate, have had varying effects on the differing geographic areas of
the State and the political subdivisions located within such geographic areas.
Although revenue obligations of the State or its political subdivisions may be
payable from a specific source or project, there can be no assurance that
further economic difficulties and the resulting impact on State and local
governmental finances will not adversely affect the market value of the Bonds in
a Kentucky Trust or the ability of the respective obligors to pay debt service
of such Bonds.
Prospective investors should study with care the portfolio of Bonds in the
Kentucky Trust and should consult with their investment advisors as to the
merits of particular issues on the portfolio.
At the time of the closing for each Kentucky Trust, Special Counsel to each
Kentucky Trust for Kentucky tax matters rendered an opinion under then existing
Kentucky income tax law applicable to taxpayers whose income is subject to
Kentucky income taxation substantially to the effect that:
Because Kentucky income tax law is based upon the Federal law and in explicit
reliance upon the opinion of Chapman and Cutler referred to above, and in
further reliance on the determination letter to us of the Revenue Cabinet of
Kentucky dated May 10, 1984, it is our opinion that the application of existing
Kentucky income tax law would be as follows:
Each Kentucky Unitholder will be treated as the owner of a pro rata portion of
the Kentucky Trust for Kentucky income tax purposes, and the income of the
Kentucky Trust will therefore be treated as the income of the Kentucky
Unitholders under Kentucky law;
Interest on Bonds that would be exempt from Federal income taxation when paid
directly to a Kentucky Unitholder will be exempt from Kentucky income taxation
when: (i) received by the Kentucky Trust and attributed to such Kentucky
Unitholder; and (ii) when distributed to such Kentucky Unitholder;
Each Kentucky Unitholder will realize taxable gain or loss when the Kentucky
Trust disposes of a Bond (whether by sale, exchange, redemption or payment of
maturity) or when the Kentucky Unitholder redeems or sells Units at a price
that differs from original cost as adjusted for amortization or accrual, as
appropriate, of bond discount or premium and other basis adjustments (including
any basis reduction that may be required to reflect a Kentucky Unitholder's
share of interest, if any, accruing on Bonds during the interval between the
Kentucky Unitholder's settlement date and the date such Bonds are delivered to
the Kentucky Trust, if later);
Tax cost reduction requirements relating to amortization of bond premium may,
under some circumstances, result in Kentucky Unitholders realizing taxable gain
when their Units are sold or redeemed for an amount equal to or less than their
original cost;
Units of the Kentucky Trust, to the extent the same represent an ownership in
obligations issued by or on behalf of the Commonwealth of Kentucky or
governmental units of the Commonwealth of Kentucky, the interest on which is
exempt from Federal and Kentucky income taxation will not be subject to ad
valorem taxation by the Commonwealth of Kentucky or any political subdivision
thereof, and
39
<PAGE>
If interest on indebtedness incurred or continued by a Kentucky Unitholder to
purchase Units in the Kentucky Trust is not deductible for Federal income tax
purposes, it also will be nondeductible for Kentucky income tax purposes.
MICHIGAN TRUSTS. Investors should be aware that the economy of the State of
Michigan has, in the past, proven to be cyclical, due primarily to the fact that
the leading sector of the State's economy is the manufacturing of durable goods.
While the State's efforts to diversify its economy have proven successful, as
reflected by the fact that the share of employment in the State in the durable
goods sector has fallen from 33.1 percent in 1960 to 17.9 percent in 1990,
durable goods manufacturing still represents a sizable portion of the State's
economy. As a result, any substantial national economic downturn is likely to
have an adverse effect on the economy of the State and on the revenues of the
State and some of its local governmental units.
In May 1986, Moody's Investors Service raised the State's general obligation
bond rating to "Al". In October 1989, Standard & Poor's Ratings Group raised
its rating on the State's general obligation bonds to "AA".
The State's economy could continue to be affected by changes in the auto
industry, notably consolidation and plant closings resulting from competitive
pressures and over-capacity. Such actions could adversely affect State revenues
and the financial impact on the local units of government in the areas in which
plants are closed could be more severe.
General Motors Corporation has announced the scheduled closing of several of
its plants in Michigan in 1993 and 1994. Some of these closings have occurred
and some have been deferred. The ultimate impact these closures may have on the
State's revenues and expenditures is not currently known. The impact on the
financial condition of the municipalities in which the plants are located may be
more severe than the impact on the State itself.
In recent years, the State has reported its financial results in accordance
with generally accepted accounting principles. For each of the five fiscal
years ending with the fiscal year ended September 30, 1989, the State reported
positive year-end General Fund balances and positive cash balances in the
combined General Fund/School Aid Fund. For the fiscal years ending September 30
1990 and 1991, the State reported negative year-end General Fund Balances of
$310.4 million and $169.4 million, respectively, but ended the 1992 fiscal year
with its general fund in balance and ended the 1993 fiscal year with a small
general lfund surplus. A positive cash balance in the combined General
Fund/School Aid Fund was recorded at September 30, 1990. In the 1991 through
1993 fiscal years the State experienced deteriorating cash balances which
necessitated short term borrowing and the deferral of certain scheduled cash
payments. The State borrowed $900 million for cash flow purposes in the 1993
fiscal year, which was repaid on September 30, 1993. The State's Budget
Stabilization Fund received a $283 million transfer from the General Fund in the
1993 State fiscal year, bringing the fund balance to $303 million at September
30, 1993.
The Michigan Constitution of 1963 limits the amount of total revenues of the
State raised from taxes and certain other sources to a level for each fiscal
year equal to a percentage of the State's personal income for the
40
<PAGE>
prior calendar year. In the event that the State's total revenues exceeds the
limit by 1 percent or more, the Michigan Constitution of 1963 requires that the
excess be refunded to taxpayers.
On March 15, 1994, Michigan voters approved a school finance reform amendment
to the State's Constitution which, among other things, increased the State sales
ax rate from 4% to 6% and placed a cap on property assessment increases for all
property taxes. Concurrent legislation cut the State's income tax rate from
4.6% to 4.4.%, reduced some property taxes and altered local school funding
sources to a combination of property taxes and state revenues, some of which is
provided from other new or increased State taxes. The legislation also
contained other provisions that alter (and, in some cases, may reduce) the
revenues of local units of government, and tax increment bonds could be
particularly affected. While the ultimate impact of the constitutional
amendment and related legislation cannot yet be accurately predicted, investors
should be alert to the potential effect of such measures upon the operations
and revenues of Michigan local units of government.
Although all or most of the Bonds in the Michigan Trust are revenue
obligations or general obligations of local governments or authorities rather
than general obligations of the State of Michigan itself, there can be no
assurance that any financial difficulties the State may experience will not
adversely affect the market value or marketability of the Bonds or the ability
of the respective obligors to pay interest on or principal of the Bonds,
particularly in view of the dependency of local governments and other
authorities upon State aid and reimbursement programs and, in the case of bonds
issued by the State Building Authority, the dependency of the State Building
Authority on the receipt of rental payments from the State to meet debt service
requirements upon such bonds. In the 1991 fiscal year, the State deferred
certain scheduled cash payments to municipalities, school districts,
universities and community colleges. While such deferrals were made up at
specified later dates, similar future deferrals could have an adverse impact on
the cash position of some local governmental units. Additionally, the State
reduced revenue sharing payments to municipalities below that level provided
under formulas by $10.9 million in the 1991 fiscal year, up $34.4 million in the
1992 fiscal year, $45.5 million in the 1993 fiscal year and $64.6 million
(budgeted) in the 1994 fiscal year.
The Michigan Trust may contain general obligation bonds of local units of
government pledging the full faith and credit of the local unit which are
payable from the levy of ad valorem taxes on taxable property within the
jurisdiction of the local unit. Such bonds issued prior to December 22, 1978,
or issued after December 22, 1978 with the approval of the electors of the local
unit, are payable from property taxes levied without limitation as to rate or
amount. With respect to bonds issued after December 22, 1978, and which were
not approved by the electors of the local unit, the tax levy of the local unit
for debt service purposes is subject to constitutional, statutory and charter
tax rate limitations. In addition, several major industrial corporations have
instituted challenges of their ad valorem property tax assessments in a number
of local municipal units in the State. If successful, such challenges could
have an adverse impact on the ad valorem tax bases of such units which could
adversely affect their ability to raise funds for operating and debt service
requirements.
At the time of the closing for each Michigan Trust, Special Counsel to each
Michigan Trust for Michigan tax matters rendered an opinion under then existing
Michigan income tax law applicable to taxpayers whose income is subject to
Michigan income taxation substantially to the effect that:
41
<PAGE>
The Michigan Trust and the owners of Units will be treated for purposes
of the Michigan income tax laws and the Single Business Tax in
substantially the same manner as they are for purposes of the Federal
income tax laws, as currently enacted. Accordingly, we have relied upon
the opinion of Messrs. Chapman and Cutler as to the applicability of
Federal income tax under the Internal Revenue Code of 1986 to the Michigan
Trust and the Holders of Units.
Under the income tax laws of the State of Michigan, the Michigan Trust is
not an association taxable as a corporation; the income of the Michigan
Trust will be treated as the income of the Unitholders and be deemed to
have been received by them when received by the Michigan Trust. Interest
on the underlying Bonds which is exempt from tax under these laws when
received by the Michigan Trust will retain its status as tax exempt
interest to the Unitholders.
For purposes of the foregoing Michigan tax laws, each Unitholder will be
considered to have received his pro rata share of Bond interest when it is
received by the Michigan Trust, and each Unitholder will have a taxable
event when the Michigan Trust disposes of a Bond (whether by sale,
exchange, redemption or payment at maturity) or when the Unitholder redeems
or sells his Certificate to the extent the transaction constitutes a
taxable event for Federal income tax purposes. The tax cost of each unit
to a Unitholder will be established and allocated for purposes of these
Michigan tax laws in the same manner as such cost is established and
allocated for Federal income tax purposes;
Under the Michigan Intangibles Tax, the Michigan Trust is not taxable and
the pro rata ownership of the underlying Bonds, as well as the interest
thereon, will be exempt to the Unitholders to the extent the Michigan Trust
consists of obligations of the State of Michigan or its political
subdivisions or municipalities, or of obligations of possessions of the
United States.
The Michigan Single Business Tax replaced the tax on corporate and
financial institution income under the Michigan Income Tax, and the
Intangible Tax with respect to those intangibles of persons subject to the
Single Business Tax the income from which would be considered in computing
the Single Business Tax. Persons are subject to the Single Business Tax
only if they are engaged in "business activity", as defined in the Act.
Under the Single Business Tax, both interest received by a Michigan Trust
on the underlying Bonds and any amount distributed from the Michigan Trust
to a Unitholder, if not included in determining taxable income for Federal
income tax purposes, is also not included in the adjusted tax base upon
which the Single Business Tax is computed, of either the Michigan Trust or
the Unitholders. If the Michigan Trust or the Unitholders have a taxable
event for Federal income tax purposes when the Michigan Trust disposes of
a Bond (whether by sale, exchange, redemption or payment at maturity) or
the Unitholder redeems or sells his Certificate, an amount equal to any
gain realized from such taxable event which was included in the
computation of taxable income for Federal income tax purposes (plus an
amount equal to any capital gain of an individual realized in connection
with such event but excluded in computing that individual's Federal taxable
income) will be included in the tax base against which, after allocation,
apportionment and other adjustments, the Single Business Tax is computed.
The tax base will be reduced by an amount equal to any capital loss
realized from such a taxable event, whether or not the capital loss was
42
<PAGE>
deducted in computing Federal taxable income in the year the loss occurred.
Unitholders should consult their tax advisor as to their status under
Michigan law.
Any proceeds paid under an insurance policy issued to the Trustee of the
Trust, or paid under individual policies obtained by issuers of Bonds,
which, when received by the Unitholders, represent maturing interest on
defaulted obligations held by the Trustee, will be excludable from the
Michigan income tax laws and the Single Business Tax if, and to the same
extent as, such interest would have been so excludable if paid by the
issuer of the defaulted obligations. While treatment under the Michigan
Intangibles Tax is not premised upon the characterization of such proceeds
under the Internal Revenue Code, the Michigan Department of Treasury should
adopt the same approach as under the Michigan income tax laws and the
Single Business Tax.
As the Tax Reform Act of 1986 eliminates the capital gain deduction for tax
years beginning after December 31, 1986, the federal adjusted gross income, the
computation base for the Michigan Income Tax, of a Unitholder will be increased
accordingly to the extent such capital gains are realized when the Michigan
Trust disposes of a Bond or when the Unitholder redeems or sells a Unit, to the
extent such transaction constitutes a taxable event for Federal income tax
purposes.
MINNESOTA TRUSTS. In the early 1980s, the State of Minnesota experienced
financial difficulties due to a downturn in the State's economy resulting from
the national recession. As a consequence, the State's revenues were
significantly lower than anticipated in the July 1, 1979 to June 30, 1981
biennium and the July 1, 1981 to June 30, 1983 biennium.
In response to revenue shortfalls, the legislature broadened and increased the
State sales tax, increased income taxes (by increasing rates and eliminating
deductions) and reduced appropriations and deferred payment of State aid,
including appropriations for and aids to local governmental units. The State's
fiscal problems affected other governmental units within the State, such as
local government, school districts and state agencies, which, in varying
degrees, also faced cash flow difficulties. In certain cases, revenues of local
governmental units and agencies were reduced by the recession.
Because of the State's fiscal problems, Standard & Poor's Corporation reduced
its rating on the State's outstanding general obligation bonds from AAA to AA+
in August 1981 and to AA in March 1982. Moody's Investors Service, Inc. lowered
its rating on the State's outstanding general obligation bonds from Aaa to Aa
in April 1982. The State's economy recovered in the July 1, 1983 to June 30,
1985 biennium, and substantial reductions in the individual income tax were
enacted in 1984 and 1985. Standard & Poor's raised its rating on the State's
outstanding general obligation bonds to AA+ in January 1985. In 1986, 1987,
1991, 1992, and 1993, legislation was required to eliminate projected budget
deficits by raising additional revenue, reducing expenditures, including aids to
political subdivisions and higher education, reducing the State's budget reserve
(cash flow account), imposing a sales tax on purchases by local governmental
units, and making other budgetary adjustments. A budget forecast released by
the Minnesota Department of Finance on March 1, 1994 projects a balanced General
Fund at the end of the current biennium, June 30, 1995, plus an increase in the
State's cash flow account from $360 million to $500 million. Total projected
expenditures and transfers for the biennium are $17.0 billion. The forecast
also projects, however, a shortage of $29.5 million in the Local
43
<PAGE>
Government Trust Fund at June 30, 1995, against total projected expenditures
from the Fund of $1.8 billion for the biennium.
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 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.
At the time of the closing for each Minnesota Trust, Special Counsel to each
Minnesota Trust for Minnesota tax matters rendered an opinion under then
existing Minnesota income tax law applicable to taxpayers whose income is
subject to Minnesota income taxation substantially to the effect that:
We understand that the Minnesota Trust will only have income consisting of
(i) interest from bonds issued by the State of Minnesota and its political
and governmental subdivisions, municipalities and governmental agencies and
instrumentalities and bonds issued by possessions of the United States
which would be exempt from federal and Minnesota income taxation when paid
directly to an individual, trust or estate (the "Bonds"), (ii) gain on the
disposition of such Bonds, and (iii) proceeds paid under certain insurance
policies issued to the Trustee or to the issuers of the Bonds which
represent maturing interest or principal payments on defaulted Bonds held
by the Trustee.
Neither the Sponsor not its counsel have independently examined the Bonds to
be deposited in and held in the Trust. However, although no opinion expressed
herein regarding such matters, it is assumed that: (i) the Bonds were validly
issued, (ii) the interest thereon is excludible from gross income for federal
income tax purposes and (iii) the interest thereon is exempt from income tax
imposed by Minnesota that is applicable to individuals, trusts and estates (the
"Minnesota Income Tax"). It should be noted that interest on the Bonds is
subject to tax in the case of corporations subject to the Minnesota Corporate
Franchise Tax or the Corporate Alternative Minimum Tax and is a factor in the
computation of the Minimum Fee applicable to financial institutions. The
opinion set forth below does not address the taxation of persons other than full
time residents of Minnesota.
(1) The Minnesota Trust is not an association taxable as a corporation and
each Unitholder of the Minnesota Trust will be treated as the owner of a
pro rata portion of the Minnesota Trust, and the income of such portion
of the Minnesota Trust will therefore be treated as the income of the
Unitholder for Minnesota Income Tax purposes;
(2) Income on the Bonds which is exempt from the Minnesota Income Tax when
received by a Unitholder of the Minnesota Trust and which would be exempt
from the Minnesota Income Tax if received directly by a Unitholder, will
retain its status as exempt from such tax when received by the Minnesota
Trust and distributed to such Unitholder;
(3) To the extent that interest on the Bonds, if any, which is includible
in the computation of "alternative minimum taxable income" for federal
income tax purposes, such interest will also be includible in the
44
<PAGE>
computation of "alternative minimum taxable income" for purposes of the
Minnesota Alternative Minimum Tax imposed on individuals, estates and
trusts and on corporations;
(4) Each Unitholder of the Minnesota Trust will recognize gain or loss for
Minnesota Income Tax purposes if the Trustee disposes of a Bond (whether
by redemption, sale or otherwise) or if the Unitholder redeems or sells
Units of the Minnesota Trust to the extent that such a transaction
results in a recognized gain or loss to such Unitholder for federal
income tax purposes;
(5) Tax cost reduction requirements relating to amortization of bond premium
may, under some circumstances, result in Unitholders realizing taxable
gain for Minnesota Income Tax purposes when their Units are sold or
redeemed for an amount equal to or less than their original cost;
(6) Proceeds, if any, paid under individual insurance policies obtained by
issuers of Bonds or the Trustee which represent maturing interest on
defaulted obligations held by the Trustee will be excludible from
Minnesota net income if, and to the same extent as, such interest would
have been so excludible from Minnesota net income if, and to the same
extent as, such interest would have been so excludible if paid in the
normal course by the issuer of the defaulted obligation provided that, at
the time such policies are purchased, the amounts paid for such policies
are reasonable, customary and consistent with the reasonable expectation
that the issuer of the Bonds, rather than the insurer, will pay debt
service on the Bonds; and
(7) To the extent that interest derived from the Minnesota Trust by a
Unitholder with respect to any Possession Bonds is excludible from gross
income for federal income tax purposes pursuant to 48 U.S.C. Section 745,
48 U.S.C. Section 1423a and 48 U.S.C. Section 1403, such interest will
not be subject to either the Minnesota Income Tax or the Minnesota
alternative minimum tax imposed on individuals, estates and trusts. It
should be noted that interest relating to Possession Bonds is subject to
tax in the case of corporations subject to the Minnesota Corporate
Franchise Tax or the Corporate Alternative Tax.
We have not examined any of the Bonds to be deposited and held in the
Minnesota Trust or the proceedings for the issuance thereof or the opinions of
bond counsel with respect thereto, and therefore express no opinions to the
exemption from State income taxes of interest on the Bonds if received directly
by a Unitholder.
MISSOURI TRUSTS. The following discussion regarding constitutional
limitations and the economy of the State of Missouri is included for the purpose
of providing general information that may or may not affect issuers of the Bonds
in Missouri.
In November 1981, the voters of Missouri adopted a tax limitation amendment to
the constitution of the State of Missouri (the "Amendment"). The Amendment
prohibits increases in local taxes, licenses, or fees by political subdivisions
without approval of the voters of such political subdivision. The Amendment
also limits the growth in revenues and expenditures of the State to the rate of
growth in the total personal income of the citizens of Missouri. The limitation
may be exceeded if the General Assembly declares an emergency by a two-thirds
vote.
45
<PAGE>
Although the June 1993 revenue estimate has been revised downward by $27.5
million, the State budget for Fiscal Year 1993 remained balanced due primarily
to delayed spending for desegregation capital projects. The downward revision
in revenues was considered necessary because of weak economic performance, and
more importantly an economic outlook for the second half of Fiscal Year 1993
which projected slower growth than was anticipated in June 1992.
For Fiscal Year 1994, the majority of revenues for the State of Missouri will
be obtained from individual income taxes (53.1%), sales and use taxes (30.0%),
corporate income taxes (5.9%), and county foreign insurance taxes (3.0%). Major
expenditures for Fiscal Year 1994 include elementary and secondary education
(30.6%), human services (25.4%), higher education (14.8%) and desegregation
(8.9%).
The Fiscal Year 1994 budget balances resources and obligations based on the
consensus revenue and refund estimate and an opening balance resulting from
continued withholdings and delayed spending for desegregation capital projects.
The total general revenue operating budget for Fiscal Year 1994 exclusive of
desegregation is $3,844.6 million. The court-ordered desegregation estimate is
$377.7 million, an increase of $30.7 million over the revised Fiscal Year 1993
estimate.
The economy of Missouri is diverse and includes manufacturing, retail and
wholesale trade, services, agriculture, tourism and mining. In recent years,
growth in the wholesale and retail trade has offset the more slowly growing
manufacturing and agricultural sectors of the economy. According to the United
States Bureau of Labor Statistics, the 1992 unemployment rate in Missouri was
5.7% and the 1993 rate was 6.4%. Although not strictly comparable, the
preliminary seasonally adjusted rate for May of 1994 was 5.0%. 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 Ratings Group rates Missouri general obligation
bonds "AAA". Although these ratings indicate that the State of Missouri is in
relatively good economic health, there can be, of course, no assurance that this
will continue or that particular bond issues may not be adversely affected by
changes in the State or local economic or political conditions.
The foregoing information constitutes only a brief summary of some of the
general factors which may impact certain issuers of Bonds and does not purport
to be a complete or exhaustive description of all adverse conditions to which
the issuers of obligations held by the Missouri Trust are subject.
Additionally, many factors including national economic, social and environmental
policies and conditions, which are not within the control of the issuers of the
Bonds, could affect or could have an adverse impact on the financial condition
of the State and various agencies and political subdivisions located in the
State. The Sponsor is unable to predict whether or to what extent such factors
or other factors may affect the issuers of the Bonds, the market value or
marketability of the Bonds or the ability of the respective issuers of the Bonds
acquired by the Missouri Trust to pay interest on or principal of the Bonds.
46
<PAGE>
At the time of the closing for each Missouri Trust, Special Counsel for
Missouri tax matters rendered an opinion under then existing Missouri income tax
law applicable to taxpayers whose income is subject to Missouri income taxation
substantially to the effect that:
The assets of the Missouri Trust will consist of debt obligations issued by or
on behalf of the State of Missouri (the "State") or counties, municipalities,
authorities or political subdivisions thereof (the "Missouri Bonds") or by the
Commonwealth of Puerto Rico, Guam and the United States Virgin Islands (the
"Possession Bonds") (collectively, the "Bonds").
Neither the Sponsor nor its counsel have independently examined the Bonds to
be deposited in and held in the Missouri Trust. However, although no opinion
is expressed herein regarding such matters, it is assumed that: (i) the Bonds
were validly issued, (ii) the interest thereon is excludable from gross income
for Federal income tax purposes and (iii) interest on the Missouri Bonds, if
received directly by a Unitholder, would be exempt from the Missouri income tax
applicable to individuals and corporations ("Missouri state income tax"). The
opinion set forth below does not address the taxation of persons other than full
time residents of Missouri.
(1) The Missouri Trust is not an association taxable as a corporation for
Missouri income tax purposes, and each Unitholder of the Missouri Trust
will be treated as the owner of a pro rata portion of the Missouri Trust
and the income of such portion of the Missouri Trust will be treated as
the income of the Unitholder for Missouri state income tax purposes.
(2) Interest paid and original issue discount, if any, on the Bonds which
would be exempt from the Missouri state income tax if received directly
by a Unitholder will be exempt from the Missouri state income tax when
received by the Missouri Trust and distributed to such Unitholder;
however, no opinion is expressed herein regarding taxation of interest
paid and original issue discount, if any, on the Bonds received by the
Missouri Trust and distributed to Unitholders under any other tax imposed
pursuant to Missouri law, including but not limited to the franchise tax
imposed on financial institutions pursuant to Chapter 148 of the Missouri
Statutes.
(3) To the extent that interest paid and original issue discount, if any,
derived from the Missouri Trust by a Unitholder with respect to
Possession Bonds is excludable from gross income for Federal income tax
purposes pursuant to 48 U.S.C. Section 745, 48 U.S.C. Section 1423a, and
48 U.S.C. Section 1403, such interest paid and original issue discount,
if any, will not be subject to the Missouri state income tax; however, no
opinion is expressed herein regarding taxation of interest paid and
original issue discount, if any, on the Bonds received by the Missouri
Trust and distributed to Unitholders under any other tax imposed pursuant
to Missouri law, including but not limited to the franchise tax imposed
on financial institutions pursuant to Chapter 148 of the Missouri
Statutes.
(4) Each Unitholder of the Missouri Trust will recognize gain or loss for
Missouri state income tax purposes if the Trustee disposes of a bond
(whether by redemption, sale, or otherwise) or if the Unitholder redeems
or sells Units of the Missouri Trust to the extent that such a
transaction results in a recognized gain or loss to such Unitholder for
Federal income tax purposes. Due
47
<PAGE>
to the amortization of bond premium and other basis adjustments required
by the Internal Revenue Code, a Unitholder under some circumstances, may
realize taxable gain when his or her Units are sold or redeemed for an
amount equal to their original cost.
(5) Any insurance proceeds paid under policies which represent maturing
interest on defaulted obligations which are excludable from gross income
for Federal income tax purposes will be excludable from Missouri state
income tax to the same extent as such interest would have been paid by
the issuer of such Bonds held by the Missouri Trust; however, no opinion
is expressed herein regarding taxation of interest paid and original
issue discount, if any, on the Bonds received by the Missouri Trust and
distributed to Unitholders under any other tax imposed pursuant to
Missouri law, including but not limited to the franchise tax imposed on
financial institutions pursuant to Chapter 148 of the Missouri Statutes.
(6) The Missouri state income tax does not permit a deduction of interest
paid or incurred on indebtedness incurred or continued to purchase or
carry Units in the Trust, the interest on which is exempt from such Tax.
(7) The Missouri Trust will not be subject to the Kansas City, Missouri
Earnings and Profits Tax and each Unitholder's share of income of the
Bonds held by the Missouri Trust will not generally be subject to the
Kansas City, Missouri Earnings and Profits Tax or the City of St Louis
Earnings Tax (except in the case of certain Unitholders, including
corporations, otherwise subject to the St. Louis City Earnings Tax).
NEW JERSEY TRUSTS. As described above, the New Jersey Trust consists of a
portfolio of Bonds. The Trust is therefore susceptible to political, economic
or regulatory factors affecting issuers of the Bonds. The following information
provides only a brief summary of some of the complex factors affecting the
financial situation in New Jersey (the "State") and is derived from sources that
are generally available to investors and is believed to be accurate. It is
based in part on information obtained from various State and local agencies in
New Jersey. No independent verification has been made of any of the following
information.
New Jersey is the ninth largest state in population and the fifth smallest in
land area. With an average of 1,062 people per square mile, it is the most
densely populated of all the states. The State's economic base is diversified,
consisting of a variety of manufacturing, construction and service industries,
supplemented by rural areas with selective commercial agriculture.
Historically, New Jersey's average per capita income has been well above the
national average, and in 1993 the State ranked second among states in per capita
personal income ($26,967).
The New Jersey Economic Policy Council, a statutory arm of the New Jersey
Department of Commerce and Economic Development, has reported in New Jersey
Economic Indicators, a monthly publication of the New Jersey Department of
Labor, Division of Labor Market and Demographic Research, that in 1988 and 1989
employment in New Jersey's manufacturing sector failed to benefit from the
export boom experienced by many Midwest states and the State's service sectors,
which had fueled the State's prosperity since 1982, lost momentum. In the
meantime, the prolonged fast growth in the State in the mid 1980s resulted in a
tight labor
48
<PAGE>
market situation, which has led to relatively high wages and housing prices.
This means that, while the incomes of New Jersey residents are relatively high,
the State's business sector has become more vulnerable to competitive pressures.
The onset of the national recession (which officially began in July 1990
according to the National Bureau of Economic Research) caused an acceleration of
New Jersey's job losses in construction and manufacturing. In addition, the
national recession caused an employment downturn in such previously growing
sectors as wholesale trade, retail trade, finance, utilities and trucking and
warehousing. Reflecting the downturn, the rate of unemployment in the State
rose from a low of 3.6% during the first quarter of 1989 to an estimated 6.6%
in November 1994, which is higher than the national average of 5.6% in November
1994. Economic recovery is likely to be slow and uneven in New Jersey, with
unemployment receding at a correspondingly slow pace, due to the fact that some
sectors may lag due to continued excess capacity. In addition, employers even
in rebounding sectors can be expected to remain cautious about hiring until they
become convinced that improved business will be sustained. Also, certain firms
will continue to merge or downsize to increase profitability.
Debt Service. The primary method for State financing of capital projects is
through the sale of the general obligation bonds of the State. These bonds are
backed by the full faith and credit of the State tax revenues and certain other
fees are pledged to meet the principal and interest payments and if provided,
redemption premium payments, if any, required to repay the bonds. As of June
30, 1993, there was a total authorized bond indebtedness of approximately $8.98
billion, of which $3.6 billion was issued and outstanding, $4.0 billion was
retired (including bonds for which provision for payment has been made through
the sale and issuance of refunding bonds) and $1.38 billion was unissued. The
appropriation for the debt service obligation on such outstanding indebtedness
was $103.5 million for fiscal year 1994.
New Jersey's Budget and Appropriation System. The State operates on a fiscal
year beginning July 1 and ending June 30. At the end of fiscal year 1989, there
was a surplus in the State's general fund (the fund into which all State
revenues not otherwise restricted by statute are deposited and from which
appropriations are made) of $411.2 million. At the end of fiscal year 1990,
there was a surplus in the general fund of $1 million. At the end of fiscal
year 1991, there was a surplus in the general fund of $1.4 million. New Jersey
closed its fiscal year 1992 with a surplus of $760.8 million. It is estimated
that New Jersey closed its fiscal year 1993 with a surplus of $937.4 million.
In order to provide additional revenues to balance future budgets, to
redistribute school aid and to contain real property taxes, on June 27, 1990,
and July 12, 1990, Governor Florio signed into law legislation which was
estimated to raise approximately $2.8 billion in additional taxes (consisting of
$1.5 billion in sales and use taxes and $1.3 billion in income taxes), the
biggest tax hike in New Jersey history. There can be no assurance that receipts
and collections of such taxes will meet such estimates.
The first part of the tax hike took effect on July 1, 1990, with the increase
in the State's sales and use tax rate from 6% to 7% and the elimination of
exemptions for certain products and services not previously subject to the tax,
such as telephone calls, paper products (which has since been reinstated), soaps
and detergents, janitorial services, alcoholic beverages and cigarettes. At the
time of enactment, it was projected that these taxes would raise approximately
$1.5 billion in additional revenue. Projections and estimates of receipts from
sales and use taxes, however, have been subject to variance in recent fiscal
years.
49
<PAGE>
The second part of the tax hike took effect on January 1, 1991, in the form of
an increased state income tax on individuals. At the time of enactment, it was
projected that this increase would raise approximately $1.3 billion in
additional income taxes to fund a new school aid formula, a new homestead rebate
program and state assumption of welfare and social services costs. Projections
and estimates of receipts from income taxes, however, have also been subject to
variance in recent fiscal years. Under the legislation, income tax rates
increased from their previous range of 2% to 3.5% to a new range of 2% to 7%,
with the higher rates applying to married couples with incomes exceeding $70,000
who file joint returns, and to individuals filing single returns with incomes of
more than $35,000.
The Florio administration had contended that the income tax package will help
reduce local property tax increases by providing more state aid to
municipalities. Under the income tax legislation the State will assume
approximately $289 million in social services costs that previously were paid by
counties and municipalities and funded by property taxes. In addition, under
the new formula for funding school aid, an extra $1.1 billion was proposed to be
sent by the State to school districts beginning in 1991, thus reducing the need
for property tax increases to support education programs.
Effective July 1, 1992, the State's sales and use tax rate decreased from 7%
to 6%. Effective January 1, 1994, an across-the-board 5% reduction in the
income tax rates was enacted and effective January 1, 1995 further reductions
ranging from 1% up to 10% in income tax rates will take effect.
On June 30, 1994, Governor Whitman signed the New Jersey Legislature's $15.7
billion budget for Fiscal Year 1995. The balanced budget which includes $455
million in surplus, is $141 million less than the 1994 budget. Whether the
State can achieve a balanced budget depends on its ability to enact and
implement expenditure reductions and to collect the estimated tax revenues.
Litigation. The State is a party in numerous legal proceedings pertaining to
matters incidental to the performance of routine governmental operations. Such
litigation includes, but is not limited to, claims asserted against the State
arising from alleged torts, alleged breaches of contracts, condemnation
proceedings and other alleged violations of State and Federal laws. Included in
the State's outstanding litigation are cases challenging the following: the
formula relating to State aid to public schools, the method by which the State
shares with its counties maintenance recoveries and costs for residents in
State institutions, unreasonably low Medicaid payment rates for long-term
facilities in New Jersey, the obligation of counties to maintain Medicaid or
Medicare eligible residents of institutions and facilities for the
developmentally disabled, taxes paid into the Spill Compensation Fund (a fund
established to provide money for use by the State to remediate hazardous waste
sites and to compensate other persons for damages incurred as a result of
hazardous waste discharge) based on Federal preemption, various provisions, and
the constitutionality of the Fair Automobile Insurance Reform Act of 1990, the
State's role in a consent order concerning the construction of a resource
facility in Passaic County, actions taken by the New Jersey Bureau of Securities
against an individual, the State's actions regarding alleged chromium
contamination of State-owned property in Hudson County, the issuance of
emergency redirection orders and a draft permit by the Department of
Environmental Protection and Energy, the adequacy of Medicaid reimbursement for
services rendered by doctors and dentists to Medicaid eligible children, the
Commissioner of Health's calculation of the hospital assessment required by the
Health Care Cost Reduction Act of 1991, refusal of the State to share with
Camden County federal funding the State recently received for disproportionate
share hospital payments made to county psychiatric facilities, and the
50
<PAGE>
constitutionality of annual A-901 hazardous and solid waste licensure renewal
fees collected by the Department of Environmental Protection and Energy.
Adverse judgments in these and other matters could have the potential for either
a significant loss of revenue or a significant unanticipated expenditure by the
State.
At any given time, there are various numbers of claims and cases pending
against the State, State agencies and employees seeking recovery of monetary
damages that are primarily paid out of the fund created pursuant to the New
Jersey Tort Claims Act. In addition, at any given time, there are various
numbers of contract claims against the State and State agencies seeking recovery
of monetary damages. The State is unable to estimate its exposure for these
claims.
Debt Ratings. For many years, both Moody's Investors Service, Inc. and
Standard and Poor's Corporation rated New Jersey general obligation bonds "Aaa"
and "AAA", respectively. On July 3, 1991, however, Standard and Poor's
Corporation downgraded New Jersey general obligation bonds to "AA+." On June 4,
1992, Standard and Poor's Corporation placed New Jersey general obligation bonds
on Credit Watch with negative implications, citing as its principal reason for
its caution the unexpected denial by the federal government of New Jersey's
request for $450 million in retroactive Medicaid payments for psychiatric
hospitals. These funds were critical to closing a $1 billion gap in the State's
$15 billion budget for fiscal year 1992 which ended on June 30, 1992. Under New
Jersey state law, the gap in the budget was required to be closed before the new
budget year began on July 1, 1992. Standard and Poor's suggested the State
could close fiscal 1992's budget gap and help fill fiscal 1993's hole by a
reversion of $700 million of pension contributions to its general fund under a
proposal to change the way the State calculates its pension liability.
On July 6, 1992, Standard and Poor's Corporation reaffirmed its "AA+" rating
for New Jersey general obligation bonds and removed the debt from its
CreditWatch list, although it stated that New Jersey's long-term financial
outlook was negative. Standard and Poor's Corporation was concerned that the
State was entering fiscal 1993 with only a $26 million surplus and remained
concerned about whether the State economy would recover quickly enough to meet
lawmakers' revenue projections. It also remained concerned about the recent
federal ruling leaving in doubt how much the State was due in retroactive
Medicaid reimbursements and a ruling by a federal judge, now on appeal, of the
State's method for paying for uninsured hospital patients. However, on July 27,
1994, Standard and Poor's announced that it was changing the State's outlook
from negative to stable due to a brightening of the State's prospects as a
result of Governor Whitman's effort to trim spending and cut taxes, coupled with
an improving economy. Standard and Poor's reaffirmed its "AA+" rating at the
same time.
On August 24, 1992, Moody's Investors Service, Inc. downgraded New Jersey
general obligation bonds to "Aal" stating that the reduction reflects a
developing pattern of reliance on nonrecurring measures to achieve budgetary
balance, four years of financial operations marked by revenue shortfalls and
operating deficits, and the likelihood that serious financial pressures will
persist. On August 5, 1994, Moody's reaffirmed its "Aa1" rating, citing on the
positive side New Jersey's broad-based economy, high income levels, history of
maintaining a positive financial position and moderate (albeit rising) debt
ratios, and on the negative side, a continued reliance on one-time revenue and
dependence on pension-related savings to achieve budgetary balance.
51
<PAGE>
At the time of the closing for each New Jersey Trust Special Counsel to each
New Jersey Trust for New Jersey tax matters rendered an opinion under then
existing New Jersey income tax law applicable to taxpayers whose income is
subject to New Jersey income taxation substantially to the effect that:
(1) Each New Jersey Trust will be recognized as a trust and not an
association taxable as a corporation. Each New Jersey Trust will not be
subject to the New Jersey Corporation Business Tax or the New Jersey
Corporation Income Tax.
(2) With respect to the non-corporate Unitholders who are residents of New
Jersey, the income of the New Jersey Trust which is allocated to each
such Unitholder will be treated as the income of such Unitholder under
the New Jersey Gross Income Tax. Interest on the underlying Bonds which
would be exempt from tax under the New Jersey Gross Income Tax if
directly received by such Unitholder will retain its status as tax-exempt
interest when received by the New Jersey Trust and distributed to such
Unitholder. Any proceeds paid under the insurance policy issued to the
Trustee of the New Jersey Trust with respect to the Bonds or under
individual policies obtained by issuers of Bonds which represent maturing
interest on defaulted obligations held by the Trustee will be exempt from
New Jersey Gross Income Tax if, and to the same extent as, such interest
would have been so exempt if paid by the issuer of the defaulted
obligations.
(3) A non-corporate Unitholder will not be subject to the New Jersey Gross
Income Tax on any gain realized either when a New Jersey Trust disposes
of a Bond (whether by sale, exchange, redemption, or payment at
maturity), when the Unitholder redeems or sells his Units or upon payment
of any proceeds under the insurance policy issued to the Trustee of a New
Jersey Trust with respect to the Bonds or under individual policies
obtained by issuers of Bonds which represent maturing principal on
defaulted obligations held by the Trustee. Any loss realized on such
disposition may not be utilized to offset gains realized by such
Unitholder on the disposition of assets the gain on which is subject to
the New Jersey Gross Income Tax.
(4) Units of a New Jersey Trust may be taxable on the death of a
Unitholder under the New Jersey Transfer Inheritance Tax Law or the New
Jersey Estate Tax Law.
(5) If a Unitholder is a corporation subject to the New Jersey Corporation
Business Tax or New Jersey Corporation Income Tax, interest from the
Bonds in a New Jersey Trust which is allocable to such corporation will
be includable in its entire net income for purposes of the New Jersey
Corporation Business Tax or New Jersey Corporation Income Tax, less any
interest expense incurred to carry such investment to the extent such
interest expense has not been deducted in computing Federal taxable
income. Net gains derived by such corporation on the disposition of the
Bonds by a New Jersey Trust or on the disposition of its Units will be
included in its entire net income for purposes of the New Jersey
Corporation Business Tax or New Jersey Corporation Income Tax. Any
proceeds paid under the insurance policy issued to the Trustee of a New
Jersey Trust with respect to the Bonds or under individual policies
obtained by issuers of Bonds which represent maturing interest or
maturing principal on defaulted obligations held by the Trustee will be
included in its entire net income for purposes
52
<PAGE>
of the New Jersey Corporation Business Tax or New Jersey Corporation
Income Tax if, and to the same extent as, such interest or proceeds would
have been so included if paid by the issuer of the defaulted obligations.
NEW YORK TRUSTS. A resident of New York State (or New York City) will be
subject to New York State (or New York City) personal income tax with respect to
gains realized when New York Obligations held in the New York Trust are sold,
redeemed or paid at maturity or when his Units are sold or redeemed, such gain
will equal the proceeds of sale, redemption or payment less the tax basis of the
New York Obligation or Unit (adjusted to reflect (a) the amortization of premium
or discount, if any, on New York Obligations held in the Trust, (b) accrued
original issue discount, with respect to each New York Obligation which, at the
time New York Obligation was issued had original issue discount, and (c) the
deposit of New York Obligations with accrued interest in the Trust after the
Unitholder's settlement date).
Interest or gain from the New York Trust derived by a Unitholder who is not a
resident of New York State (or New York City) will not be subject to New York
State (or New York City) personal income tax, unless the Units are property
employed in a business, trade, profession or occupation carried on in New York
State (or New York City).
Amount paid on defaulted New York Obligations held by the Trustee under
policies of insurance issued with respect to such New York Obligations will be
excludable from income for New York State and New York City income tax purposes,
if and to the same extent as, such interest would have been excludable if paid
by the respective issuer.
For purposes of the New York State and New York City franchise tax on
corporations, Unitholders which are subject to such tax will be required to
include in their entie net income any interest or gains distributed to them even
though distributed in respect of New York obligations.
If borrowed funds are used to purchase Units in the Trust, all (or part) of
the interest on such indebtedness will not be deductible for New York State and
New York City tax purposes. The purchase of Units may be considered to have
been made with borrowed funds even though such funds are not directly traceable
to the purchase of Units in any New York Trust.
The Portfolio of the New York Trust includes obligations issued by New York
State (the "State"), by its various public bodies (the "Agencies"), and/or by
other entities located within the State, including the City of New York (the
"City").
Some of the more significant events relating to the financial situation in New
York are summarized below. This section provides only a brief summary of the
complex factors affecting the financial situation in New York and is based in
part on Official Statements issued by, and on other information reported by the
State, the City and the Agencies in connection with the issuance of their
respective securities.
There can be no assurance that future statewide or regional economic
difficulties, and the resulting impact on State or local government finances
generally, will not adversely affect the market value of New York
53
<PAGE>
Municipal Obligations held in the portfolio of the Trust or the ability of
particular obligors to make timely payments of debt service on (or relating to)
those obligations.
The State has historically been one of the wealthiest states in the nation.
For decades, however, the State economy has grown more slowly than that of the
nation as a whole, gradually eroding the State's relative economic affluence.
Statewide, urban centers have experienced significant changes involving
migration of the more affluent to the suburbs and an influx of generally less
affluent residents. Regionally, the older Northeast cities have suffered
because of the relative success that the South and the West have had in
attracting people and business. The City has also had to face greater
competition as other major cities have developed financial and business
capabilities which make them less dependent on the specialized services
traditionally available almost exclusively in the City.
The State has for many years had a very high State and local tax burden
relative to other states. The burden of State and local taxation, in
combination with the many other causes of regional economic dislocation, has
contributed to the decisions of some businesses and individuals to relocate
outside, or not locate within, the State.
A national recession commenced in mid-1990. The downturn continued throughout
the State's 1990-91 fiscal year and was followed by a period of weak economic
growth during the 1991 calendar year. For calendar year 1992, the national
economy continued to recover, although at a rate below all post-war recoveries.
For calendar year 1993, the economy is expected to grow faster than 1992, but
still at a very moderate rate as compared to other recoveries. The national
recession has been more severe in the State because of factors such as a
significant retrenchment in the financial services industry, cutbacks in defense
spending, and an overbuilt real estate market.
1993-94 Fiscal Year. On April 5, 1993, the State Legislature approval a
$32.08 billion budget. Following enactment of the budget the 1993-94 State
Financial Plan was formulated on April 16, 1993. This Plan projects General
Fund receipts and transfers from other funds at $32.367 billion and
disbursements and transfers to other funds at $32.300 billion. In comparison to
the Governor's recommended Executive Budget for the 1993-94 fiscal year, as
revised on February 18, 1993, the 1993-94 State Financial Plan reflects
increases in both receipts and disbursements in the General Fund of $811
million.
While a portion of the increased receipts was the result of a $487 million
increase in the States's 1992-93 positive year-end margin at March 31, 1993 to
$671 million, the balance of such increased receipts is based upon (i) a
projected $269 million increase in receipts resulting from improved 1992-93
results and the expectation of an improving economy, (ii) projected additional
payments of $200 million from the Federal government as reimbursements for
indigent medical care, (iii) the early payment of $50 million of personal tax
returns in 1992-93 which otherwise would have been paid in 1993-94; offset by
(iv) the State Legislature's failure to enact $195 million of additional
revenue-raising recommendations proposed by the Governor. There can be no
assurances that all of the projected receipts referred to above will be
received.
Despite the $811 million increase in disbursements included in the 1993-94
State Financial Plan, a reduction in aid to some local government units can be
expected. To offset a portion of such reductions, the 1993-94 State Financial
Plan contains a package of mandate relief, cost containment and other proposals
to
54
<PAGE>
reduce the costs of many programs for which local governments provide funding.
There can be no assurance, however, that localities that suffer cuts will not be
adversely affected, leading to further requests for State financial assistance.
There can be no assurance that the State will not face substantial potential
budget gaps in the future 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.
1992-93 Fiscal Year. Before giving effect to a 1992-93 year-end deposit to
the refund reserve account of $671 million, General Fund receipts in 1992-93
would have been $716 million higher than originally projected. This year-end
deposits effectively reduced 1992-93 receipts by $671 million and made those
receipts available for 1993-94.
The State's favorable performance primarily resulted from income tax
collections that were $700 million higher than projected which reflected both
stronger economic activity and tax-induced one-time acceleration of income into
1992. In other areas larger than projected business tax collections and
unbudgeted receipts offset the loss of $200 million of anticipated Federal
reimbursement and losses of, or shortfalls in, other projected revenue sources.
For 1992-93, disbursements and transfers to other funds (including the deposit
to the refund reserve account discussed above) totalled $30.829 billion, an
increase of $45 million above projections in April 1992.
Fiscal year 1992-93 was the first time in four years that the State did not
incur a cash-basis operating deficit in the General Fund requiring the issuance
of deficit notes or other bonds, spending cuts or other revenue raising
measures.
Indebtedness. As of March 31, 1993, the total amount of long-term State
general obligation debt authorized but unissued stood at $2.4 billion. As of
the same date, the State had approximately $5.4 billion in general obligation
bonds. The State issued $850 million in tax and revenue anticipation notes
("TRANS") on April 28, 1993. The State does not project the need to issue
additional TRANS during the States's 1993-94 fiscal year.
The State projects that its borrowings for capital purposes during the State's
1993-94 fiscal year will consist of $460 million in general obligation bonds and
$140 million in new commercial paper issuances. In addition, the State expects
to issue $140 million in bonds for the purpose of redeeming outstanding bond
anticipation notes. The Legislature has authorized the issuance of up to $85
million in certificates of participation during the State's 1993-94 fiscal year
for personal and real property acquisitions during the State's 1993-94 fiscal
year. The projection or the State regarding its borrowing for the 1993-94
fiscal year may change if actual receipts fall short of State projections or if
other circumstances require.
In June, 1990, legislation was enacted creating the "New York Local Government
Assistance Corporation" ("LGAC"), a public benefit corporation empowered to
issue long-term obligations to fund certain payments to local governments
traditionally funded through the State's annual seasonal borrowing. To date,
LGAC has
55
<PAGE>
issued its bonds to provide net proceeds of $3.28 billion. LGAC has been
authorized to issue additional bonds to provide net proceeds of $703 million
during the State's 1993-94 fiscal year.
Ratings. The $850 million in TRANS issued by the State in April 1993 were
rated SP-1-Plus by S&P on April 26, 1993, and MIG-1 by Moody's on April 23,
1993, which represents the highest ratings given by such agencies and the first
time the State's TRANS have received these ratings since its May 1989 TRANS
issuance. Both agencies cited the State's improved fiscal position as a
significant factor in the upgrading of the April 1993 TRANS.
Moody's rating of the State's general obligation bonds stood at a A on April
23, 1993, and S&P's rating stood at A- with a stable outlook on April 26, 1993,
an improvement from S&P's negative outlook prior to April 1993. Previously,
Moody's lowered its rating to A on June 6, 1990, its rating having been A1 since
May 27, 1986. S&P lowered its rating from A to A- on January 13, 1992. S&P's
previous ratings were A from March 1990 to January 1992, AA- from August 1987 to
March 1990 and A+ from November 1982 to August 1987.
Moody's, in confirming its rating of the State's general obligation bonds, and
S&P, in improving its outlook on such bonds from negative to stable, noted the
State's improved fiscal condition and reasonable revenue assumptions contained
in the 1993-94 State budget.
The City accounts for approximately 41% of the State's population and personal
income, and the City's financial health affects the State in numerous ways.
In 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 other actions,
the State Legislature (i) created MAC to assist with long-term financing for the
City's short-term debt and other cash requirements and (ii) created the State
Financial Control Board (the "Control Board") to review and approve the City's
budgets and City four-year financial plans (the financial plans also apply to
certain City-related public agencies (the "Covered Organizations").
In February 1975, the New York State Urban Development Corporation ("UDC"),
which had approximately $1 billion of outstanding debt, defaulted on certain of
its short-term notes. Shortly after the UDC default, the City entered a period
of financial crisis. Both the State Legislature and the United States enacted
legislation in response to this crisis. During 1975, the State Legislature (i)
created MAC to assist with long-term financing for the City's short-term debt
and other cash requirements and (ii) created the State Financial Control Board
(the "Control Board") to review and approve the City's budgets and City four-
year financial plans (the financial plans also apply to certain City-related
public agencies (the "Covered Organizations")).
Over the past three years, the rate of economic growth in the City has slowed
substantially, and the City's economy is currently in recession. The City
projects, and its current four-year financial plan assumes, a recovery early in
the 1993 calendar year. The Mayor is responsible for preparing the City's four-
year financial plan, including the City's current financial plan. The City
Comptroller has issued reports concluding that the recession of the City's
economy will be more severe and last longer than is assumed in the financial
plan.
56
<PAGE>
Fiscal Year 1993 and 1993-1996 Financial Plan. The City's 1993 fiscal year
results are projected to be balanced in accordance with generally accepted
accounting principles ("GAAP"). The City was required to close substantial
budget gaps in its 1990, 1991 and 1992 fiscal years in order to maintain
balanced operating results.
The City's modified Financial Plan dated February 9, 1993 covering fiscal
years 1993-1996 projects budget gaps for 1994 through 1996. The Office of the
State Deputy Controller for the City of New York has estimated that under the
modified Financial Plan budget gaps will be $102 million for fiscal year 1994,
$196 million for fiscal year 1995 and $354 million for fiscal year 1996,
primarily due to anticipated higher spending on labor costs.
However, the City's modified Plan is dependent upon a gap-closing program,
certain elements of which the staff of Control Board identified on March 25,
1993 to be at risk due to projected levels of State and Federal aid and revenue
and expenditures estimates which may not be achievable. The Control Board
indicated that the City's modified Financial Plan does not make progress towards
establishing a balanced budget process. The Control Board's report identified
budget gap risks of $1.0 billion, $1.9 billion, $2.3 billion and $2.6 billion in
fiscal years 1994 through 1997, respectively.
On June 3, 1993, the Mayor announced that State and federal aid for Fiscal
Year 1993-94 would be $280 million less than projected and that in order to
balance the City's budget $176 million of previously announced contingent budget
cuts would be imposed. The Mayor indicated that further savings would entail
serious reductions in services. The State Comptroller on June 14, 1993
criticized efforts by the Mayor and City Council to balance the City's budget
which rely primarily on one-shot revenues. The Comptroller added that the
City's budget should be based on "recurring revenues that fund recurring
expenditures." Given the foregoing factors, there can be no assurance that City
will continue to maintain a balanced budget, or that it can maintain a balanced
budget without additional tax or other revenue increases or reductions in City
services, which could adversely affect the City's economic base.
Pursuant to State law, the City prepares a four-year annual financial plan
which is reviewed and revised on a quarterly basis and which includes the City's
capital, revenue and expense projections. The City is required to submit its
financial plans to review bodies, including the Control Board. If the City were
to experience certain adverse financial circumstances, including the occurrence
or the substantial likelihood and imminence of the occurrence of an annual
operating deficit of more than $100 million or the loss of access to the public
credit markets to satisfy the City's capital and seasonal financial
requirements, the Control Board would be required by State law to exercise
certain powers, including prior approval of City financial plans, proposed
borrowings and certain contracts.
The City depends on the State for State aid both to enable the City to balance
its budget and to meet its cash requirements. As a result of the national and
regional economic recession, the State's projections of tax revenues for its
1991 and 1992 fiscal years were substantially reduced. For its 1993 fiscal
year, the State, before taking any remedial action reflected in the State budget
enacted by the State Legislature on April 2, 1992 reported a potential budget
deficit of $4.8 billion. If the State experiences revenue shortfalls or
spending increases beyond its projections during its 1993 fiscal year or
subsequent years, such developments could also result in reductions in projected
State aid to the City. In addition, there can be no assurance that State
budgets
57
<PAGE>
in future fiscal years will be adopted by the April 1 statutory deadline and
that there will not be adverse effects on the City's cash flow and additional
City expenditures as a result of such delays.
The City's projections set forth in the financial plan are based on various
assumptions and contingencies which are uncertain and which may not materialize.
Changes in major assumptions could significantly affect the City's ability to
balance its budget as required by State law and to meet its annual cash flow and
financing requirements. Such assumptions and contingencies include the timing
of any regional and local economic recovery, the absence of wage increases in
excess of the increases assumed in its financial plan, employment growth,
provision of State and Federal aid and mandate relief, State legislative
approval of future State budgets, levels of education expenditures as may be
required by State law, adoption of future City budgets by the New York City
Council, and approval by the Governor or the State Legislature and the
cooperation of MAC with respect to various other actions proposed in such
financial plan.
The City's ability to maintain a balanced operating budget is dependent on
whether it can implement necessary service and personnel reduction programs
successfully. As discussed above, the City must identify additional expenditure
reductions and revenue sources to achieve balanced operating budgets for fiscal
years 1994 and thereafter. Any such proposed expenditure reductions will be
difficult to implement because of their size and the substantial expenditure
reductions already imposed on City operations in the past two years.
Attaining a balanced budget is also dependent upon the City's ability to
market its securities successfully in the public credit markets. The City's
financing program for fiscal years 1993 through 1996 contemplates issuance of
$15.7 billion of general obligation bonds primarily to reconstruct and
rehabilitate the City's infrastructure and physical assets and to make capital
investments. A significant portion of such bond financing is used to reimburse
the City's general fund for capital expenditures already incurred. In addition,
the City issues revenue and tax anticipation notes to finance its seasonal
working capital requirements. The terms and success of projected public sales
of City general obligation bonds and notes will be subject to prevailing market
conditions at the time of the sale, and no assurance can be given that the
credit markets will absorb the projected amounts of public bond and note sales.
In addition, future developments concerning the City and public discussion of
such developments, the City's future financial needs and other issues may affect
the market for outstanding City general obligation bonds and notes. If the City
were unable to sell its general obligation bonds and notes, it would be
prevented from meeting its planned operating and capital expenditures.
The City Comptroller, the staff of the Control Board, the Office of the State
Deputy Comptroller for the City of New York (the "OSDC") and other agencies and
public officials have issued reports and made public statements which, among
other things, state that projected revenues may be less and future expenditures
may be greater than those forecast in the financial plan. In addition, the
Control Board and other agencies have questioned whether the City has the
capacity to generate sufficient revenues in the future to meet the costs of its
expenditure increases and to provide necessary services. It is reasonable to
expect that such reports and statements will continue to be issued and to
engender public comment.
Fiscal Years 1990, 1991 and 1992. The City achieved balanced operating
results as reported in accordance with GAAP for the 1992 fiscal year. During
the 1990 and 1991 fiscal years, the City implemented various actions to offset a
projected budget deficit of $3.2 billion for the 1991 fiscal year, which
resulted from declines
58
<PAGE>
in City revenue sources and increased public assistance needs due to the
recession. Such actions included $822 million of tax increases and substantial
expenditure reductions.
The quarterly modification to the City's financial plan submitted to the
Control Board on May 7, 1992 (the "1992 Modification") projected a balanced
budget in accordance with GAAP for the 1992 fiscal year after taking into
account a discretionary transfer of $455 million to the 1993 fiscal year as the
result of a 1992 fiscal year surplus. In order to achieve a balanced budget for
the 1992 fiscal year, during the 1991 fiscal year, the City proposed various
actions for the 1992 fiscal year to close a projected gap of $3.3 billion in the
1992 fiscal year.
On November 19, 1992 the City submitted to the Control Board the Financial
Plan for the 1993 through 1996 fiscal years, which is a modification to a
financial plan submitted to the Control Board on June 11, 1992 (the "June
Financial Plan"), and which relates to the City, the Board of Education ("BOE")
and the City University of New York ("CUNY"). The 1993-1996 Financial Plan
projects revenues and expenditures of $29.9 billion each for the 1993 fiscal
year balanced in accordance with GAAP.
During the 1992 fiscal year, the City proposed various actions to close a
previously projected gap of approximately $1.2 billion for the 1993 fiscal year.
The gap-closing actions for the 1993 fiscal year proposed during the 1992 fiscal
year and outlined in the City's June Financial Plan included $489 million of
discretionary transfers from the 1992 fiscal year. The 1993-1996 City Financial
Plan includes additional gap-closing actions to offset an additional potential
$81 million budget gap.
The 1993-1996 Financial Plan also sets forth projections and outlines a
proposed gap-closing program for the 1994 through 1996 fiscal years to close
projected budget gaps of $1.7 billion, $2.0 billion and $2.6 billion,
respectively, in the 1994 through 1996 fiscal years. On February 9, 1993, the
City issued a modification to the 1993-1996 Financial Plan (the "February
Modification"). The February Modification projects budget gaps for the fiscal
years 1994, 1995 and 1996 of $2.1 billion, $3.1 billion and $3.8 billion,
respectively.
Various actions proposed in the 1993-1996 Financial Plan are subject to
approval by the Governor and approval by the State Legislature, and the proposed
increase in Federal aid is subject to approval by Congress and the President.
The State Legislature has in the past failed to approve certain proposals
similar to those that the 1993-1996 Financial Plan assumes will be approved by
the State Legislature during the 1993 fiscal year. If these actions cannot be
implemented, the City will be required to take other actions to decrease
expenditures or increase revenues to maintain a balanced financial plan.
On March 9, 1993, OSDC issued a report on the February Modification. The
report expressed concern that the budget gaps projected for fiscal years 1994
through 1996 are the largest the City has faced at this point in the financial
planning cycle in at least a decade, and concluded that the February
Modification represented a step backward in the City's efforts to bring
recurring revenues into line with recurring expenditures.
The City is a defendant in a significant number of lawsuits. Such litigation
includes, but is not limited to, actions commenced and claims asserted against
the City arising out of alleged constitutional violations, torts, breaches of
contracts, and other violations of law and condemnation proceedings. While the
ultimate outcome and fiscal impact, if any, on the proceedings and claims are
not currently predictable, adverse determinations
59
<PAGE>
in certain of them might have a material adverse effect upon the City's ability
to carry out its financial plan. As of June 30, 1992, legal claims in excess of
$341 billion were outstanding against the City for which the City estimated its
potential future liability to be $2.3 billion.
As of the date of this prospectus, Moody's rating of the City's general
obligation bonds stood at Baal and S&P's rating stood at A-. On February 11,
1991, Moody's lowered its rating from A.
On March 30, 1993 in confirming the Baa1 rating, Moody's noted that:
The financial plan for fiscal year 1994 and beyond shows an ongoing imbalance
between the City's expenditures and revenues. The key indication of this
structural imbalance is not necessarily the presence of sizable out-year budget
gaps, but the recurring use of one-shot actions to close gaps. One-shots
constitute a significant share of the proposed gap-closing program for fiscal
year 1994, and they represent an even larger share of those measures which the
City seems reasonably certain to attain. Several major elements of the program,
including certain state actions, federal counter cyclical aid and part of the
city's tax package, remain uncertain. However, the gap closing plan may be
substantially altered when the executive budget is offered later this spring.
On March 30, 1993, S&P affirmed its A- rating with a negative outlook, stating
that:
The City's key credit factors are marked by a high and growing debt burden,
and taxation levels that are relatively high, but stable. The City's economy is
broad-based and diverse, but currently is in prolonged recession, with slow
growth prospects for the foreseeable future.
The rating outlook is negative, reflecting the continued fiscal pressure
facing the City, driven by continued weakness in the local economy, rising
spending pressures for education and labor costs of city employees, and
increasing costs associated with rising debt for capital construction and
repair.
The current financial plan for the City assumes substantial increases in aid
from national and state governments. Maintenance of the current rating, and
stabilization of the rating outlook, will depend on the City's success in
realizing budgetary aid from these governments, or replacing those revenues with
ongoing revenue-raising measures or spending reductions under the City's
control. However, increased reliance on non-recurring budget balancing measures
that would support current spending, but defer budgetary gaps to future years,
would be viewed by S&P as detrimental to New YorkCity's single-'A-' rating.
Previously, Moody's had raised its rating to A in May 1988, to Baal in
December 1985, to Baa in November 1983 and to Bal in November 1981. S&P had
raised its rating to A- in November 1987, to BBB+ in July 1985 and to BBB in
March 1981.
On May 9, 1990, Moody's revised downward its rating on outstanding City
revenue anticipation notes from MIG-1 to MIG-2 and rated the $900 million Notes
then being sold MIG-2. On April 30, 1991 Moody's confirmed its MIG-2 rating for
the outstanding revenue anticipation notes and for the $1.25 billion in notes
then being sold. On April 29, 1991, S&P revised downward its rating on City
revenue anticipation notes from SP-1 to SP-2.
60
<PAGE>
As of December 31, 1992, the City and MAC had, respectively, $20.3 billion and
$4.7 billion of outstanding net long-term indebtedness.
Certain Agencies of the State have faced substantial financial difficulties
which could adversely affect the ability of such Agencies to make payments of
interest on, and principal amounts of, their respective bonds. The difficulties
have in certain instances caused the State (under so-called "moral obligation"
provisions which are non-binding statutory provisions for State appropriations
to maintain various debt service reserve funds) to appropriate funds on behalf
of the Agencies. Moreover, it is expected that the problems faced by these
Agencies will continue and will require increasing amounts of State assistance
in future years. Failure of the State to appropriate necessary amounts or to
take other action to permit those Agencies having financial difficulties to meet
their obligations could result in a default by one or more of the Agencies.
Such default, if it were to occur, would be likely to have a significant adverse
effect on investor confidence in, and therefore the market price of, obligations
of the defaulting Agencies. In addition, any default in payment on any general
obligation of any Agency whose bonds contain a moral obligation provision could
constitute a failure of certain conditions that must be satisfied in connection
with Federal guarantees of City and MAC obligations and could thus jeopardize
the City's long-term financing plans.
As of September 30, 1992, the State reported that there were eighteen Agencies
that each had outstanding debt of $100 million or more. These eighteen
Agencies had an aggregate of $62.2 billion of outstanding debt, including
refunding bonds, of which the State was obligated under lease-purchase,
contractual obligation or moral obligation provisions on $25.3 billion.
The State is a defendant in numerous legal proceedings pertaining to matters
incidental to the performance of routine governmental operations. Such
litigation includes, but is not limited to, claims asserted against the State
arising from alleged torts, alleged breaches of contracts, condemnation
proceedings and other alleged violations of State and Federal laws. Included in
the State's outstanding litigation are a number of cases challenging the
constitutionality or the adequacy and effectiveness of a variety of significant
social welfare programs primarily involving the State's mental hygiene programs.
Adverse judgments in these matters generally could result in injunctive relief
coupled with prospective changes in patient care which could require substantial
increased financing of the litigated programs in the future.
The State is also engaged in a variety of claims wherein significant monetary
damages are sought. Actions commenced by several Indian nations claim that
significant amounts of land were unconstitutionally taken from the Indians in
violation of various treaties and agreements during the eighteenth and
nineteenth centuries. The claimants seek recovery of approximately six million
acres of land as well as compensatory and punitive damages.
The U.S. Supreme Court on March 30, 1993 referred to a Special Master for
determination of damages on an action by the State of Delaware to recover
certain unclaimed dividends, interest and other distributions made by issuers of
securities held by New York-based brokers incorporated in Delaware. (State of
Delaware v. State of New York.) The State had taken such unclaimed property
under its Abandoned Property Law. The State expects that it may pay a
significant amount in damages during fiscal year 1993-94 but it has indicated
that it has sufficient funds on hand to pay any such award, including funds held
in contingency reserves. The
61
<PAGE>
State's 1993-94 Financial Plan includes the establishment of a $100 million
contingency reserve fund which would be available to fund such an award which
some reports have estimated at $100-$800 million.
In Schulz v. State of New York, commenced May 24, 1993 ("Schulz 1993"),
petitioners have challenged the constitutionality of mass transportation bonding
programs of the New York State Thruway Authority and the Metropolitan
Transportation Authority. On May 24, 1993, the Supreme Court, Albany County,
temporarily enjoined the State from implementing those bonding programs. In
previous actions Mr. Schulz and others have challenged on similar grounds
bonding programs for the New York State Urban Development Corporation and the
New York Local Government Assistance Corporation. While there have been no
decisions on the merits in such previous actions, by an opinion dated May 11,
1993, the New York Court of Appeals held in a proceeding commenced on April 29,
1991 in the Supreme Court, Albany County (Schulz v. State of New York), that
petitioners had standing as voters under the State Constitution to bring such
action.
Petitioners in Schulz 1993 have asserted that issuance of bonds by the two
Authorities is subject to approval by statewide referendum. At this time there
can be no forecast of the likelihood of success on the merits by the
petitioners, but a decision upholding this constitutional challenge could
restrict and limit the ability of the State and its instrumentalities to borrow
funds in the future. The State has not indicated that the temporary injunction
issued by the Supreme Court in this action will have any immediate impact on its
financial condition or interfere with projects requiring immediate action.
Adverse developments in the foregoing proceedings or new proceedings could
adversely affect the financial condition of the State in the future.
Certain localities in addition to New York City could have financial problems
leading to requests for additional State assistance. Both the Revised 1992-93
State Financial Plan and the recommended 1993-94 State Financial Plan includes a
significant reduction in State aid to localities in such programs as revenue
sharing and aid to education from projected base-line growth in such programs.
It is expected that such reductions will result in the need for localities to
reduce their spending or increase their revenues. The potential impact on the
State of such actions by localities is not included in projections of State
receipts and expenditures in the State's 1993-94 fiscal year.
Fiscal difficulties experienced by the City of Yonkers ("Yonkers") resulted in
the creation of the Financial Control Board for the City of Yonkers (the
"Yonkers Board") by the State in 1984. The Yonkers Board is charged with
oversight of the fiscal affairs of Yonkers. Future actions taken by the
Governor or the State Legislature to assist Yonkers could result in allocation
of State resources in amounts that cannot yet be determined.
Municipalities and school districts have engaged in substantial short-term and
long-term borrowings. In 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). State law requires the
Comptroller to review and make recommendations concerning the budgets of those
local government units other than New York City authorized by State law to issue
debt to finance deficits during the period that such deficit financing is
outstanding. Fifteen localities had outstanding indebtedness for state
financing at the close of their fiscal year ending in 1991. In 1992, an
unusually large number of local government units requested authorization for
62
<PAGE>
deficit financings. According to the Comptroller, ten local government units
have been authorized to issue deficit financing in the aggregate amount of
$131.1 million.
Certain proposed Federal expenditure reductions could reduce, or in some cases
eliminate, Federal funding of some local programs and accordingly might impose
substantial increased expenditure requirements on affected localities. If the
State, New York City or any of the Agencies were to suffer serious financial
difficulties jeopardizing their respective access to the public credit markets,
the marketability of notes and bonds issued by localities within the State,
including notes or bonds in the New York Trust, could be adversely affected.
Localities also face anticipated and potential problems resulting from certain
pending litigation, judicial decisions, and long-range economic trends. The
longer-range potential problems of declining urban population, increasing
expenditures, and other economic trends could adversely affect localities and
require increasing State assistance in the future.
At the time of the closing for each New York Trust, Special Counsel to each
New York Trust for New York tax matters rendered an opinion under then existing
New York income tax law applicable to taxpayers whose income is subject to New
York income taxation substantially to the effect that:
The New York Trust is not an association taxable as a corporation and the
income of the New York Trust will be treated as the income of the Unitholders
under the income tax laws of the State and City of New York. Individuals who
reside in New York State or City will not be subject to State and City tax on
interest income which is exempt from Federal income tax under section 103 of the
Internal Revenue Code of 1986 and derived from obligations of New York State or
a political subdivision thereof, although they will be subject to New York State
and City tax with respect to any gains realized when such obligations are sold,
redeemed or paid at maturity or when any such Units are sold or redeemed.
NORTH CAROLINA TRUSTS. General obligations of a city, town or county in North
Carolina are payable from the general revenues of the entity, including ad
valorem tax revenues on property within the jurisdiction. Revenue bonds issued
by North Carolina political subdivisions include (1) revenue bonds payable
exclusively from revenue-producing governmental enterprises and (2) industrial
revenue bonds, college and hospital revenue bonds and other "private activity
bonds" which are essentially non-governmental debt issues and which are payable
exclusively by private entities such as non-profit organizations and business
concerns of all sizes. State and local governments have no obligation to
provide for payment of such private activity bonds and in many cases would be
legally prohibited from doing so. The value of such private activity bonds may
be affected by a wide variety of factors relevant to particular localities or
industries, including economic developments outside of North Carolina.
Section 23-48 of the North Carolina General Statutes appears to permit any
city, town, school district, county or other taxing district to avail itself of
the provisions of Chapter 9 of the United States Bankruptcy Code, but only with
the consent of the Local Government Commission of the State and of the holders
of such percentage or percentages of the indebtedness of the issuer as may be
required by the Bankruptcy Code (if any such consent is required). Thus,
although limitations apply, in certain circumstances political subdivisions
might be able to seek the protection of the Bankruptcy Code.
63
<PAGE>
State Budget and Revenues. The North Carolina State Constitution requires
that the total expenditures of the State for the fiscal period covered by each
budget not exceed the total of receipts during the fiscal period and the surplus
remaining in the State Treasury at the beginning of the period. The State's
fiscal year runs from July 1st through June 30th.
In 1990 and 1991, the State had difficulty meeting its budget projections.
Lower than anticipated revenues coupled with increases in State spending
requirements imposed by the federal government led to projected budget deficits
for fiscal 1989-1990 and fiscal 1990-91. Consequently, the Governor ordered
cuts in budgeted State expenditures for both fiscal years.
The State, like the nation, has experienced economic recovery since 1991.
Apparently due to both increased tax and fee revenue and the previously enacted
spending reductions, the State has a budget surplus of approximately $887
million at the end of the fiscal 1993-94. After review of the 1994-95
continuation budget adopted in 1993, the General Assembly approved spending
expansion funds, in part to restore certain employee salaries to budgeted
levels, which amounts had been deferred to balance the budgets in 1989-1993, and
to authorize funding for new initiatives for economic development, education,
human services and environmental programs. (The cutback in funding for
infrastructure and social development projects had been cited by agencies rating
State obligations, following the 1991 reductions, as cause for concern about the
long-term consequences of those reductions on the economy of the State and the
State's fiscal prospects.)
Based on projected growth in State tax and fee revenues, the General Fund
balance forecast for the end of the 1994-95 fiscal year is approximately $310
million.
It is unclear what effect these developments at the State level may have on
the value of the Debt Obligations in the North Carolina Trust.
The State is subject to claims by classes of plaintiffs asserting a right to
refund of taxes paid under State statutes that allegedly discriminated against
federal retirees and armed services personnel in a manner that was
unconstitutional based on the decision by the United States Supreme court in a
1989 Michigan case involving a similar law, Davis v. Michigan Department of
Treasury ("Davis"). At the time of that decision, State income tax law exempted
retirement income paid by North Carolina State and local governments but did not
exempt retirement income paid by the federal government to its former employees.
Also, State tax law at the time provided a deduction for certain income earned
by members of the North Carolina National Guard, but did not provide a similar
deduction for members of the federal armed services.
Following the Davis decision the North Carolina legislature amended the tax
law to provide identical retirement income exclusions for former stat and
federal employees (effective for 1989), and repealed the deduction given to
members of the State National Guard. In addition, the amendments authorized a
special tax credit for federal retirees equal to the taxes paid on their
nonexcluded federal pensions in 1988 (to be taken over a three year period
beginning with returns for 1990).
Subsequent to Davis, the North Carolina plaintiffs brought an action in
federal court against the North Carolina Department of Revenue and certain
officials of the State alleging that the collection of the taxes under the prior
North Carolina tax statues was prohibited by the state and federal
constitutions, and also violated civil
64
<PAGE>
rights protections under 42 U.S.C. Section 1983, a federal statute prohibiting
discriminatory taxation of the compensation of certain federal employees (4
U.S.C. Section 111), and the principle of intergovernmental tax immunity. The
plaintiffs sought injunctive relief requiring the State to provide refunds of
the illegally collected taxes paid on federal retirement or military pay for the
years 1985-88 (covering the asserted 3 year limitations period), plus interest.
Swanson, et al. v. Powers, et al. (United States District Court for the Eastern
District of North Carolina, No. 89-282-CIV-5-H) ("Swanson Federal"). The
individual plaintiffs in Swanson Federal also brought an action in North
Carolina state court seeking refunds of the illegal taxes. Swanson, et al. v.
State of North Carolina, et al. (Wake County, North Carolina Superior Court, No.
90 CVS 3127) ("Swanson State").
The amounts claimed by federal retirees in the Swanson actions have not been
precisely calculated. Plaintiffs have asserted that the plaintiff class
contains about 100,000 taxpayers; the State estimated that as of June 30, 1994,
the claims (including interest) would then aggregate approximately $280 million.
In 1991, the North Carolina Supreme Court in Swanson State affirmed a decision
in favor of the State, holding that the U.S. Supreme Court decision in Davis was
not to have retroactive effect. Review was granted by the United States Supreme
Court and the case subsequently was remanded to the North Carolina Supreme Court
for reconsideration in light of the U.S. Supreme Court's 1993 holding in Harper
v. Virginia Dept. of Taxation ("Harper"). In Harper, which also involved the
disparate income tax treatment of retired state and federal employees and the
question of retroactive application of Davis, the U.S. Supreme Court held that
the Commonwealth of Virginia must provide "meaningful backward-looking relief"
to the plaintiffs if the Commonwealth did not have a predeprivation process
adequate to satisfy due process requirements. Harper was remanded to the
Supreme Court of Virginia to determine whether a remedy was required and, if so,
what form it would take.
Similarly, Swanson State was remanded for reconsideration of whether the North
Carolina tax laws satisfied the due process requirements of the federal
constitution and, if not, what remedy was to be provided by the State.
On remand, the North Carolina Supreme Court held in early 1994 that the
plaintiffs in Swanson State was procedurally barred from recovering refunds
because they did not comply with the State's statutory postpayment refund demand
procedure. The plaintiffs contended unsuccessfully that the postpayment demand
requirement did not meet the requirements of the federal constitution, in light
of the Harper decision, for "meaningful backward-looking relief." Plaintiffs in
Swanson State have petitioned the U.S. Supreme Court for review of the most
recent North Carolina Supreme Court decision. In December 1994, the Court
denied certiorari to the Swanson State plaintiffs. At the same time the Court
issued a decision in Reich v. Collins, a Georgia case involving similar claims,
finding for the plaintiff taxpayers, but the effect of the Reich decision on the
claims of Swanson State plaintiffs is uncertain. It is yet undetermined whether
North Carolina offers pre-deprivation procedures (payment and protest within a
specified time period) or post-deprivation remedies (tax credits especially
tailored to these claims) adequate to satisfy constitutional requirements, and
plaintiffs in Swanson State have petitioned the North Carolina Supreme Court for
a rehearing of its last decision in the case.
Following Harper, the plaintiffs in Swanson Federal again requested an
injunction requiring refunds. (Although the federal and state cases are
independent, the refund claims apparently would lead to only a single
65
<PAGE>
recovery of taxes deemed unlawfully collected.) In May 1994, the U.S. District
Court granted the State's motion to dismiss all but one claim made by the
plaintiffs, declaring that those claims were precluded by the 1994 North
Carolina Supreme Court decision in Swanson State. Plaintiffs in Swanson Federal
asserted that relief should have been granted because of the effect of the
federal District Court's 1990 opinion in Swanson Federal denying the defendants'
motion that the federal Tax Injunction Act precluded the plaintiffs' claims, in
which the court found that the statutory post-payment remedy for refund of
unlawful taxes was not "plain, speedy and efficient", as required by the law,
Swanson Federal, 1990 WL 545, 761 (E.D.N.C.), rev,d, 937 F.2d 965 (1991), cert
denied, __ U.S. __ , 112 S. Ct. 871 (1992). In its May 1994 decision, the
federal court rejected that assertion and held that its finding regarding the
federal Tax Injunction Act was jurisdictional only and was not a determination
that the statutory remedy violated the due process clause.
The plaintiffs' claim that was not dismissed with prejudice in the recent
District Court order asserts that the State continued an unlawful
discrimination, contrary to the requirements of 4 U.S.C. (S) 111 and the
doctrine of intergovernmental tax immunity, by increasing benefits to State
retirees (in order to offset the effect of the deletion of the preferential
State retirement income exemption) as part of the bill that equalized the income
exclusion of State and federal retirement payments. The claim is based on a
holding of similar effect in Sheehy v. Public Employees Retirement Div., 864 P.
2d 762 (Mont. 1993). In its May 1994 order, the District Court allowed the
plaintiffs to dismiss the Sheedy claim without prejudice. Therefore, plaintiffs
could assert those claims in another action; apparently, the relief would
require providing federal retirees with tax refunds or other payments equal to
allegedly discriminatory payments made to State retirees since 1989. The court
noted that those claims will be subject to the statutory post-deprivation
procedural requirements, and that a challenge to the legality of the remedial
statute would be precluded under the scope of the court's order dismissing the
other claims. However, the court granted plaintiffs' motion to dismiss the
Sheedy claims without prejudice because the record did not show whether the
plaintiffs had complied with statutory requirements. The plaintiffs in Swanson
State have appealed the District Court decision to the United States Court of
Appeals and a hearing is scheduled for March 1995.
Several states involved in similar suits have reached settlements.
Expressions of interest in settlement of the claims in Swanson by both the
plaintiffs and State officials have been reported in the press, but no
prediction can be made of the likelihood or amount of settlement. Although the
recent improvements in the economy and fiscal condition of the State might
better enable the State to satisfy an adverse decision without significant
consequences to the State's fiscal condition or governmental functions, because
the amount of the potential liability has not been fixed and because of the
potential that adverse fiscal or economic developments could cause a more
negative result on the State if a large amount must be paid, no assurance can be
given that the impact of the Swanson cases, if the plaintiffs ultimately
succeed, will not have an adverse impact on the Debt Obligations.
State and local government retirees also filed a class action suit in 1990 as
a result of the repeal of the income tax exemptions for state and local
government retirement benefits. The original suit was dismissed after the North
Carolina Supreme court ruled in 1991 that the plaintiffs had failed to comply
with state law requirements for challenging unconstitutional taxes and the
United States Supreme Court denied review. In 1992, many of the same plaintiffs
filed a new lawsuit alleging essentially the same claims, including breach of
contract, unconstitutional impairment of contract rights by the State in taxing
benefits that were allegedly promised to be tax-exempt and violation of several
state constitutional provisions. The North Carolina Attorney
66
<PAGE>
General's office estimates that the amount in controversy is approximately $40-
45 million annually for the tax years 1989 through 1992. The case is now
pending in state court.
Other litigation against the State include the following. None of the cases,
in the reported opinion of the Department of the Treasurer, would have a
material adverse affect on the State's ability ot meet its obligations.
Leandro et al. v. State of North Carolina and State Board of Education - In
May, 1994 students and boards of education in five counties in the State filed
suit in state court requesting a declaration that the public education system of
North Carolina, including its system of funding, violated the State constitution
by failing to provide adequate or substantially equal educational opportunities
and denying due process of law and violates various statutes relating to public
education. The suit is similar to a number of suits in other states, some of
which resulted in holdings that the respective systems of public education
funding were unconstitutional under the applicable state law. The defendants in
such suit have filed a motion to dismiss, but no answer to the complaint, and no
pretrial discovery has taken place.
Francisco Case - In August, 1994 a class action lawsuit was filed in state
court against the Superintendent of Public Instruction and the State Board of
Education on behalf of a class of parents and their children who are
characterized as limited English proficient. The complaint alleges that the
State has failed to provide funding for the education of these students and has
failed to supervise local school systems in administering programs for them.
The complaint does not allege an amount in controversy, but asks the Court to
order the defendants to fund a comprehensive program to ensure equal educational
opportunities for children with limited English proficiency.
Faulkenburg v. Teachers' and State Employees' Retirement System, Peeve v.
Teachers' and State Employees' Retirement System, and Woodard v. Local
Governmental Employees' Retirement System - Plaintiffs are disability retirees
who brought class actions in state court challenging changes in the formulas for
payment of disability retirement benefits and claiming impairment of contract
rights, breach of fiduciary duty, violation of other federal constitutional
rights, and violation of state constitutional and statutory rights. The State
estimates that the cost in damages and higher prospective benefit payments to
plaintiffs and class members would probably amount to $50 million or more in
Faulkenburg, $50 million or more in Peele, and $15 million or more in Woodward,
all ultimately payable, at least initially, from the retirement system funds.
Upon review in Faulkenburg, the North Carolina Court of Appeals and Supreme
Court have held that claims made in constitutional rights brought under the
federal Civil Rights Act eight do not state a cause of action or are otherwise
barred by the statute of limitations. In 1994 plaintiffs took voluntary
dismissals of their claims for impairment of contract rights in violation of the
United States Constitution and filed new actions in federal court asserting the
same claims along with claims for violation of constitutional rights in the
taxation of retirement benefits. The remaining state court claims in all cases
are scheduled to be heard in North Carolina in October, 1994.
Fulton Case - The State's intangible personal property tax levied on certain
shares of stock has been challenged by the plaintiff on grounds that it violates
the Commerce Clause of the United States Constitution by discriminating against
stock issued by corporations that do all or part of their business outside the
State. The plaintiff in the action is a North Carolina corporation that does
all or part of its business outside the State. The plaintiff seeks to
invalidate the tax in its entirety and to recover tax paid on the value of its
shares in other
67
<PAGE>
corporations. The North Carolina Court of Appeals invalidated the taxable
percentage deduction and excised it from the statute beginning with the 1994 tax
year. The effect of this ruling is to increase collections by rendering all
stock taxable on 100% of its value. The State and the plaintiff have sought
further appellate review, and the case is pending before the North Carolina
Supreme Court. Net collections from the tax for fiscal year ended June 30, 1993
amounted to $120.6 million.
General. The population of the State has increased 13% from 1980, from
5,880,095 to 6,647,351 as reported by the 1990 federal census and the State rose
from twelfth to tenth in population. The State's estimate of population as of
June 30, 1994 is 7,023,663. Notwithstanding its rank in population size, North
Carolina is primarily a rural state, having only five municipalities with
populations in excess of 100,000.
The labor force has undergone significant change during recent years as the
state has moved from as agricultural to a service and goods producing economy.
Those persons displaced by farm mechanization and farm consolidations have, in
large measure, sought and found employment in other pursuits. Due to wide
dispersion of non-agricultural employment, the people have been able to
maintain, to a large extent, their rural habitation practices. During the
period 1980 to 1994, the State labor force grew about 25% (from 2,855,200 to
3,560,000), and per capita income during the period 1980 to 1993 grew from
$7,999 to $18,702, an increase of 133.8%.
The current economic profile of the State consists of a combination of
industry, agriculture and tourism. As of June 1994, the State was reported to
rank tenth among the states in non-agricultural employment and eighth in
manufacturing employment, Employment indicators have fluctuated somewhat in the
annual periods since June of 1990 but have demonstrated an upward trend since
1991. The following table reflects the fluctuation in certain key employment
categories.
<TABLE>
<CAPTION>
CATEGORY (ALL SEASONALLY ADJUSTED) JUNE 1990 JUNE 1991 JUNE 1992 JUNE 1993 JUNE 1994
<S> <C> <C> <C> <C> <C>
CIVILIAN LABOR FORCE 3,312,000 3,228,000 3,495,000 3,504,000 3,560,000
NONAGRICULTURAL EMPLOYMENT 3,129,000 3,059,000 3,135,000 3,203,400 3,359,700
GOODS PRODUCING OCCUPATIONS (MIN- 1,023,100 973,600 980,800 993,600 1,021,500
ING, CONSTRUCTION AND MANUFACTURING)
SERVICE OCCUPATIONS 2,106,300 2,085,400 2,154,200 2,209,800 2,337,200
WHOLESALE/RETAIL OCCUPATIONS 732,500 704,100 715,100 723,200 749,000
GOVERNMENT EMPLOYEES 496,400 496,700 513,400 515,400 554,600
MISCELLANEOUS SERVICES 587,300 596,300 638,300 676,900 731,900
AGRICULTURAL EMPLOYMENT 58,900 88,700 102,800 88,400 53,000
</TABLE>
The seasonally adjusted unemployment rate in January 1995 was estimated to be
3.8% of the labor force (down from 4.0% in January 1994), as compared with 5.7%
nationwide (down from 6.7% in January 1994).
As of 1993, the State was tenth in the nation in gross agricultural income of
which nearly the entire amount (approximately $5.3 billion) was from
commodities. According to the State Commissioner of Agriculture, in 1993, the
State ranked first in the nation in the production of flue-cured tobacco,
turkeys and sweet potatoes; second in the value of poultry and eggs, hog
production, trout and the production of cucumbers for pickles; fourth in
commercial broilers, blueberries and peanuts; sixth in burley tobacco and net
farm income.
68
<PAGE>
The diversity of agriculture in North Carolina and a continuing push in
marketing efforts have protected farm income from some of the wide variations
that have been experienced in other states where most of the agricultural
economy is dependent on a small number of agricultural commodities. North
Carolina is the third most diversified agricultural state in the nation.
Tobacco production is the leading source of agricultural income in the State,
accounting for 20% of gross agricultural income. Tobacco farming in North
Carolina has been and is expected to continue to be affected by major Federal
legislation and regulatory measures regarding tobacco production and marketing
and by international competition. Measures adverse to tobacco farming could
have negative effects on farm income and the North Carolina economy generally.
The poultry industry provides nearly 34% of gross agricultural income. The pork
industry has been expanding and accounted for 17% of gross agricultural income
in 1993.
The number of farms has been decreasing; in 1994 there were approximately
58,000 farms in the State (down from approximately 72,000 in 1987, a decrease of
about 19% in seven years). However, a strong agribusiness sector also supports
farmers with inputs (fertilizer, insecticide, pesticide and farm machinery) and
processing of commodities produced by farmers (vegetable canning and cigarette
manufacturing).
The State Department of Commerce, Travel and Tourism Division reports that in
1993 more than $803 billion was spent on tourism in the State. The Department
estimates that two-thirds of total expenditures came from out-of-state
travelers, and that approximately 250,000 people were employed in tourism-
related jobs.
Bond Ratings. Currently, Moody's rates North Carolina general obligation
bonds as Aaa and Standard & Poor's rates such bonds as AAA. Standard & Poor's
also reaffirmed its stable outlook for the State in January 1994.
Standard & Poor's reports that North Carolina's rating reflects the State's
strong economic characteristics, sound financial performance, and low debt
levels.
The Sponsor believes the information summarized above describes some of the
more significant events relating to the North Carolina Trust. The sources of
this information are the official statements of issuers located in North
Carolina, State agencies, publicly available documents, publications of rating
agencies and statements by, or news reports of statements by State officials and
employees and by rating agencies. The Sponsor and its counsel have not
independently verified any of the information contained in the official
statements and other sources and counsel have not expressed any opinion
regarding the completeness or materiality of any matters contained in this
Prospectus other than the tax opinions set forth below under North Carolina
Taxes.
The Sponsor believes the information summarized above describes some of the
more significant events relating to the North Carolina Trust. The sources of
this information are the official statements of issuers located in North
Carolina, State agencies, publicly available documents, publications of ratings
agencies and news reports of statements by State officials and employees and by
rating agencies. The Sponsor and its counsel have not independently verified
any of the information contained in the official statements and other sources
and counsel have not expressed any opinion regarding the completeness or
materiality of any contained in this Prospectus other than the tax opinions set
forth below under North Carolina Taxes.
At the time of the closing for each North Carolina Trust, Special Counsel to
the fund for North Carolina tax matters rendered an opinion under then existing
North Carolina income tax law applicable to taxpayers whose income is subject to
North Carolina income taxation substantially to the effect that:
Upon the establishing of the North Carolina Trust and the Units thereunder:
69
<PAGE>
(1) The North Carolina Trust is not an "association" taxable as a
corporation under North Carolina law with the result that income of the
North Carolina Trust will be deemed to be income of the Unitholders.
(2) Interest on the Bonds that is exempt from North Carolina income tax when
received by the North Carolina Trust will retain its tax-exempt status
when received by the Unitholders.
(3) Unitholders will realize a taxable event when the North Carolina Trust
disposes of a Bond (whether by sale, exchange, redemption or payment at
maturity) or when a Unitholder redeems or sells his Units (or any of
them), and taxable gains for Federal income tax purposes may result in
gain taxable as ordinary income for North Carolina income tax purposes.
However, when a Bond had been issued under an act of the North Carolina
General Assembly that provides that all income from such Bond, including
any profit made from the sale thereof, shall be free from all taxation by
the State of North Carolina, any such profit received by the North
Carolina Trust will retain its tax-exempt status in the hands of the
Unitholders.
(4) Unitholders must authorize their proportionate share of any premium on a
Bond. Amortization for each taxable year is accomplished by lowering the
Unitholder's basis (as adjusted) in his Units with no deduction against
gross income for the year.
(5) The Units are exempt from the North Carolina tax on intangible personal
property so long as the corpus of the North Carolina Trust remains
composed entirely of Bonds or, pending distribution, amounts received on
the sale, redemption or maturity of the Bonds and the Trustee
periodically supplies to the North Carolina Department of Revenue at such
times required by the Department of Revenue a complete description of the
North Carolina Trust and also the name, description and value of the
obligations held in the corpus of the North Carolina Trust.
OHIO TRUSTS. As described above, the Ohio Trust will invest substantially all
of its net assets in securities issued by or on behalf of (or in certificates of
participation in lease purchase obligations of) the State of Ohio, political
subdivisions of the State or agencies or instrumentalities of the State or its
political subdivisions ("Ohio Obligations"). The Ohio Trust is therefore
susceptible to general or particular political, economic or regulatory factors
that may affect issuers of Ohio Obligations. The following information
constitutes only a brief summary of some of the complex factors that may have an
effect. This information does not apply to "conduit" obligations on which the
public issuer itself has no financial responsibility. This information is
derived from official statements published in connection with their issuance of
securities of certain Ohio issuers and from other publicly available
information, and is believed to be accurate. No independent verification has
been made of any of the following information.
Generally, creditworthiness of Ohio Obligations of local issuers is unrelated
to that of obligations of the State itself, and the State has no responsibility
to make payments on those local obligations. There may be specific factors that
at particular times apply in connection with investment in particular Ohio
Obligations or in those obligations of particular Ohio issuers. It is possible
that the investment may be in particular Ohio Obligations, or in those of
particular issuers as to which those factors apply. However, the information
below is intended only as a general summary and is not intended as a discussion
of any specific factors that may affect any particular obligation or issuer.
The timely payment of principal of and interest on Ohio Obligations has been
guaranteed by the bond insurance purchased by the issuers, the Ohio or other
parties. Ohio Obligations may not be subject to the factors referred to in this
section of the Prospectus.
70
<PAGE>
Ohio is the seventh most populous state; The 1990 Census count of 10,847,000
indicates a 0.5% population increase from 1980. The Census estimate for 1993 is
11,091,000.
While diversifying more into the service and other non-manufacturing areas,
the Ohio economy continues to rely in part on durable goods manufacturing
largely concentrated in motor vehicles and equipment, steel, rubber products and
household appliances. As a result, general economic activity, as in many other
industrially-developed states, tends to be more cyclical than in some other
states and in the nation as a whole. Agriculture also is an important segment
of the economy, with over half the State's area devoted to farming and
approximately 15% of total employment is in agribusiness.
In prior years, the State's overall unemployment rate was commonly somewhat
higher than the national figure. For example, the reported 1990 average monthly
State rate was 5.7%, compared to the 5.5% national figure. However, for the
last four years the State rates were below the national rates (6.5% versus 6.8%
in 1993). The unemployment rate and its effects vary among geographic areas of
the State.
There can be no assurance that future national, regional or state-wide
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 Ohio portfolio or the ability of 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 its July 1 to June 30
fiscal year ("FY") or fiscal biennium in a deficit position. Most State
operations are financed through the General Revenue Fund ("GRF"), for which
personal income and sales-use taxes are the major sources. Growth and depletion
of GRF ending fund balances show a consistent pattern related to national
economic conditions, with the ending FY balance reduced during less favorable
and increased during more favorable economic periods. The State has well-
established procedures for, and has timely taken, necessary actions to ensure
resource/expenditure balances during less favorable economic periods. Those
procedures included general and selected reductions in appropriations spending.
Key biennium ending fund balances at June 30, 1989 were $475.1 million in the
GRF and $353 million in the Budget Stabilization Fund ("BSF", a cash and
budgetary management fund). In the next two fiscal years, necessary corrective
steps were taken to respond to lower receipts and higher expenditures in certain
categories than earlier estimated. Those steps included selected reductions in
appropriations spending and the transfer of $64 million from the BSF to the GRF.
Reported June 30, 1991 ending fund balances were 35.3 million (GRF) and $300
million (BSF).
To allow time to resolve certain budget differences for the latest complete
biennium, an interim appropriations act was enacted effective July 1, 1991; it
included GRF debt service and lease rental appropriations for the entire 1992-93
biennium, while continuing most other appropriations for a month. Pursuant to
the general appropriations act for the entire biennium passed on July 11, 1991,
$200 million was transferred from the BSF to the GRF in FY 1992.
Based on updated results and forecasts in the course of FY 1992, both in light
of the continuing uncertain nationwide economic situation, there was projected
and then timely addressed an FY 1992 imbalance in GRF resources and
expenditures. GRF receipts significantly below original forecasts resulted
primarily from lower collections of certain taxes, particularly sales, use and
personal income taxes. Higher expenditure levels came in certain areas,
particularly human services including Medicaid. The Governor ordered most State
agencies to reduce GRF spending in the last six months of the FY 1992 by a total
of approximately $184 million. As authorized by the General Assembly the $100.4
million BSF balance, and additional amounts from certain other funds were
transferred late in the FY to the GRF, and adjustments made in the timing of
certain tax payments. Other administrative revenue and spending actions
resolved the remaining imbalance.
71
<PAGE>
A significant GRF shortfall (approximately $520 million) was then projected
for the next year, FY 1993. It was addressed by appropriate legislative and
administrative actions. The Governor ordered, effective July 1, 1992, $300
million in selected GRF spending reductions. Subsequent executive and
legislative action in December 1992 -- a combination of tax revisions and
additional spending reductions -- resulted in a balance of GRF resources and
expenditures in the 1992-93 biennium. The June 30, 1993 ending GRF fund balance
was approximately $111 million, of which, as a first step to BSF replenishment,
$21 million was deposited in the BSF. (Based on June 30, 1994 balances, an
additional $260 million has been deposited in the BSF, which has a current
balance of $281 million.)
No spending reductions were applied to appropriations needed for debt service
on or lease rentals relating to any State obligations.
The GRF appropriations act for the current 1994-95 biennium was passed and
signed by the Governor on July 1, 1993. It includes all necessary GRF
appropriations for State debt services and lease rental payments then projected
for the biennium.
The State's incurrence or assumption of debt without a vote of the people is,
with limited exceptions, prohibited by current State Constitution provisions.
The State may incur debt, limited in amount to $750,000, to cover casual
deficits or failures in revenues or to meet expenses not otherwise provided for.
The Constitution expressly precludes the State from assuming the debts of any
local government or corporation. (An exception is made in both cases for any
debt incurred to repel invasion, suppress insurrection or defend the State in
war.)
By 13 constitutional amendments, the last adopted in 1993, Ohio voters have
authorized the incurrence of State debt and the pledge to taxes or excises to
its payment. At January 25, 1995, $794.4 million (excluding certain highway
bonds payable primarily from highway use charges) of this debt was outstanding
or awaiting delivery. The only such State debt then still authorized to be
incurred are portions of the highway bonds, and the following: (a) up to $100
million of obligations for coal research and development may be outstanding at
any one time ($38.9 million outstanding); (b) $360 million of obligations
authorized for local infrastructure improvements, no more than $120 million may
be issued in any calendar year ($728 million outstanding or awaiting delivery);
and (c) up to $200 million in general obligation bonds for parks, recreation and
natural resources which may be outstanding at any one time (no more than $50
million to be issued in any one year).
The Constitution also authorizes the issuance of State obligations for certain
purposes, the owners of which do not have the right to have excises or taxes
levied to pay debt service. Those special obligations include obligations
issued by the Ohio Public Facilities Commission and the Ohio Building Authority,
and certain obligations issued by the State Treasurer, over $4.5 billion of
which were outstanding or awaiting delivery at January 25, 1995.
A 1990 constitutional amendment authorizes greater State and political
subdivision participation (including financing) in the provision of housing.
The General Assembly may for that purpose authorize the issuance of State
obligations secured by a pledge of all or such portion as it authorizes of State
revenues or receipts (but not by a pledge of the State's full faith and credit).
A 1994 constitutional amendment pledges the full faith and credit and taxing
power of the State to meeting certain guarantees under the State's tuition
credit program which provides for purchases of tuition credits, for the benefit
of State residents, guaranteed to cover a specified amount when applied to the
cost of higher education tuition. (A 1965 constitutional provision that
authorized student loan guarantees payable from available State moneys has never
been implemented, apart from a "guarantee fund" approach funded especially from
program revenues.)
72
<PAGE>
State and local agencies issue obligations that are payable from revenues from
or relating to certain facilities (but not from taxes). By judicial
interpretation, these obligations are not "debt" within constitution provisions.
In general, payment obligations under lease-purchase agreements of Ohio public
agencies (in which certificates of participation may be issued) are limited in
duration to the agency's fiscal period, and are renewable only upon
appropriations being made available for the subsequent fiscal period.
Local school districts in Ohio receive a major portion (state-wide aggregate
in the range of 46% in recent years) of their operating moneys from State
subsidies, but are dependent on local property taxes, and in 107 districts from
voter-authorized income taxes, for significant portions of their budgets.
Litigation, similar to that in other states, is pending questioning the
constitutionality of Ohio's system of school funding. The trial court recently
concluded that aspects of the system (including basic operating assistance) are
unconstitutional and ordered the State to provide for and fund a system
complying with the Ohio Constitution. The State has appealed. A small number of
the State's 612 local school districts have in any year required special
assistance to avoid year-end deficits. A current program provides for school
district cash need borrowing directly from commercial lenders, with diversion of
State subsidy distributions to repayment if needed. Borrowings under this
program totalled $68.6 million for 44 districts (including $46.6 million for one
district) in FY 1992, $94.5 million for 27 districts (including $75 million for
one) in FY 1993, and $15.6 million for 28 districts in FY 1994.
Ohio's 943 incorporated cities and villages rely primarily on property and
municipal income taxes for their operations. With other subdivisions, they also
receive local government support and property tax relief moneys distributed by
the State. For those few municipalities that on occasion have faced significant
financial problems, there are statutory procedures for a joint State/local
commission to monitor the municipality's fiscal affairs and for development of a
financial plan to eliminate deficits and cure any defaults. Since inception in
1979, these procedures have been applied to 23 cities and villages; for 18 of
them the fiscal situation was 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 to 1%
of true value in money the amount of the aggregate levy (including a levy for
unvoted general obligations) of property taxes by all overlapping subdivisions,
without a vote of the electors or a municipal charter provision, and statutes
limit the amount of that aggregate levy to 10 mills per $1 of assessed valuation
(commonly referred to as the "ten-mill limitation"). Voted general obligations
of subdivisions are payable from property taxes that are unlimited as to amount
or rate.
Commencing in 1985 Ohio municipalities may be permitted under Ohio law to
subject interest on certain of the obligations held by the Ohio Trust to income
taxes imposed on their residents and entities doing business therein.
At the time of the closing for each Ohio Trust, Special Counsel to each Ohio
Trust for Ohio tax matters rendered an opinion under then existing Ohio income
tax law applicable to taxpayers whose income is subject to Ohio income taxation
substantially to the effect that:
(1) The Ohio Trust is not taxable as a corporation or otherwise for purposes
of the Ohio personal income tax, the school district income taxes in
Ohio, the Ohio corporation franchise tax, or the Ohio dealers in
intangibles tax.
(2) Distributions with respect to Units of the Ohio Trust ("Distributions")
will be treated as the income of the Unitholders for purposes of the Ohio
personal income tax, and school district and municipal income taxes in
Ohio, and the Ohio corporation franchise tax in proportion to the
respective interest therein of each Unitholder.
73
<PAGE>
(3) Distributions properly attributable to interest on obligations issued by
or on behalf of the State of Ohio, political subdivisions thereof, or
agencies or instrumentalities thereof ("Ohio Obligations"), or by the
governments of Puerto Rico, the Virgin Islands or Guam ("Territorial
Obligations") held by the Trust are exempt from the Ohio personal income
tax, school district and municipal income taxes, and are excluded from
the net income base of the Ohio corporation franchise tax when
distributed or deemed distributed to Unitholders.
(4) Distributions properly attributable to proceeds of insurance paid to the
Ohio Trust that represent maturing or matured interest on defaulted
obligations held by the Ohio Trust and that are excluded from gross
income for federal income tax purposes will be exempt from Ohio personal
income tax, and school district municipal income taxes in Ohio and the
net income base of the Ohio corporation franchise tax.
(5) Distributions of profit made on the sale, exchange or other disposition
by the Ohio Trust of Ohio Obligations including Distributions of "capital
gain dividends" as defined in Section 852 (b) (3) (C) of the Code,
properly attributable to the sale, exchange or other disposition of Ohio
Obligations are exempt from Ohio personal income tax, and school district
and municipal income taxes in Ohio, and are excluded from the net income
base of the Ohio corporation franchise tax.
SOUTH CAROLINA TRUSTS. Although all or most of the Bonds in the South
Carolina Quality Trust are revenue obligations of local governments or
authorities rather than general obligations of the State of South Carolina
itself, there can be no assurance that any financial difficulties the State may
experience will not adversely affect the market value or marketability of the
Bonds or the ability of the respective obligors to pay interest on or principal
of the Bonds. The information regarding the financial condition of the State is
included for the purpose of providing information about general economic
conditions that may affect issuers of the Bonds in South Carolina.
From the early 1920s to the present nine, the State's economy has been
dominated by the textile industry with over one out of every three manufacturing
workers directly or indirectly related to the textile industry. While the
textile industry is still the major industrial employer in the State, since 1950
the State's economy has undergone a gradual transition. The economic base of
the State has diversified as the trade and service sectors developed and with
the added development of the durable goods manufacturing industries, South
Carolina's economy now resembles more closely that of the United States.
In South Carolina in 1992, personal income grew at an average annual rate of
5.9%. During the same period the nation's income grew 6.1% and the Southeast
grew 6.5%. Over the last five (5) years (1987-1992) personal income in South
Carolina rose at a compounded annual rate of 7.0%, outpacing the nation and the
Southeast with income growth rates of 6.2% and 6.8%, respectively, in the same
period. During the first nine months in 1993, personal income in South Carolina
rose 5.7% while the rate of increase in the U.S. for the same period was 5.2%.
Monthly unemployment rates in the State have equalled or been below
comparable national rates for the nation during 1993. The rate for December,
1993, was 7% compared to 6.4% national rate.
The State Constitution requires the General Assembly to provide a balanced
budget and requires that if there be a deficit, such deficit shall be provided
for in the succeeding fiscal year. The State Constitution also provides that
the State Budget and Control Board may, if a deficit appears likely, effect such
reductions in appropriations as may be necessary to prevent a deficit. At the
November 6, 1984 general election there was approved a constitutional amendment
providing that annual increases in State appropriations may not exceed the
average growth rate of the economy of the State and that the annual increase in
the number of State
74
<PAGE>
employees may not exceed the average growth of population of the State. The
State Constitution also establishes a Reserve Fund to be maintained in an amount
equal to 4% of General Fund revenue for the latest fiscal year. Despite the
efforts of the State Budget and Control Board, deficits were experienced in each
of the fiscal years ended June 30, 1981, June 30, 1982, June 30, 1985 and June
30, 1986. All deficits have been funded out of the Reserve Fund. For the
fiscal years ending June 30, 1983 and 1984, the State had cash surpluses. As of
June 30, 1985 the General Fund reserve was $89,100,000.
In 1993 the General Assembly provided that beginning with appropriations for
fiscal year 1994-1995, appropriations in the annual general appropriations act
may not exceed the base revenue estimate. The base revenue estimate is defined
as the lesser of (i) the total of recurring general fund revenues collected in
the latest completed fiscal year before the General Assembly first considers the
annual general appropriations bill plus an increase of seventy-five percent of
the difference between the general fund revenue estimate of the Board of
Economic Advisors for the upcoming fiscal year and actual revenue collections
from the latest completed fiscal year; or (ii) the Board of Economic Advisors
general fund estimate for the upcoming fiscal year.
At its July 1985 meeting the State Budget and Control Board, acting upon
advice that a shortfall in General Fund revenues for the fiscal year ending June
30, 1985 might develop, froze all supplemental appropriations pending the final
accounting of the General Fund for fiscal year 1985. On August 8, 1985, the
Office of the Comptroller General advised the State Budget and Control Board
that General Fund expenditures for the fiscal year ended June 30, 1985 did
exceed General Fund revenues by $11,936,636. Obedient to the constitutional
mandate that a casual deficit shall be provided for in the succeeding fiscal
year, the State Budget and Control Board delayed certain hiring and capital
improvements scheduled to be made in fiscal year 1986 in an amount sufficient to
meet the fiscal year 1985 budget shortfall. In January of the fiscal year ended
June 30, 1986 the State Budget and Control Board was advised of a possible
shortfall of $46,346,968. The Board immediately reduced State agency
appropriations by the amount of the anticipated shortfall. Notwithstanding this
action, at the end of fiscal year 1986, it became apparent that a shortfall
would result. In August of 1986, the State Budget and Control Board voted to
fund the deficit by transferring $37,353,272 from the Reserve Fund to the
General Fund, bringing the balance in the Reserve Fund to $51.8 million.
At the November 5, 1986 meeting of the Budget and Control Board, the Board of
Economic Advisors advised that it had reduced its revenue estimate for the
current fiscal year by $87,434,452. As required by the provisions of the
Capital Expenditure Fund, the Board applied $27,714,661 budgeted for this fund
to the anticipated shortfall. This action left a remaining shortfall of
$59,719,791 which the Budget and Control Board funded by imposing a 2.6% cut in
expenditures. In a February 1987 meeting of the Board, a further cut in
expenditures of 0.8% was ordered.
After net downward revisions of $122 million in estimated revenues during the
year, the actual revenue collections exceeded the final estimate by $37 million,
resulting in a surplus for the fiscal year ending June 30, 1987, of $20.5
million. The General Reserve Fund received $6.6 million during the year in
accordance with the Appropriation Act, and $17 million of the year-end surplus
was transferred to the General Reserve Fund, bringing the balance in the General
Reserve Fund to $75.4 million at June 30, 1987.
On August 5, 1988, it was announced that for the fiscal year ending June 30,
1988, the Budgetary General Fund had a surplus of $107.5 million. The surplus
resulted from a $117.3 million excess of revenues over expenditures. The State
will use $52.6 million of the surplus to fund supplemental appropriations, $28.3
million to fund the Capital Reserve, and $20.5 million for an early buy-out of a
school bus lease agreement The General Assembly will decide how the State will
spend the remaining $6.1 million.
The General Reserve Fund received $25.1 million during the 1987-88 fiscal year
in accordance with the Appropriation Act During the year, the General Assembly
reduced the required funding of the General Reserve Fund from 4% to 3 % of the
latest completed fiscal year's actual revenue. The General Assembly
75
<PAGE>
used $14.4 million of the resulting excess to fund the 1987-1988 Supplemental
Appropriation Act, leaving $86.1 million in the General Reserve Fund at June 30,
1988. The full-funding amount at that date, however, was only $80.8 million.
In accordance with the 1988-1989 Appropriation Act, the excess of $5.3 million
will help fund 1988-1989 appropriations.
At the November 8, 1988 general election there was approved a constitutional
amendment reducing from 4% to 3% the amount of General Fund revenue which must
be kept in the General Reserve Fund, and removing the provisions requiring a
special vote to adjust this percentage. The amendment also created a Capital
Reserve Fund equal to 2% of General Fund revenue. Before March 1 of each year,
the Capital Reserve Fund must be used to offset mid-year budget reductions
before mandating cuts in operating appropriations, and after March 1, the
Capital Reserve Fund may be appropriated by a special vote in separate
legislation by the General Assembly to finance in cash previously authorized
capital improvement bond projects, retire bond principal or interest on bonds
previously issued, and for capital improvements or other nonrecurring purposes
which must be ranked in order of priority of expenditure. Monies in the Capital
Reserve Fund not appropriated or any appropriation for a particular project or
item which has been reduced due to application of the monies to year-end deficit
must go back to the General Fund.
For the fiscal year ended June 30, 1989, the State had a surplus of
$129,788,135. At June 30, 1989, the balance in the General Reserve Fund was
$87,999,428.
Because of anticipated revenue shortfalls for the fiscal year 1989-1990, the
State Budget and Control Board committed $42.4 million of the $58.7 million
Capital Reserve Fund in April, 1990. Lack of sufficient funding at year end
resulted in an additional use of $4.5 million from the Capital Reserve Fund.
After the above reductions, the State had a fiscal year 1989-1990 surplus of
$13,159,892 which was used to fund supplemental appropriations of $1,325,000 and
the Capital Reserve Fund at $11,834,892. At June 30, 1990, the balance in the
General Reserve Fund was $94,114,351.
During 1990-91 fiscal year, the State Budget and Control Board has approved
mid-year budget changes in November of 1990 and again in February of 1991, to
offset lower revenue estimates. Those changes included committing the Capital
Reserve Fund appropriation ($62,742,901) and reducing agency appropriations in
an additional amount necessary to offset (together with automatic expenditure
reductions that are tied to revenue levels) what would otherwise be a projected
deficit of approximately $132.6 million. On May 14 and May 21, 1991, the Budget
and Control Board, responding to April revenue figures and unofficial estimates
indicating an additional shortfall of $30 to $50 million, ordered an immediate
freeze on all personnel activities, from hiring to promotions; a freeze on
purchasing, with limited exceptions; and an indefinite halt to new contracts and
contract renewals. The Board also asked the General Assembly for the power to
furlough government workers periodically during the next fiscal year.
In the past the State's budgetary accounting principles allowed revenue to be
recorded only when the State received the related cash. On July 30, 1991, the
Budget and Control Board approved a change in this principle for sales tax
revenue beginning with the fiscal year ended June 30, 1991. The Board's
resolution requires that sales taxes collected by merchants in June and received
by the State in July be reported as revenue in June rather than in July. This
change resulted in a $5.2 million decrease in reported 1990-91 sales tax revenue
and a one-time $83.1 million addition to fund balance. The one-time adjustment
increases the fund balance to the level it would be if the new principle had
been in effect in years before 1990-91. Following such action, the year-end
balance in the General Reserve Fund was $33.4 million.
At its July 30, 1991, meeting the Budget and Control Board also took action
with respect to the current fiscal year. On July 26, 1991, the Board of
Economic Advisors advised the Budget and Control Board that it projected a
revenue shortfall of $148 million for the fiscal year 1991-92 budget of $3.581
billion. In response, the Budget and Control Board eliminated the two percent
(2%) Capital Reserve Fund appropriation
76
<PAGE>
of $65.9 million and reduced other expenditures across the board by three
percent (3%). On February 10, 1992, the Board of Economic Advisers advised the
Budget and Control Board that it had revised its estimate of revenues for the
current fiscal year downward by an additional $55 million. At its February 11,
1992 meeting, the Budget and Control Board responded by imposing an addition one
percent (1%) across-the-board reduction of expenditures (except with respect to
approximately $10 million for certain agencies). At its February 13, 1992
meeting, the Budget and Control Board restored a portion of the one percent (1%)
reduction to four (4) education-related agencies totalling approximately $5.7
million. These expenditure reduction measures, when coupled with revenue
increases projected by the Budget and Control Board, resulted in an estimated
balance of approximately $1.4 million in the General Fund for the fiscal year
1991-92. Despite such actions, expenditures exceeded revenues by $38.2 million
and, as required by the South Carolina Constitution, such amount was withdrawn
from the General Rescue Fund to cover the shortfall.
Responding to these recurrent operating deficits, Standard & Poor's Corp. has
placed the State's AAA-rated general obligation debt on its CreditWatch, and on
January 29, 1993, this rating was reduced to AA+.
On August 22, 1992, the Budget and Control Board adopted a plan to reduce
appropriations under the 1992 Appropriations Act because of revenue shortfall
projections of approximately $200 million for the 1992-93 fiscal year. These
reductions were based on the rate of growth in each agency's budget over the
past year. On September 15, 1992, the Supreme Court of South Carolina enjoined
the Budget and Control Board from implementing its proposed plan for budget
reductions on the grounds that the Board had authority to make budget reductions
only across-the-board based on total appropriations. In response to this
decision, the Board instituted a 4% across the board reduction. On November 10,
1992, the Budget and Control Board permanently reduced the $88.1 million in
appropriations which were set aside on September 15, 1992. This action, along
with improved actual revenue collections, created a budgetary surplus of
approximately $101 million.
Prospective investors should study with care the portfolio of Bonds in the
South Carolina Trust and should consult with their investment advisers as to the
merits of particular issues in the portfolio.
At the time of the closing for each South Carolina Trust, Special Counsel for
each South Carolina Trust for South Carolina tax matters rendered an opinion
under then existing South Carolina income tax law applicable to taxpayers whose
income is subject to South Carolina income taxation substantially to the effect
that:
By the provision of paragraph (j) of Section 3 of Article 10 of the South
Carolina Constitution (revised 1977) intangible personal property is
specifically exempted from any and all ad valorem taxation.
Pursuant to the provisions of Section 12-1-60 the interest of all bonds, notes
or certificates of indebtedness issued by or on behalf of the State of South
Carolina and any authority, agency, department or institution of the State and
all counties, school districts, municipalities, divisions and subdivisions of
the State and all agencies thereof are exempt from income taxes and that the
exemption so granted extends to all recipients of interest paid thereon through
the Trust. (This opinion does not extend to so-called 63-20 obligations.) The
income of the Trust would be treated as income to each Unitholder of the Trust
in the proportion that the number of Units of the Trust held by the Unitholder
bears to the total number of Units of the Trust outstanding. For this reason,
interest derived by the Trust that would not be includable in income for South
Carolina income tax purposes when paid directly to a South Carolina Unitholder
will be exempt from South Carolina income taxation when received by the Trust
and attributed to such South Carolina Unitholder.
Each Unitholder will recognize gain or loss for South Carolina state income
tax purposes if the Trustee disposes of a Bond (whether by sale, payment on
maturity, retirement or otherwise) or if the Unitholder
77
<PAGE>
redeems or sells his Unit. The Trust would be regarded, under South Carolina
law, as a common trust fund and therefore not subject to taxation under any
income tax law of South Carolina.
The above described opinion of Special Counsel has been concurred in by an
informal ruling of the South Carolina Tax Commission pursuant to Section 12-3-
170 of the South Carolina Code.
VIRGINIA TRUSTS. The Commonwealth's financial condition is supported by a
broad-based economy, including manufacturing, tourism, agriculture, ports,
mining and fisheries. Manufacturing continues to be a major source of
employment, ranking behind only services, wholesale and retail trade, and
government (Federal, state and local). The federal government is a major
employer in Virginia, due to the heavy concentration of federal employees in the
metropolitan Washington, D.C. segment of Northern Virginia and the military
employment in the Hampton Roads area, which houses the nation's largest
concentration of military installations. However, the expected retrenchment of
the military sector as a consequence of the end of the Cold War remains a cloud
on the economic horizon.
In recent years per capita personal income in Virginia has consistently been
above the national average. However, while total personal income has continued
to rise during the current recession, it has not always kept pace with both
inflation and the population, either nationally or in Virginia. Real personal
income in Virginia fell for seven consecutive quarters, ending with the last
quarter of 1991, with a slow recovery being evidenced in 1992. The annualized
rate of growth in real personal income in Virginia for the second quarter of
1992 was 0.5 percent compared to a national rate of 0.3 percent. Virginia's
real per capita income has exceeded that for both the nation and the southeast
region since the early 1980s, although the differentials have decreased since
1989. Virginia's nonagricultural employment figures mirror the national economy
although the recent recession has hit Virginia harder than the nation as a whole
with employment declining at an average annual rate of 1.6 percent since 1990 in
Virginia, compared to 0.7 percent nationally, With respect ot unemployment,
Virginia's unemployment rate has consistently been below that of the nation.
For the decade of 1980 to 1990, the differential has been two percentage points,
although it decreased to below one percentage point in 1991 and the first six
months of 1992.
Employment trends in Virginia have varied from sector to sector and from
region to region. For example, manufacturing and trade sectors in 1980 each
employed more workers than the service sector. Now the service sector is the
largest employer in Virginia and mining and manufacturing are now at lower
levels than in 1980. Highest rates of employment are concentrated in southwest
Virginia where mining jobs have been lost and the lowest unemployment rates are
seen in Northern Virginia where much federally related employment is
concentrated. Not surprisingly, there is great overlap between areas of lowest
unemployment and those highest per capita income. Economic recovery from the
recent recession is expected to be long and slow in Virginia, although in the
long term, a growing and more diversified export sector holds promise that
should mitigate current concerns.
The Commonwealth of Virginia has historically operated on a fiscally
conservative basis and is required by its Constitution to have a balanced
biennial budget. At the end of the June 30, 1992, fiscal year, the General Fund
had an ending fund balance computed on a budgetary cash basis of $195.2 million,
of which $15 million was in required reserve; $142.3 million thereof was
designated for expenditure during the next fiscal year, leaving an undesignated,
unreserved fund balance of $52.8 million, the first such undesignated fund
balance since 1988. Computed on a modified accrual basis in accordance with
generally accepted accounting principles, the General Fund balance at the end of
the fiscal year ended June 30, 1992, was minus $121.8 million, compared with a
General Fund balance at the end of the fiscal year ended June 30, 1991, of minus
$265.1 million. Contributing to the reduction were $256.4 million in deferred
credits, representing estimated tax refunds associated with income taxes
withheld for the period January through June, 1992, and an accrual for estimated
Medicaid claims of $155.8 million.
78
<PAGE>
As of June 30, 1992, Outstanding general obligation debt backed by the full
faith and credit of the Commonwealth was $582.7 million at June 30, 1992. Of
that amount, $544.4 million was also secured by revenue producing capital
projects. Debt service on the balance equaled 0.2% of total General Fund
expenditures in fiscal year 1992.
The Virginia Constitution contains limits on the amount of general obligation
bonds which the Commonwealth can issue. These limits are substantially in
excess of current levels of outstanding bonds, and at June 30, 1992 would permit
an additional total of approximately $5.00 billion of bonds secured by revenue-
producing projects and approximately $5.50 billion of unsecured general
obligation bonds, with not more than approximately $1.39 billion of the latter
to be issued in any four-year period. Bonds which are not secured by revenue-
producing projects must be approved in a state-wide election.
In November of 1992 the Constitution of Virginia was amended to establish a
permanent Revenue Stabilization Fund. This Fund will go into effect in the
1994-96 biennium. In anticipation of the first required deposit ($40.5 million)
to the fund, the Governor included, and the General Assembly approved, a $30.0
million down payment.
The current biennium started on July 1, 1992 and will end on June 30, 1994.
The amended biennial budget appropriated a total of $29,090.6 million: $6,416.0
million in general funds and $7,907.1 million in nongeneral funds in fiscal
1993, and $6,852.1 million in general funds and $7,915.3 million in nongeneral
funds in fiscal 1994.
The amended Appropriations Act assumed that general fund revenues would
increase by 7.1 percent in fiscal 1993 and 6.0 percent in fiscal 1994.
Currently, year-to-date general fund growth for the 11 months of fiscal 1993 is
9.7 percent. When general fund revenues are adjusted for one-time corporate
payments, the year-to-date growth declined to 7.9 percent.
The Commonwealth of Virginia has consistently maintained ratings of AAA by
Standard & Poor's and Aaa by Moody's on its general obligation indebtedness,
reflecting in part its sound fiscal management, diversified economic base and
low debt ratios. There can be no assurance that these conditions will continue.
Nor are these same conditions necessarily applicable to securities which are not
general obligations of the Commonwealth. Securities issued by specific
municipalities, governmental authorities or similar issuers may be subject to
economic risks or uncertainties peculiar to the issuers of such securities or
the sources from which they are to be paid.
At the time of the closing for each Virginia Trust, Special Counsel to each
Virginia Trust for Virginia tax matters rendered an opinion under then existing
Virginia income tax law applicable to taxpayers whose income is subject to
Virginia income taxation substantially to the effect that:
(1) The Virginia Trust is not an association taxable as a corporation for
purposes of the Virginia Income Tax and each Unitholder of the Trust will
be treated as the owner of a pro rata portion of the assets held by the
Trust and the income of such portion of the Virginia Trust will be
treated as income of the Unitholder for purposes of the Virginia Income
Tax.
(2) Income on the Bonds which is exempt from Virginia Income Tax when
received by the Virginia Trust and which would be exempt from Virginia
Income Tax if received directly by a Unitholder, will retain its status
as exempt from such tax when received by the Trust and distributed to
such Unitholder.
79
<PAGE>
(3) Each Unitholder will recognize gain or loss for purposes of the
Virginia Income Tax if the Trustee disposes of a bond (whether by
redemption, sale or otherwise) or if the Unitholder redeems or sells
Units of the Trust to the extent that such a transaction results in a
recognized gain or loss to such Unitholder for federal income tax
purposes, except as described in this paragraph. Virginia has by law
provided that all income from certain tax-exempt obligations issued under
the laws of Virginia, including any profits made from the sale of such
Bonds, shall be exempt from all taxation by Virginia. Although we express
no opinion, the Virginia Department of Taxation has indicated that the
gain on the sale of such tax-exempt obligations, recognized for federal
income tax purposes, would not be subject to Virginia income taxation.
Accordingly, any such gain relating to the disposition of any Bond that
would not be subject to Virginia Income Tax if the Bond was held directly
by a Unitholder will retain its tax-exempt status for purposes of the
Virginia Income Tax when the Bond is disposed of by the Virginia Trust or
when the Unitholder is deemed to have disposed of his pro rata portion of
such Bond upon the disposition of his Unit provided that such gain can be
determined with reasonable certainty and substantiated.
(4) The Virginia Income Tax does not permit a deduction of interest paid on
indebtedness incurred or continued to purchase or carry Units in the
Virginia Trust to the extent that interest income related to the
ownership of Units is exempt from the Virginia Income Tax.
In the case of Unitholders subject to the Virginia Bank Franchise Tax, the
income derived by such a Unitholder from his pro rata portion of the Bonds held
by the Virginia Trust may affect the determination of such Unitholders' Bank
Franchise Tax. Prospective investors subject to the Virginia Bank Franchise Tax
should consult their tax advisors.
PUBLIC OFFERING OF UNITS
PUBLIC OFFERING PRICE. Units of each State Trust are offered at the Public
Offering Price thereof. The Public Offering Price per Unit is equal to the
aggregate bid side evaluation of the Municipal Bonds in the State Trust's
portfolio (as determined pursuant to the terms of a contract with the Evaluator,
by Muller Data Corporation, a non-affiliated firm regularly engaged in the
business of evaluating, quoting or appraising comparable securities), plus or
minus cash, if any, in the Principal Account, held or owned by the State Trust,
divided by the number of outstanding Units of the State Trust plus accrued
interest to the date of settlement (which in the case of Kemper Defined Funds,
consists of Purchased Interest and Daily Accrued Interest), plus the sales
charge applicable to a Unit of such State Trust. Investors who purchase Units
through brokers or dealers pursuant to a current management agreement which by
contract or operation of law does not allow such broker or dealer to earn an
additional commission (other than any fee of commission paid for maintenance of
such investor's account under the management agreement) on such transactions may
purchase such Units at the current Public Offering Price net of the applicable
broker or dealer concession. See "Public Distribution of Units" below.
The sales charge is based upon the dollar weighted average maturity of the
State Trust and is determined in accordance with the table set forth below. For
purposes of this computation, Municipal Bonds will be deemed to mature on their
expressed maturity dates unless: (a) the Municipal Bonds have been called for
redemption or funds or securities have been placed in escrow to redeem them on
an earlier call date, in which case such call date will be deemed to be the date
upon which they mature; or (b) such Municipal Bonds are subject to a "mandatory
tender", in which case such mandatory tender will be deemed to be the date upon
which they mature. The effect of this method of sales charge computation will
be that different sales charge rates will be applied to the State Trust based
upon the dollar weighted average maturity of such State Trust's portfolio, in
accordance with the following schedule:
80
<PAGE>
<TABLE>
DOLLAR PERCENT OF PERCENT OF NET
WEIGHTED AVERAGE PUBLIC OFFERING AMOUNT
YEARS TO MATURITY PRICE INVESTED
- ----------------- --------------- --------------
<S> <C> <C>
0 to .99 years.............. 0.00% 0.000%
1 to 3.99 years............. 2.00 2.041
4 to 7.99 years............. 3.50 3.627
8 to 14.99 years............ 4.50 4.712
15 or more years............ 5.50 5.820
</TABLE>
The sales charge per Unit will be reduced as set forth below:
<TABLE>
<CAPTION>
DOLLAR WEIGHTED AVERAGE
YEARS TO MATURITY*
4 TO 7.99 8 TO 14.99 15 OR MORE
-----------------------------------
AMOUNT OF INVESTMENT SALES CHARGE (% OF PUBLIC OFFERING PRICE)
-------------------- -----------------------------------------
<S> <C> <C> <C>
$1 to $99,999............................. 3.50% 4.50% 5.50%
$100,000 to $499,999...................... 3.25 4.25 5.00
$500,000 to $999,999...................... 3.00 4.00 4.50
$1,000,000 or more........................ 2.75 3.75 4.00
</TABLE>
- --------------------------
* If the dollar weighted average maturity of a State Trust is from 1 to 3.99
years, the sales charge is 2% and 1.5% of the Public Offering Price for
purchases of $1 to $249,999 and $250,000 or more, respectively.
The reduced sales charges as shown on the preceding charts will apply to all
purchases of Units on any one day by the same purchaser from the same firm and
for this purpose, purchases of Units of a Series of the Trust will be aggregated
with concurrent purchases of Units of any other unit investment trust that may
be offered by the Sponsor. Additionally, Units purchased in the name of a
spouse or child (under 21) of such purchaser will be deemed to be additional
purchases by such purchaser. The reduced sales charges will also be applicable
to a trust or other fiduciary purchasing for a single trust estate or single
fiduciary account.
The Sponsor intends to permit officers, directors and employees of the Sponsor
and Evaluator and in the sole direction of the Sponsor, registered
representatives of selling firms to purchase Units of the Trust without a sales
charge, although a transaction processing fee may be imposed on such trades.
The Public Offering Price per Unit of a State Trust on the date shown on the
cover page of Part Two of the Prospectus or on any subsequent date will vary
from the amounts stated under "Essential Information" in Part Two in accordance
with fluctuations in the prices of the underlying Municipal Bonds and the amount
of accrued interest on the Units. The aggregate bid side evaluation of the
Municipal Bonds shall be determined (a) on the basis of current bid prices of
the Municipal Bonds, (b) if bid prices are not available for any particular
Municipal Bond, on the basis of current bid prices for comparable bonds, (c) by
determining the value of the Municipal Bonds on the bid side of the market by
appraisal, or (d) by any combination of the above.
The foregoing evaluations and computations shall be made as of the Evaluation
Time stated under "Essential Information" in Part Two, on each business day
effective for all sales made during the preceding 24-hour period, and for
purposes of resales and repurchases of Units.
81
<PAGE>
The interest on the Municipal Bonds in each State Trust, less the related
estimated fees and expenses, is estimated to accrue in the annual amounts per
Unit set forth under "Essential Information" in Part Two. The amount of net
interest income which accrues per Unit may change as Municipal Bonds mature or
are redeemed, exchanged or sold, or as the expenses of a State Trust change or
as the number of outstanding Units of such State Trust changes.
Payment for Units must be made on or before the fifth business day following
the order for purchase (the "settlement date"). A purchaser becomes the owner
of Units on the settlement date. Cash, if any, made available to the Sponsor
prior to the date of settlement for the purchase of Units may be used in the
Sponsor's business and may be deemed to be a benefit to the Sponsor, subject to
the limitations of the Securities Exchange Act of 1934. If a Unitholder desires
to have certificates representing Units purchased, such certificates will be
delivered as soon as possible following a written request therefor, or shortly
thereafter. For information with respect to redemption of Units purchased, but
as to which certificates requested have not been received, see "Redemption"
below.
The following section entitled "Accrued Interest" applies only to series of
Kemper Tax-Exempt Income Trust, Multi-State Series and Ohio Tax-Exempt Bond
Trust, Series 1-10.
ACCRUED INTEREST. Accrued interest consists of two elements. The first
element arises as a result of accrued interest which is the accumulation of
unpaid interest on a bond from the last day on which interest thereon was paid.
Interest on Bonds in the State Trusts is actually paid either monthly or semi-
annually to the State Trust. However, interest on the Bonds in the State Trusts
is accounted for daily on an accrual basis. Because of this, a State Trust
always has an amount of interest earned but not yet collected by the Trustee
because of coupons that are not yet due. For this reason, the Public Offering
Price of Units will have added to it the proportionate share of accrued and
undistributed interest to the date of settlement.
The Trustee advanced the amount of accrued interest as of the First Settlement
Date (which is five business days following the Date of Deposit) and the same
was distributed to the Sponsor. Such advance was repaid to the Trustee through
the first receipts of interest received on the Municipal Bonds. Consequently,
the amount of accrued interest added to the Public Offering Price of Units
included only accrued interest arising after the First Settlement Date of a
State Trust, less any distributions from the Interest Account subsequent to this
First Settlement Date. Since the First Settlement Date was the date of
settlement for anyone who ordered Units on the Date of Deposit, no accrued
interest was added to the Public Offering Price of Units ordered on the Date of
Deposit.
The second element of accrued interest arises because of the structure of the
Interest Account. The Trustee has no cash for distribution to Unitholders until
it receives interest payments on the Bonds in a State Trust. The Trustee is
obligated to provide its own funds, at times, in order to advanced interest
distributions. The Trustee will recover these advancements when such interest
is received. Interest Account balances are established so that it will not be
necessary on a regular basis for the Trustee to advance its own funds in
connection with such interest distributions. The Interest Account balances are
also structured so that there will generally be positive cash balances and since
the funds held by the Trustee will be used by it to earn interest thereon, it
benefits thereby (see "Expenses of the Trust").
Accrued interest is computed as of the initial Record Date of the State
Trusts. On the date of the first distribution of interest to Unitholders after
the First Settlement Date the interest collected by the Trustee will be
sufficient to repay its advances, to allow for accrued interest under the
monthly, quarterly and semi-annual plans of distribution and to generate enough
cash to commerce distributions to Unitholders. If a Unitholder sells or redeems
all or a portion of his Units or if the Bonds in a State Trust are sold or
otherwise removed or if a State Trust is liquidated, he will receive at that
time his proportionate share of the accrued interest
82
<PAGE>
computed to the settlement date in the case of sale or liquidation and to the
date of tender in the case of redemption in such State Trust.
The following section entitled "Purchased and Daily Accrued Interest" applies
only to series of Kemper Defined Funds (Tax-Exempt Portfolio).
PURCHASED AND DAILY ACCRUED INTEREST. Accrued interest consists of two
elements. The first element arises as a result of accrued interest which is the
accumulation of unpaid interest on a bond from the later of the last day on
which interest thereon was paid or the date of original issuance of the bond.
Interest on the coupon Bonds in the State Trust is paid semi-annually to the
Trust. In the case of series of Kemper Defined Funds, a portion of the
aggregate amount of such accrued interest on the Bonds in the Trust to the First
Settlement Date of the Trust is referred to herein as "Purchased Interest."
Included in the Public Offering Price of the Trust Units in any series of Kemper
Defined Funds is the Purchased Interest. In an effort to reduce the amount of
Purchased Interest which would otherwise have to be paid by Unitholders, the
Trustee may advance a portion of the accrued interest to the Sponsor as the
Unitholder of record as the First Settlement Date. The second element of
accrued interest arises because the estimated net interest on the Units in the
State Trust is accounted for daily on an accrual basis (herein referred to as
"Daily Accrued Interest in connection with Kemper Defined Funds"). Because of
this, the Units always have an amount of interest earned but not yet paid or
reserved for payment. For this reason, the Public Offering Price of Units in
any series of Kemper Defined Funds will include the proportionate share of Daily
Accrued Interest to the date of settlement.
If a Unitholder in any series of Kemper Defined Funds sells or redeems all or
a portion of his Units or if the Bonds are sold or otherwise removed or if the
State Trust is liquidated, he will receive at that time his proportionate share
of the Purchased Interest and Daily Accrued Interest computed to the settlement
date in the case of sale or liquidation and to the date of tender in the case of
redemption in the State Trust.
PUBLIC DISTRIBUTION OF UNITS. The Sponsor has qualified Units of each State
Trust for sale in the State for which such State Trust is named. Units will be
sold through dealers who are members of the National Association of Securities
Dealers, Inc. and through others. Sales may be made to or through dealers at
prices which represent discounts from the Public Offering Price as set forth in
the table below. Certain commercial banks are making Units of the Trust
available to their customers on an agency basis. A portion of the sales charge
paid by their customers is retained by or remitted to the banks, in the amounts
in the table below. Under the Glass-Steagall Act, banks are prohibited from
underwriting Trust Units; however, the Glass-Steagall Act does permit certain
agency transactions and the banking regulators have indicated that these
particular agency transactions are permitted under such Act. In addition, state
securities laws on this issue may differ from the interpretations of Federal law
expressed herein and banks and financial institutions may be required to
register as dealers pursuant to state law.
<TABLE>
<CAPTION>
DOLLAR WEIGHTED AVERAGE
YEARS TO MATURITY*
4 TO 7.99 8 TO 14.99 15 OR MORE
-----------------------------------
DISCOUNT PER UNIT
AMOUNT OF INVESTMENT (% OF PUBLIC OFFERING PRICE)
-------------------- -----------------------------------
<S> <C> <C> <C>
$1 to $99,999.......................... 2.00% 3.00% 4.00%
$100,000 to $499,999................... 1.75 2.75 3.50
$500,000 to $999,999................... 1.50 2.50 3.00
$1,000,000 or more..................... 1.25 2.25 2.50
</TABLE>
83
<PAGE>
In addition to such discounts, the Sponsor may, from time to time, pay or
allow an additional discount, in the form of cash or other compensation, to
dealers employing registered representatives who sell, during a specified time
period, a minimum dollar amount of Units of the Trust and other unit investment
trusts underwritten by the Sponsor. The Sponsor reserves the right to change
the levels of discounts at any time. The difference between the discount
allowed to firms and the sales charge will be retained by the Sponsor. The
Sponsor reserves the right to reject, in whole or in part, any order for the
purchase of Units.
PROFITS OF SPONSOR. The Sponsor will retain a portion of the sales charge on
each Unit sold from its inventory, representing the difference between the
Public Offering Price of the Units, calculated as stated under "Public Offering
Price," and the discounts allowed to firms selling such Units. The Sponsor may
realize additional profit or loss as a result of the possible change in the
daily evaluation of the Municipal Bonds in the State Trusts from its inventory.
MARKET FOR UNITS
While not obligated to do so, the Sponsor intends to subject to change at any
time, maintain a market for Units of the State Trust offered hereby and to offer
to purchase said Units at prices, as determined by the Evaluator, based on the
aggregate bid prices of the underlying Municipal Bonds in such State Trusts,
together with accrued interest to the expected date of settlement (which, in the
case of Kemper Defined Funds, consists of Purchased Interest and Daily Accrued
Interest). Accordingly, Unitholders who wish to dispose of their Units should
inquire of their broker or bank as to the current market prices in order to
determine whether there is in existence any price in excess of the Redemption
Price and, if so, the amount thereof.
The offering price of any Units resold by the Sponsor will be in accord with
that described in the currently effective Prospectus describing such Units. Any
profits or loss resulting from the resale of such Units will belong to the
Sponsor. The Sponsor may suspend of discontinue purchases of Units of any Trust
Fund if the supply of Units exceeds demand, or for other business reasons.
REDEMPTION
A Unitholder who does not dispose of Units in the secondary market described
above may cause their Units to be redeemed by the Trustee by making a written
request to the Trustee, Investors Fiduciary Trust Company, P.O. Box 419430,
Kansas City, Missouri 64173-0216 and, in the case of Units evidenced by a
certificate, by tendering such certificate to the Trustee, properly endorsed or
accompanied by a written instrument or instruments of transfer in form
satisfactory to the Trustee. Unitholders must sign such written request, and
such certificate or transfer instrument, exactly as their names appear on the
records of the Trustee and on any certificate representing the Units to be
redeemed. If the amount of the redemption is $25,000 or less and the proceeds
are payable to the Unitholder of record at the address of record, no signature
guarantee is necessary for redemptions by individual account owners (including
joint owners). Additional documentation may be requested, and a signature
guarantee is always required, from corporations, executors, administrators,
trustees, guardians or associations. The signatures must be guaranteed by a
participant in the Securities Transfer Agents Medallion Program ("STAMP") or
such other signature guarantee program in addition to, or in substitution for,
STAMP, as may be accepted by the Trustee. A certificate should only be sent by
registered or certified mail for the protection of the Unitholder. Since tender
of the certificate is required for redemption when one has been issued, Units
represented by a certificate cannot be redeemed until the certificate
representing such Units has been received by the purchasers.
Redemption shall be made by the Trustee on the seventh calendar day following
the day on which a tender for redemption is received, or if the seventh calendar
day is not a business day, on the first business day prior
84
<PAGE>
thereto (the "Redemption Date"), by payment of cash equivalent to the Redemption
Price for such State Trust, determined as set forth below under "Computation of
Redemption Price," as of the Evaluation Time stated under "Essential
Information" in Part Two, next following such tender, multiplied by the number
of Units being redeemed. The price received upon redemption might be more or
less than the amount paid by the Unitholder depending on the value of the
Municipal Bonds in the State Trust's portfolio at the time of redemption. Any
Units redeemed shall be cancelled and any undivided fractional interest in the
State Trust will be extinguished.
Under regulations issued by the Internal Revenue Service, the Trustee is
required to withhold a specified percentage of the principal amount of a Unit
redemption if the Trustee has not been furnished the redeeming Unitholder's tax
identification number in the manner required by such regulations. Any amount so
withheld is transmitted to the Internal Revenue Service and may be recovered by
the Unitholder only when filing a tax return. Under normal circumstances the
Trustee obtains the Unitholder's tax identification number from the selling
broker. However, any time a Unitholder elects to tender Units for redemption,
such Unitholder should make sure that the Trustee has been provided a certified
tax identification number in order to avoid this possible "back-up withholding."
In the event the Trustee has not been previously provided such number, one must
be provided at the time redemption is requested.
Any amounts paid on redemption representing interest shall be withdrawn from
the Interest Account for such State Trust to the extent that funds are available
for such purpose. All other amounts paid on redemption shall be withdrawn from
the Principal Account for such State Trust. The Trustee is empowered to sell
Municipal Bonds for such State Trust in order to make funds available for the
redemption of Units of such State Trust. Such sale may be required when
Municipal Bonds would not otherwise be sold and might result in lower prices
then might otherwise be realized. To the extent Municipal Bonds are sold, the
size and diversity of such State Trust will be reduced.
The Trustee is irrevocably authorized in its discretion, if the Sponsor does
not elect to purchase any Units tendered for redemption, in lieu of redeeming
such Units, to sell such Units in over-the-counter market for the account of
tendering Unitholders at prices which will return to such Unitholders amounts in
cash, net after brokerage commissions, transfer taxes and other charges, equal
to or in excess of the Redemption Price for such Units. In the event of any
such sale, the Trustee shall pay the net proceeds thereof to the Unitholders on
the day they would otherwise be entitled to receive payment of the Redemption
Price.
The right of redemption may be suspended and payment postponed (1) for any
period during which the New York Stock Exchange is closed, other than customary
weekend and holiday closings, or during which (as determined by the Securities
and Exchange Commission) trading on the New York Stock Exchange is restricted;
(2) for any period during which an emergency exists as a result of which
disposal by the Trustee of Municipal Bonds is not reasonably practicable or it
is not reasonably practicable fairly to determine the value of the underlying
Municipal Bonds in accordance with the Agreement; or (3) for such other period
as the Securities and Exchange Commission may by order permit. The Trustee is
not liable to any person or in any way for any loss or damage which may result
from any such suspension or postponement.
COMPUTATION OF REDEMPTION PRICE. The Redemption Price for Units of each State
Trust is computed by the Evaluator as of the Evaluation Time stated under
"Essential Information" in Part Two next occurring after the tendering of a Unit
for redemption and on any other business day desired by it, by
A. adding (1) the principal cash on hand held or owed by the State Trust
other than cash deposited in the Trust Fund to purchase Municipal Bonds
not applied to the purchase of such Bonds; (2) the aggregate value of the
Municipal Bonds held in the State Trust, as determined by the Evaluator on
the basis of bid prices therefor; and (3) interest accrued and unpaid on
the Municipal Bonds in the State Trust as of the date of computation; and
85
<PAGE>
B. deducting therefrom (1) amounts representing any applicable taxes or
governmental charges payable out of the State Trust and for which no
deductions have been previously made for the purpose of additions to the
Reserve Account described under "Expenses of the Trust"; (2) amounts
representing estimated accrued expenses of the State Trust including, but
not limited to, unpaid fees and expenses of the Trustee (including legal
and auditing fees and any insurance costs), the Evaluator, the Sponsor and
bond counsel, if any; (3) cash held for distribution to Unitholders of
record as of the business day prior to the evaluation being made; and (4)
other liabilities incurred by the State Trust; and
C. finally, dividing the results of such computation by the number of Units
of the State Trust outstanding as of the date thereof.
UNITHOLDERS
OWNERSHIP OF UNITS. Ownership of Units of any State Trust will not be
evidenced by a certificate unless a Unitholder or the Unitholder's registered
broker/dealer or the clearing agent for such broker/dealer makes a written
request to the Trustee. Certificates, if issued, will be so noted on the
confirmation statement sent to the Underwriter and broker. Non-receipt of such
certificate(s) must be reported to the Trustee within one year; otherwise, a 2%
surety bond fee will be required for replacement.
Units are transferable by making a written request to the Trustee and, in the
case of Units evidenced by a certificate, by presenting and surrendering such
certificate to the Trustee properly endorsed or accompanied by a written
instrument or instruments of transfer which should be sent registered or
certified mail for the protection of Unitholders. Unitholders must sign such
written request, and such certificate or transfer instrument, exactly as their
names appear on the records of the Trustee and on any certificate representing
the Units to be transferred. Such signatures must be guaranteed by a
participant in the Securities Transfer Agents Medallion Program ("STAMP") or
such other signature guaranty program in addition to, or in substitution for,
STAMP, as may be accepted by the Trustee.
Units may be purchased and certificates, if requested, will be issued in
denominations of one Unit or any multiple thereof subject to any minimum
investment requirement established by the Sponsor from time to time. Any
certificate issued will be numbered serially for identification, issued in fully
registered form and will be transferable only on the books of the trustee. The
Trustee may require a Unitholder to pay a fee for each certificate re-issued or
transferred, and to pay any governmental charge that may be imposed in
connection with each such transfer or interchange. The Trustee at the present
time does not intend to charge for the normal transfer or interchange of
certificates. Destroyed, stolen, mutilated or lost certificates will be
replaced upon delivery to the Trustee of satisfactory indemnity (generally
amounting to 3% of the market value of the Units), affidavit of loss, evidence
of ownership and payment of expenses incurred.
DISTRIBUTIONS TO UNITHOLDERS. Interest Distributions: Interest received by
each State Trust, including any portion of the proceeds from a disposition of
Municipal Bonds which represents accrued interest, is credited by the Trustee to
the Interest Account for such State Trust. All other receipts are credited by
the Trustee to a separate Principal Account for the State Trust. The Trustee
normally has no cash for distribution to Unitholders until it received interest
payments on the Bonds in the State Trust. Since municipal interest usually is
paid semi-annually, during the initial months of the Trust, the Interest Account
of each State Trust, consisting of accrued but uncollected interest and
collected interest (cash), will be predominantly the uncollected accrued
interest that is not available for distribution.
Thereafter, assuming the State Trust retains its original size and
composition, after deduction of the fees and expenses of the Trustee, the
Sponsor and Evaluator and reimbursements (without interest) to the Trustee
86
<PAGE>
for any amount advanced to a State Trust, the Trustee will normally distribute
on each Interest Distribution Date (the fifteenth of the month) of shortly
thereafter to Unitholders of record of such State Trust on the preceding Record
Date. Unitholders of the State Trusts will receive an amount substantially
equal to one-twelfth, one-fourth or one-half (depending on the distribution
option selected) of such holders' pro rata share of the estimated net annual
interest income to the Interest Account of such State Trust. However, interest
earned at any point in time will be greater than the amount actually received by
the Trustee and distributed to the Unitholders. Therefore, there will always
remain an item of accrued interest that is added to the daily value of the
Units. If Unitholders of a State Trust sell or redeem all or a portion of their
Units, they will be paid their proportionate share of the accrued interest of
such State Trust to, but not including, the fifth business day after the date of
a sale or to the date of tender in the case of a redemption.
In order to equalize distributions and keep the undistributed interest income
of the Trusts at a low level, all Unitholders of record in such State Trust on
the first Record Date received and interest distribution on the first Interest
Distribution Date. Because the period of time between the first Interest
Distribution Date and the regular distribution dates may not have been a full
period, the first regular distributions amy have been partial distributions.
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. Since interest on Municipal Bonds in the State Trusts is
payable at varying intervals, usually in semi-annual installments, and
distributions of income are made to Unitholders at different intervals from
receipt of interest, the interest accruing to a State Trust may not be equal to
the amount of money received and available for distribution from the Interest
Account. Therefore, on each Distribution Date the amount of interest actually
deposited in the Interest Account of a State Trust and available for
distribution may be slightly more or less than the interest distribution made.
In order to eliminate fluctuations in interest distributions resulting from
variances, the Trustee is authorized by the Trust Agreements to advance such
amounts as may be necessary to provide interest distributions of approximately
equal amounts. The Trustee will be reimbursed, without interest, for any such
advances from funds available in the Interest Account for such State Trust.
Unitholders of any series of Kemper Tax-Exempt Income Trust, Multi-State
Series or Ohio Tax-Exempt Bond Trust, Series 1-10 who desire to receive
distributions on a quarterly or semi-annual basis may elect to do so, however,
only monthly distributions are available for series of Kemper Defined Funds.
Record Dates for monthly distributions will be the first day of each month;
Record Dates for quarterly distributions will be the first day of January,
April, July and October; and Record Dates for semi-annual distributions will be
the first day of January and July. The distribution option selected by a
Unitholder of any series of Kemper Tax-Exempt Income Trust, Multi-State Series
or Ohio Tax-Exempt Bond Trust, Series 1-10 will remain in effect until changed
by written notice to the Trustee.
Unitholders of any series of Kemper Tax-Exempt Income Trust, Multi-State
Series or Ohio Tax-Exempt Bond Trust, Series 1-10 purchasing Units of the State
Trusts in the secondary market will initially receive distributions in
accordance with the election of the prior owner. Unitholders of such Trusts
desiring to change their distribution option may do so by sending written notice
to the Trustee, together with their certificate (if one was issued).
Certificates should only be sent by registered or certified mail to minimize the
possibility of loss. If written notice and any certificate are received by the
Trustee not later than January 1 or July 1 of a year, the change will become
effective for distributions commencing with February 15 or August 15,
respectively, of that year. If notice is not received by the Trustee, the
Unitholder will be deemed to have elected to continue with the same option.
Principal Distributions. The Trustee will distribute on each semi-annual
Distribution Date (or, in the case of Kemper Defined Funds, on each Distribution
Date) or shortly thereafter, to each Unitholder of record of
87
<PAGE>
the State Trust of the preceding Record Date, an amount substantially equal to
such holder's pro rata share of the cash balance, if any, in the Principal
Account of such State Trust computed as of the close of business on the
preceding Record Date. However, no distribution will be required if the balance
in the Principal Account is less than $1.00 per Unit (or $.001 per Unit for
certain Series). Additionally, in the case of any series of Kemper Tax-Exempt
Income Trust, Multi-State Series or Ohio Tax-Exempt Bond Trust, Series 1-10, if
such balance is between $5.00 and $10.00 per Unit, distributions will be made on
each quarterly Distribution Date; and if such balance exceeds $10.00 per Unit,
such amounts will be distributed on the next monthly Distribution Date.
STATEMENTS TO UNITHOLDERS. With each distribution, the Trustee will furnish
each Unitholder a statement of the amount of interest and the amount of other
receipts, if any, which are being distributed, expressed in each case as a
dollar amount per Unit.
The accounts of each State Trust are required to be audited annually, at the
State Trust's expense, by independent auditors designated by the Sponsor, unless
the Trustee determines that such an audit would not be in the best interest of
the Unitholders of such State Trust. The accountants' report will be furnished
by the Trustee to any Unitholder of such State Trust upon written request.
Within a reasonable period of time after the end of each calendar year, the
Trustee shall furnish to each person who at any time during the calendar year
was a Unitholder of a State Trust a statement covering the calendar year,
setting forth:
A. As to the Interest Account:
1. The amount of interest received on the Municipal Bonds and the
percentage of such amount by states and territories in which the issuers
of such Bonds are located;
2. The amount paid from the Interest Account of such State Trust
representing accrued interest of any Units redeemed;
3. The deductions from the Interest Account of such State Trust for
applicable taxes, if any, fees and expenses (including auditing fees) of
the Trustee, the Evaluator, the Sponsor and bond counsel, if any;
4. Any amounts credited by the Trustee to a Reserve Account for such State
Trust described under "Expenses of the Trust"; and
5. The net amount remaining after such payments and deductions, expressed
both as a total dollar amount and a dollar amount per Unit outstanding on
the last business day of such calendar year.
B. As to the Principal Account:
1. The dates of the maturity, liquidation or redemption of any of the
Municipal Bonds in such State Trust and the net proceeds received
therefrom excluding any portion credited to the Interest Account;
2. The amount paid from the Principal Account of such Series representing
the principal of any Units redeemed;
88
<PAGE>
3. The deductions from the Principal Account of such Series for payment of
applicable taxes, if any, fees and expenses (including auditing expenses)
of the Trustee, the Evaluator, the Sponsor and bond counsel, if any;
4. Any amounts credited by the Trustee to a Reserve Account for such Series
described under "Expenses of the Trust"; and
5. The net amount remaining after distributions of principal and
deductions, expressed both as a dollar amount and as a dollar amount per
Unit outstanding on the last business day of such calendar year.
C. The following information:
1. A list of the Municipal Bonds in such State Trust as of the last
business day of such calendar year;
2. The number of Units of such State Trust outstanding on the last business
day of such calendar year;
3. The Redemption Price of such State Trust based on the last Trust Fund
Evaluation made during such calendar year; and
4. The amount actually distributed during such calendar year from the
Interest and Principal Accounts of such State Trust separately stated,
expressed both as total dollar amounts and as dollar amounts per Unit of
such State Trust outstanding on the Record Date for each such
distribution.
RIGHTS OF UNITHOLDERS. A Unitholder may at any time tender Units to the
Trustee for redemption. No Unitholder of a State Trust shall have the right to
control the operation and management of the Trust or such State Trust in any
manner, except to vote with respect to amendment of the Agreement or termination
of the Trust or such State Trust. The death or incapacity of any Unitholder
will not operate to terminate the Trust or any State Trust nor entitle legal
representatives or heirs to claim an accounting or to bring any action or
proceeding in any court for partition or winding up of the Trust or any State
Trust.
INVESTMENT SUPERVISION
The Sponsor may not alter the portfolio of the State Trusts by the purchase,
sale or substitution of Municipal Bonds, except in the special circumstances
noted below. Thus, with the exception of the redemption or maturity of
Municipal Bonds in accordance with their terms, and/or the sale of Municipal
Bonds to meet redemption requests, the assets of the State Trusts will remain
unchanged under normal circumstances.
The Sponsor may direct the Trustee to dispose of Municipal Bonds the value of
which has been affected by certain adverse events including default in the
payment of principal or interest, institution of certain legal proceedings,
default under other documents which may adversely affect debt service, default
in the payment of interest on other obligations of the same issuer, decline in
projected income pledged for debt service on revenue bonds, or decline in their
price or the occurrence of other market factors, including advance refunding, so
that in the opinion of the Sponsor the retention of such Municipal Bonds in a
State Trust would be detrimental to the interest of its Unitholders. The
proceeds from any such sales, exclusive of any portion which represents accrued
interest, will be credited to the Principal Account of such Trust Fund for
distribution to its Unitholders.
89
<PAGE>
The Sponsor is required to instruct the Trustee to reject any offer made by an
issuer of the Municipal Bonds to issue new obligations in exchange or
substitution for any of such Municipal Bonds pursuant to a refunding financing
plan, except that the Sponsor may instruct the Trustee to accept or reject such
an offer or to take any other action with respect thereto as the Sponsor may
deem proper if (a) the issuer is in default with respect to such Municipal
Bonds; or (b) in the written opinion of the Sponsor, there is a reasonable basis
to believe that the issuer will default with respect to such Municipal Bonds in
the foreseeable future. Any obligations received in exchange or substitution
will be held by the Trustee subject to the terms and conditions of the Agreement
to the same extent as the Municipal Bonds originally deposited thereunder.
Within five days after such deposit, notice of such exchange and deposit shall
be given by the Trustee to each unitholder of such State Trust registered on the
books of the Trustee, including an identification of the Municipal Bonds
eliminated and the Municipal Bonds substituted therefor.
The Trustee may sell Municipal Bonds, designated by the Sponsor, from a State
Trust for the purpose of redeeming Units of such State Trust tendered for
redemption and the payment of expenses.
ADMINISTRATION OF THE TRUST
THE TRUSTEE. The Trustee, Investors Fiduciary Trust Company, is a trust
company specializing in investment related services, organized and existing
under the laws of Missouri, having its trust office at 127 West 10th Street,
Kansas City, Missouri 64105. The Trustee is subject to supervision and
examination by the Division of Finance of the State of Missouri and the Federal
Deposit Insurance Corporation. Investors Fiduciary Trust Company is owned by
State Street Boston Corporation.
The Trustee, whose duties are ministerial in nature, has not participated in
selecting the portfolio of any Trust Fund. For information relating to the
responsibilities of the Trustee under the Agreement, reference is made to the
material set forth under "Unitholders."
In accordance with the Agreements, the Trustee shall keep proper books of
record and account of all transactions at its office. Such records shall
include the name and address of, and the number of Units held by, every
Unitholder of each State Trust. Such books and records shall be open to
inspection by any Unitholder of such State Trust at all reasonable times during
the usual business hours. The Trustee shall make such annual or other reports
as may from time to time be required under any applicable state or Federal
statute, rule or regulation. The Trustee shall keep a certified copy or
duplicate original of the Agreements on file in its office available for
inspection at all reasonable times during usual business hours by any
Unitholder, together with a current list of the Municipal Bonds held in each
State Trust. Pursuant to the Agreements, the Trustee may employ one or more
agents for the purpose of custody and safeguarding of Municipal Bonds comprising
the portfolios.
Under the Agreement, the Trustee or any successor trustee may resign and be
discharged of the trust created by the Agreement by executing an instrument in
writing and filing the same with the Sponsor.
The Trustee or successor trustee must mail a copy of the notice of resignation
to all Unitholders then of record, not less than sixty days before the date
specified in such notice when such resignation is to take effect. The Sponsor
upon receiving notice of such resignation is obligated to appoint a successor
trustee promptly. If, upon such resignation, no successor trustee has been
appointed and has accepted the appointment within thirty days after
notification, the retiring Trustee may apply to a court of competent
jurisdiction for the appointment of a successor. The Sponsor may at any time
remove the Trustee with or without cause and appoint a successor trustee as
provided in the Agreement. Notice of such removal and appointment shall be
mailed to each Unitholder by the Sponsor. Upon execution of a written
acceptance of such appointment by
90
<PAGE>
a successor trustee, all the rights, powers, duties and obligations of the
original Trustee shall vest in the successor.
The Trustee shall be a corporation organized under the laws of the United
States or any state thereof, which is authorized under such laws to exercise
trust powers. The Trustee shall have at all times an aggregate capital, surplus
and undivided profits of not less than $5,000,000.
THE EVALUATOR. Kemper Unit Investment Trusts, a service of Kemper Securities,
Inc., the Sponsor, also serves as Evaluator. The Evaluator may resign or be
removed by the Trustee, which is to use its best efforts to appoint a
satisfactory successor. Such resignation or removal shall become effective upon
acceptance of appointment by the successor evaluator. If, upon resignation of
the Evaluator no successor has accepted appointment within thirty days after
notice of resignation, the Evaluator may apply to a court of competent
jurisdiction for the appointment of a successor. Notice of such resignation or
removal and appointment shall be mailed by the Trustee to each Unitholder. At
the present time, pursuant to a contract with the Evaluator, Muller Data
Corporation a non-affiliated firm regularly engaged in the business of
evaluating, quoting or appraising comparable securities, provides portfolio
evaluations of the Municipal Bonds in the State Trusts which are then reviewed
by the Evaluator. In the event the Sponsor is unable to obtain current
evaluations from Muller Data Corporation, it may make its own evaluations or it
may utilize the services of any other non-affiliated evaluator or evaluators it
deems appropriate.
AMENDMENT AND TERMINATION. The Agreement may be amended by the Trustee and
the Sponsor without the consent of any of the Unitholders: (1) to cure any
ambiguity or to correct or supplement any provision which may be defective or
inconsistent; (2) to change any provision thereof as may be required by the
Securities and Exchange Commission or any successor governmental agency; or (3)
to make such provisions as shall not adversely affect the interest of the
Unitholders. The Agreement with respect to any State Trust may also be amended
in any respect by the Sponsor and the Trustee, or any of the provisions thereof
may be waived, with the written consent of the holders of Units representing
66-2/3% of the Units then outstanding of such State Trust, provided that no such
amendment or waiver will reduce the interest in the State Trust of any
Unitholder thereof without the consent of such Unitholder or reduce the
percentage of Units required to consent to any such amendment or waiver without
the consent of all Unitholders of such State Trust. In no event shall the
Agreement be amended to increase the number of Units of a State Trust issuable
thereunder or to permit, except in accordance with the provisions of the
Agreement, the acquisition of any Municipal Bonds in addition to or in
substitution for those in a State Trust. The Trustee shall promptly notify
Unitholders of the substance of any such amendment.
The Agreement provides that each State Trust shall terminate upon the
maturity, redemption or other disposition, as the case may be, of the last of
the Municipal Bonds held in such State Trust. If the value of a State Trust
shall be less than the applicable minimum value stated under "Essential
Information" in Part Two the Trustee may, in its discretion, and shall, when so
directed by the Sponsor, terminate the State Trust. A State Trust may be
terminated at any time by the holders of Units representing 66-2/3% of the Units
thereof then outstanding. Notwithstanding the foregoing, in no event shall any
State Trust continue beyond the mandatory termination date shown in Part Two
under "Essential Information." In the event of termination of a State Trust,
written notice thereof will be sent by the Trustee to all Unitholders of such
State Trust. Within a reasonable period after termination, the Trustee will
sell any Municipal Bonds remaining in the State Trust and, after paying all
expenses and charges incurred by the State Trust, will distribute to Unitholders
thereof (upon surrender for cancellation of certificates for Units, if issued)
their pro rata share of the balances remaining in the Interest and Principal
Accounts of such State Trust.
LIMITATIONS ON LIABILITY. The Sponsor: The Sponsor is liable for the
performance of its obligations arising from its responsibilities under the
Agreement, but will be under no liability to the Unitholders for taking any
action or refraining from any action in good faith pursuant to the Agreement or
for errors in judgment,
91
<PAGE>
except in cases of its own gross negligence, bad faith or willful misconduct.
The Sponsor shall not be liable or responsible in any way for depreciation or
loss incurred by reason of the sale of any Municipal Bonds.
The Trustee: The Agreement provides that the Trustee shall be under no
liability for any action taken in good faith in reliance upon prima facie
properly executed documents or for the disposition of monies, Municipal Bonds,
or certificates except by reason of its own gross negligence, bad faith or
willful misconduct, nor shall the Trustee be liable or responsible in any way
for depreciation or loss incurred by reason of the sale by the Trustee of any
Municipal Bonds. In the event that the Sponsor shall fail to act, the Trustee
may act and shall not be liable for any such action taken by it in good faith.
The Trustee shall not be personally liable for any taxes or other governmental
charges imposed upon or in respect of the Municipal Bonds or upon the interest
thereon. In addition, the Agreement contains other customary provisions
limiting the liability of the Trustee. The Trustee, whose duties are
ministerial, did not participate in the selection of Municipal Bonds for the
State Trusts.
The Evaluator: The Trustee and Unitholders may rely on any evaluation
furnished by the Evaluator and shall have no responsibility for the accuracy
thereof. The Agreement provides that the determinations made by the Evaluator
shall be made in good faith upon the basis of the best information available to
it; provided, however, that the Evaluator shall be under no liability to the
Trustee or Unitholders for errors in judgment, but shall be liable only for its
gross negligence, lack of good faith or willful misconduct.
EXPENSES OF THE TRUST
Except with respect to those series indicated in the next sentence and except
as otherwise stated under "Essential Information" in Part Two of the Prospectus,
the Sponsor will not charge any State Trust an advisory fee and will receive no
fee from the Trust for services performed as Sponsor. The Sponsor will charge
Kemper Tax-Exempt Income Trust, Multi-State Series 45 and subsequent series and
all series of Kemper Defined Funds an annual surveillance fee for services
performed for such Trust Funds in an amount not to exceed the amount shown under
"Essential Information" in Part Two, but in no event will such compensation when
combined with all compensation received from other unit investment trusts for
which the Sponsor acts as Sponsor and provides portfolio surveillance, exceed
the aggregate cost to the Sponsor for providing such services. Such fee shall
be based on the total number of Units of such State Trust outstanding as of the
January Record Date for any annual period. The Sponsor and other Underwriters
paid all the expenses of creating and establishing the Trust, including the cost
of the initial preparation, printing and execution of the Prospectus, Agreements
and the certificates, legal and accounting expenses, advertising and selling
expenses, payment of closing fees, expenses of the Trustee, initial evaluation
fees and other out-of-pocket expenses.
The Trustee receives for its services a fee calculated on the basis of the
annual rate set forth under "Essential Information" in Part Two per $1,000
principal amount of Municipal Bonds in each State Trust, based on the largest
aggregate principal amount of Municipal Bonds in the State Trust at any time
during the monthly, quarterly or semi-annual period, as appropriate. The
Trustee also receives indirect benefits to the extent that it holds funds on
deposit in the various non-interest bearing accounts created pursuant to the
Agreement; however, the Trustee is also authorized by the Agreement to make from
time to time certain non-interest bearing advances to the State Trusts. See
"Unitholders - Distributions to Unitholders."
For evaluation of Municipal Bonds in the State Trusts, the Evaluator receives
a fee, payable monthly calculated on an annual rate as set forth under
"Essential Information" in Part Two, based upon the largest aggregate principal
amount of Municipal Bonds in such State Trust at any time during such monthly
period.
The Trustee's, Sponsor's (if any) and Evaluator's fees for the State Trusts
are payable monthly on or before each Distribution Date by deductions from the
Interest Accounts thereof to the extent funds are available
92
<PAGE>
and then from the Principal Accounts. Such fees may be increased without
approval of the Unitholders by amounts not exceeding a proportionate increase in
the Consumer Price Index entitled "All Services Less Rent of Shelter," published
by the United States Department of Labor, or any equivalent index substituted
therefor.
The following additional charges are or may be incurred by a State Trust: (a)
fees for the Trustee's extraordinary services; (b) expenses of the Trustee
(including legal and auditing expenses, but not including any fees and expenses
charged by any agent for custody and safeguarding of Municipal Bonds) and of
bond counsel, if any; (c) various governmental charges; (d) expenses and costs
of any action taken by the Trustee to protect the Trust or such State Trust, or
the rights and interests of the Unitholders; (e) indemnification of the Trustee
for any loss, liability or expense incurred by it in the administration of the
Trust or such State Trust without gross negligence, bad faith or willful
misconduct on its part; (f) indemnification of the Sponsor for any loss,
liability or expense incurred in acting as Sponsor of the State Trust without
gross negligence, bad faith or willful misconduct; and (g) expenditures incurred
in contacting Unitholders upon termination of the State Trust. The fees and
expenses set forth herein are payable out of the appropriate State Trust and,
when owed to the Trustee, are secured by a lien on such State Trust.
Fees and expenses of a State Trust shall be deducted from the Interest Account
thereof, or, to the extent funds are not available in such Account, from the
Principal Account. The Trustee may withdraw from the Principal Account or the
Interest Account of any State Trust such amounts, if any, as it deems necessary
to establish a reserve for any taxes or other governmental charges or other
extraordinary expenses payable out of the State Trust. Amounts so withdrawn
shall be credited to a separate account maintained for the State Trust known as
the Reserve Account and shall not be considered a part of the State Trust when
determining the value of the Units until such time as the Trustee shall return
all or any part of such amounts to the appropriate account.
THE SPONSOR
The Sponsor, Kemper Unit Investment Trusts, with an office at 77 W. Wacker
Drive, 29th Floor, Chicago, Illinois 60601, (800) 621-5024, is a service of
Kemper Securities, Inc., which is a wholly-owned subsidiary of Kemper Financial
Companies, Inc., a financial services holding company which, in turn, is a
wholly-owned subsidiary of Kemper Corporation. The Sponsor acts as principal
underwriter of a number of other Kemper unit investment trusts and will act as
underwriter of any other unit investment trust products developed by the Sponsor
in the future. As of December 31, 1994, the total stockholder's equity of
Kemper Securities, Inc. was approximately $252,676,937 (unaudited).
If at any time the Sponsor shall fail to perform any of its duties under the
Agreement or shall become incapable of acting or shall be adjudged a bankrupt or
insolvent or its affairs are taken over by public authorities, then the Trustee
may (a) appoint a successor sponsor at rates of compensation deemed by the
Trustee to be reasonable and not exceeding such reasonable amounts as may be
prescribed by the Securities and Exchange Commission, or (b) terminate the
Agreement and liquidate the Trust or any State Trust as provided therein or (c)
continue to act as Trustee without terminating the Agreement.
The foregoing financial information with regard to the Sponsor relates to the
Sponsor only and not to this Trust or any State Trust. Such information is
included in this Prospectus only for the purpose of informing investors as to
the financial responsibility of the Sponsor and its ability to carry out its
contractual obligations with respect to the State Trusts. More comprehensive
financial information can be obtained upon request from the Sponsor.
93
<PAGE>
LEGAL OPINIONS
The legality of the Units offered hereby and certain matters relating to
federal tax law were originally passed upon by Chapman and Cutler, 111 West
Monroe Street, Chicago, Illinois 60603, as counsel for the Sponsor.
INDEPENDENT AUDITORS
The statement of net assets, including the schedule of investments, appearing
in Part Two of this Prospectus and Registration Statement, with information
pertaining to the specific State Trust to which such statement relates, has been
audited by Ernst & Young LLP, independent auditors, as set forth in their report
appearing in Part Two and is included in reliance upon such report given upon
the authority of such firm as experts in accounting and auditing.
DESCRIPTION OF SECURITIES RATINGS/3/
Standard & Poor's Ratings Group. - A brief description of the applicable
Standard & Poor's Ratings Group ("Standard & Poor's") rating symbols and their
meanings follows:
A Standard & Poor's corporate or municipal bond rating is a current assessment
of the creditworthiness of an obligor with respect to a specific debt
obligation. This assessment may take into consideration obligors such as
guarantors, insurers, or lessees.
The bond rating is not a recommendation to purchase, sell or hold a security,
inasmuch as it does not comment as to market price or suitability for a
particular investor.
The ratings are based on current information furnished by the issuer and
obtained by Standard & Poor's from other sources it considers reliable.
Standard & Poor's does not perform an audit in connection with any rating and
may, on occasion, rely on unaudited financial information. The ratings may be
changed, suspended, or withdrawn as a result of changes in, or unavailability
of, such information, or for other circumstances.
The ratings are based, in varying degrees, on the following considerations:
I. Likelihood of default - capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with the
terms of the obligation;
II. Nature of and provisions of the obligations;
III. Protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization or other arrangement, under the laws of
bankruptcy and other laws affecting creditors' rights.
AAA - Bonds rated AAA have the highest rating assigned by Standard & Poor's
to a debt obligation. Capacity to pay interest and repay principal is extremely
strong.
AA - Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in small degree.
- ------------------------
/3/As published by the rating companies.
94
<PAGE>
A - Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than for bonds in higher rated categories.
Plus (+) or Minus (-): The ratings from "AA" to "A" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
Provisional Ratings: The letter "p" indicates the rating is provisional. A
provisional rating assumes the successful completion of the project being
financed by the bonds being rated and indicates that payment of debt service
requirements is largely or entirely dependent upon the successful and timely
completion of the project. This rating, however, while addressing credit
quality subsequent to completion of the project, makes no comment on the
likelihood of, or the risk of default upon failure of, such completion. The
investor should exercise his own judgment with respect to such likelihood and
risk.
Moody's Investors Service, Inc. - A brief description of the applicable
Moody's Investors Service, Inc. rating symbols and their meanings follow:
Aaa - Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues. Their safety is so
absolute that with the occasional exception of oversupply in a few specific
instances, characteristically, their market value is affected solely by money
market fluctuations.
Aa - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuations of
protective elements may be of greater amplitude or there may be other elements
present which make the long term risks appear somewhat larger than in Aaa
securities. Their market value is virtually immune to all but money market
influences, with the occasional exception of oversupply in a few specific
instances.
A - Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future. The market
value of A-rated bonds may be influenced to some degree by economic performance
during a sustained period of depressed business conditions, but, during periods
of normalcy, A-rated bonds frequently move in parallel with Aaa and Aa
obligations, with the occasional exception of oversupply in a few specific
instances.
A1 - Bonds which are rated A1 offer the maximum in security within their
quality group, can be bought for possible upgrading in quality, and
additionally, afford the investor an opportunity to gauge more precisely the
relative attractiveness of offerings in the market place.
Baa - Bonds which are rated Baa are considered as lower medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the 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
95
<PAGE>
characteristics as well. The market value of Baa-rated bonds is more sensitive
to changes in economic circumstances and, aside from occasional speculative
factors applying to some bonds of this class, Baa market valuations move in
parallel with Aaa, Aa and A obligations during periods of economic normalcy,
except in instances of oversupply.
Conditional Ratings: Bonds rated "Con(-)" are ones for which the security
depends upon the completion of some act or the fulfillment of some condition.
These are bonds secured by (a) earnings of projects under construction, (b)
earnings of projects unseasoned in operation experience, (c) rentals which begin
when facilities are completed, or (d) payments to which some other limiting
condition attaches. Parenthetical rating denotes probable credit stature upon
completion of construction or elimination of basis of condition.
Note: Moody's applies numerical modifiers, 1, 2, and 3 in each generic
rating classification from Aa through B in certain areas of its bond rating
system. The modifier 1 indicates that the security ranks in the higher end of
its generic rating category; the modifier 2 indicates a mid-range ranking; and
the modifier 3 indicates that the issue ranks in the lower end of its generic
rating category.
96
<PAGE>
Kemper Tax-Exempt Income Trust
Multi-State Series 39
North Carolina Trust
Part Two
Dated September 28, 1995
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY
IS A CRIMINAL OFFENSE.
NOTE: Part Two of this Prospectus May Not Be Distributed unless
Accompanied by
Part One.
<PAGE>
Kemper Tax-Exempt Income Trust
Multi-State Series 39
North Carolina Trust
Essential Information
As of August 15, 1995
Sponsor and Evaluator: Kemper Unit Investment
Trusts
Trustee: Investors Fiduciary Trust
Company
<TABLE>
<CAPTION>
General Information
<S>
<C>
Principal Amount of Municipal Bonds
$2,870,000
Number of Units
2,955
Fractional Undivided Interest in the Trust per Unit
1/2,955
Principal Amount of Municipal Bonds per Unit
$971.24
Public Offering Price:
Aggregate Bid Price of Municipal Bonds in the Portfolio
$2,880,699
Aggregate Bid Price of Municipal Bonds per Unit
$974.86
Cash per Unit (1)
$.07
Sales Charge 4.712% (4.5% of Public Offering Price)
$45.94
Public Offering Price per Unit (exclusive of accrued
interest) (2)
$1,020.87
Redemption Price per Unit (exclusive of accrued interest)
$974.93
Excess of Public Offering Price per Unit Over Redemption
Price per Unit
$45.94
Minimum Value of the Trust under which Trust Agreement
may be terminated
$641,000
</TABLE>
Date of Trust
June 15, 1989
Mandatory Termination Date
December 31, 2039
Annual Evaluation Fee: $.30 per $1,000 principal amount of
Municipal Bonds.
Evaluations for purpose of sale, purchase or redemption of Units
are made as
of the close of business of the Sponsor next following receipt of
an order for
a sale or purchase of Units or receipt by Investors Fiduciary
Trust Company of
Units tendered for redemption.
[FN]
1. This amount, if any, represents principal cash or overdraft
which is an
asset or liability of the Trust and is included in the Public
Offering Price.
2. Units are offered at the Public Offering Price plus accrued
interest to
the date of settlement (three business days after purchase). On
August 15,
1995, there was added to the Public Offering Price of $1,020.87,
accrued
interest to the settlement date of August 18, 1995 of $10.51,
$16.02 and
$16.12 for a total price of $1,031.38, $1,036.89 and $1,036.99
for the
monthly, quarterly and semiannual distribution options,
respectively.
<PAGE>
Kemper Tax-Exempt Income Trust
Multi-State Series 39
North Carolina Trust
Essential Information (continued)
As of August 15, 1995
Sponsor and Evaluator: Kemper Unit Investment
Trusts(4)
Trustee: Investors Fiduciary Trust
Company
<TABLE>
<CAPTION>
Special Information Based on Various Distribution Options
Monthly Quarterly
Semiannual
<S> <C> <C>
<C>
-------- --------
--------
Calculation of Estimated Net Annual
Interest Income per Unit (3):
Estimated Annual Interest Income $67.0178 $67.0178
$67.0178
Less: Estimated Annual Expense 2.2130 1.8696
1.5268
-------- --------
--------
Estimated Net Annual Interest Income $64.8048 $65.1482
$65.4910
======== ========
========
Calculation of Interest Distribution
per Unit:
Estimated Net Annual Interest Income $64.8048 $65.1482
$65.4910
Divided by 12, 4 and 2, respectively $5.4004 $16.2871
$32.7455
Estimated Daily Rate of Net Interest
Accrual per Unit $.1800 $.1810
$.1819
Estimated Current Return Based on Public
Offering Price (3) 6.35% 6.38%
6.42%
Estimated Long-Term Return (3) 6.35% 6.38%
6.42%
</TABLE>
Trustee's Annual Fees and Expenses (including Evaluator's Fee):
$2.2130,
$1.8696 and $1.5268 ($.8754, $.8045 and $.7837 of which represent
expenses)
per Unit under the monthly, quarterly and semiannual distribution
options,
respectively.
Record and Computation Dates: First day of the month, as
follows: monthly -
each month; quarterly - January, April, July and October;
semiannual - January
and July.
Distribution Dates: Fifteenth day of the month, as follows:
monthly - each
month; quarterly - January, April, July and October; semiannual -
January and
July.
[FN]
3. The Estimated Long-Term Return and Estimated Current Return
will vary.
For detailed explanation, see Part One of this prospectus.
4. See Note 6 to the accompanying financial statements of the
Trust regarding
a change in ownership of Kemper Unit Investment Trusts and Kemper
Securities,
Inc.
<PAGE>
Report of Independent Auditors
Unitholders
Kemper Tax-Exempt Income Trust
Multi-State Series 39 North Carolina Trust
We have audited the accompanying statement of assets and
liabilities of Kemper
Tax-Exempt Income Trust Multi-State Series 39 North Carolina
Trust, including
the schedule of investments, as of May 31, 1995, and the related
statements of
operations and changes in net assets for each of the three years
in the period
then ended. These financial statements are the responsibility of
the Trust's
sponsor. Our responsibility is to express an opinion on these
financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing
standards. Those standards require that we plan and perform the
audit to
obtain reasonable assurance about whether the financial
statements are free of
material misstatement. An audit includes examining, on a test
basis, evidence
supporting the amounts and disclosures in the financial
statements. Our
procedures included confirmation of investments owned as of May
31, 1995, by
correspondence with the custodial bank. An audit also includes
assessing the
accounting principles used and significant estimates made by the
sponsor, as
well as evaluating the overall financial statement presentation.
We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in
all material respects, the financial position of Kemper
Tax-Exempt Income
Trust Multi-State Series 39 North Carolina Trust at May 31, 1995,
and the
results of its operations and the changes in its net assets for
the periods
indicated above in conformity with generally accepted accounting
principles.
Ernst & Young LLP
Kansas City, Missouri
September 14, 1995, except for Note 6, as
to which the date is September 26, 1995
<PAGE>
Kemper Tax-Exempt Income Trust
Multi-State Series 39
North Carolina Trust
Statement of Assets and Liabilities
May 31, 1995
<TABLE>
<CAPTION>
<S> <C>
<C>
Assets
Municipal Bonds, at value (cost $2,803,813)
$2,889,749
Interest receivable
68,612
----------
2,958,361
Liabilities and net assets
Cash overdraft
7,270
Accrued liabilities
1,334
----------
8,604
Net assets, applicable to 2,955 Units outstanding:
Cost of Trust assets, exclusive of interest $2,803,813
Unrealized appreciation 85,936
Distributable funds 60,008
----------
----------
Net assets
$2,949,757
==========
</TABLE>
[FN]
See accompanying notes to financial statements.
<PAGE>
Kemper Tax-Exempt Income Trust
Multi-State Series 39
North Carolina Trust
Statements of Operations
<TABLE>
<CAPTION>
Year ended
May 31
1995 1994
1993
<S> <C> <C>
<C>
--------- ---------
--------
Investment income - interest $200,123 $214,960
$219,387
Expenses:
Trustee's fees and related expenses 4,775 4,794
4,790
Evaluator's fees 871 935
952
--------- ---------
--------
Total expenses 5,646 5,729
5,742
--------- ---------
--------
Net investment income 194,477 209,231
213,645
Realized and unrealized gain (loss)
on investments:
Realized gain 1,109 24,122
-
Unrealized appreciation
(depreciation) during the year (119,161) (104,455)
194,252
--------- ---------
--------
Net gain (loss) on investments (118,052) (80,333)
194,252
--------- ---------
--------
Net increase in net assets resulting
from operations $76,425 $128,898
$407,897
========= =========
========
</TABLE>
[FN]
See accompanying notes to financial statements.
<PAGE>
Kemper Tax-Exempt Income Trust
Multi-State Series 39
North Carolina Trust
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Year ended
May 31
1995 1994
1993
<S> <C> <C>
<C>
---------- ----------
- ----------
Operations:
Net investment income $194,477 $209,231
$213,645
Realized gain on investments 1,109 24,122
-
Unrealized appreciation (depreciation)
on investments during the year (119,161) (104,455)
194,252
---------- ----------
- ----------
Net increase in net assets resulting
from operations 76,425 128,898
407,897
Distributions to Unitholders:
Net investment income (199,643) (215,882)
(213,827)
Capital transactions:
Redemption of Units (75,521) (253,639)
-
---------- ----------
- ----------
Total increase (decrease) in net assets (198,739) (340,623)
194,070
Net assets:
At the beginning of the year 3,148,496 3,489,119
3,295,049
---------- ----------
- ----------
At the end of the year (including
distributable funds applicable to
Trust Units of $60,008, $64,399
and $69,991 at May 31, 1995, 1994
and 1993, respectively) $2,949,757 $3,148,496
$3,489,119
========== ==========
==========
Trust Units outstanding at the end
of the year 2,955 3,030
3,269
========== ==========
==========
</TABLE>
[FN]
See accompanying notes to financial statements.
<PAGE>
<TABLE>
Kemper Tax-Exempt
Income Trust
Multi-State
Series 39
North
Carolina Trust
Schedule of
Investments
May 31,
1995
<CAPTION>
Coupon
Maturity Redemption Principal
Name of Issuer and Title of Bond(7) Rate
Date Provisions(2) Rating(1) Amount(4) Value(3)
<S> <C> <C>
<C> <C> <C> <C>
-------
- ---------- -------------- --------- ---------- ----------
+City of Albemarle, North Carolina, Water and 7.00%
5/01/2006 1999 @ 102 A $165,000 $175,116
Sewer Bonds, Series 1989.
+City of Charlotte, North Carolina, General 6.75
6/01/2009 1999 @ 102 AAA 250,000 263,638
Obligation Bonds, Series 1989.
+County of Guilford, North Carolina, General 6.90
6/01/2006 1999 @ 102 AAA 140,000 148,324
Obligation Bonds, Series 1989.
North Carolina Medical Care Commission, Health 7.25
2/15/2019 2001 @ 100 S.F. A 500,000 494,030
Care Facilities Revenue Bonds (Gaston Health
1999 @ 102
Care Support Project), Series 1989.
North Carolina Medical Care Commission, Health 0.00
2/15/2008 1999 @ 54.023 A 150,000 60,894
Care Facilities Revenue Bonds (Gaston Health
Care Support Project), Series 1989. (5)
North Carolina Eastern Municipal Power Agency, 7.00
1/01/2017 2014 @ 100 S.F. AAA 195,000 199,633
Power System Revenue Bonds, Refunding Series
1999 @ 102
1989 A. Insured by Financial Guaranty
Insurance Company. (6)
+North Carolina Medical Care Commission, Hospital 7.25
10/01/2014 1998 @ 102 AAA 500,000 529,520
Revenue Refunding Bonds (St. Joseph's Hospital
Project), Series 1988. Insured by AMBAC
Indemnity Corporation. (6)
+North Carolina Municipal Power Agency Number 1, 7.875
1/01/2019 1998 @ 102 AAA 750,000 793,688
Catawba Electric Revenue Bonds, Series 1988.
North Carolina State University at Raleigh, 6.70
6/01/2009 1999 @ 102 AA- 220,000 224,906
Parking Systems Revenue Bonds, Series 1989.
---------- ----------
$2,870,000 $2,889,749
========== ==========
</TABLE>
[FN]
See accompanying notes to Schedule of Investments.
<PAGE>
Kemper Tax-Exempt Income Trust
Multi-State Series 39
North Carolina Trust
Notes to Schedule of Investments
1. All ratings are by Standard & Poor's Corporation, unless
marked with the
symbol "*", in which case the rating is by Moody's Investors
Service, Inc.
The symbol "NR" indicates Bonds for which no rating is available.
2. There is shown under this heading the year in which each
issue of Bonds is
initially redeemable and the redemption price for that year or,
if currently
redeemable, the redemption price currently in effect; unless
otherwise
indicated, each issue continues to be redeemable at declining
prices
thereafter, but not below par value. In addition, certain Bonds
in the
Portfolio may be redeemed in whole or in part other than by
operation of the
stated redemption or sinking fund provisions under certain
unusual or
extraordinary circumstances specified in the instruments setting
forth the
terms and provisions of such Bonds. "S.F." indicates a sinking
fund is
established with respect to an issue of Bonds. Redemption
pursuant to call
provisions generally will, and redemption pursuant to sinking
fund provisions
may, occur at times when the redeemed Bonds have a valuation
which represents
a premium over the call price or par.
To the extent that the Bonds were deposited in the Trust at a
price higher
than the price at which they are redeemed, this will represent a
loss of
capital when compared with the original Public Offering Price of
the Units.
To the extent that the Bonds were acquired at a price lower than
the
redemption price, this may represent an increase in capital when
compared with
the original Public Offering Price of the Units. Distributions
of net income
will generally be reduced by the amount of the income which would
otherwise
have been paid with respect to redeemed Bonds and, unless
utilized to pay for
Units tendered for redemption, there will be distributed to
Unitholders the
principal amount and any premium received on such redemption. In
this event
the estimated current return and estimated long-term return may
be affected by
such redemptions.
3. See Note 1 to the accompanying financial statements for a
description of
the method of determining cost and value.
<PAGE>
Kemper Tax-Exempt Income Trust
Multi-State Series 39
North Carolina Trust
Notes to Schedule of Investments
(continued)
4. At May 31, 1995, the Portfolio of the Trust consists of 9
obligations
issued by entities located in North Carolina. Seven issues,
representing
$2,480,000 of the aggregate principal amount, are payable from
the income of a
specific project or authority and are not supported by an
issuer's power to
levy taxes. Two issues, representing $390,000 of the aggregate
principal
amount, are general obligations of governmental entities and are
backed by the
taxing powers of such entities. The sources of payment for the
revenue bonds
are divided as follows: Electric Systems, 2; Hospital and Health
Care, 3;
Parking, 1; Water and Sewer, 1. Approximately 40% of the
aggregate principal
amount of Bonds in the Trust are obligations of issuers whose
revenues are
derived from services provided by hospitals and other health care
facilities.
Approximately 33% of the aggregate principal amount of Bonds in
the Trust are
obligations of electrical system issuers. All of the Bonds in
the Trust are
subject to call by the issuers within five years after May 31,
1995.
5. This Bond has been purchased at a discount from the par value
because
there is no stated interest income thereon. Such Bond is
normally described
as a "zero coupon" Bond. Over the life of the Bond the value
increases, so
that upon maturity, the holders of the Bond will receive 100% of
the principal
amount thereof.
6. Insurance on these Bonds was obtained by the issuers of such
Bonds. No
representation is made as to any insurer's ability to meet its
commitments.
7. Those securities preceded by (+) are secured by, and payable
from,
escrowed U.S. Government securities.
[FN]
See accompanying notes to financial statements.
<PAGE>
Kemper Tax-Exempt Income Trust
Multi-State Series 39
North Carolina Trust
Notes to Financial Statements
1. Significant Accounting Policies
Valuation of Municipal Bonds
Municipal Bonds (Bonds) are stated at bid prices as determined by
Kemper Unit
Investment Trusts (A Service of Kemper Securities, Inc.), the
"Evaluator" and
sponsor of the Trust. The aggregate bid prices of the Bonds are
determined by
the Evaluator based on (a) current bid prices of the Bonds, (b)
current bid
prices for comparable bonds, (c) appraisal, or (d) any
combination of the
above.
Cost of Municipal Bonds
Cost of the Trust's Bonds was based on the offering prices of the
Bonds on
June 15, 1989 (Date of Deposit). The premium or discount
(including any
original issue discount) existing at June 15, 1989, is not being
amortized.
Realized gain (loss) from Bond transactions is reported on an
identified cost
basis.
2. Unrealized Appreciation and Depreciation
Following is an analysis of net unrealized appreciation at May
31, 1995:
<TABLE>
<CAPTION>
<S>
<C>
Gross unrealized depreciation
$-
Gross unrealized appreciation
85,936
--------
Net unrealized appreciation
$85,936
========
</TABLE>
3. Transactions with Affiliates
From the inception of the Trust through January 31, 1995, the
Trustee,
Investors Fiduciary Trust Company (IFTC), was 50% owned by Kemper
Financial
Services, Inc., an affiliate of Kemper Unit Investment Trusts.
On that date,
State Street Boston Corporation acquired IFTC. Prior to January
1, 1995, the
Trustee's fee (not including the reimbursement of out-of-pocket
expenses),
calculated monthly, was at the annual rate of $1.22, $.97 and
$.68 under the
monthly, quarterly and semiannual distribution options,
respectively, per
$1,000 principal amount of Bonds in the Trust, based on the
largest aggregate
principal amount of Bonds in the Trust at any time during such
monthly,
quarterly or semiannual periods. Effective January 1, 1995, such
fees were
revised to $1.3772, $1.0966 and $.7651 under the monthly,
quarterly and
semiannual distribution options, respectively. The Evaluator
received a fee,
payable monthly, at an annual rate of $.30 per $1,000 principal
amount of
Bonds, based on the largest aggregate principal amount of Bonds
in the Trust
at any time during such monthly period.
<PAGE>
Kemper Tax-Exempt Income Trust
Multi-State Series 39
North Carolina Trust
Notes to Financial Statements (continued)
4. Federal Income Taxes
The Trust is not an association taxable as a corporation for
federal income
tax purposes. Each Unitholder is considered to be the owner of a
pro rata
portion of the Trust under Subpart E, Subchapter J of Chapter 1
of the
Internal Revenue Code of 1986, as amended. Accordingly, no
provision has been
made for federal income taxes.
5. Other Information
Cost to Investors
The cost to initial investors of Units of the Trust was based on
the aggregate
offering price of the Bonds on the date of an investor's
purchase, plus a
sales charge of 4.9% of the Public Offering Price (equivalent to
5.152% of the
net amount invested). The Public Offering Price for secondary
market
transactions is based on the aggregate bid price of the Bonds
plus or minus a
pro rata share of cash or overdraft in the Principal Account, if
any, on the
date of an investor's purchase, plus a sales charge of 4.5% of
the Public
Offering Price (equivalent to 4.712% of the net amount invested).
Distributions
Distributions of net investment income to Unitholders are
declared and paid in
accordance with the option (monthly, quarterly or semiannual)
selected by the
investor. Such income distributions, on a record date basis, are
as follows:
<TABLE>
<CAPTION>
Year ended Year ended
Year ended
Distribution May 31, 1995 May 31, 1994
May 31, 1993
Plan Per Unit Total Per Unit Total Per
Unit Total
<S> <C> <C> <C> <C> <C>
<C>
-------- -------- -------- --------
- -------- --------
Monthly $65.75 $104,626 $65.09 $110,516
$64.75 $105,092
Quarterly 66.10 32,504 65.40 31,946
65.06 34,223
Semiannual 66.45 60,338 65.71 69,981
65.36 74,512
-------- --------
--------
$197,468 $212,443
$213,827
======== ========
========
</TABLE>
<PAGE>
Kemper Tax-Exempt Income Trust
Multi-State Series 39
North Carolina Trust
Notes to Financial Statements (continued)
5. Other Information (continued)
In addition, the Trust redeemed Units with proceeds from the sale
of Bonds as
follows:
<TABLE>
<CAPTION>
Year
ended May 31
1995
1994
<S> <C>
<C>
-------
--------
Principal portion $75,521
$253,639
Net interest accrued 2,175
3,439
-------
--------
$77,696
$257,078
=======
========
Units 75
239
=======
========
</TABLE>
<PAGE>
<TABLE>
Kemper Tax-Exempt
Income Trust
Multi-State
Series 39
North
Carolina Trust
Notes to Financial
Statements (continued)
5. Other Information (continued)
Selected data for a Unit of the Trust outstanding throughout each
year -
<CAPTION>
Monthly
Quarterly Semiannual
Year ended May 31
Year ended May 31 Year ended May 31
1995 1994 1993
1995 1994 1993 1995 1994 1993
<S> <C> <C> <C>
<C> <C> <C> <C> <C> <C>
-------- --------- ---------
- -------- --------- --------- --------- --------- ---------
Investment income - interest $67.07 $67.28 $67.11
$67.07 $67.28 $67.11 $67.07 $67.28 $67.11
Expenses 2.13 2.03 2.02
1.80 1.71 1.71 1.48 1.41 1.40
-------- --------- ---------
- -------- --------- --------- --------- --------- ---------
Net investment income 64.94 65.25 65.09
65.27 65.57 65.40 65.59 65.87 65.71
Distributions to Unitholders:
Net investment income (65.75) (65.09) (64.75)
(66.10) (65.40) (65.06) (66.45) (65.71) (65.36)
Net gain (loss) on investments (39.71) (27.93) 59.43
(39.71) (27.93) 59.43 (39.71) (27.93) 59.43
-------- --------- ---------
- -------- --------- --------- --------- --------- ---------
Change in net asset value (40.52) (27.77) 59.77
(40.54) (27.76) 59.77 (40.57) (27.77) 59.78
Net asset value:
Beginning of the year 1,031.32 1,059.09 999.32
1,036.91 1,064.67 1,004.90 1,053.45 1,081.22 1,021.44
-------- --------- ---------
- -------- --------- --------- --------- --------- ---------
End of the year, including
distributable funds $990.80 $1,031.32 $1,059.09
$996.37 $1,036.91 $1,064.67 $1,012.88 $1,053.45 $1,081.22
======== ========= =========
======== ========= ========= ========= ========= =========
</TABLE>
<PAGE>
Kemper Tax-Exempt Income Trust
Multi-State Series 39
North Carolina Trust
Notes to Financial Statements (continued)
6. Subsequent Event
Effective September 14, 1995, through an ESOP, the members of
certain Kemper
Corporation operating units have acquired ownership of certain
Kemper
Corporation operating units, which included Kemper Securities,
Inc., the
Trust's sponsor and evaluator. In connection with the
acquisition, Kemper
Securities, Inc. changed its name to EVEREN Securities, Inc., and
Kemper Unit
Investment Trusts is now a Service of EVEREN Securities, Inc.
Subsequent to
the date of acquisition, neither EVEREN Securities, Inc. nor
Kemper Unit
Investment Trusts is affiliated with Kemper Financial Services,
Inc. or Kemper
Corporation. On September 26, 1995, Kemper Unit Investment
Trusts changed its
name to EVEREN Unit Investment Trusts.
<PAGE>
Consent of Independent Auditors
We consent to the reference to our firm under the caption
"Independent
Auditors" and to the use of our report dated September 14, 1995,
in this Post-
Effective Amendment to the Registration Statement (Form S-6) and
related
Prospectus of Kemper Tax-Exempt Income Trust Multi-State Series
39 North
Carolina Trust dated September 28, 1995.
Ernst & Young LLP
Kansas City, Missouri
September 28, 1995
<PAGE>
Contents of Post-Effective AmendmentTo Registration Statement
This Post-Effective amendment to the Registration Statement
comprises the following papers and documents:
The facing sheet
The prospectus
The signatures
The Consent of Independent Accountants
<PAGE>
Signatures
Pursuant to the requirements of the Securities Act of 1933, The
Registrant, Kemper Tax-Exempt Insured Income Trust, Series A-59,
Kemper Tax-Exempt Insured Income Trust Multi-State, Series 17,
Kemper Tax-Exempt Income Trust, Series 86, and Kemper Tax-Exempt
Income Trust Multi-State, Series 39, certifies that it meets all
of the requirements for effectiveness of this registration
statement pursuant to Rule 485(b) under the Securities Act of
1933 and has duly caused this Amendment to the Registration
Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Chicago, and State of
Illinois, on the 27th day of September, 1995.
Kemper Tax-Exempt Insured Income Trust, Series A-59, Kemper
Tax-Exempt Insured Income Trust Multi-State, Series 17, Kemper
Tax-Exempt Income Trust, Series 86, and Kemper Tax-Exempt Income
Trust Multi-State, Series 39
Registrant
By: EVEREN Unit Investment Trusts
(a division of EVEREN Securities, Inc.)
Depositor
By: Michael J. Thoms
Vice President
Pursuant to the requirements of the Securities Act of 1933, this
Amendment to the Registration Statement has been signed below on
September 27, 1995 by the following persons, who constitute a
majority of the Board of Directors of EVEREN Securities, Inc.
Signature Title
James R. Boris Chairman and Chief Executive Officer
James R. Boris
Stephen G. McConahey President and Chief Operating Officer
Stephen G. McConahey
Frank V. Geremia Senior Executive Vice President
Frank V. Geremia
David M. Greene Senior Executive Vice President
David M. Greene
Ramon Pecuch Senior Executive Vice President and Director
Ramon Pecuch
Thomas R. Reedy Senior Executive Vice President and Director
Thomas R. Reedy
Janet L. Reali Executive Vice President and Director
Janet L. Reali
Daniel D. Williams Executive Vice President and Treasurer
Daniel D. Williams
Michael J. Thoms
Michael J. Thoms signs this document pursuant to a Power of
Attorney filed with the Securities and Exchange Commission with
Amendment No. 1 to the Registration Statement on Form S-6 for
Kemper Defined Funds Series 28 (Registration No. 33-56779).
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted
from
Post-effective Amendment Number 6 to Form S-6 and is qualified in
its entirety by reference to such Post-effective Amendment to
Form S-6.
</LEGEND>
<SERIES>
<NUMBER> 59
<NAME> KEMPER TAX EXEMPT INSURES SERIES A
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1995
<PERIOD-START> JUN-01-1994
<PERIOD-END> MAY-31-1995
<INVESTMENTS-AT-COST> 10,777,667
<INVESTMENTS-AT-VALUE> 10,574,376
<RECEIVABLES> 205,969
<ASSETS-OTHER> 86,935
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 10,867,280
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,321
<TOTAL-LIABILITIES> 2,321
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 10,777,667
<SHARES-COMMON-STOCK> 22,567
<SHARES-COMMON-PRIOR> 22,880
<ACCUMULATED-NII-CURRENT> 290,583
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (203,291)
<NET-ASSETS> 10,864,959
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,275,234
<OTHER-INCOME> 0
<EXPENSES-NET> 28,911
<NET-INVESTMENT-INCOME> 1,246,323
<REALIZED-GAINS-CURRENT> (1,467,945)
<APPREC-INCREASE-CURRENT> 845,445
<NET-CHANGE-FROM-OPS> 623,823
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,453,765)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> (9,309,982)
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 313
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (10,341,004)
<ACCUMULATED-NII-PRIOR> 508,096
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted
from
Post-effective Amendment Number 6 to Form S-6 and is qualified in
its entirety by reference to such Post-effecitve Amendment to
Form S-6.
</LEGEND>
<SERIES>
<NUMBER> 17
<NAME> KEMPER TAX EXEMPT INSURED MULTI-STATE OHIO SERIES
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1995
<PERIOD-START> JUN-01-1994
<PERIOD-END> MAY-31-1995
<INVESTMENTS-AT-COST> 2,801,875
<INVESTMENTS-AT-VALUE> 2,933,827
<RECEIVABLES> 70,241
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 3,004,068
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 10,882
<TOTAL-LIABILITIES> 10,882
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 2,801,875
<SHARES-COMMON-STOCK> 2,833
<SHARES-COMMON-PRIOR> 2,863
<ACCUMULATED-NII-CURRENT> 59,359
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 131,952
<NET-ASSETS> 2,993,186
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 197,205
<OTHER-INCOME> 0
<EXPENSES-NET> 5,654
<NET-INVESTMENT-INCOME> 191,551
<REALIZED-GAINS-CURRENT> 448
<APPREC-INCREASE-CURRENT> (84,815)
<NET-CHANGE-FROM-OPS> 107,184
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (194,178)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 30
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (118,535)
<ACCUMULATED-NII-PRIOR> 61,375
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted
from
Post-effective Amendment Number 6 to Form S-6 and is qualified in
its entirety by reference to such Post-effective Amendment to
Form S-6.
</LEGEND>
<SERIES>
<NUMBER> 86
<NAME> KEMPER TAX EXEMPT SERIES A
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1995
<PERIOD-START> JUN-01-1994
<PERIOD-END> MAY-31-1995
<INVESTMENTS-AT-COST> 4,798,227
<INVESTMENTS-AT-VALUE> 4,891,409
<RECEIVABLES> 141,320
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 5,032,729
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 28,352
<TOTAL-LIABILITIES> 28,352
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 4,798,227
<SHARES-COMMON-STOCK> 5,077
<SHARES-COMMON-PRIOR> 5,077
<ACCUMULATED-NII-CURRENT> 112,968
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 93,182
<NET-ASSETS> 5,004,377
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 360,707
<OTHER-INCOME> 0
<EXPENSES-NET> 8,699
<NET-INVESTMENT-INCOME> 352,008
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 5,473
<NET-CHANGE-FROM-OPS> 357,481
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (352,531)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> (10,002)
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (5,052)
<ACCUMULATED-NII-PRIOR> 118,493
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted
from
Post-effective Amendment Number 6 to Form S-6 and is qualified in
its entirety by reference to such Post-effective Amendment to
Form S-6.
</LEGEND>
<SERIES>
<NUMBER> 39
<NAME> KEMPER TAX EXEMPT MULTI-STATE NORTH CAROLINA SERIES
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1995
<PERIOD-START> JUN-01-1994
<PERIOD-END> MAY-31-1995
<INVESTMENTS-AT-COST> 2,803,813
<INVESTMENTS-AT-VALUE> 2,889,749
<RECEIVABLES> 68,612
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 2,958,361
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 8,604
<TOTAL-LIABILITIES> 8,604
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 2,803,813
<SHARES-COMMON-STOCK> 2,955
<SHARES-COMMON-PRIOR> 3,030
<ACCUMULATED-NII-CURRENT> 60,008
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 85,936
<NET-ASSETS> 2,949,757
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 200,123
<OTHER-INCOME> 0
<EXPENSES-NET> 5,646
<NET-INVESTMENT-INCOME> 194,477
<REALIZED-GAINS-CURRENT> 1,109
<APPREC-INCREASE-CURRENT> (119,161)
<NET-CHANGE-FROM-OPS> 76,425
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (199,643)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 75
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (198,739)
<ACCUMULATED-NII-PRIOR> 64,399
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
