<PAGE>
Registration No. 33-23873
S E C U R I T I E S A N D E X C H A N G E C O M M
I S S I O
N
Washington, D.C. 20549
POST-EFFECTIVE AMENDMENT NO. 5
to
F O R M S-6
FOR REGISTRATION UNDER THE SECURITIES ACT
OF 1933
OF SECURITIES OF UNIT INVESTMENT TRUSTS
REGISTERED ON FORM N-8B-2
A. Exact Name of Trust:
TAX EXEMPT SECURITIES TRUST,
INSURED SERIES 18
B.
Names of Depositors:
SMITH BARNEY SHEARSON INCORPORATED
KIDDER, PEABODY & CO. INCORPORATED
<TABLE>
<S> <C>
C. Complete addresses of depositors' principal executive
offices:
SMITH BARNEY SHEARSON KIDDER,
PEABODY & CO.
SHEARSON INC. INCORPORATED
1345 Avenue of the Americas 60 Broad Street
New York, New York 10105 New York, New York
10005
D. Names and complete addresses of agents for service:
STEPHEN J. TREADWAY GILBERT R. OTT,
JR.
Smith Barney Kidder, Peabody & Co.
Shearson Inc. Incorporated
1345 Avenue of the Americas 10 Hanover Square
New York, New York 10105 New York, New York
10005
</TABLE>
It is proposed that this filing will become effective February 17,
1994
pursuant to paragraph (b) of Rule 485.
<PAGE>
TAX EXEMPT SECURITIES TRUST
CROSS-REFERENCE SHEET
Pursuant to Regulation C
under the Securities Act of 1933
(Form N-8B-2 Items required by Instruction
as to the Prospectus in Form S-6)
<TABLE>
Form N-89B-2 Form S-6
Item Number Heading in Prospectus
I. Organization and General Information
<C> <S> <C>
1. . . . . . . . . (a) Name of trust Prospectus front cover
(b) Title of securities issued . .
2.Name and address of each depositor Sponsors: Prospectus back
cover
3. . . . Name and address of trustee Trustee
4.Name and address of each principal underwriterSponsors:
Prospectus back cover
5. . .State of organization of trust Tax Exempt Securities
Trust
6.Execution and termination of trust agreementTax Exempt
Securities Trust - The
Trust:
Amendment and Termination
of the Trust Agreement 7. .
. . . . . . . . Changes of name *
8. . . . . . . . . . . . Fiscal year *
9. . . . . . . . . . . . .Litigation *
II. General Description of the Trust and
Securities of the Trust
10.(a) Registered or bearer securities Rights of Unit Holders
(b) Cumulative or distributive securities
(c) Redemption . . . . . . . . . .
(d) Conversion, transfer, etc. . .
(e) Periodic payment plan. . . . . *
(f) Voting rights. . . . . . . . .
(g) Notice to certificate holders Rights of Unit Holders -
Reports and Records:
Sponsors -
Responsibility: Trustee -
Resignation: Amendment
and Termination of the
Trust Agreement -
Amendment
(h) Consents required. . . . . . . Sponsors - Responsibility:
Amendment and Termination
of the Trust Agreement (i) Other
provisions . . . . . . . Tax Exempt Securities Trust - Tax Status
11.Type of securities comprising units Prospectus front cover:
Tax Exempt Securities
Trust - Portfolio
12.Certain information regarding periodic
payment certificates. . . . . . . *
13.. .(a) Load, fees, expenses, etc. Prospectus front cover:
Summary of Essential
Information; Public
Offering - Offering
Price; Public Offering -
Sponsors' and
Underwriters' Profits:
Tax Exempt Securities
Trust - Expenses and
Charges
<PAGE>
Form N-89B-2 Form S-6
Item Number Heading in Prospectus
II. General Description of the Trust and
Securities of the Trust
<C> <S> <C>
(b) Certain information regarding periodic
payment certificates . . . . *
(c) Certain percentages. . . . . . Public Offering - Offering
Price
(d) Certain other fees, etc, payable by holders
Rights of Unit Holders - Certificates
(e) Certain profits receivable by depositors,
principal underwriters, trustee or
affiliated persons . . . . . . Public Offering - Sponsors'
and Underwriters' Profits:
Rights of Unit Holders -
Redemption of Units -
Purchase by the Sponsors of
Units Tendered for
Redemption
(f) Ratio of annual charges to income*
14.. .Issuance of trust's securities Tax Exempt Securities
Trust - The Trust: Rights
of Unit Holders -
Certificates
15.Receipt and handling of payments from purchasers*
16.Acquisition and disposition of underlying
securities . . . . . . . . . . . . Tax Exempt Securities Trust
- Portfolio: Sponsors -
Responsibility
17.. . . . .Withdrawal or redemption Rights of Unit Holders -
Redemption of Units
18.(a) Receipt, custody and disposition of incomeRights of Units
Holders - Distribution of
Interest and Principal:
Rights of Unit Holders -
Reports and Records
(b) Reinvestment of distributions *
(c) Reserves or special funds. . . Rights of Unit Holders -
Distribution of Interest
and Principal: Tax Exempt
Securities Trust - Expenses
and Charges - Other Charges (d) Schedule of
distributions. . . *
19.. . Records, accounts and reports Rights of Unit Holders -
Reports and Records:
Rights of Unit Holders -
Distribution of Interest
and Principal
20.Certain miscellaneous provisions of trust agreementAmendment
and Termination of the Trust
(a) Amendment. . . . . . . . . . . Agreement: Trustee -
Resignation: Trustee -
(b) Termination . . . . . . . . . Resignation: Trustee -
Limitations on Liability:
(c) and (d) Trustee, removal and successorSponsors -
Responsibility: Sponsors - Resignation
(e) and (f) Depositors, removal and successor
21.. . . . Loans to security holders *
22.. . . . .Limitations on liability Sponsors - Limitations on
Liability: Trustee -
Limitations on Liability:
Tax Exempt Securities
Trust - Portfolio
23.. . . . . . .Bonding arrangements *
24.Other material provisions of trust agreement*
______
* Inapplicable, answer negative or not required.
<PAGE>
<PAGE> Form N-89B-2 Form S-6
Item Number Heading in Prospectus
III. Organization, Personnel and
Affiliated Persons of Depositor
<C> <S> <C>
25.. . . .Organization of depositors Sponsors
26.. . . Fees received by depositors *
27.. . . . . .Business of depositors Sponsors
28.Certain information as to officials and
affiliated persons of depositors [Contents of Registration
Statement]
29.. Voting securities of depositors *
30.. .Persons controlling depositors *
31.Payments by depositor for certain services
rendered to trust . . . . . . . . *
32.Payments by depositors for certain other services
rendered to trust . . . . . . . . *
33.Remuneration of employees of depositors for
certain services rendered to trust *
34.Remuneration of other persons for certain services
rendered to trust . . . . . . . . *
IV. General Description of the Trust and
Securities of the Trust
35.Distribution of trust's securities by statesPublic Offering -
Distribution of Units
36.Suspension of sales of trust's securities*
37.Revocation of authority to distribute*
38.. . . .(a) Method of distribution Public Offering -
Distribution of Units
(b) Underwriting agreements. . . .
(c) Selling agreements . . . . . .
39.(a) Organization of principal underwritersSponsors
(b) N.A.S.D. membership of principal underwriters
40.Certain fees received by principal underwriters*
41.(a) Business of principal underwritersSponsors
(b) Branch offices of principal underwriters*
(c) Salesmen of principal underwriters*
42.Ownership of trust's securities by certain persons*
43.Certain brokerage commissions received by principal
underwriters. . . . . . . . . . . *
44.. . . . . (a) Method of valuation Prospectus front cover:
Public Offering -
Offering Price: Public
Offering - Distribution
of Units
(b) Schedule as to offering price *
(c) Variation in offering price to certain personsPublic
Offering - Distribution of Units
45.. Suspension of redemption rights *
46.. . . . .(a) Redemption Valuation Rights of Unit Holders -
Redemption of Units -
Computation of Redemption
Price per Unit
(b) Schedule as to redemption price *
47.Maintenance of position in underlying securities
Public Offering - Market for Units: Rights of Unit Holders -
Redemption of Units - Purchase by the Sponsors of Units
tendered for Redemption; Rights of Unit Holders - Redemption
of Units - Computation of Redemption Price per Unit
______
* Inapplicable, answer negative or not required.<PAGE>
<PAGE> Form N-89B-2 Form S-6
Item Number Heading in Prospectus
V. Information Concerning the Trustee
or Custodian
<C> <S> <C>
48.Organization and regulation of trusteeTrustee
49.. . .Fees and expenses of trustee Tax Exempt Securities
Trust - Expenses and
Charges
50.. . . . . . . . . .Trustee's lien Tax Exempt Securities
Trust - Expenses and
Charges - Other Charges
VI. Information Concerning Insurance of
Holders of Securities
51.Insurance of holders of trust's securities*
VI. Policy of Registrant
52. (a) Provisions of trust agreement with respect to
selection or elimination of underlying securitiesProspectus
front cover: Sponsors-Responsibility
(b)Transactions involving elimination of
underlying securities . . . . . *
(c)Policy regarding substitution or elimination
of underlying securities. . . . Sponsors - Responsibility
(d)Fundamental policy not otherwise covered*
53. Tax status of trust . . . . . . Prospectus front cover: Tax
Exempt Securities Trust -
Tax Status
VIII. Financial and Statistical Information
54. Trust's securities during last ten years*
55. . . . . . . . . . . . . . . . . *
56. Certain information regarding periodic payment
securities . . . . . . . . . . . . *
57. . . . . . . . . . . . . . . . . *
58. . . . . . . . . . . . . . . . . *
59. Financial statements (Instruction 1(c) to form S-6)
Statement of Financial Condition of The Tax Exempt Securities
Trust
______
* Inapplicable, answer negative or not required.
<PAGE>
</TABLE>
INSURED SERIES 18
[S] [C]
In the opinion of counsel, under existing law interest income to the
Trust and, with certain exceptions, to Unit holders is exempt from all
Federal income tax, but may be subject to state and local taxes.
Capital gains, if any, are subject to tax. Investors should retain both
parts of this Prospectus for future reference.
THE INITIAL PUBLIC OFFERING OF UNITS IN THE TRUST HAS
BEEN COMPLETED. THE UNITS OFFERED HEREBY ARE
ISSUED AND OUTSTANDING UNITS WHICH HAVE BEEN
ACQUIRED BY THE SPONSORS EITHER BY PURCHASE FROM
THE TRUSTEE OF UNITS TENDERED FOR REDEMPTION OR IN
THE SECONDARY MARKET. SEE PART B, "RIGHTS OF UNIT
HOLDERS--REDEMPTION OF UNITS--PURCHASE BY THE
SPONSORS OF UNITS TENDERED FOR REDEMPTION" AND
"MARKET FOR UNITS". THE PRICE AT WHICH THE UNITS
OFFERED HEREBY WERE ACQUIRED WAS NOT LESS THAN
THE REDEMPTION PRICE DETERMINED AS PROVIDED
HEREIN. SEE PART B, "RIGHTS OF UNIT HOLDERS--
REDEMPTION OF UNITS--COMPUTATION OF REDEMPTION
PRICE PER UNIT".
INSURED SERIES 18 is a unit investment trust designated as the
National Trust formed for the purpose of obtaining for its Unit holders
tax-exempt interest income and conservation of capital through investment
in a fixed portfolio of long term municipal bonds. As a result of the
insurance on the bonds the Units were rated AAA by Standard & Poor's
Corporation as of the Date of Deposit (See "Portfolio of Securities".) The
bonds are issued on behalf of states, counties, territories, possession and
municipalities of the United States and authorities or political subdivisions
thereof. The interest on all bonds in each Trust is, in the opinion of
recognized bond counsel to the issuers of the obligations, (i) exempt under
existing law (except in certain instances depending upon the Unit holders)
from all Federal income tax, and (ii) subject to the alternative minimum
tax under the Tax Reform Act of 1986 as respects the required inclusion
in the alternative minimum tax base of one-half of adjusted net book
income of corporate Unit holders. (See Part B, "Tax Exempt Securities
Trust--Tax Status.")
THE OBJECTIVES of the Trust are tax-exempt income and conservation
of capital through an investment in a diversified portfolio consisting
primarily of insured municipal bonds. There is, of course, no guarantee
that the Trust's objectives will be achieved since the payment of interest
and preservation of principal are dependent upon the continued ability of
the issuers and the obligors of the bonds, and the insurers thereof, to meet
such obligations. The insurance does not protect Unit holders from the
risk that the value of the Units may decline.
INSURANCE, guaranteeing the scheduled payment of all principal and
interest throughout the life of certain of the Bonds in the Trust has been
obtained at either cost of the issuer at the time of issuance, at the cost of
a holder prior to the purchase of the Bond by the Trust, or at the cost of
the Sponsor at the Date of Deposit. Insurance guaranteeing the scheduled
payments of principal and interest on the remainder of the Bonds in the
portfolio of the Trust ("Portfolio Insurance") has been obtained by the
Trust from Financial Guaranty Insurance Company ("Financial Guaranty")
and applies only while such Bonds are retained in the Trust. Pursuant to
an irrevocable commitment obtained from Financial Guaranty, in the event
of the sale of a Bond covered by Portfolio Insurance, the Trustee has the
right to obtain permanent insurance ("Permanent Insurance") for such
Bonds upon payment of a single predetermined premium from the proceeds
of the sale of such Bond. The monthly cost of the Portfolio Insurance on
the Bonds while held in the Trust is accounted for as an expense of the
Trust. Any amount paid for Permanent Insurance on a Bond sold by the
Trust will be accounted for as an offset to the amount received on the sale.
All insurance relates only to the Bonds in the Trust and not to the Units
offered hereby or to the market value thereof. On the Date of Deposit, the
Units were rated "AAA" by Standard & Poor's Corporation. The Sponsor
has been advised that the basis for the "AAA" rating on the Units of the
Trust was the "AAA" claims-paying ability rating of the Insurers of the
Bonds in such Trusts. The Sponsor has not sought to confirm the rating
on the Units subsequent to the Date of Deposit. (See Part B--"Insurance".)
THE PUBLIC OFFERING PRICE of the Units is equal to the aggregate
bid price of the underlying securities in the Trust's portfolio divided by the
number of Units outstanding, plus a sales charge equal to 5% of the Public
Offering Price (5.263% of the aggregate bid price of the Securities per
Unit). A proportional share of accrued and undistributed interest on the
securities at the date of delivery of the Units to the purchaser is also added
to the Public Offering Price.
THE SPONSOR, although not obligated to do so, intends to maintain a
market for the Units at prices based upon the aggregate bid price of the
underlying securities, as more fully described in Part B, "Market for
Units". If such a market is not maintained, a Unit holder may be able to
dispose of his Units only through redemption at prices based upon the
aggregate bid price of the underlying securities. The market value of the
underlying securities includes the value attributable to the insurance on the
securities. (See Part B--"Insurance".)
MONTHLY DISTRIBUTIONS of principal and interest received by the
Trust will be made on or shortly after the fifteenth day of each month to
holders of record on the first day of that month. For further information
regarding the distributions by the Trust, see the "Summary of Essential
Information".
THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION,
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
Prospectus Part A dated February 17, 1994
Note: Part A of this Prospectus may not be distributed unless
accompanied by Part B.
<PAGE>
<TABLE>
TAX EXEMPT SECURITIES TRUST, INSURED SERIES 18
SUMMARY OF ESSENTIAL INFORMATION AS OF
NOVEMBER 24, 1993+
Sponsors: SMITH BARNEY SHEARSON INC. and
KIDDER, PEABODY & CO.
INCORPORATED
Trustee: UNITED STATES TRUST COMPANY
OF NEW YORK
Evaluator: KENNY S&P EVALUATION SERVICES
<S> <C>
Principal Amount of Securities in Trust $9,125,000
Number of Units 9,840
Fractional Undivided Interest in Trust per Unit 1/9,840
Principal Amount of Securities in Trust per Unit $927.33
Public Offering Price per Unit #* $1,027.61
Sales Charge (3.25% of Public Offering Price)# 33.39
Approximate Redemption and Sponsor's Repurchase
Price per Unit
(per Unit Bid Price of Securities)#** $ 994.22
Calculation of Estimated Net Annual Income per Unit:
Estimated Annual Income per Unit $ 73.33
Estimated Annual Insurance Expense per
Unit .93
Less Estimated Annual Expenses per
Unit 1.52
Estimated Net Annual Income per Unit $70.88
Monthly Income Distribution per Unit
$5.90
Daily Rate (360-day basis) of Income Accrual per Unit $
.1968
Estimated Current Return Based on Public Offering
Price# 6.89%
Estimated Long-Term Return# 4.55%
<FN>
#Subject to changes in the prices of the underlying
securities. The aggregate bid price of the securities is determined
on each business day as of the Evaluation Time.
*Plus $10.27 per Unit representing accrued interest and
the net of cash on hand, accrued expenses and amounts
distributable to Unit holders through the expected date of
settlement (five business days after November 24, 1993). (See
"Public Offering--Offering Price".)
The sales charge has been reduced effective as of the date of this
prospectus because prerefundings of Portfolio securities have
shortened the average life of the Trust.
**Plus $14.59 per Unit representing accrued interest and
the net of cash on hand, accrued expenses and amounts
distributable to Unit holders of record as of November 24, 1993
on a pro rata basis. (See "Redemption of Units--Computation of
Redemption Price per Unit".)
</TABLE>
Record Dates: The first day of each month
Distribution Dates: The fifteenth day of each month
Evaluation Time: Close of trading on the New York Stock
Exchange (currently 4:00 P.M. New York time)
Date of Deposit and Trust Agreement: December 14, 1988
Mandatory Termination Date: January 1, 2038
Minimum Value of Trust: Trust may be terminated if the value
of the Trust is less than $5,000,000 and must be terminated if the
value of the Trust is less than $2,500,000
Trustee's Annual Fee: $1.16 per $1,000 principal amount of bonds
($10,585 per year on the basis of bonds in the principal amount
of $9,125,000) plus expenses.
Evaluator's Fee: $.30 per bond per evaluation Number of
issues: 23 Number of States: 13
As of November 24, 1993, 21 (88%) of the Bonds were rated
by Standard & Poor's Corporation (68% being rated AAA, 15%
being rated A and 5% being rated BBB) and 2 (12%) were rated
by Moody's Investors Service (12% being rated A). Ratings
assigned by the bond rating services are subject to change from
time to time.
<PAGE>
Additional Considerations - Investment in the Trust should be made
with an understanding that the value of the underlying Portfolio may
decline with increases in interest rates. Approximately 17% of the
Bonds in the Trust consist of hospital revenue bonds (including
obligations of health care facilities). Approximately 6% of the Bonds
in the Trust consist of bonds which are subject to the Mortgage
Subsidy Bond Tax Act of 1980. Approximately 60% of the Bonds in
the Trust consist of bonds in the power facilities category. (See Part
B, "Tax Exempt Securities Trust-Portfolio" for a brief summary of
additional considerations relating to certain of these issues.)
+ The percentages referred to in this summary are each computed
on the basis of the aggregate bid price of the Bonds as of November
24, 1993.
<TABLE>
FINANCIAL AND STATISTICAL INFORMATION
Selected data for each Unit outstanding
<S> <C> <C> <C> <C>
IncomePrincipal
Units Net AssetDistributions
Distributions
Period Ended Outstanding Value Per UnitPer Unit
Per Unit
October 31, 1991 10,000 $ 1,064.02$ 78.12 $-
October 31, 1992 10,000 1,064.1678.06 1.00
October 31, 1993 9,840 1,017.2776.77 72.33
</TABLE>
INDEPENDENT AUDITORS' REPORT
To the Unit Holders, Sponsor and Trustee of
Tax Exempt Securities Trust, Insured Series 18:
We have audited the accompanying balance sheet of Tax Exempt
Securities Trust, Insured Series 18, including the portfolio of
securities, as of October 31, 1993, and the related statements of
operations and changes in net assets for each of the years in the
three-year period ended October 31, 1993. These financial
statements are the responsibility of the Trustee (see Note 6). Our
responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. Our procedures included
confirmation of securities owned as of October 31, 1993 by
correspondence with the Trustee. An audit also includes assessing
the accounting principles used and significant estimates made by the
Trustee, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Tax Exempt
Securities Trust, Insured Series 18 as of October 31, 1993, and the
results of its operations and changes in its net assets for each of the
years in the three-year period ended October 31, 1993, in conformity
with generally accepted accounting principles.
KPMG PEAT MARWICK
New York, New York
January 14, 1994<PAGE>
<PAGE>
<TABLE>
TAX EXEMPT SECURITIES TRUST, INSURED SERIES
18
BALANCE SHEET
October 31, 1993
ASSETS
<S> <C>
Investments in tax exempt bonds, at market value
(Cost $8,975,859) (Note 3 to Portfolio of Securities)
$9,842,018
Accrued interest
241,682
Total Assets
$
10,083,700
LIABILITIES AND NET ASSETS
Overdraft payable $ 72,603
Accrued expenses
1,148
Total Liabilities 73,751
Net Assets (9,840 units of fractional undivided
interest outstanding):
Original cost to investors (Note 1) $ 10,449,526
Less initial underwriting commission (sales charge)
(Note 1) 491,000
9,958,526
Cost of securities sold or redeemed since date
of deposit (December 14, 1988) (982,667
)
Net unrealized market appreciation 866,159
9,842,018
Undistributed net investment income 158,377
Undistributed proceeds from securities sold or
redeemed 9,554
Net Assets 10,009,949
Total Liabilities and Net Assets
$10,083,700
Net asset value per unit $1,017.27
STATEMENTS OF OPERATIONS
For the years ended October 31, 1993, 1992 and 1991
1993 1992 1991
<S> <C>
<C> <C>
Investment Income-interest (Note 2) . . . . . . . . . . . . . . . . . . . . .
$ 791,674. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 807,742. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
807,898
Less expenses:
Insurance expenses . . . . . . . . . . . . . . . . . . . . . . . . . . .9,246
9,246. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,246
Trustee's fees and expenses. . . . . . . . . . . . . . . . . . . . . . .
13,689 13,371 13,163
Evaluator's fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,132
2,008 . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,003
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 25,067
24,625 . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,412
Net investment income. . . . . . . . . . . . . . . . . . . . . . . . . . 766,607
783,117 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
783,486
Realized and unrealized gain (loss) on investments:
Net realized gain (loss) on securities transactions
(Note 5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(79,188
) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144 -
Net increase in unrealized market appreciation . . . . . . . . . . . . . 333,367
8,714 . . . . . . . . . . . . . . . . . . . . . . . . . . . 468,664
Net gain on investments. . . . . . . . . . . . . . . . . . . . . . . . . 254,179
8,858 . . . . . . . . . . . . . . . . . . . . . . . . . . . 468,664
Net increase in net assets resulting from operations . . . . . . . . . . $1,020,786$
791,975 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,252,150
The accompanying Notes are an integral part of these statements.
<PAGE>
TAX EXEMPT SECURITIES TRUST, INSURED SERIES 18
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended October 31, 1993, 1992 and 1991
1993 1992 1991
Operations:
Net investment income. . . . . . . . . . . . . . . . . . . . . . . . . . . $766,607$
783,117 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 783,486
Net realized gain (loss) on securities transactions
(Note 5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(79,188
) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144 -
Net increase in unrealized market appreciation . . . . . . . . . . . . . . 333,367
8,714 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 468,664
Net increase in net assets resulting from operations . . . . . . . . . . . 1,020,786
791,975 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,252,150
Distributions to Unit Holders:
Net investment income (Note 4) . . . . . . . . . . . . . . . . . . . . . .(766,085
) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(780,600)
(781,200)
Proceeds from securities sold or redeemed. . . . . . . . . . . . . . . . . (715,850
) . . . . . . . . . . . . . . . . . . . . . . . . . . . . (10,000)
-
Total Distributions. . . . . . . . . . . . . . . . . . . . . . . . . (1,481,935
) . . . . . . . . . . . . . . . . . . . . . . . . . . . . (790,600)
(781,20
0 )
Unit Redemptions by Unit Holders (Note 3):
Accrued interest at date of redemption . . . . . . . . . . . . . . . . . .
(2,203 ) - -
Value of Units at date of redemption . . . . . . . . . . . . . . . . . . .
(168,363 ). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -
-
Total Redemptions. . . . . . . . . . . . . . . . . . . . . . . . . .
(170,566 ). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -
-
Increase (decrease) in net assets. . . . . . . . . . . . . . . . . . . . .(631,715
) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,375 470,950
Net Assets:
Beginning of year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,641,664
10,640,289. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10,169,339
End of year (including undistributed net
investment income of $158,377, $160,058 and
$157,541, respectively). . . . . . . . . . . . . . . . . . . . . . . . . $
10,009,949. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
10,641,664. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,640,289
</TABLE>
NOTES TO FINANCIAL STATEMENTS
(1) The original cost to the investors represents the aggregate initial
public offering price as of the date of deposit (December 14,
1988), exclusive of accrued interest, computed on the basis of
the aggregate offering price of the securities. The initial
underwriting commission (sales charge) was 4.25% of the
aggregate public offering price (4.439% of the aggregate
offering price of the securities).
(2) Interest income represents interest earned on the Trust's
portfolio and has been recorded on the accrual basis.
(3) 160 Units were redeemed by the Trustee during the three years
ended October 31, 1993 (all Units being redeemed in 1993).
(4) Interest received by the Trust is distributed to Unit holders on
the fifteenth day of each month, after deducting applicable
expenses.
(5) The gain (loss) from the sale or redemption of securities is
computed on the basis of average cost of the issue sold or
redeemed.
(6) The Trustee has custody of and responsibility for all accounting
and financial books, records, financial statements and related
data of each Trust and is responsible for establishing and
maintaining a system of internal control directly related to, and
designed to provide reasonable assurance as to the integrity and
reliability of, financial reporting of each Trust. The Trustee is
also responsible for all estimates of expenses and accruals
reflected in each Trust's financial statements. The Evaluator
determines the price for each underlying Bond included in each
Trust's Portfolio of Securities on the basis set forth in Part B,
"Public Offering - Offering Price". Under the Securities Act of
1933, as amended (the "Act"), the Sponsor is deemed to be
issuer of each Trust's Units. As such, the Sponsor has the
responsibility of issuer under the Act with respect to financial
statements of each Trust included in the Registration Statement.
<PAGE>
<TABLE>
TAX EXEMPT SECURITIES TRUST, INSURED SERIES 18
NATIONAL INSURED TRUST - PORTFOLIO OF SECURITIES -
October 31, 1993
<S> <C> <C> <C>
<C>
Ratings
Redemption Principal
Market
Security Description (1)
Provisions (2) Amount
Value (3)
Denver, Colorado, Airport System Baa1* 8/1/94 @
101 1/2 $ 445,000$466,640
Revenue Bonds, 8.875% due 8/1/2015 S.F. 8/1/12
@ 100
Florida Housing Finance Agency,
Residential Mortgage Revenue Bonds,
8.50% due 6/15/2006 AAA 6/15/95 @
103 250,000268,503
(Financial Guaranty Ins.) (Note 4) S.F.
6/15/02 @ 100
Palm Beach County, Florida, Solid
Waste Authority Revenue Bonds, A 7/1/97 @
103 400,000465,500
8.75% due 7/1/2010 S.F. 7/1/05
@ 100
Burke County, Georgia, Development
Authority, Pollution Control Revenue
Bonds, Georgia Power Company,
11.75% due 11/1/2014 AAA 11/1/94 @
102 360,000397,692
(Financial Guaranty Ins.) (Note 4)
City of Chicago, Illinois,
Chicago-O'Hare International Airport,
General Airport Revenue Bonds, A+ 1/1/94 @
102 500,000515,050
8.75% due 1/1/2016 (p)
Indiana Municipal Power Agency, Power
Supply System Revenue Refunding Bonds,
5.75% due 1/1/2018 AAA 1/1/96 @
100 500,000503,600
(BIG Ins.) (Note 4) S.F. 1/1/16
@ 100
Muscatine, Iowa, Electric Revenue
Refunding Bonds, 5.00% due 1/1/2007 AAA 1/1/96 @
100 500,000497,580
(Capital Guaranty Ins.) (Note 4)
Louisiana Public Facilities Authority,
Certificates of Participation Program
Hospital Revenue, Our Lady of The Lake
Regional Medical Center Program,
8.20% due 12/1/2015 AAA 12/1/98 @
102 430,000508,939
(BIG Ins.) (Note 4)
Christian Health Service, Missouri,
Development Corporation-Village
North, Inc., Issue Revenue Bonds,
9.125% due 11/1/2005 AAA 5/1/94 @
103 160,000169,422
(Financial Guaranty Ins.) (Note 4) (p)
North Carolina Municipal Power Agency
No. 1, Catawba Electric Revenue A* 1/1/96 @
100 500,000470,550
Bonds, 5.00% due 1/1/2017 S.F. 1/1/06
@ 100
North Carolina Eastern Municipal Power
Agency, Power System Revenue
Refunding Bonds, 6.00% due 1/1/2026 A* 1/1/98 @
100 750,000761,513
S.F. 1/1/25
@ 100
9.00% due 1/1/2014 (p) AAA 1/1/96 @
102 500,000564,575
A-6
<PAGE>
TAX EXEMPT SECURITIES TRUST, INSURED SERIES 18
NATIONAL INSURED TRUST - PORTFOLIO OF SECURITIES -
October 31, 1993
(Continued)
Ratings
Redemption Principal
Market
Security Description (1)
Provisions (2) Amount
Value (3)
Mercer County, North Dakota, Pollution
Control Revenue Bonds, Basin Electric
Power Cooperative Antelope Valley
Station, 10.50% due 6/30/2013 AAA 12/30/94
@ 102 $ 500,000$547,565
(AMBAC Ins.) (Note 4) S.F.
6/30/09 @ 100
South Carolina Public Service Authority
Electric System Expansion Revenue A+ 1/1/95 @
102 500,000525,745
Refunding Bonds, 6.90% due 7/1/2021 S.F. 7/1/14
@ 100
Texas Housing Agency, Single Family
Mortgage Revenue Bonds,
7.50% due 9/1/2017 AAA 9/1/96 @
102 280,000286,810
(MBIA Ins.) (Note 4) S.F. 3/1/07
@ 100
City of Austin, Texas, Combined Utility
Systems Revenue Refunding Bonds,
7.75% due 11/15/2012 (p) AAA 5/15/96 @
102 250,000279,050
(Financial Guaranty Ins.) (Note 4)
7.75% due 5/15/2018 (p) AAA 5/15/03 @
100 250,000306,363
(Financial Guaranty Ins.) (Note 4)
Harris County, Texas, Toll Road
Unlimited Tax & Subordinate Revenue AAA 2/1/95 @
103 400,000439,564
Refunding Bonds, 9.25% due 8/1/2014 (p)
Lower Colorado, Texas, River Authority,
Priority Revenue Bonds, 7.75% due 1/1/2010 AAA 1/1/96 @
102 150,000166,042
(BIG Ins.) (Note 4) (p)
North Central Texas, Health Facilities
Development Corporation Hospital Revenue
Bonds, Children's Medical Center of Dallas
Project,7.875% due 7/1/2018 (p) AAA 7/1/97 @
102 250,000288,290
(BIG Ins.) (Note 4)
Sam Rayburn, Texas, Municipal Power
Agency, Power Supply System Revenue
Refunding Bonds, 9.25% due 9/1/2008 AAA 9/1/95 @
102 250,000280,150
(MBIA Ins.) (Note 4) (p)
San Antonio, Texas, Electric Gas
System Revenue Improvement Bonds, AAA 2/1/96 @
101 1/2 500,000559,520
8.60% due 2/1/2007 (p)
Washington Health Care Facilities
Authority, Virginia Mason Medical
Center, Hospital Revenue Bonds,
8.00% due 7/1/2015 AAA 7/1/97 @
102 500,000 573,355
(MBIA Ins.) (Note 4) S.F. 7/1/07
@ 100
$9,125,000$9,842,018
The accompanying Notes are an integral part of this Portfolio.
<PAGE> A-7<PAGE>
TAX EXEMPT SECURITIES TRUST, INSURED SERIES 18
NATIONAL INSURED TRUST - PORTFOLIO OF SECURITIES -
October 31, 1993
(Continued)
At October 31, 1993 the net unrealized market appreciation of all tax
exempt bonds was comprised of the following:
<S> <C>
Gross unrealized market appreciation $ 1,064,245
Gross unrealized market depreciation (198,086)
Net unrealized market appreciation $ 866,159
</TABLE>
NOTES TO PORTFOLIO OF SECURITIES:
(1) All Ratings are by Standard & Poor's Corporation, except those
identified by an asterisk (*) which are by Moody's Investors
Service. The meaning of the applicable rating symbols is set
forth in Part B, "Ratings".
(2) There is shown under this heading the year in which each issue
of bonds initially or currently is redeemable and the redemption
price for that year; unless otherwise indicated, each issue
continues to be redeemable at declining prices thereafter, but
not below par. "S.F." indicates a sinking fund has been or will
be established with respect to an issue of bonds. The prices at
which bonds may be redeemed or called prior to maturity may
or may not include a premium and, in certain cases, may be less
than the cost of the bonds to the Trust. Certain bonds in the
portfolio, including bonds not listed as being subject to
redemption provisions, may be redeemed in whole or in part
other than by operation of the stated redemption or sinking
fund provisions under certain unusual or extraordinary
circumstances specified in the instruments setting forth the
terms and provisions of such bonds. For example, see discussion
of obligations of municipal housing authorities under "Tax
Exempt Securities Trust-Portfolio" in Part B.
(3) The market value of securities as of October 31, 1993 was
determined by the Evaluator on the basis of bid prices for the
securities at such date.
(4) Insurance to maturity has been obtained previously from the
listed Insurance Company for these Bonds. The AAA ratings
on these Bonds are based in part on the creditworthiness and
claims-paying ability of the Insurance Company insuring such
Bond to maturity. No premium is payable therefore by the
Trust. All other bonds in the portfolio are insured by the
Portfolio Insurance Policy obtained by the Trust. (See Part B,
"Insurance on the Bonds in the Portfolio of a Trust").
(p) It is anticipated that these bonds will be redeemed prior to
their scheduled maturity, pursuant to a pre-refunding, as
reflected under the column "Redemption Provisions".
A-8
<PAGE>
[TEXT]
PROSPECTUS-PART B
Note that Part B of the Prospectus may not be distributed
unless accompanied by Part A.
TAX EXEMPT SECURITIES TRUST--INSURED SERIES
The Trusts
Each Trust is one of a series of similar but separate unit
investment trusts created under the laws of the State of New York by a
Trust Indenture and Agreement and related Reference Trust Agreement,
dated the Date of Deposit (collectively, the "Trust Agreement"), among
Smith Barney Shearson Inc. and Kidder, Peabody & Co. Incorporated
(the "Sponsors"), United States Trust Company of New York, as
Trustee, and Kenny Information Systems, Inc., as Evaluator. Each trust
containing Bonds of a State for which such Trust is named (a "State
Trust") and each National Trust and Selected Term Trust is referred to
herein as the "Trust" or "Trusts," unless the context
requires otherwise. On the Date of Deposit the Sponsors deposited with
the Trustee interest-bearing obligations (the "Bonds"), including contracts
and funds (represented by a certified check or checks and/or an
irrevocable letter or letters of credit, issued by a major commercial bank)
for the purchase of certain such obligations (such Bonds being referred
to herein as the "Securities"). The Trustee thereafter delivered to the
Sponsors registered certificates of beneficial interest (the "Certificates")
representing the units (the "Units") comprising the
entire ownership of each Trust. The initial public offering of Units in
each Trust has been completed. The Units offered hereby are issued and
outstanding Units which have been acquired by the Sponsors either by
<PAGE>
purchase from the Trustee of Units tendered for redemption or in the
secondary market. See "Rights of Unit Holders--Redemption of
Units--Purchase by the Sponsors of Units Tendered for Redemption" and
"Public Offering--Market for Units".
Objectives
The objectives of a Trust in the Insured Series are tax-exempt
income and conservation of capital through an investment in a diversified
portfolio of insured municipal bonds. There is, of course, no guarantee
that a Trust's objectives will be achieved since the payment of interest
and the preservation of principal are dependent upon the continued ability
of the issuers of the bonds or the creditworthiness of the insurers to meet
such obligations. The insurance does not protect Unit holders from the
risk that the value of the Units may decline before the ratings of the
Bonds subsequent to the Date of Deposit, set forth in Part A - "Portfolio
of Securities" may have declined due to, among other factors (including
a decline in the creditworthiness of an insurer in the case of an insured
trust which may also result in a decline in the AAA ratings of the Units
of an insured trust), a decline in the creditworthiness of the
issuer of said Bonds.
Portfolio
The following factors, among others, were considered in
selecting Bonds for each Trust: (1) all the Bonds of the National Trust
and the Selected Term Trust are obligations of the states, counties,
territories, or municipalities of the United States and authorities or
political subdivisions thereof, so that the interest on them will, in the
opinion of recognized bond counsel to the issuing governmental
authorities, be exempt from Federal income
tax under existing law to the extent described in "Tax Status", (2) all the
Bonds deposited in a State Trust are obligations of the State for which
such Trust is named or of the counties, territories or municipalities of
such State, and authorities or political subdivisions thereof, or of the
Territory of Guam or the Commonwealth of Puerto Rico, so that the
interest on them will, in the opinion
of recognized bond counsel to the issuing governmental authorities, be
exempt from Federal income tax under existing law to the extent
described in "Tax Status" and from state income taxes in the state for
which such State Trust is named to the extent described in Part C - "Tax
Exempt Securities Trust -Taxes," (3) the Bonds are diversified as to
purpose of issue and location of issuer, except in the case of a State
Trust where the Bonds are diversified only
as to purpose of issue, (4) in the opinion of the Sponsors, the Bonds are
fairly valued relative to other bonds of comparable quality and maturity,
and (5) whether insurance guaranteeing the timely payment, when due,
of all principal and interest on the Bonds was available.
<PAGE>
The Bonds in the Portfolio of a Trust were chosen in part on
the basis of their respective maturity dates. The Selected Term Trust
will contain Bonds which will have a dollar-weighted average portfolio
maturity of more than three years but not more than ten years from the
Date of Deposit. The National
Trust or a State Trust not specified as to term will have a dollar-weighted
average portfolio maturity of more than ten years from the Date of
Deposit. For the actual maturity dates of each of the Bonds contained in
each Trust, see Part A, "Portfolio or Securities". A sale or other
disposition of a Bond by the Trust prior to the maturity of such Bond
may be at a price which results in a loss to the Trust. The inability of an
issuer to pay the principal amount due upon
the maturity of a Bond would result in a loss to the Trust.
Additional Considerations Regarding the Trusts
The Portfolio of a Trust may contain Bonds that are general
obligations of governmental entities which are backed by the taxing
power of such entities (see Part A, the "Summary of Essential
Information" of this Prospectus for information relating to the particular
Trust described therein). General obligation bonds are general obligations
of a state or local government, secured by the power of such issuer to
levy taxes, and are backed by the pledge
of such governmental entity. The ability of the issuer of a general
obligation bond to meet its obligation depends largely upon its economic
condition. Many issuers rely upon ad valorem real property taxes as a
source of revenue. Proposals in the form of state legislative or voter
initiatives to limit ad valorem
real property taxes have been introduced in various states. It is not
presently possible to predict the impact of these or future proposals, if
adopted, on states, local governments or school districts or on their
abilities to make future payments on their outstanding debt obligations.
The remaining issues contained in a Trust's portfolio are payable from
the income of specific projects or
authorities and are not supported by the issuer's power to levy taxes.
This latter group of issues contains Bonds that are supported by the
moral obligations of governmental entities. In the event of a deficiency
in the debt service reserve funds of moral obligations bonds, the
governmental entity having the moral
commitment may (but is not legally obligated to) satisfy such deficiency.
However, in the event of a deficiency in the debt service reserve funds
of bonds not backed by such moral obligations, no such moral
commitment exists.
The Portfolio of a Trust may contain Bonds which are
"private activity bonds" (often called Industrial Revenue Bonds ("IRBs")
if issued prior to 1987) which would be primarily of two activity types:
(1) Bonds for a publicly owned facility which a private entity may have
<PAGE>
a right to use or manage to some degree, such as an airport, seaport
facility or water system and (2)
facilities deemed owned or beneficially owned by a private entity but
which were financed with tax-exempt bonds of a public issuer, such as
a manufacturing facility or a pollution control facility. In the case of the
first type, bonds are generally payable from a designated source of
revenues derived from the facility and may further receive the benefit of
the legal or moral obligation of one or
more political subdivisions or taxing jurisdictions. In most cases of
project financing of the first type, issuers are obligated to pay the
principal of, any premium then due, or interest on the private activity
bonds only to the extent that funds are available from receipts or
revenues of the issuer derived from the project or the operator or from
the unexpended proceeds of the bonds. Such revenues include user fees,
service charges, rental and lease payments, and mortgage and other loan
payments.
The second type of issue will generally finance projects which
are owned by or for the benefit of, and are operated by, corporate
entities. Ordinarily, such private activity bonds are not general
obligations of governmental entities and are not backed by the taxing
power of such entities, and are solely dependent upon the
creditworthiness of the corporate user of the
project or corporate guarantor.
The private activity bonds in the State Trust have generally
been issued under bond resolutions, agreements or trust indentures
pursuant to which the revenues and receipts payable under the issuer's
arrangements with the users or the corporate operator of a particular
project have been assigned and pledged to the holders of the private
activity bonds. In certain cases a mortgage on the
underlying project has been assigned to the holders of the private activity
bonds or a trustee as additional security. In addition, private activity
bonds are frequently directly guaranteed by the corporate operator of the
project or by another affiliated company. See "Description of Portfolio"
in Part A for the amount of private activity bonds contained therein.
Most of the Bonds in the Portfolio of a Trust are subject to
redemption prior to their stated maturity date pursuant to sinking fund or
call provisions. In general, a call or redemption provision is more likely
to be exercised when the offering price valuation of a bond is higher than
its call or redemption price, as it might be in periods of declining interest
rates, than when such price valuation is less than the bond's call or
redemption price. The Bonds may also be subject to other calls, which
may be permitted or required by events which cannot be predicted (such
as destruction, condemnation, termination of a contract, or receipt of
excess or unanticipated revenues). To the extent that
a Bond was deposited in a Trust at a price higher than the price at which
it is redeemable, redemption will result in a loss of capital when
<PAGE>
compared with the original public offering price of the Units.
Conversely, to the extent that a Bond was acquired at a price lower than
the redemption price, redemption will result in an increase in capital
when compared with the original public offering price of the Units.
Monthly distributions will generally be reduced by the amount of
the income which would otherwise have been paid with respect to
redeemed bonds. The Estimated Current Return and Estimated
Long-Term Return of the Units may be affected by such redemptions.
Each Portfolio of Securities in Part A contains a listing of the sinking
fund and call provisions, if any, with respect to each of the Bonds in a
Trust. Because certain of the Bonds may from time
to time under certain circumstances by sold or redeemed or will mature
in accordance with their terms and proceeds from such events will be
distributed to Unit holders and will not be reinvested, no assurance can
be given that a Trust will retain for any length of time its present size
and composition. Neither the Sponsors nor the Trustee shall be liable in
any way for any default, failure or defect in any Bond.
The Portfolio of the Trust may consist of some Bonds whose
current market values were below face value on the Date of Deposit. A
primary reason for the market value of such Bonds being less than face
value at maturity is that the interest coupons of such Bonds are at lower
rates than the current market interest rate for comparably rated Bonds,
even though at the time of the issuance of such Bonds the interest
coupons thereon represented then prevailing
interest rates on comparably rated Bonds then newly issued. Bonds
selling at market discounts tend to increase in market value as they
approach maturity when the principal amount is payable. A market
discount tax-exempt Bond held to maturity will have a larger portion of
its total return in the form of taxable
ordinary income and less in the form of tax-exempt income than a
comparable Bond bearing interest at current market rates. Under the
provisions of the Internal Revenue Code in effect on the date of this
Prospectus, any ordinary income attributable to market discount will be
taxable but will not be realized until maturity, redemption or sale of the
Bonds or Units. Gain on the disposition of a Bond purchased at a market
discount generally will be treated as ordinary income rather than capital
gain, to the extent of accrued market discount.
The Portfolio of a Trust may contain Bonds in the hospital
facilities category that are payable from revenues derived from hospitals
and health care facilities which, generally, were constructed or are being
constructed from the proceeds of such Bonds. The ability of the issuers
of such bonds to meet their obligations is dependent, among other things,
upon the revenues, costs and occupancy levels of the subject facilities.
Revenues and expenses of hospitals and health care facilities will be
affected by future events and conditions relating generally to, among
other things, demand for health care services at the particular type of
facility, increasing costs of medical technology,
<PAGE>
utilization practices of physicians, the ability of the facilities to provide
the services required by patients, employee strikes and other adverse
labor actions, economic developments in the service area, demographic
changes, greater longevity and the higher medical expenses of treating
the elderly, increased competition from other health care providers and
rates that can be charged for the services provided. Additionally, a
major portion of hospital revenues typically is derived from Federal or
state programs such as Medicare and Medicaid and from Blue Cross and
other issuers. The future solvency of the Medicare trust fund is
periodically subject to question. Changes in the
compensation and reimbursement formulas of these governmental
programs or in the rates of insurers may reduce revenues available for
the payment of principal of or interest on hospital revenue bonds. New
government legislation or regulation and other factors, such as the
inability to obtain sufficient malpractice insurance, may also adversely
impact upon the revenues or costs of hospitals. Future actions by the
federal government with respect to Medicare and by the federal and state
governments with respect to Medicaid, reducing the
total amount of funds available for either or both of these programs or
changing the reimbursement regulations of their interpretation, could
adversely affect the amount of reimbursement available to hospital
facilities. A number of additional legislative proposals concerning health
care are typically under review by the United State Congress at any
given time. These proposals span a wide range
of topics, including cost controls, national health insurance, incentives
for competition in the provision of health care services, tax incentives
and penalties related to health care insurance premiums, and promotion
of prepaid health care plans. The Sponsors are unable to predict the
effect of any of these proposals, if enacted, on any of the Bonds in the
Portfolio of a Trust.
The Portfolio of a Trust may contain Bonds of housing
authorities that are payable from revenues derived by state housing
finance agencies or municipal housing authorities from repayments on
mortgage and home improvement loans made by such agencies. Since
housing authority obligations, which are not general obligations of a
particular state, are generally supported to a large extent by Federal
housing subsidy programs, the failure of
a housing authority to meet the qualifications required for coverage under
the Federal programs, or any legal or administrative determination that
the coverage of such Federal programs is not available to a housing
authority, could result in a decrease or elimination of subsidies available
for payment of principal and interest on such housing authority's
obligations. It is unclear whether legislation
extending the authority to issue mortgage revenue bonds will continue to
be enacted. If any portion of the Bonds proceeds are not committed for
this purpose, Bonds in such amount could be subject to earlier mandatory
redemption at par. Weaknesses in Federal housing subsidy programs and
their administration may result in a decrease of subsidies available for
<PAGE>
payment of principal and interest on housing authority bonds.
Repayment of housing loans and home improvement loans in a timely
manner is dependent upon factors affecting the housing market generally
and upon the underwriting and management ability of the individual
agencies (i.e. the initial soundness of the loan and the effective use of
available remedies should there be a default in loan
payments.) Economic developments including fluctuations in interest
rates, failure or inability to increase rentals and increasing construction
and operating costs, may also adversely impact upon revenues of housing
authorities. In the case of some housing authorities, inability to obtain
additional financing could also reduce revenues available to pay existing
obligations.
The Portfolio of a Trust may contain Bonds of housing
authorities which require the issuer to retire such obligations at par from
unused proceeds of the issue within a stated period (which may be within
a year of the date of issue). Moreover, housing authority obligations
may contain provisions which require the issuer to redeem such
obligations at par prior to any optional
or mandatory redemption dates or maturity under certain unusual or
extraordinary circumstances, including among others, if the project is
condemned or sold or if the project is destroyed and insurance proceeds
are used to redeem the bonds. In the case of certain of the obligations
which were deposited in a Trust at a price higher than their par value,
such a retirement at par would result in a loss of capital to a purchaser
of Units at their original public offering price. Also, monthly
distributions from such Trusts would be reduced by the amount of the
income that would otherwise have been paid with
respect to retired bonds. The Estimated Current Return and Estimated
Long-Term Return of the Units might be adversely affected if the return
on retired bonds is greater than the average return on the Securities in
the relevant Trust. In recent periods of declining interest rates there have
been increased redemptions of housing securities according to such
redemption provisions for two reasons, (i) conventional mortgage loans
have become available at interest rates equal to or less than the interest
rates charged on the mortgage loans which
back such housing securities, and (ii) mortgage loans made with the
proceeds of housing securities may be prepaid earlier than their maturity
dates. Therefore, issuers of such housing securities have experienced
insufficient demand to complete mortgage loan origination for all of the
money made available from such securities. The Sponsors are unable to
predict at this time whether such
redemptions will continue to be made at the same rate, or what effect,
if any, such redemptions will have on the Bonds in the Portfolio of a
Trust. To the extent such obligations are evaluated at a price higher than
their value at the time a Unit holder purchases a Unit, such a retirement
at par would result in a loss of capital to such a purchaser. Also,
monthly distributions would be reduced by the amount of income that
otherwise would have been paid with respect to retired bonds.
<PAGE>
The Portfolio of a Trust may contain Bonds which are subject
to the requirements of Section 103A of the Internal Revenue Code of
1954, as amended (the "1954 Code") or Section 143 of the Internal
Revenue Code of 1986 (the "Code" or the "1986 Code"). Section 103A
and Section 143 provide that obligations issued to provide single family
housing will be exempt from Federal income taxation if all of the
proceeds of the issue (exclusive of issuance
costs and a reasonable required reserve) are used to make or acquire
loans which meet requirements including certain requirements which
must be satisfied after issuance. If proceeds of the issue are not used to
acquire such loans, the issuer may be required to redeem all or a portion
of such issue from such uncommitted proceeds to maintain its tax
exemption. Bond counsel to each such
issuer has issued an opinion that the interest on such Bonds was exempt
from Federal income tax at the time the Bonds were issued. The failure
of the issuers of such Bonds to meet certain ongoing compliance
requirements imposed by Section 103A or Section 143 could render the
interest on such Bonds subject to Federal income taxation, possibly from
the date of their issuance. If interest on such a Bond in a Trust is
deemed to be subject to Federal income taxation, the
loss of tax-exempt status can be expected to adversely affect the market
value of such Bond. In this event, and under the terms of the Trust
Agreement, the Sponsors may direct the sale of such Bond. The sale of
such Bond in such circumstances is likely to result in a loss to the Trust.
The tax exemption for certain housing authority bonds
depends on qualifications under Section 103(b)(4)(A) of the 1954 Code
or Section 142 of the 1986 Code and appropriate Treasury Regulations.
Both Sections require that specified minimum percentages of the units in
each rental housing project financed by the tax-exempt debt are to be
continuously occupied by low or moderate income tenants for specified
periods. Department of the Treasury regulations issued under Section
103 (b)(4)(A) of the 1954 Code provide that in
order to prevent possible retroactive Federal income taxation of interest
on such Bonds certain conditions must be met. The regulations provide,
however, that such retroactive taxation will not occur if the issuer
corrects any non-compliance occurring after the issuance of the Bonds
within a reasonable period after such non-compliance is first discovered
or should have been discovered by the issuer.
Similar regulations are expected to be issued under 1986 Code Section
142. If the interest on any of the Bonds in a Trust that are housing
securities should ultimately be deemed to be taxable, the Sponsor may
instruct the Trustee to sell such Bonds and, since they would be sold as
taxable securities, it is expected that such Bonds would have to be sold
at a substantial discount from the current market price of a comparable
tax-exempt security.
<PAGE>
The Portfolio of a Trust may contain Bonds of issuers in the
power facilities category which are generally payable from revenues
derived from the sale of electricity generated and distributed by power
agencies using hydroelectric, nuclear, fossil or other power sources.
The ability of the issuers of such Bonds to make payments of principal
of, or interest on, such obligations is dependent, among other things,
upon the continuing ability of such issuers to derive sufficient revenues
from their operations to meet debt service requirements. General
problems of the power and electric industry confronting
such issuers include the difficulty in financing large construction projects
during inflationary periods, restrictions on operations and increased costs
and delays attributable to applicable environmental considerations,
uncertain technical and cost factors relating to the construction and
operation of nuclear power-generating facilities, the difficulty of the
capital markets in absorbing utility debt and equity securities, the
availability of fuel for electrical generation at
reasonable prices, the difficulty in obtaining natural gas for resale, the
steady rise in fuel costs, the costs associated with conversion to alternate
fuel sources such as coal and the effects of present or proposed energy
or natural resource conservation programs. Current and future
environmental legislation, regulations or other governmental actions may
increase the cost of utility service. The Sponsor is unable to predict the
ultimate form that any such future legislation, regulations or other
governmental action may take or the resulting impact on the Securities.
The Portfolio of a Trust may contain Bonds issued for the
financing of nuclear power plants. Federal, state and municipal
governmental authorities may from time to time impose additional
regulations governing the licensing, construction and operation of nuclear
power plants. Any delays in the licensing, construction or operation of
nuclear power plants, or the suspension
of operations of such plants, may affect the payment of interest on, or
the repayment of the principal amount of, such Bonds issued to finance
such plants. The Sponsors are unable to predict the ultimate form any
such regulations may take or their impact such regulations might have on
the Bonds in the Portfolio of a Trust.
The Portfolio of a Trust may contain Bonds of issuers which
are in the water and sewer facilities category. Bonds in the water and
sewer facilities category include securities issued to finance public water
and sewer projects for water management and supply and sewer control
and securities issued by public issuers on behalf of private corporations
for such projects. These Bonds are payable from the income of specific
facilities or from payments made by such private corporations to the state
authorities issuing such Bonds.
The income of such facilities is generated from the payment of user fees.
The ability of state and local water and sewer authorities to meet their
obligations may be affected by failure of municipalities to utilize fully the
<PAGE>
facilities constructed by these authorities, economic or population decline
and resulting decline in revenue from user charges, rising construction
and maintenance costs and delays in construction of facilities, impact of
environmental requirements, the difficulty of obtaining or discovering
new supplies of fresh water, the effect
of conservation programs and the impact of "no growth" zoning
ordinances.
The Portfolio of a Trust may contain Bonds of issuers which
are revenue obligations of universities and schools. The ability of
universities and schools to meet their obligations is dependent upon
various factors, including the revenues, costs and enrollment levels of the
institutions. In addition, their ability may be affected by declines in
enrollment and tuition revenue, the availability of Federal, state and
alumni financial support, the method and
validity, under state constitutions, of present systems of financing public
education, fluctuations in interest rates and construction costs, increased
maintenance and energy costs, failure or inability to raise tuition or room
charges and adverse results of endowment fund investments. Studies
undertaken by public and private groups differ with respect to statistics
and projections for post secondary enrollment at educational institutions
during the 1990's.
The Portfolio of a Trust may contain Bonds of issuers in the
pollution control facilities category. Bonds in the pollution control
facilities category include securities issued to finance pubic water,
sewage or solid waste treatment facilities and securities issued by a
public issuer on behalf of a private
corporation to provide facilities for the treatment of air, water and solid
waste pollution. These Bonds are payable from the income of specific
facilities, state authorities or from payments made by such private
corporations.
The Portfolio of a Trust may contain Bonds which are in the
capital improvement facilities category. Capital improvement bonds are
bonds issued to provide funds to assist political subdivisions or agencies
of a state through acquisition of the underlying debt of a state or local
political subdivision or agency which bonds are secured by the proceeds
of the sale of the bonds, proceeds from investments and the indebtedness
of a local political subdivision
or agency. The risks of an investment in such bonds include the risk of
possible prepayment or failure of payment of proceeds on an default of
the underlying debt.
The Portfolio of a Trust may contain Bonds in the resource
recovery category. The issuers of such Bonds are municipalities or
agencies or authorities thereof that have allocated the proceeds of the
issue towards the construction and operation of a resource recovery
facility operated by a corporate operator. Payments on the bonds are
<PAGE>
dependent upon the creditworthiness of the corporate operator of the
particular project. The operation of such facilities typically depends
upon the delivery thereto of specified quantities of solid waste from
which refuse-derived fuel can be extracted and in turn converted into
electricity or steam by the facility. The
operation of the facility may be limited or totally curtailed from
operating because of failure to comply with governmental regulations
concerning the environment, failure to obtain necessary environmental
permits, zoning permits and other municipal ordinances or inability to
maintain or renew such permits because of an inability to comply with
changes in government environmental regulations. If the resource
recovery facility is unable to operate or cannot operate at full capacity,
the corporate operator of such facility will be unable to
generate revenues necessary to cover payments on the resource recovery
bonds. Furthermore, the corporate operator's revenue is typically derived
from the sale of the power generated by the facility to a power agency
or company under a power purchase agreement. The continued flow and
level of payments made by the corporate operator might therefore depend
upon the financial condition of the purchaser under such a power
agreement and the operator's continued ability to generate the minimum
amount of power required to be delivered thereunder.
Such a purchaser may be subject to the various general problems and
risks associated with the power industry and the regulatory environment
in which it operates. A decline in price of the extracted materials or the
electricity or steam created by the facility may also result in insufficient
revenues generated by the corporate operator as will an increase in its
operating costs. Finally, there may be technological risks that become
apparent in the long run that are not presently
apparent because of the relatively short history of these facilities which
risks may involve the successful construction or operation of such
facilities.
The Portfolio of a Trust may contain Bonds secured in whole
or in part by governmental payments, pursuant to a lease agreement,
service contract, installment sale or other agreement. A governmental
entity that enters into such agreement can not obligate future
governments to make payments thereunder, but generally has covenanted
to take such action as is necessary to include all such payments due
under such agreement in its annual budgets and
to make the appropriations therefor. However, a budgetary imbalance
in future fiscal years could effect the ability and willingness of the
governing legislative body to appropriate, and the availability of monies
to make, the payments provided for under such agreement. The failure
of a governmental entity to meet its obligations under such an agreement
could result in an insufficient amount of funds to cover debt service on
the Bonds.
<PAGE>
The Portfolio of a Trust may contain Bonds of issuers in the
convention facilities category. Bonds in the convention facilities category
include special limited obligation securities issued to finance convention
and sports facilities payable from rental payments and annual
governmental appropriations. The governmental agency is not obligated
to make payments in any year in which the monies have not been
appropriated to make such payments. In addition, these facilities are
limited use facilities that may not be
used for purposes other than as convention centers or sports facilities.
The Portfolio of a Trust may contain Bonds of issuers located
in the Commonwealth of Puerto Rico. (See Part A-"Portfolio of
Securities".) The ability of the issuers of such bonds to meet their
obligations may be affected by the economic and social problems facing
Puerto Rico. Unemployment in Puerto Rico remains high by United
States standards. The island's personal income has been lower than in
any state in the United States. Transfer payments from the United States
government under various social welfare programs (such as food stamps,
social security and veterans' benefits) contribute significantly to personal
income.
The economy of Puerto Rico is closely integrated with that of
the mainland United States, and is largely dependent for its development
upon U.S. policies and programs that could be eliminated by the U.S.
Congress. Aid for Puerto Rico's economy has traditionally depended
heavily on federal programs which may not always be available. An
adverse effect on the Puerto Rican economy could result from other U.S.
policies, including a reduction of tax benefits for distilled products,
further reduction in transfer payment programs such as food stamps,
curtailment of military spending and policies which could lead to a
stronger dollar. During fiscal 1991, approximately 87%
of Puerto Rico's exports were to the United States mainland, which was
also the source of 68% of Puerto Rico's imports.
The Puerto Rico economy consists principally of
manufacturing (pharmaceutical, scientific instruments, computers,
microprocessors, medical products, textiles and petrochemicals),
agriculture (largely sugar), tourism and the service sector (including
finance, insurance, and real estate). Since Puerto
Rico is an island and is heavily dependent upon imports and exports,
maritime and air transportation are of basic importance to its economy.
The manufacturing and service sectors generate the largest portion of
gross product. Most of the island's manufacturing output is shipped to
the mainland United States, which is also the chief source of
semi-finished manufacturing articles on which further manufacturing
operations are performed in Puerto Rico. The
finance, insurance and real estate components of this sector have recently
experienced the most growth. The level of tourism is affected by various
factors, including the strength of the U.S. dollar. During periods when
<PAGE>
the dollar is strong, tourism in foreign countries becomes relatively more
attractive.
The government sector of the Commonwealth plays an
important role in the economy of the island. Since World War II the
economic importance of agriculture for Puerto Rico, particularly in the
dominance of sugar production, has declined. Nevertheless, the
Commonwealth-controlled sugar monopoly remains an important
economic factor and is largely dependent upon Federal maintenance of
sugar prices, the discontinuation of which could severely
affect Puerto Rican sugar production.
The Puerto Rican economy is affected by a number of
Commonwealth and Federal investment incentive programs. For
example, Section 936 of the Internal Revenue Code provides deferral of
Federal income taxes for U.S. companies operating on the island until
profits are repatriated. No assessment can be made as to whether or not
Section 936 and other incentive programs will be continued. It is
expected that the elimination of Section 936, if it occurred, would have
a strongly negative impact on Puerto Rico's economy.
There have for many years been two major viewpoints in
Puerto Rico with respect to the Island's relationship to the United States,
one essentially favoring the existing commonwealth status (but with
modifications providing for greater local autonomy), and the other
favoring statehood. A third viewpoint favors independence from the
United States. The Sponsors cannot predict what effect, if any, a change
in the relationship between Puerto Rico and the United
States would have on the issuers' ability to meet their obligations.
Currently, growth in the Puerto Rico economy depends on
several factors, including the state of the United States economy and the
relative stability in the price of oil imports. The exchange value of the
U.S. dollar and the cost of borrowing.
To the best knowledge of the Sponsors, and except as may
otherwise be indicated in this Prospectus, there was no litigation pending
as of the Date of Deposit in respect of any Bonds which might have
reasonably been expected to have a material adverse effect upon a Trust.
At any time after the date of this Prospectus, litigation may be initiated
on a variety of grounds with respect to Bonds in a Trust. Such
litigation, as, for example, suits challenging
the issuance of pollution control revenue bonds under recently-enacted
environmental protection statutes, may, if successful, affect the validity
of such Bonds or the tax-free nature of the interest thereon. While the
outcome of litigation of such nature can never to entirely predicted, each
Trust has received opinions of bond counsel to the issuing authorities of
each Bonds on the date of issuance to the effect that such Bonds have
been validly issued and that the interest thereon is exempt from Federal
<PAGE>
income tax. In addition, other factors
may arise from time to time which potentially may impair the ability of
issuers to meet obligations undertaken with respect to the Bonds. The
Sponsors are unable to predict whether any such litigation may be
instituted or if instituted, whether it will have a material adverse effect
on a Trust.
Under the Federal Bankruptcy Code, political subdivisions,
public agencies or other instrumentalities of any state (including
municipalities) which are insolvent or unable to meet their debts as they
mature may file a petition in Federal bankruptcy court. Generally, the
filing of such a petition operates as a stay of any proceeding to enforce
a claim against the debtor. The Federal Bankruptcy Code also requires
the debtor to file a plan for the adjustment of its debts which may modify
or alter the rights of creditors. Under
such a plan the Federal bankruptcy court may permit the debtor to issue
certificates of indebtedness which have priority over existing creditors
and which could be secured. Any plan of reorganization confirmed by
the court must be approved by the requisite majorities of creditors of
different classes. If confirmed by the bankruptcy court, the plan would
be binding upon all creditors of different classes. Amendments made to
the federal bankruptcy laws ease the requirements that must be met
before a municipality may seek federal court
protection to assist in reorganizing its debts. This easing of requirements
may encourage financially troubled municipalities to seek court assistance
in reorganizing their debts. The Sponsors are unable to predict the effect
these bankruptcy provisions may have on a Trust.
Moreover, a State Trust is subject to certain additional risk
factors:
California Trust
California's economy is the largest among the 50 states. The
State's January 1, 1992 population of 31 million represented
approximately 12.0% of the total United States population. Total
employment was about 14 million, the majority of which was in the
service, trade and manufacturing sectors.
Since the start of the 1990-91 fiscal year, the State has faced
the worst economic, fiscal and budget conditions since the 1930s.
Construction, manufacturing (especially aerospace), and financial
services, among others, have all been severely affected. Job losses have
been the worst of any post-war recession. Employment levels are
expected to stabilize by late 1993. However, pre-recession job levels are
not expected to be reached for several more years.
Unemployment reached 10% in November 1992 and is expected to
remain above 9% through 1993 and 1994. According to the Department
of Finance, recovery from the recession in California is not expected in
<PAGE>
meaningful terms until late 1993 or 19994, notwithstanding signs of
recovery elsewhere in the nation.
After three years of recession, California's economy seems
to be stabilizing, however, economic signals remain mixed. On the plus
side, nonfarm employment in April was essentially unchanged from the
December level. The unemployment rate seems to be moving down,
although the large April drop, from 9.4% to 8.6%, probably exaggerates
the improvement. Personal income growth is improving gradually, from
gains of 2% or less in 1991 to slightly over 3% at the beginning of 1993,
and taxable sales are stabilizing after a lengthy decline.
There are still ample signs of weakness. Manufacturing
employment continues to decline, with deep losses in aerospace,
reflecting defense cuts and weak commercial markets. Despite strong
output and sales gains, electronics firms continue to cut payrolls. All
manufacturing industries, with the exception of apparel and textiles, are
posting employment losses. Housing, usually an engine of recovery,
remains in a slump. Permit volume has
averaged a 95,000 unit annual rate in recent months, actually somewhat
below 1992's 98,000 total. Nonresidential construction continues to hit
new recession lows, reflecting oversupplied commercial office, retail and
hotel markets. Employment continues to decline in normally stable
industries such as banking,
the utilities and most segments of wholesale and retail trade. Food,
department and apparel stores are shedding jobs and government
employment is down 30,000 jobs over the past year.
The department of Finance, in its May 1993 Revision of the
Governor's 1993-94 Budget, states that it expects this essentially flat
pattern of economic activity to persist throughout 1993, with employment
by year end only marginally higher than in April. Gains in service
industries, mainly health care, temporary agencies (in business services),
motion picture production and amusements are expected to continue.
There should be modest increases in
wholesale and retail trade. The finance and transportation and utilities
groups will be stable to down slightly. Assuming a modest pickup in
homebuilding, construction employment will also be flat this year.
Against these, manufacturing and government will continue to lose jobs.
The largest losses in percentage terms will be in aerospace manufacturing
and the Federal Department of Defense, reflecting cuts in the military
budget. Budget constraints will also affect State and local government.
The recession has seriously affected State tax revenues, which
basically mirror economic conditions. It has also caused increased
expenditures for health and welfare programs. The State is also facing
a structural imbalance in its budget with the largest programs supported
by the General Fund--K-14 education (kindergarten through community
college), health, welfare and corrections--growing at rates significantly
<PAGE>
higher than the growth rates for the principal revenue sources of the
General Fund. As a result, the State entered a period of chronic budget
imbalance, with expenditures exceeding revenues for four of the last five
fiscal years. Revenues declined in 1990-91 over 1989-90,
the first time since the 1930s. By June 30, 1993, the State's General
Fund had an accumulated deficit, on a budget basis, of approximately
$2.75 billion. Further consequence of the larger budget imbalances over
the last three fiscal years has been that the State depleted its available
cash resources and has had to use a series of external borrowings to meet
its cash needs.
The 1992-93 Governor's Budget proposed expenditures of
$56.3 billion in General and Special Funds for the 1992-93 fiscal year,
a 1.6% increase over corresponding figures for the 1991-92 fiscal year.
General Fund expenditures were projected at $43.8 billion, an increase
of 0.2% over the 1992-93 Revised Governor's Budget. The Budget
estimated $45.7 billion of revenues and transfers for the General Fund
(a 4.7% increase over 1991-92) and $12.4 billion for Special Funds (a
9.6% increase over 1991-92). To balance the proposed budget, program
reductions totaling $4.365 billion and revenue and transfer increases of
$872 million were proposed for the 1991-92 and 1992-93
fiscal years. By the time of the Governor's May Revision issued on May
20, 1992, the Administration estimated that the 1992-93 Budget needed
to address a gap of about $7.9 billion, much of which was needed to
repay the accumulated budget deficits of the previous two years.
The severity of the budget actions needed led to a long delay
in adopting the budget. With the failure to adopt a budget by July 1,
1992, which would have allowed the State to carry out its normal annual
cash flow borrowing, the Controller was forced to issue registered
warrants to pay a variety of obligations representing prior year's or
continuing appropriations, and mandates from court orders. Available
funds were used to make constitutionally-mandated payments, such as
debt service on bonds and revenue
anticipations warrants. After that date, all remaining outstanding
registered warrants (about $2.9 billion) were called for redemption from
proceeds of the issuance of 1992 Interim Notes after the budget was
adopted.
The 1992-93 Budget Act provided for expenditures of $57.4
billion, consisting of General Fund expenditures of $40.8 billion and
Special Fund and Bond Fund expenditures of $16.6 billion. The
Department of Finance estimates there will be a balance in the Special
Fund for Economic Uncertainties of $28 million on June 30, 1993.
The $7.9 billion budget gap was closed through a combination
of increased revenues and transfers and expenditure cuts such as:
1. General fund savings in health and welfare
<PAGE>
programs totaling $1.6 billion.
2. General fund reductions of $1.9 billion for K-12
schools and community colleges.
3. General fund savings of $1.3 billion by revising
the State aid program to local governments
originally enacted after Proposition 13.
4. Program cuts for higher education totaling $415
million.
5. A total of $1.6 billion of transfers and
accelerated collections of State
revenues.
6. Approximately $1.0 billion from various
additional program reductions.
Shortly after the 1992-93 Budget Act was enacted, it became
evident the economic conditions in the State were not beginning to
improve in the second half of 1992, as assumed by the Department of
Finance's May 1992 economic estimates. This was exacerbated by
enactment of an initiative measure
in November 1992 repealing a sales tax for certain candy, snack foods
and bottled water, reducing revenues by about $300 million for a full
fiscal year ($200 million in 1992-93). The Governor's Budget proposal
for 1993-94, released on January 8, 1993 (the "January Governor's
Budget"), confirmed the earlier forecasts about the State's economy and
the 1992-93 Budget Act. The January Governor's Budget projected that
the economy would not start meaningful recovery from the recession
until late 1993 or 1994. With the economy continuing in recession
throughout the 1992-93 fiscal year, revenues
were projected about $2.5 billion lower than anticipated when the
1992-93 Budget Act was signed, leading to a projected $2.1 billion
budget deficit at June 30, 1993 (compared to the Budget Act projection
of a $28 million balance). That deficit amount was projected if, by
March 1993, the Legislature adopted
several actions proposed by the Governor to save about $475 million in
the 1992-93 fiscal year. The Legislature did not adopt any of the
Governor's proposals.
On May 20. 1993, the Department of Finance released its
May Revision to the January Governor's Budget (the "May Revision"),
updating
<PAGE>
revenue and expenditure projections and proposals for the 1992-93 and
1993-94 fiscal years. The May Revision projected that the General Fund
will end the fiscal year on June 30, 1993 with an accumulated budget
deficit of about $2.8 billion, and a negative fund balance of about $2.2
billion ( the difference being certain reserves for encumbrances and
school funding costs). The Governor projected revenues for 1992-93 of
$41.0 billion, $1.0 billion less than in the
1991-92 fiscal year. On the expenditure side, the continued recession
increased health and welfare costs above the original Budget Act
projections. Also, property tax receipts at the local level were less than
projected, so that the State will not get the full $1.3 billion benefit from
the property tax shift enacted in the
1992-93 Budget Act. Overall, the May Revision projected total General
Fund expenditures of $1.1 billion for the 1992-93 fiscal year, about $300
million higher than the Budget Act and $2.2 billion less than fiscal year
1991-92.
The January Governor's Budget had projected that, because
of severely reduced revenues, the State would face a cash flow shortfall
in May 1993, necessitating additional external borrowing. The State met
this cash flow need by issuing $3.0 billion of revenue anticipation notes
on April 26, 1993, which matured on June 24, 1993. The State also
issued the 1993 Revenue Participation Warrants in the principal amount
of $2.0 billion to meet cash flow requirements for the end of the 1992-93
fiscal year and the start of the 1993-94 fiscal year.
The 1993-94 fiscal year represents the third consecutive year
the Governor and the Legislature were faced with a very difficult budget
environment, requiring revenue actions and expenditure cuts totalling
multiple billions of dollars to produce a balanced budget.
The Governor's budget introduced on January 8, 1993
proposed General Fund Expenditures of $37.33 billion, with projected
revenues of $39.87 billion. It also proposed Special Fund expenditures
of $12.35 billion and Special Fund Revenues of $12.10 billion. To
balance the budget in the face of declining
revenues, the Governor proposed a series of revenue shifts from local
government, reliance on increased federal aid and reductions in State
spending.
The May Revision of the Governor's Budget, released on
May 20, 1993, indicated that the revenue projections of the January
Budget Proposal were tracking well, with full year 1992-93 about $80
million higher than the
January projection. Personal Income tax revenue was higher than
projected, sales tax was close to target, and bank and corporation taxes
were lagging behind projections. The May Revision projected the State
would have about $2.7 billion accumulated deficit by June 30, 1993.
The Governor proposed to repay this deficit over an 18-month period.
<PAGE>
He also agreed to retain the 0.5% sales tax scheduled to expire June 30
for a six-month period, dedicated to local
public safety purposes, with a November election to determine a
permanent extension. Unlike previous years, the Governor's Budget and
May Revision did not calculate a "gap" to be closed, but rather set forth
revenue and expenditure forecasts and proposals designed to produce a
balanced budget.
The 1993-94 Budget Act, signed by the Governor on June 30,
1993, is predicated on revenue and transfer estimates of $40.6 billion,
about $700 million higher than the January Governor's Budget, but still
about $400 million below 1992-93 (and the second consecutive year of
actual decline). The principal reasons for this decline are the continued
weak economy and the expiration (or repeal) of three fiscal steps taken
in 1991-a half cent temporary sales tax (which generates about $1.5
billion annually), a deferral of operating loss carry forwards ($440
million), and repeal by initiative of a sales tax on
candy and snack foods ($300 million). The Governor also proposes a
number of fiscal steps (tax credits and the like) to stimulate job growth,
which could result in short-term revenue costs. The 1993-94 Budget Act
assumes Special Fund revenues of $11.8 billion, an increase of 5.0%
over 1992-93.
The 1993-94 Budget Act includes General Fund expenditures
of $38.5 billion (a 6.5% reduction from projected 1992-93 expenditures
of $41.2 billion), in order to keep a balanced budget within the available
revenues. The Budget also includes Special Fund expenditures of $12.1
billion, a 4.2% increase. The Budget Act reflects the following major
adjustments:
1. Changes in local government
financing to shift about $2.6
billion in property taxes from
cities, counties, special districts
and redevelopment agencies to
school and community districts.
2. The Budget keeps K-12
Proposition 98 funding on a
cash basis at the same per-
pupil level as 1992-93 by
providing schools a loan
payable from future years'
Proposition 98 funds.
3. Receipt in 1993-94 of about
$550 million in aid from the
federal government to offset
<PAGE>
health and welfare costs
associated with foreign
immigrants living in the State,
which would reduce a like
amount of General Fund
expenditures.
4. Reductions of $0.3 billion in
health and welfare programs.
5. Reductions of $400 million
in support for higher education.
6. A 2 year suspension of the
renters' tax credit ($390 million
expenditure reduction in 1993-
94).
7. Various miscellaneous cuts
(totalling approximately $150
million ) in Sate government
services in many agencies, up
to 15%.
8. Miscellaneous one-time
items, including deferral of
payment to the Public
Employees Retirement Fund
and a change in accounting for
debt service from accrual to
cash basis, saving $107
million.
A key feature of the 1993-94 Budget Act is a plan to retire
the projected $2.8 billion accumulated deficit over an 18 month period
by the use of external borrowing. The Budget Act estimates that about
$1.6 billion of the deficit elimination loan would be repaid by December
23, 1993 from the proceeds of the $2.0 billion Revenue Anticipation
Warrants issued on June 23, 1993.
The 1993-94 Budget Act continues to predict that population
growth in the 1990's will keep upward pressure on major State
programs, such as K-14 education, health, welfare and corrections,
outstripping projected revenue growth in an economy only very slowly
emerging from a deep recession. The Governor's health, welfare and
local government reductions continue his efforts to keep expenditures in
line with resources in the long term.
The Budget Act also proposes significant restructuring of State
<PAGE>
government, with elimination and consolidation of several agencies and
numerous smaller boards, and change to a "performance budgeting"
concept which would be more efficient and cost-effective (with a pilot
project to be implemented in 1994-95). The
Governor also proposes initiatives in the fields of information technology
to increase governmental productivity.
On June 2, 1993, the Commission on State Finance ("COSF")
issued its Quarterly General Fund Forecast, which assessed the
Governor's May Revision. The COSF report projected stagnant
economic conditions through 1994, and agreed generally with the
Governor's economic projections, although the COSF showed slightly
lower growth than the Governor in some California economic factors.
The COSF projects lower revenues and higher expenditures
in 1993-94 than the May Revision, and notes that the May Revision
continues the uses of off-bookloans to schools and has no built-in
protection against downside risk.
The COSF projects about $700 million lower revenues in
1993-94 than the May Revision, principally because COSF believes most
of the increase in personal income taxes seen late in 1992-93 came from
a one-time income,e shift, rather than reflecting a permanent base of
greater tax revenues. COSF also knows other major taxes (and local
property taxes) a little weaker than the May Revision, with a resulting
increase in expenditures to make up the
property tax shortfall for school financing. Altogether, COSF projects
in its "primary forecast" that the fund balance at June 30,1994 would be
over $800 million more negative than the May Revision forecast, and the
negative difference would grow to $1.9 billion by June 30, 1995.
The COSF report includes two alternative forecasts based on
either continued recession, or stronger recovery. The pessimistic
forecast is $3.8 billion worse at June 30, 1995 than the Primary
Forecast, and the optimistic forecast is about $3.8 billion better. The
COSF also expressed concern that the proposed $2.6 billion shift of
property taxes could materially impact local government's fiscal stability.
THE FOREGOING DISCUSSION OF THE 1993-94
FISCAL YEAR BUDGET IS BASED IN LARGE PART ON
STATEMENTS MADE IN A RECENT "PRELIMINARY OFFICIAL
STATEMENT" DISTRIBUTED BY THE STATE OF CALIFORNIA.
IN THAT DOCUMENT, THE STATE INDICATED THAT ITS
DISCUSSION OF THE 1993-94 FISCAL YEAR BUDGET WAS
BASED ON ESTIMATES AND PROJECTIONS OF REVENUES AND
EXPENDITURES FOR THE CURRENT FISCAL YEAR AND MUST
NOT BE CONSTRUED AS STATEMENTS OF FACT. THE STATE
NOTED FURTHER THAT THE ESTIMATES AND PROJECTIONS
ARE BASED UPON VARIOUS ASSUMPTIONS WHICH MAY BE
<PAGE>
AFFECTED BY NUMEROUS FACTORS, INCLUDING FUTURE
ECONOMIC CONDITIONS IN THE STATE AND THE NATION,
AND THAT THERE CAN BE NO ASSURANCE THAT THE
ESTIMATES WILL BE ACHIEVED.
The State is subject to an annual appropriations limit imposed
by Article XIIIB of the State Constitution (the "Appropriations Limit"),
and is prohibited from spending "appropriations subject to limitation" in
excess of the Appropriations Limit. Article XIIIB, originally adopted in
1979, was modified substantially by Propositions 98 and 111 in 1988 and
1990, respectively. "Appropriations subject to limitation" are
authorizations to spend "proceeds of
taxes", which consist of tax revenues and certain other funds, including
proceeds from regulatory licenses, user charges or other fees to the
extent that such proceeds exceed the reasonable cost of providing the
regulation, product or service. The Appropriations Limit is based on the
limit for the prior year, adjusted annually for certain changes, and is
tested over consecutive two-year periods. Any excess of the aggregate
proceeds of taxes received over such two-year period above the
combined Appropriation Limits for those two years is
divided equally between transfers to K-14 districts and refunds to
taxpayers.
Exempted from the Appropriations Limit are debt service
costs of certain bonds, court or federally mandated costs, and, pursuant
to Proposition 111, qualified capital outlay projects and appropriations
or revenues derived from any increase in gasoline taxes and motor
vehicle weight fees above January 1, 1990 levels. Some recent initiatives
were structured to create new tax revenues dedicated to specific uses and
expressly exempted from the Article XIIIB limits. The Appropriations
Limit may also be exceeded in cases of emergency arising from civil
disturbance or natural disaster declared by the Governor and approved
by two-thirds of the Legislature. If not so declared and
approved, the Appropriations Limit for the next three years must be
reduced by the amount of the excess.
Article XIIIB, as amended by Proposition 98 on November
8, 1988, also establishes a minimum level of state funding for school and
community college districts and requires that excess revenues up to a
certain limit be transferred to schools and community college districts
instead of returned to the taxpayers. Determination of the minimum
level of funding is based on several tests set forth in Proposition 98.
During fiscal year 1991-92 revenues were smaller than expected, thus
reducing the payment owed to schools in 1991-92 under alternate "test"
provisions. In response to the changing revenue situation, and to fully
fund the Proposition 98 guarantee in the 1991-92
and 1992-93 fiscal years without exceeding it, the Legislature enacted
legislation to reduce 1991-92 appropriations. The amount budgeted to
<PAGE>
schools but which exceeded the reduced appropriation was treated as a
non-Proposition 98 short-term loan in 1991-92. As part of the 1992-93
Budget, $1.1 billion of the amount budgeted to K-14 schools was
designated to "repay" the prior year loan,
thereby reducing cash outlays in 1992-93 by that amount.
Because of the complexities of Article XIIIB, the ambiguities
and possible inconsistencies in its terms, the applicability of its
exceptions and exemptions and the impossibility of predicting future
appropriations, the Sponsor cannot predict the impact of this or related
legislation on the Bonds in the California Trust Portfolio. Other
Constitutional amendments affecting state and
local taxes and appropriations have been proposed from time to time. If
any such initiatives are adopted, the State could be pressured to provide
additional financial assistance to local governments or appropriate
revenues as mandated by such initiatives. Propositions such as
Proposition 98 and others that may be
adopted in the future, may place increasing pressure on the State's
budget over future years, potentially reducing resources available for
other State programs, especially to the extent the Article XIIIB spending
limit would restrain the State's ability to fund such other programs by
raising taxes.
As of June 30, 1993, the State had over $17.64 billion
aggregate amount of its general obligation bonds outstanding. General
obligation bond authorizations in the aggregate amount of approximately
$7.24 billion remained unissued as of June 30, 1993. The State also
builds and acquires capital facilities through the use of lease purchase
borrowing. As of June 30, 1992, the State had approximately $2.88
billion of outstanding Lease-Purchase Debt.
In addition to the general obligation bonds, State agencies and
authorities had approximately $21.87 billion aggregate principal amount
of revenue bonds and notes outstanding as of March 31, 1993. Revenue
bonds represent both obligations payable from State revenue-producing
enterprises and projects, which are not payable from the General Fund,
and conduit obligations payable only from revenues paid by private users
of facilities financed by such
revenue bonds. Such enterprises and projects include transportation
projects, various public works and exposition projects, education
facilities (including the California State University and University of
California systems), housing health facilities and pollution control
facilities.
The State is a party to numerous legal proceedings, many of
which normally occur in governmental operations. In addition, the State
is involved in certain other legal proceedings that, if decided against the
State, might require the State to make significant future expenditures or
<PAGE>
impair future revenue sources. Examples of such cases include
challenges to the State's method of taxation of certain businesses,
challenges to certain vehicle license fees, and challenges to the State's
use of Public Employee Retirement System
funds to offset future State and local pension contributions. Other cases
which could significantly impact revenue or expenditures involve
reimbursement to school districts for voluntary school desegregation and
state mandated costs, challenges to Medi-Cal eligibility, recovery for
flood damages, and liability for
toxic waste cleanup. Because of the prospective nature of these
proceedings, it is not presently possible to predict the outcome of such
litigation or estimate the potential impact on the ability of the State to
pay debt service on its obligations.
As a result of the deterioration in the State's budget and cash
situation in fiscal year 1991-92, and the delay in adopting the 1992-93
budget which resulted in issuance of registered warrants (I.O.U.s), rating
agencies reduced the State's credit rating. Between November 1991 and
September 30, 1992, the rating on the State's general obligation bonds
was reduced by Standard & Poor's Corporation from "AAA" to "A+",
by Moody's Investors Service, Inc. from "Aaa" to "Aa", and by Fitch
Investors Service, Inc. from "AAA" to
"AA". There can be no assurance that such ratings will continue for any
given period of time or that they will not in the future be further revised
or withdrawn.
Massachusetts Trust
In the past, the Commonwealth of Massachusetts, and certain
of its public bodies and municipalities, including the City of Boston,
have faced serious financial difficulties which have adversely affected the
credit standing and borrowing abilities of Massachusetts and the
respective entities.
The recurrence of such financial difficulties could result in
declines in the market values of, or default on, existing obligations,
including Bonds deposited in the Massachusetts Trust. The following
constitutes only a brief summary of the most significant financial
problems of the Commonwealth of Massachusetts and issues related to
its financial condition and does not purport to be complete.
On June 30, 1991 the legislature approved a fiscal 1992
budget of $12.994 billion. The budget as passed represents a substantial
reduction in levels of spending for a variety of programs, including a
reduction in local aid of approximately $328 million. As signed by the
Governor on July 10, 1991, the budget for fiscal 1992 was based on
estimated total revenues of $13.032
billion (including estimated tax revenues of $8.292 billion, which was
<PAGE>
$703 million less than tax revenues for fiscal 1991) and total estimated
expenditures of $13.177 billion (including, at that time, approximately
$537 million in anticipated supplemental appropriations). The fiscal
1992 budget was projected to end the year with a small positive balance
through the use of $145 million in estimated positive balances from fiscal
1991.
With regard to revenues, the fiscal 1992 budget as signed
depended on non-tax and one-time revenue sources, such as the sale of
certain assets, the availability of which was subject to certain
contingencies. The fiscal 1992 budget as signed assumed continued
federal reimbursements related to uncompensated care payments. The
federal Health Care Financing Administration has published regulations
to become effective October 1, 1992 that are not expected to materially
affect these reimbursements in fiscal 1992 and
it is currently expected that the amount of such federal reimbursements
in fiscal 1992 will be $195 million.
With regard to spending, the budget made large reductions in
appropriations for certain programs such as Medicaid, General Relief,
and Group Health Insurance, where spending has been difficult to control
in the past.
Budgeted revenues and other sources for fiscal 1992 were
$13.728 billion, including projected tax revenues of $9.484 billion.
Budgeted revenues and other sources increased by approximately 0.7%
from fiscal 1991 to fiscal 1992, while tax revenues increased by 5.4%
for the same period.
Budgeted expenditures were approximately $13.420 billion in
fiscal 1992, which is $238.7 million, or 1.7%, lower than fiscal 1991
budgeted expenditures. Final fiscal 1992 budgeted expenditures were
approximately $300 million higher than the initial July 1991 estimates of
budgeted expenditures. While certain expenditures were less than
originally estimated, spending for certain human services programs, in
particular, was higher than initially
estimated, including an increase of $268.7 million for the Medicaid
program and $50.0 million for mental retardation consent decree
requirements. Fiscal 1992 budgeted expenditures for Medicaid were
$2.818 billion, or 1.9% higher than fiscal 1991. This increase compares
favorably with the 19.0% average annual
growth rate of Medicaid expenditures for fiscal years 1988 and 1991.
Overall, the budgeted operating funds ended 1992 with an
excess of revenues and other sources over expenditures and other uses
of $312.3 million and with positive fund balances of $549.4 million,
when such excess is added to the fund balances of $237.1 million carried
forward from fiscal 1991. Total fiscal 1992 spending authority continued
into fiscal 1993 is $231.0 million.
<PAGE>
After payment in full of the quarterly Local Aid distribution
of $514.0 million due on June 30, 1992, retirement of the
Commonwealth's outstanding commercial paper (except for
approximately $50 million of bond anticipation notes) and certain other
short-term borrowings, as of June 30, 1992,
the Commonwealth showed a year-end cash position of approximately
$731.0 million. The fiscal 1992 ending balance compares favorably with
the cash balance of $182.3 million at the end of fiscal 1991.
On January 22, 1992, the Governor submitted his fiscal 1993
budget recommendation of $13.992 billion. The Governor's budget
recommendation is based on a tax revenue estimate of $9.150 billion, a
decrease of approximately $75 million, or less than 1%, from estimated
fiscal 1992 tax revenues of $9.225 billion. The reduction in estimated
tax revenues in fiscal 1993 is attributable in part to reduction in the
Commonwealth's personal income
tax rate on earned income and certain other income from 6.25% to
5.95%, which took effect on January 1, 1992, and on the assumption
that a proposed further reduction in that rate to 5.75% will be adopted
retroactive to the same date; the rate reductions are estimated to decrease
fiscal 1993 tax revenues by $210 million and $140 million, respectively.
The fiscal 1993 reduction in estimated tax revenues is also attributable
in part to proposed new tax credits which are estimated to reduce tax
revenues by approximately $52 million in fiscal 1993.
On November 17, 1992, the Legislature authorized the partial
funding of certain collective bargaining agreements between the
Commonwealth and its employees. These agreements, which were
originally scheduled to take effect in January 1991, included a three year
increase in wage levels for Commonwealth employees of approximately
13.7%. The legislative authorization effectively increases wage levels by
6% during the remainder of fiscal 1993, and by approximately an
additional 7% for fiscal 1994. This action
increases the Commonwealth's compensation obligations by
approximately $39.8 million for fiscal 1993 and $173.8 million for fiscal
1994. The Governor vetoed the legislation authorizing such funding due
to then current fiscal conditions. However, the veto was overridden by
the Legislature and the pay raise was implemented effective December
21, 1992.
The fiscal 1993 budget is based on estimated budgeted
revenue and other sources of $14.641 billion (including the current tax
revenue estimate of $9.940 billion). Concurrently with signing the fiscal
1993 budget, the Governor vetoed or reduced approximately $315.0
million in line-item appropriations. In addition, the Governor vetoed
certain legislative riders to the fiscal 1993 budget which affected the
ability of the Commonwealth to collect an
estimated $69.0 million of non-tax revenues otherwise available for fiscal
1993.
<PAGE>
The Legislature has overridden the Governor's veto of approximately
$200.3 million of fiscal 1993 budgetary spending authority. In addition,
the Legislature has extended certain fiscal 1992 spending authority to
fiscal 1993. These actions will increase fiscal 1993 spending by $231.0
million. The fiscal 1993 budget, as signed by the Governor and
including the additional spending authority noted
above, is based upon budgeted expenditures of $14.976 billion, which is
$1.556 billion or 11.6% higher than fiscal 1992 budgeted expenditures.
The fiscal 1993 budget presently anticipates that the difference between
estimated revenues and other sources and expenditures and other uses be
provided for by application of
$319.4 million of the estimated $549.4 million beginning fund balance
for fiscal 1993 to produce an estimated ending fund balance for fiscal
1993 of approximately $230.0 million.
In September 1992, the Governor submitted legislation
proposing various tax and other incentives for businesses to locate or
remain in the Commonwealth. The legislation included a phase-out of
the capital gains tax and up to $50 million of indirect loan guarantees.
The legislation was not enacted during the 1992 legislative session.
However, portions of the legislation
were refiled in January 1993, and the Legislature is now considering a
different version of the original legislation, including provisions for
increasing the investment tax credit for businesses, establishing a fund to
assist biotechnology firms and various tax incentives to business.
On January 27, 1993, the Governor submitted his fiscal 1994
budget recommendation which called for budgeted expenditures of
approximately $15.208 billion. This recommended spending level is
approximately $232.2 million, or 1.6%, over estimated budgeted
expenditures for fiscal 1993 of $14.976 billion. Proposed budgeted
revenues for fiscal 1994 would exceed proposed budgeted expenditures
by approximately $20.5 million. The Governor's recommendation
projects a fiscal 1994 ending fund balance of
$250.7 million, of which $198.8 million will be in the Stabilization
Fund. The Governor's budget recommendation is based on a tax revenue
estimate of $10.460 billion, an increase of approximately $520 million,
or approximately 5.2%, as compared to currently estimated fiscal 1993
tax revenues of $9.940 billion. This increase from fiscal 1993 to fiscal
1994 is based on estimates of
real economic growth of approximately 1.75% and inflation of 2.75%,
as well as additional fiscal 1994 revenues from the newly increased
cigarette tax. The Governor's fiscal 1994 budget submission also
proposes tax reductions aggregating $30 million, including a tax credit
for credit for certain college tuition payments and a tax credit for health
insurance premiums paid by the elderly.
Unemployment has been decreasing since January 1993 and,
as of July, 1993 was 6.3%, as compared to 6.0% for June, 1993 and
8.4% for July, 1992. The United States unemployment rate in July,
1993 was 6.8%, as compared to 7.0% for June, 1993 and 7.6% for July,
1992. In addition, per capita personal income is currently growing at a
rate lower than the national average.
Prior to 1980, property taxes on residential property were
substantially higher in Massachusetts than in most states. In 1979, the
property tax was virtually the only source of tax revenues available for
use by Massachusetts cities and towns to meet local costs and represented
46% of all state and local taxes in Massachusetts. The pressures to
reduce the levels of taxation in Massachusetts, particularly the property
tax, culminated in the adoption on November 4, 1980 by the voters of
an initiative petition, known as Proposition 2.5 , designed to cut
property taxes sharply and to reduce governmental spending. The
reduction in local revenues caused by Proposition
2.5 varied considerably among the cities and towns. Proposed
reductions in personnel and services created strong demand from the
cities and towns for substantial increases in local aid from State
government. These demands lead to significant increases in local aid
from fiscal 1981 to fiscal 1989. Because of
decreased Commonwealth revenues, local aid declined slightly in fiscal
1990, decreased by approximately $330 million more in fiscal 1991 and
decreased by $240 million more in fiscal 1992. Accordingly, substantial
reductions in personnel and services may be required in certain localities
and local capital expenditures may have to be further deferred.
Limitations on state tax revenues have been established by
legislation approved by the Governor on October 25, 1986 and by an
initiative petition approved by the voters on November 4, 1986. The
two measures are inconsistent in several respects, including the methods
of calculating the limits and the exclusions from the limits. The initiative
petition, unlike its legislative counterpart, contains no exclusion for debt
service on Commonwealth bonds and notes. Under both measures,
excess revenues are returned to taxpayers in the
form of lower taxes. It is not yet clear how differences between the two
measures will be resolved. State tax revenues in fiscal 1988 through
fiscal 1992 did not exceed the limit imposed either by the initiative
petition or the legislative enactment. The Executive Office for
Administration and Finance currently estimates that state tax revenues in
fiscal 1993 will not reach the limit imposed by either of these statutes.
The Commonwealth's two retirement systems historically
have been operated on a pay-as-you-go basis, resulting in a significant
unfunded pension liability. In January 1988, comprehensive pension
reform legislation was approved which will require the Commonwealth
to fund future pension liabilities on a current basis and to amortize over
a 40-year period its existing unfunded liabilities for the two state
<PAGE>
retirement systems and for the cost-of-living
adjustments for local systems. The new legislation also provides for
state aid to local pension systems which also commit to eliminating their
unfunded liabilities over a 40-year period. Total pension expenditures
increased at an average annual rate of 5.8% from $600.2 million in fiscal
1988 to $751.5 million in 1992. In November 1992, the Legislature
overrode the Governor's veto of approximately $14.9 million of spending
authority passed by the Legislature to fund 5% cost of living adjustments
for certain Commonwealth, county and municipal retirees for the period
January 1, 1992 through June 30, 1992, which spending authority is
included within fiscal 1992 pension expenditures. The estimated pension
expenditures (inclusive of current benefits
and pension reserves) for fiscal 1993 are $873.8 million, representing an
increase of 16.2% over fiscal 1992 expenditures.
Capital spending by the State in the State bond funds was
approximately $595 million in fiscal 1987, $632 million in fiscal 1988,
$971 million in fiscal 1989, $936 million in fiscal 1990, $847.1 million
in fiscal 1991 and $694 million in fiscal 1992. Capital expenditures are
projected to increase to $821 million in fiscal 1993.
The Commonwealth maintains financial information on a
budgetary basis. Since fiscal year 1986, the Comptroller also has
prepared annual financial statements in accordance with generally
accepted accounting principles (GAAP) as defined by the Government
Accounting Standards Board. On a GAAP basis all budgeted operating
funds of the Commonwealth had deficits of $51.6 million, $946.2
million, $1.896 billion, $761.2 million and $381.6 million at the end of
fiscal years 1988, 1989, 1990, 1991 and 1992, respectively.
Many factors affect the financial condition of the
Commonwealth, including many social, environmental and economic
conditions which are beyond the control of the Commonwealth. As with
most urban states, the continuation of many of the Commonwealth's
programs, particularly its human services programs, is in significant part
dependent upon continuing federal reimbursements which have been
declining. Recent federal legislation has effected substantial reductions
in direct federal payments and in grants to
states and municipalities for programs in social service, water pollution
control and other areas. The loss of grants to the state and the cities and
towns could slow economic development and cause programs to be
curtailed or cause the recipients of such funding to find other revenue
sources. Reductions in state revenues, reductions in federal aid, the
rehabilitation of public facilities and
meeting environmental requirements for clean water and clean air and
solid and hazardous waste disposal are expected to be the principal
challenges for the Commonwealth and its local governments in the near
future.
<PAGE>
The Sponsors are unable to predict what effect, if any, such
factors may have on the Bonds in the Massachusetts Trust. Nevertheless,
investors should be aware that if there should be a financial crisis
relating to Massachusetts, its public bodies or municipalities (including
the city of Boston), the market value and marketability of all outstanding
bonds issued by the Commonwealth and its public authorities or
municipalities, including the Bonds in the Massachusetts Trust, could be
adversely affected.
New York Trust
New York State
The national and regional economic recession has caused a
substantial reduction in State tax receipts. This reduction is the principal
cause of the imbalance between recurring receipts and disbursements that
faced the Governor and Legislature in the adoption of the budget for the
1992-1993 fiscal year.
Consequently, the State took various actions for its 1992
fiscal year, which included increases in certain State taxes and fees,
substantial decreases in certain expenditures from previously projected
levels, including cuts in State operations and reductions in State aid to
localities, and the sale of $531 million of short-term deficit notes prior
to the end of the State's 1992 fiscal year. The State's 1992-93 budget
was passed on time, closing an estimated $4.8
billion imbalance resulting primarily from the national and regional
economic recession. Major budgetary actions included a freeze in the
scheduled reduction in the personal income tax and business tax
surcharge, adoption of significant
Medicaid cost containment or revenue initiatives, and reductions in both
agency operations and grants to local governments from previously
anticipated levels. the State completed its 1993 fiscal year with a positive
margin of $671 million in the General Fund which was adopted into a
tax refund reserve account.
The Governor released the recommended Governor's
Executive Budget for the 1993-94 fiscal year on January 19, 1993. The
recommended 1993-94 State Financial Plan projected a balanced General
Fund. General Fund receipts and transfers from other funds were
projected at $31.6 billion, including
$184 million carried over from the State's 1993 fiscal year.
Disbursements and transfers from other funds were projected at $31.5
billion, not including a $67 million repayment to the State's Tax
Stabilization Reserve Fund. To achieve General Fund budgetary balance
in the 1994 State fiscal year, the Governor
recommended various actions. These included proposed spending
reductions and other actions that would reduce General Fund spending
<PAGE>
($1.6 billion); continuing the freeze on personal income and corporate
tax reductions and on hospital assessments (41.3 billion); retaining
moneys in the General Fund that would otherwise have been deposited
in dedicated highway and transportation funds
($516 million); a 21-cent increase in the cigarette tax ($180 million); and
new revenues from miscellaneous sources ($91 million). The
recommended Governor's 1993-94 Executive Budget included reductions
in anticipated aid to all levels of local government.
In comparison to the recommended 1993-94 Executive
Budget, the 1993-94 State budget, as enacted, reflects increases in both
receipts and disbursements in the general Fund of $811 million.
The $811 million increase in projected receipts reflects (i) an
increase of $487 million, from $184 million to $671 million, in the
positive year-end margin at March 31, 1993, which resulted primarily
from improving economic conditions and higher-than-expected tax
collections, (ii) an increase of $269 million in projected receipts, $211
million resulting from the improved 1992-93 results and the expectation
of an improving economy and the balance
from improved auditing and enforcement measures and other
miscellaneous items, (iii) additional payments of $200 million from the
Federal government to reimburse the State for the cost of providing
indigent medical care, and (iv) the payment of an additional $50 million
of personal income tax refunds in the 1993-94; offset by (v) $195 million
of revenue raising recommendations in the
Executive Budget that were not enacted in the budget and thus are not
included in the 1993-94 State Financial Plan.
The $811 million increase in projected disbursements reflects
(i) an increase of $252 million in projected school-aid payments, after
applying estimated receipts from the State Lottery allocated to school aid,
(ii) an increase of $194 million in projected payments for Medicaid
assistance and other social service programs, (iii) additional spending on
the judiciary ($56 million) and criminal justice ($48 million), (iv) a net
increase in projected disbursements for
all other programs and purposes, including mental hygiene and capital
projects, of $161 million, after reflecting certain re-estimates in
spending, and (v) the transfer of $100 million to a newly established
contingency reserve.
The 1993-94 State budget, as enacted, included $400 million
less in State actions that the City had anticipated. Reform of education
aid formulas was achieved which brought an additional 145 million
education dollars to New York City. However, the State legislature
failed to enact a takeover of local Medicaid cost containment items
proposed by the Governor, which would have provided the City with
savings. The adopted State budget cut aid for
probation services, increased sanctions on social service programs,
<PAGE>
eliminated the pass-through of a State surcharge on parking tickets, cut
reimbursement for CHIPS transportation operating dollars, and required
a large contribution in City funds to hold the MTA fare at the current
level. In the event of any significant
reduction in projected State revenues or increases in projected State
expenditures from the amounts currently projected by the State, there
could be an adverse impact on the timing and amounts of State aid
payments to the City in the future.
In certain prior fiscal years, the State has failed to enact a
budget prior to the beginning of the State's fiscal year. A delay in the
adoption of the State's budget beyond the statutory April 1 deadline and
the resultant delay in the State's Spring borrowing has in certain prior
years delayed the projected receipt by the City of State aid, and there can
be no assurance that State budgets in the future fiscal years will be
adopted by the April 1 statutory deadline.
The State has noted that its forecasts of tax receipts have been
subject to variance in recent fiscal years. As a result of these
uncertainties and other factors, actual results could differ materially and
adversely from the State's current projections and the State's projections
could be materially and adversely changed from time to time.
There can be no assurance that the State will not face
substantial potential budget gaps in future years resulting from a
significant disparity between tax revenues projected from a lower
recurring receipts base and the spending required to maintain State
programs at current levels.
To address any potential budgetary imbalance, the State may
need to take significant actions to align recurring receipts and
disbursements in future fiscal years.
Ratings on general obligation bonds of the State of New York
were lowered by Standard & Poor's Corporation and Moody's Investors
Service during 1990 from AA- to A and Aa to A, respectively. On
January 6, 1992, Moody's Investors Service lowered its rating on certain
appropriations-backed debt of New York State to Baa1 from A. The
agency cited the failure of Governor Mario M. Cuomo and New York
State lawmakers to close New York's current year budget gap. Moody's
Investors Services also placed the general obligation, State guaranteed
and New York local Municipal Assistance Corporation Bonds under
review for possible downgrade in coming months. In
addition, on January 13, 1992, Standard & Poor's Corporation lowered
its rating on general obligation debt and guaranteed debt to A- from A.
Standard & Poor's Corporation also downgraded its rating on variously
rated debt, State moral obligations, contractual obligations, lease
purchase obligations and other State guarantees. Additional reductions
<PAGE>
in ratings could result in a loss to Unit holders.
State Authorities
The fiscal stability of the State is related to the fiscal stability
of its authorities, which generally have responsibility for financing,
constructing, and operating revenue-producing benefit facilities. Certain
authorities of the State, including the State Housing Finance Agency
("HFA"), the Urban Development Corporation ("UDC") and the
Metropolitan Transportation Authority ("MTA") have faced and continue
to experience substantial financial difficulties which could adversely
affect the ability of such authorities to make payments of interest on, and
principal amounts of, their respective bonds. Should any of its authorities
default on their respective obligations, the State's
access to public credit markets could be impaired. The difficulties have
in certain instances caused the State (under its so-called "moral
obligation") to appropriate funds on behalf of the authorities. Moreover,
it is expected that the problems faced by these authorities will continue
and will require increasing amounts of State assistance in future years.
Failure of the State to appropriate necessary amounts or to take other
action to permit those authorities having
financial difficulties to meet their obligations (including HFA, UDC and
MTA) could result in a default by one or more of the authorities. Such
default, if it were to occur, would be likely to have a significant adverse
effect on investor confidence in, and therefore the market price of,
obligations of the defaulting authority. In addition, any default in
payment of any general obligation of any authority whose bonds contain
a moral obligation provision could constitute a
failure of certain conditions that must be satisfied in connection with
Federal guarantees of City and MAC obligations and could thus
jeopardize the City's long-term financing plans.
The fiscal stability of the State is related to the fiscal stability
of its authorities, which generally have responsibility for financing,
constructing and operating revenue-producing public benefit facilities.
The authorities are not subject to the constitutional restrictions on the
incurrence of debt which apply to the State itself and may issue bonds
and notes within the amounts of, and as otherwise restricted by, their
legislative authorization. As of September 30, 1992
there were 18 authorities that had outstanding debt of $100 million or
more. The aggregate outstanding debt, including refunding bonds, of
these 18 authorities was $62.2 billion as of September 30, 1992, of
which approximately $8.2 billion was moral obligation debt and
approximately $17.1 billion was financed under
lease-purchase or contractual-obligation financing arrangements.
The authorities are generally supported by revenues generated
by the projects financed or operated, such as fares, user fees on bridges,
<PAGE>
highway tolls and rentals for dormitory rooms and housing. In recent
years, however, the State has provided financial assistance through
appropriations, in some cases of a recurring nature, to certain of the 18
authorities for operating and other expenses and, in fulfillment of its
commitments on moral obligation indebtedness or otherwise for debt
service. This assistance is expected to continue to be required in future
years.
The MTA oversees the operation of New York City's subway
and bus lines by its affiliates, the New York City Transit Authority and
the Manhattan and Bronx Surface Transit operating (collectively, the
"Transit Authority" or the "TA"). Through MTA's subsidiaries, the
Long Island Railroad Company, the Metro-North Commuter Railroad
Company and the Metropolitan Suburban Bus Authority, the MTA
operates certain commuter rail and bus lines in the New York
metropolitan area. In addition, the Staten Island
Rapid Transit Operating Authority, an MTA subsidiary, operates a rapid
transit line on Staten Island. Through its affiliated agency, the
Triborough Bridge and Tunnel Authority (the "TBTA"), the MTA
operates certain intrastate toll bridges and tunnels. Because fare revenues
are not sufficient to finance the mass transit portion of these operations,
the MTA has depended and will continue to depend
for operating support upon a system of Federal, State, local government
and TBTA support, including loans, grants and operating subsidies.
Over the past several years, the State has enacted several taxes, including
a surcharge on the profits of banks, insurance corporations and general
business corporations doing business in the 12-county region served by
the MTA (the"Metropolitan Transportation Region") and a special
one-quarter of 1% regional sales and use tax, that provide additional
revenues for mass transit purposes including assistance to the MTA, the
surcharge, which expires in November 1995, yielded
$507 million in calendar year 1992, of which the MTA was entitled to
receive approximately 90 percent, or approximately $456 million.
For 1993, the TA is currently projecting a budget gap of
about $266 million. The MTA Board approved an increase in TBTA
tolls which took effect January 31, 1993. Since the TBTA operating
surplus helps subsidize TA operations, the January toll increase on TBTA
facilities, and other developments, reduced the projected gap to
approximately $241 million. Legislation passed in April 1993 relating to
the MTA's 1992-1996 Capital Program reflected a plan for closing this
gap without raising fares. A major element of the plan provides that the
TA receive a significant share of the petroleum business tax which will
be paid directly to MTA for its agencies. The plan also relies on certain
City actions that have not yet been taken. The plan
also relies on certain City resources projected to be available to help
close the gap. If any of the assumptions used in making these
projections prove incorrect, the TA's gap could grow, and the TA would
be required to seek additional State assistance, raise fares or take other
<PAGE>
actions.
A subway fire on December 28, 1990, which caused fatalities
and many injuries, has given rise to substantial claims for damages
against both the TA and the City. A subway derailment on August 28,
1991, which caused fatalities and many injuries, may give rise to
additional claims.
The State's experience has been that if an Authority suffers
serious financial difficulties, both the ability of the State and the
Authorities to obtain financing in the public credit markets and the
market price of the State's outstanding bonds and notes may be adversely
affected. The Housing Finance Agency ("HFA") and the Urban
Development Corporation ("UDC") have in the
past required substantial amounts of assistance from the State to meet
debt service costs or to pay operating expenses. Further assistance,
possibly in increasing amounts, may be required for these, or other,
Authorities in the future. In addition, certain statutory arrangements
provide for State local assistance payments otherwise payable to localities
whose local assistance payments otherwise payable to localities to be
made under certain circumstances to certain Authorities. The State has
no obligation to provide additional assistance to localities whose local
assistance payments have been paid to Authorities under these
arrangements. However, in the event that such local
assistance payments are so diverted, the affected localities could seek
additional State funds.
New York City and Other Localities
The fiscal health of the State is closely related to the fiscal
health of its localities, particularly The City of New York (the "City"),
which has required and continues to require significant financial
assistance from the State. The City's independently audited operating
results for each of its 1981 through 1992 fiscal years show a General
Fund surplus reported in accordance with GAAP. The City has
eliminated the cumulative deficit in its net General
Fund position. In addition, the City's financial statements for the 1992
fiscal year received an unqualified opinion from the City's independent
auditors, the tenth consecutive year the City has received such an
opinion.
In response to the City's fiscal crisis in 1975, the State took
a number of steps to assist the City in returning to fiscal stability.
Among these actions, the State created the Municipal Assistance
Corporation for The City of New York ("MAC") to provide financing
assistance to the City. The State also enacted the New York State
Financial Emergency Act for The City of New
York (the "Financial Emergency Act") which, among other things,
<PAGE>
established the New York State Financial Control Board (the "Control
Board") to oversee the City's financial affairs. The State also established
the Office of the State Deputy Comptroller for The City of New York
("OSDC") to assist the Control Board in exercising its powers and
responsibilities. On June 30, 1986, the
Control Board's powers of approval over the City's Financial Plan were
suspended pursuant to the Financial Emergency Act. However, the
Control Board, MAC and OSDC continue to exercise various monitoring
functions relating to the City's financial position. The City operates
under a four-year financial plan which is prepared annually and is
periodically updated. The City submits its financial plans as well as the
periodic updates to the Control Board for its review.
The City's economy, whose rate of growth slowed
substantially over the past three years, is currently in recession. During
the 1990 and 1991 fiscal years, as a result of the slowing economy, the
City has experienced significant shortfalls in almost all of its major tax
sources and increases in social
services costs, and has been required to take actions to close substantial
budget gaps in order to maintain balanced budgets in accordance with the
Financial Plan.
Beginning in 1992, the improvement in the national economy
helped stabilize conditions in the City. The City now projects, and its
current four-year financial plan assumes, that the City's economy will
continue to improve during calendar year 1993 and that a modest
economic recovery will begin during the second half of this calendar
year.
On July 6, 1993, the City prepared the Financial Plan for the
1994 through 1997 fiscal years, which relates to the City, the Board of
Education ("BOE") and the City University of New York ("CUNY").
The City is in the process of preparing a more detailed financial plan,
which will conform to the Financial Plan, and which the City expects to
submit to the Control Board in August 1993.
The 1994-97 Financial Plan projects revenues and
expenditures for the 1994 fiscal year balanced in accordance with GAAP.
The 1994-1997 Financial Plan sets forth actions to close a previously
projected gap of approximately $2.0 billion in the 1994 fiscal year. The
gap-closing actions for the 1994 fiscal year included agency actions
aggregating $666 million, including
productivity savings and savings from restructuring the delivery of City
services; service reductions aggregating $274 million; the sale of
delinquent real property tax receivables for $215 million; discretionary
transfers from the 1993 fiscal year of $110 million; reduced debt service
costs aggregating $187 million, resulting from refinancings and other
actions; $150 million in proposed increased Federal assistance; a
proposed continuation of the personal income tax
<PAGE>
surcharge, resulting in revenues of $143 million; $80 million in proposed
increased State aid, of which approximately $35 million may be subject
to approval by the Governor and State Legislature; and revenue actions
aggregating $173 million. The projected expenditures, for the 1994
fiscal year reflect the $131 million of expenditure reductions announced
subsequent to the adoption of the budget on June 14, 1993, including a
$50 million reduction in BOE expenditures, a $30 million reduction in
personal service costs and a $25 million reduction in other than personal
services.
The Financial Plan also sets forth projections for the 1995
through 1997 fiscal years and outlines a proposed gap-closing program
to close projected budget gaps of $1.3 billion, $1.8 billion and $2.0
billion for the 1995 through 1997 fiscal years, respectively. The
projections include $150 million of increased Federal assistance in each
of the 1995 through 1997 fiscal years and $131 million, $291 million and
$291 million of increased State assistance in the 1995, 1996 and 1997
fiscal years, respectively, which could include savings
from the proposed State assumption of certain Medicaid costs or various
proposed mandate relief measures and include the continuation of the
personal income tax surcharge, resulting in revenues of $420, $446 and
$471 million in the 1995, 1996 and 1997 fiscal years, respectively. The
proposed gap-closing actions include City actions aggregating $287
million,$564 million and $645 million in the 1995 through 1997 fiscal
years respectively; $100 million and $200 million in proposed additional
Federal assistance in the 1996 and 1997 fiscal years, respectively;
savings from various proposed mandate relief
measures and the proposed reallocation of State education aid among
various localities, aggregating $175 million, $325 million and $475
million in the 1995 through 1997 fiscal years, respectively; and other
unspecified Federal, State or City actions of $800 million, $800 million
and $700 million in the 1995 through 1997 fiscal years, respectively.
Various actions proposed in the Financial Plan, including the
proposed continuation of the personal income tax surcharge beyond
December 31, 1995 and the proposed increase in State aid, are subject
to approval by the Governor and the State Legislature, and the proposed
increase in Federal aid, is subject to approval by Congress and the
President. The State Legislature has in previous legislative sessions failed
to approve proposals for the State assumption of certain Medicaid costs,
mandate relief and reallocation of State
education aid, thereby increasing the uncertainty as to the receipt of the
State assistance included in the Financial Plan. If these actions can not
be implemented, the City will be required to take other actions to
decrease expenditures or increase revenues to maintain a balance
financial plan. The State Legislature has approved the continuation of the
personal income tax surcharge through December 31, 1995, and the
Governor is expected to approve this continuation. The Financial Plan
has been the subject of extensive public comment and criticism
<PAGE>
particularly regarding the sale of delinquent property tax
receivables, the sale of the New York City Off-Track Betting
Corporation, the amount of State and Federal aid included in the
Financial Plan and the inclusion of non-recurring actions.
The City Comptroller issued a statement on June 14, 1993
that identified problems totalling $476 million in the fiscal year 1994
budget. The problems included the uncertainty of (1) receiving all the
Federal aid anticipated, (ii) completing the sale or reorganization of OTB
in fiscal year 1994 and (iii) winning approval to eliminate preparation
time of certain teachers. The City Comptroller is expected to issue
reports on the Financial Plan in the near future.
Although the City has maintained balanced budgets in each of
its last twelve fiscal years, and is projected to achieve balanced operating
results for the 1993 fiscal year, there can be no assurance that the
gap-closing actions proposed in the Financial Plan can be successfully
implemented or that the City will maintain a balanced budget in future
years without additional State aid, revenue increases or expenditure
reductions. Additional tax increases and reductions in essential City
services could adversely affect the City's economic base.
The 1994-97 Financial Plan is based on numerous
assumptions, including the recovery of the City's and the region's
economy early in the calendar year 1993. The 1994-97 Financial Plan
is subject to various other uncertainties and contingencies relating to,
among other factors, the extent, if any, to which wage increases for City
employees exceed the annual increases assumed for the 1994 through
1997 fiscal years; continuation of the 9% interest
earnings assumptions for pension fund assets affecting the City's
required pension fund contributions; the willingness and the ability of the
State to provide the aid contemplated by the Financial Plan and to take
various other actions to assist the City, including the proposed State
takeover of certain Medicaid costs and State mandate relief, the ability
of HHC, BOE and other agencies to maintain budget balance; the
willingness of the Federal government to provide
Federal aid; approval of the proposed continuation of the personal
income tax surcharge and the State budgets; adoption of the City's
budgets by the City Council; the ability of the City to implement
contemplated productivity and service and personnel reduction programs
and the success with which the City controls expenditures; additional
expenditures that may be incurred due to therequirements of certain
legislation requiring minimum levels of funding for
education; the City's ability to market its securities successfully in the
public credit markets; the level of funding required to comply with the
Americans with Disabilities Act of 1990; and additional expenditures that
may be incurred as a result of deterioration in the condition of the City's
infrastructure. Certain of these assumptions have been questioned by the
City Comptroller and other public officials.
<PAGE>
Estimates of the City's revenues and expenditures are based
on numerous assumptions and the subject to various uncertainties. If
expected Federal or State aid is not forthcoming, if unforeseen
developments in the economy significantly reduce revenues derived from
economically sensitive taxes or necessitate increased expenditures for
public assistance, if the City provided
for in the City's Financial Plan of if other uncertainties materialize that
reduce expected revenues or increase projected expenditures then, to
avoid operating deficits, the City may be required to implement
additional actions, including increases in taxes and reductions in essential
City services. The City might also seek additional assistance from the
State.
The City depends on the State for State aid both to enable the
City to balance its budget and to meet its cash requirements. For its
1993 fiscal year, the State, before taking any remedial action, reported
a potential budget deficit of $4.8 billion (before providing for repayment
of the deficit notes as described below). If the State experiences revenue
shortfalls or spending increases beyond its projections during its 1993
fiscal year or subsequent years, such developments could result in
reductions in projected State aid to the City.
In addition, there can be no assurance that State budgets in future fiscal
years will be adopted by the April 1 statutory deadline and that there will
not be adverse effects on the City's cash flow and additional City
expenditures as a result of such delays.
Implementation of the Financial Plan is also dependent upon
the City's ability to market its securities successfully in the public credit
markets. The City's financing program for fiscal years 1994-97
contemplates issuance of $10.8 billion of general obligation bonds
primarily to reconstruct and rehabilitate
the City's infrastructure and physical assets and to make capital
investments. A significant portion of such bond financing is used to
reimburse the City's general fund for capital expenditures already
incurred. In addition, the City issues revenue and tax anticipation notes
to finance its seasonal working capital
requirements. The success of projected public sales of City bonds and
notes will be subject to prevailing market conditions at the time of the
sale, and no assurance can be given that such sales will be completed.
If the City were unable to sell its general obligation bonds and notes, it
would be prevented from meeting its planned operating and capital
expenditures.
Substantially all of the City's full-time employees are
members of labor unions. The Financial Emergency Act requires that
all collective bargaining agreements entered into by the City and the
Covered Organizations be consistent with the City's current financial
plan, except under certain circumstances, such as awards arrived at
through impasse procedures.
<PAGE>
On January 11, 1993, the City announced a settlement with
a coalition of municipal unions, including Local 237 of the International
Brotherhood of Teamsters ("Local 237"), District 37 of the American
Federation of State, County and Municipal Employees ("District Council
37") and other unions covering approximately 44% of the City's
workforce. The settlement, which has been ratified by the unions,
includes a total net expenditure increase
of 8.25% over a 39-month period, ending March 31, 1995 for most of
these employees. On April 9, 1993 the City announced an agreement
with the Uniformed Fire Officers Association (the"UFOA") which is
consistent with the coalition agreement. The agreement has been
ratified. The Financial Plan reflects the costs associated with these
settlements and provides for similar increases for all other City-funded
employees.
The Financial Plan provides no additional wage increases for
City employees after their contracts expire in the 1995 fiscal year. Each
1% wage increase for all employees commencing in the 1995 fiscal year
would cost the City an additional $56 million for the 1995 fiscal year and
$152 million for the 1996 fiscal year and each year thereafter above the
amounts provided for in the Financial Plan.
The terms of eventual wage settlements could be determined
through the impasse procedure in the New York City Collective
Bargaining Law, which can impose a binding settlement.
MAC was organized in 1975 to provide financing assistance
for the City and also to exercise certain review functions with respect to
the City's finances. MAC bonds are payable out of certain State sales
and compensating use taxes imposed within the City, State stock transfer
taxes and per capita State aid to the City. Any balance from these
sources after meeting MAC debt service and reserve fund requirements
and paying MAC's operating expenses is remitted to the City or, in the
case of stock transfer taxes, rebated to the
taxpayers. The State is not, however, obligated to continue the
imposition of such taxes or to continue appropriation of the revenues
therefrom to MAC, nor is the State obligated to continue to appropriate
the State per capita aid to the City which would be required to pay the
debt service on certain MAC obligations. MAC has not taxing power
and MAC bonds do not create an enforceable obligation of either the
State or the City. As of March 31, 1993,
MAC had outstanding an aggregate of approximately $5.463 billion of
its bonds.
On February 11, 1991, Moody's Investors Service lowered
its rating on the City's general obligation bonds from A to Baa1. On July
2, 1993, Standard & Poor's reconfirmed its A- rating of City bonds,
continued its negative rating outlook assessment and stated that
maintenance of such ratings depended upon the City's making further
<PAGE>
progress towards reducing budget gaps in the outlying years.
Certain localities in addition to New York City could also
have financial problems leading to requests for additional State assistance
during the State's 1992-93 fiscal year and thereafter. The 1992-93 State
Financial Plan includes a significant reduction in State aid to localities in
such programs as revenue sharing and aid to education from projected
base-line growth in such programs. It is expected that such reductions
will result in the need for localities to reduce their spending or increase
their revenues. Fiscal difficulties experienced by the City of Yonkers
("Yonkers") resulted in the creation of the
Financial Control Board for the City of Yonkers (the "Yonkers Board")
by the State in 1984. The Yonkers Board is charged with oversight of
the fiscal affairs of Yonkers. Future actions taken by the Governor or
the State Legislature to assist Yonkers could result in allocation of State
resources in amounts that cannot yet be determined.
Municipalities and school districts have engaged in substantial
short-term and long-term borrowings. In 1991, the total indebtedness of
all localities in the State was approximately $31.6 billion, of which $16.8
billion was debt of New York City (excluding $6.7 billion in MAC
debt); a small portion (approximately $39 million) of the $31.6 billion
of indebtedness represented borrowing to finance budgetary deficits and
was issued pursuant to enabling State legislation. In 1992, an unusually
large number of local government units requested authorization for
deficit financings. Although the comptroller has indicated that the level
of deficit financing requests is unprecedented, such developments are not
expected to have a material adverse effect on the financial conditions of
the State. Certain proposed Federal expenditure reductions would
reduce, or in some cases affected localities. If the
State, New York City or any of the Authorities were to suffer serious
financial difficulties jeopardizing their respective access to the public
credit markets, the marketability of notes and bonds issued by localities
within the State could be adversely affected. Localities also face
anticipated and potential problems resulting from certain pending
litigation, judicial decisions, and long-range
economic trends. The longer-range problems of declining urban
population, increasing expenditures, and other economic trends could
adversely affect localities and require increasing State assistance in the
future.
Litigation
The State is the subject of numerous legal proceedings
relating to State finances, State programs and miscellaneous tort, real
property and contract claims in which the State is a defendant and where
monetary damages sought are substantial. These proceedings could
adversely affect the financial condition of the State in the 1991-92 fiscal
<PAGE>
years or thereafter.
Among the more significant of these litigations, which are at
various procedural stages, are those that challenge: (i) the validity of
agreements and treaties by which various Indian tribes transferred title
to the State of certain land in central New York; (ii) certain aspects of
the State's Medicaid rates and regulations, including reimbursements to
providers of mandatory and optional Medicaid services; (iii)
contamination in the Love Canal area of Niagara Falls;
(iv) an action against State and New York City officials alleging that the
present level of shelter allowance for public assistance recipients is
inadequate under statutory standards to maintain proper housing; (v)
alleged employment discrimination by the State and its agencies; (vii)
challenges to the practice of reimbursing certain Office of Mental Health
patient care expenses from the client's Social Security benefits; (vii) a
challenge to the methods by which the State reimburses localities for the
administrative costs of food stamp programs;
(viii) a challenge to the State's possession of certain funds taken pursuant
to the State's Abandoned Property Law; (ix) alleged responsibility of
State officials to assist in remedying racial segregation in the City of
Yonkers; (x) an action in which the State is a third party defendant, for
injunctive or other appropriate relief concerning liability for the
maintenance of stone groins constructed along
certain areas of Long Island's shoreline; (xi) actions challenging the
constitutionality of legislation enacted during the 1990 legislative session
which changed the actuarial funding methods for determining
contributions to State employee retirement systems; (xii) actions
challenging legislation enacted in 1990 which requires the withholding
of certain amounts of pay from State employees until their separation
from State employment; (xiii) a challenge to the
constitutionality of specified financial programs authorized by Chapter
190 of the laws of 1990 and which seeks the recall and refunding of
obligations of certain public authorities issued pursuant to such
legislation; (xiv) challenges to the constitutionality of financial programs
of the Thruway Authority authorized by Chapters 166 and 410 of the
Laws of 1991, and to the sufficiency of the fiscal year 1991-92 judiciary
budget; (xv) challenges to the constitutionality of
sections 1, 2, 3 and 10 of Chapter 220 of the Laws of 1990 which relate
to the creation and operation of the New York Local Governmental
Assistance Corporation ("LGAC") and of the issuance of bonds by
LGAC; (xvi) challenges to the constitutionality of the State's statutory
scheme relating to excess medical malpractice insurance; (xvii) an action
challenging the constitutionality of a proposal by the Governor for a
multi-year fiscal plan for the State's 1991-92 and
1992-93 fiscal years and the "continuous issuance, retirement and
reissuance of the temporary revenue anticipation notes (TRANS)"; (xviii)
challenges to the delay by the State Department of Social Services in
making two one-week Medicaid payments to the service providers; (xxi)
<PAGE>
challenges to portions of Chapter 55 of the laws of 1992 requiring
hospitals to impose and remit to the State an 11% surcharge on hospital
bills paid by commercial insurers; (xx) challenges promulgated by the
State Department of Social Services of a home
assessment resource review instrument used to determine eligibility for
and nature of home care services for Medicaid recipients; and (xxi)
challenges to programs implemented under Section 62 of Chapter 41 of
the Laws of 1992 to reduce Medicaid benefits to certain home-relief
Medicaid recipients.
Economy
A national recession commenced in mid-1990. The State has
suffered a more severe economic downturn. The national recession has
been exacerbated in the State by a significant retrenchment in the
financial services industry, cutbacks in defense spending, and an
overbuilt real estate market.
Over the long term, serious potential economic problems may
continue to aggravate State and local financial conditions. For decades,
the State economy has grown more slowly than the nation as a whole,
resulting in the gradual erosion of the State's relative economic affluence
and tax base, and the relocation of certain manufacturing operations and
executive offices outside the State. The causes of this relative decline are
varied and complex, in many cases involving national and international
developments beyond the State's control. Part of the reason for the
long-term relative decline in the State economy has
been attributed to the combined state and local tax burden, which is
among the highest in the nation. The existence of this tax burden limits
the State's ability to impose higher taxes in the event of future financial
difficulties.
If during the existence of the New York Trust, the City of
New York, the State, or any of its agencies or municipalities, because of
its or their own financial difficulties, become unable to meet regular
commitments or if there should be a default, moratorium or other
interruption of payments of interest or principal on any obligation issued
by New York City, the State, or a municipality or other authority in the
State, the market value and marketability of Bonds in the New York
Trust, the asset value of Units of the New York Trust, and the interest
income to the New York Trust, could be adversely affected.
Pennsylvania Trust
Potential purchasers of Units of the Trust should consider the
fact that the Trust's portfolio consists primarily of securities issued by
the Commonwealth of Pennsylvania (the "Commonwealth"), its
municipalities and authorities and should realize the substantial risks
<PAGE>
associated with an investment in such securities. Although the
Commonwealth had a positive budgetary balance at the end of each fiscal
year from fiscal 1984 to fiscal 1989, the positive balance in the General
Fund of the Commonwealth (the principal operating fund of the
Commonwealth) declined to a zero balance at the close of
fiscal 1989, and a negative balance was experienced in 1990 and 1991,
tax increases and spending decreases helped return the General Fund
balance to a surplus at June 30, 1992 of $87.5 million. The deficit in
the Commonwealth's unreserved/undesignated funds was also reduced,
from $1.1462 million at June 30, 1991 to $138.6 million at June 30,
1992.
Pennsylvania's economy historically has been dependent upon
heavy industry, but has diversified recently into various services,
particularly into medical and health services, education and financial
services. Agricultural industries continue to be an important part of the
economy, including not only the production of diversified food and
livestock products, but substantial economic activity in agribusiness and
food-related industries. Service industries
currently employ the greatest share of non-agricultural workers, followed
by the categories of trade and manufacturing. Future economic
difficulties in any of these industries could have an adverse impact on the
finances of the Commonwealth or its municipalities, and could adversely
affect the market value of the Bonds in the Pennsylvania Trust or the
ability of the respective obligors to make payments of interest and
principal due on such Bonds.
Certain litigation is pending against the Commonwealth that
could adversely affect the ability of the Commonwealth to pay debt
service on its obligations, including suits relating to the following
matters: (i) the ACLU has filed suit in federal court demanding
additional funding for child welfare services; the Commonwealth settled
a similar suit in the Commonwealth Court of Pennsylvania and is seeking
the dismissal of the federal suit, inter alia, because of that settlement; in
April 1993, the federal court granted in part and
denied in part the Commonwealth's motion for summary judgment (no
available estimates of potential liability); (ii) in 1987, the Supreme Court
of Pennsylvania held that the statutory scheme for county funding of the
judicial system to be in conflict with the Constitution of the
Commonwealth but stayed judgment pending enactment by the legislature
of funding consistent with the opinion and the
legislature has yet to consider legislation implementing the judgment; (iii)
several banks have filed suit against the Commonwealth contesting the
constitutionality of a law enacted in 1989 imposing a bank shares tax
(potential liability estimated at $1.023 billion plus interest); (iv) in
January 1992, the Pennsylvania Commonwealth Court held that dividends
received by a corporate taxpayer and accounted for under the equity
method of accounting are not included in the tax base for purposes of the
capital stock/franchise tax--the Commonwealth of Pennsylvania has
<PAGE>
appealed the decision but believes the likelihood of an unfavorable
outcome is reasonably possible, and has provided
sufficient reserves to fund the potential loss (potential lost revenue to the
Commonwealth estimated at $30 million annually); (v) litigation has been
filed in both state and federal court by an association of rural and small
schools and several individual school districts and parents challenging the
constitutionality of the Commonwealth's system for funding local school
districts--the federal case has been stayed pending resolution of the state
case and the state case is in the pre-trial state (no available estimate of
potential liability); (vi) litigation has been filed in state court by a variety
of plaintiffs challenging the validity of a number of provisions in the
1991 tax legislation, including the tax on leased vehicles the sales tax on
periodicals, and the repeal of the deduction for net operating loss
carryforwards (no available estimate of potential liability for
refund of taxes collected or amount of tax revenue at risk); (vii) the
ACLU has brought a class action on behalf of inmates challenging the
conditions of confinement in thirteen of the Commonwealth's correctional
institutions (no available estimate of potential cost of complying with the
injunction sought but capital and personnel costs might cost millions of
dollars) and (viii) a consortium of public interest law firms has filed a
class action suit alleging that the Commonwealth has not complied with
a federal mandate to provide screening, diagnostic and treatment services
for all Medicaid-eligible children under 21 (potentially liability estimated
at $98 million).
The Commonwealth's general obligation bonds have been
rated AA- by Standard & Poor's and A1 by Moody's for approximately
the last five years.
The City of Philadelphia (the "City") has been experiencing
severe financial difficulties which has impaired its access to public credit
markets and a long-term solution to the City's financial crisis is still
being sought. The City experienced a series of General Fund deficits for
fiscal years 1988 through 1991.
Additional deficits are expected for the 1992 and 1993 fiscal
years. The City has no legal authority to issue deficit reduction bonds
on its own behalf, but state legislation has been enacted to create an
Intergovernmental Cooperation Authority to provide fiscal oversight for
Pennsylvania cities (primarily Philadelphia) suffering recurring financial
difficulties. The Authority is broadly empowered to assist cities in
avoiding defaults and eliminating deficits by encouraging the adoption of
sound budgetary practices and issuing bonds.
In order for the Authority to issue bonds on behalf of the City, the City
and the Authority entered into an intergovernmental cooperative
agreement providing the Authority with certain oversight powers with
respect to the fiscal affairs of the City, and the Authority approved a
five-year financial plan prepared by the City.
On June 16, 1992, the Authority issued a $474,555,000 bond issue on
<PAGE>
behalf of the City. A five year plan that projects a balanced General
Fund budget in Fiscal Year 1994 without a grant from the Authority was
approved by the Authority on April 6, 1992. Full implementation of the
five year plan was delayed due to labor negotiations that were not
completed until October 1992, three months after the expiration of the
old labor contracts. In March 1993, Philadelphia filed an amended five
year plan with the Authority, which projects a $6.6 million deficit in the
General Fund for the fiscal year ending June 30, 1993. The City
Council and the Authority have approved a fiscal 1994 budget
that projects no deficit for the fiscal year ending June 30, 1994. In July
1993, the Authority issued $643,430,000 of bonds to refund certain
general obligation bonds of the City and to fund additional capital
projects. In September 1993, the Authority issued $178,675,000 of bonds
to advance refund certain of the bonds issued in June 1992.
The Sponsors believe the information summarized above
describes some of the more significant aspects relating to the State
Trusts. The sources of such information are the official statements of
issuers located in each of the respective States as well as other publicly
available documents. While the Sponsors have not independently
verified this information, they have no reason to believe that such
information is not correct in all material respects.
The Units
On the date of this Prospectus, each Unit in a Trust
represented a fractional undivided interest in the principal and net income
of the Trust as set forth in the "Summary of Essential Information" in
Part A. If any Units are redeemed by the Trustee, the principal amount
of the Bonds in the affected Trust will be reduced by an amount allocable
to redeemed Units and the fractional undivided interest in the affected
Trust represented by each unredeemed Unit will be increased. Units will
remain outstanding until redeemed upon tender to
the Trustee by any Unit holder, which may include the Sponsors, or until
the termination of the Trust Agreement. (See "Amendment and
Termination of the Trust Agreement-Termination".) References in this
Prospectus to "Units" are to Units which represented the fractional
undivided interest indicated in the "Summary of Essential Information"
of Part A.
Estimated Current Return and Estimated Long-Term Return
Under accepted bond practice, tax-exempt bonds are
customarily offered to investors on a "yield price" basis (as contrasted
to a "dollar price" basis) at the lesser of the yield as computed to
maturity of the bonds or to an earlier redemption date and which takes
<PAGE>
into account not only the interest payable on the bonds but also the
amortization or accretion to a specified date
of any premium over or discount from the par (maturity) value in the
bond's purchase price. Since Units of the Trust are offered on a dollar
price basis, the rate of return on an investment in Units of the Trust is
stated in terms of "Estimated Current Return", computed by dividing the
Net Annual Income per Unit by the Public Offering Price per Unit. Any
change in either the Net Annual Income per Unit or the Public Offering
Price per Unit will result in a change in the Estimated Current Return.
The Net Annual Income per Unit of a Trust is determined by dividing
the total annual interest income of such Trust, less estimated annual fees
and expenses of the Trustee, the Sponsor and the
Evaluator, by the number of Units of such Trust outstanding. The Net
Annual Income per Unit of a Trust will change as the income or
expenses of such Trust changes and as Bonds are redeemed, paid, sold
or exchanged. For a statement of the Net Annual Income per Unit and
the Estimated Current Return Based on Public Offering Price, see Part
A, "Summary of Essential Information".
The Estimated Long-Term Return for a Trust is a measure of
the return to the investor over the estimated life of a Trust. The
Estimated Long-Term Return represents an average of the yields to
maturity (or call) of the Bonds in a Trust's portfolio calculated in
accordance with accepted bond practice and adjusted to reflect expenses
and sales charges. In calculating Estimated Long-Term Return, the
average yield for a Trust's portfolio is derived
by weighing each Bond's yield by the market value of the Bond and by
the amount of time remaining to the date to which the Bond is priced.
Once the average portfolio yield is computed, this figure is then reduced
to reflect estimated expenses and the effect of the maximum sales charge
paid by investors. The Estimated Long-Term Return calculation does not
take into account the difference in the timing of payments to Unitholders
who choose the quarterly or semi-annual plan of distribution which will
reduce the economic return compared to those who choose the monthly
plan of distribution.
A Trust may experience expenses and portfolio charges
different from those assumed in the calculation of Estimated Long-Term
Return. There thus can be no assurance that the Estimated Current
Returns or Estimated Long-Term Returns quoted for a Trust will be
realized in the future. Since both Estimated Current Return and
Estimated Long-Term Return quoted on a given
business day are based on the market value of the underlying Bonds on
that day, subsequent calculations of these performance measures will
reflect the then-current market value of the underlying Bonds and may
be higher or lower.
<PAGE>
Tax Status
In the opinion of bond counsel to the issuing governmental
authorities given at the time of the original delivery of the Bonds,
interest income on the Bonds comprising the Portfolio of each Trust is
(except in certain instances, depending upon the Unit holder, as
described below) exempt from Federal income tax under the provisions
of the Internal Revenue Code in effect as of the date of issuance. In the
case of bonds issued when the Internal Revenue Code of 1954 was in
effect, redesignation of the Code as the Internal Revenue Code of 1986
(the "Code" or the "1986 Code") has not adversely
affected such exemption. (See "Tax Exempt Securities Trust --
Portfolio.)"
On the Date of Deposit, Messrs. Cahill Gordon & Reindel,
special counsel for the Sponsors, and special counsel on New York tax
matters, rendered an opinion under then existing provisions of the Code,
the regulations then promulgated thereunder and then current rulings of
the Internal Revenue Service, substantially to the effect:
None of the Trusts is an association taxable as a corporation
for Federal income tax purposes, and interest on the underlying debt
obligations (including insurance company payments treated as tax-exempt
interest for Federal income tax purposes) which is exempt from Federal
income tax under the Code when received by each Trust (or by a
previously issued Series in whose property the Trust has an ownership
interest) will retain its status as tax-exempt interest, for Federal income
tax purposes, to the Unit holders.
Each Unit holder will be considered the owner of a pro rata
portion of the assets of the Trust, Units of which are held by him
(including any ownership interest of the Trust in property comprising a
previously issued Series) under Sections 671-678 of the Code. Each Unit
holder will be considered to have received his pro rata share of interest
derived from such Trust assets when it is received by the Trust (or by
the previously issued Series), and each Unit holder will have a taxable
event when an underlying debt obligation is disposed of (whether by sale,
exchange, redemption or payment at maturity) or when the Unit holder
redeems or sells his Units. The total tax cost of each Unit to a Unit
holder is allocated among each of the underlying debt
obligations held in a particular trust (in accordance with the proportion
of the particular Trust assets comprised by each underlying debt
obligation) in order to determine his per Unit tax cost for each
underlying debt obligation, and the tax cost reduction requirements of the
Code relating to amortization of bond premium will apply separately to
the per Unit tax cost of each underlying debt obligation. Therefore,
under some circumstances a Unit holder may realize taxable gains when
his Units are sold or redeemed for an amount equal to or
less than his original cost.
<PAGE>
When a contract to acquire an underlying debt obligation is
settled after the Unit holder's settlement date for a Unit, the Unit
holder's proportionate share of the interest accrued on the underlying
debt obligation on the debt obligation's settlement date will exceed the
portion of the purchase price that was allocable to interest accrued on the
Unit settlement date. A Unit holder will not be subject to federal income
tax on his proportionate share of the interest which accrues during the
period between the Unit settlement date and the debt obligation's
settlement date either when such interest is received by the
trust or when it is distributed to him.
Under the personal income tax laws of the State and City of
New York, the income of each Trust will be treated as the income of its
Unit holders. Interest on the underlying debt obligations (including
insurance company payments treated as tax-exempt interest for Federal
income tax purposes) which is exempt from tax under the laws of the
State and City of New York when received by the New York Trust (or
by a previously-issued Series in whose property the New York Trust has
an interest) will retain its status as tax-exempt interest to its Unit holders.
(Interest on the underlying obligations in the New York Trust is,
however, not excludable from income in determining the amount of the
income-based (i) New York State franchise taxes on business
and financial corporations or (ii) the New York City general corporation
tax and the New York City financial corporation tax.) The minimum
income taxes imposed by New York State and New York City on
individuals, estates and trusts exclude from their taxable bases the federal
tax preference item with respect to tax-exempt interest. Non-residents
of New York City will not be subject to the City personal income tax on
gains derived with respect to their Units. Non-residents of the State will
not be subject to New York State personal income tax on such gains
unless the Units are employed in a business, trade or
occupation carried on in New York State. A New York State or City
resident should determine his basis and holding period for his Units in
the same manner for New York State and City personal income tax
purposes as for Federal income tax purposes.
With respect to Bonds insured by Financial Guaranty in the
Trusts comprising Insured Series 9 and previous Insured Series, in the
opinion of Brown & Wood issued as of the Date of Deposit for such
Trusts, as special tax counsel for Financial Guaranty:
[A]ny proceeds received pursuant to the terms
of [any insurance policy issued by Financial
Guaranty in respect of the Bonds in the Trust]
which represent maturing interest on defaulted
obligations will be excludable from Federal
gross income if, and to the same extent, such
interest would have been so excludable if paid
by the Issuer of such defaulted obligations.
<PAGE>
Furthermore, assuming that each of the other insurance
policies has been validly issued, is of standard form with respect to
subrogation and does not relieve the issuer of the Bond of its obligations
thereunder, in the opinion of Messrs. Cahill Gordon & Reindel issued as
of the time of Closing, the proceeds received under such insurance
policies representing matured interest on a defaulted obligation will
likewise be excludable from Federal gross income
and from New York State gross income under the personal income tax
laws of the State and City of New York, if, and to the same extent, such
interest would have been so excludable if paid by the issuer of such
defaulted obligation.
If the proceeds received by a Trust upon the sale or
redemption of an underlying debt obligation exceed a Unit holder's
adjusted tax cost allocable to the debt obligation disposed of, that Unit
holder will realize a taxable gain to the extent of such excess.
Conversely, if the proceeds received by a Trust upon the sale or
redemption of an underlying debt obligation are less
than a Unit holder's adjusted tax cost allocable to the debt obligation
disposed of, that Unit holder will realize a loss for tax purposes to the
extent of such difference.
The Revenue Reconciliation Act of 1993 (P.L. 103-66) was
recently enacted. P.L. 103-66 increases maximum marginal income tax
rates for individuals and corporations (generally effective for taxable
years beginning after December 31, 1992), extends the authority to issue
certain categories of tax-exempt bonds (qualified small issue bonds and
qualified mortgage bonds), limits the availability of capital gain treatment
for tax-exempt bonds purchased at a market discount, increases the
amount of Social Security benefits subject to tax (effective for taxable
years beginning after December 31, 1993) and makes a variety of other
changes. Prospective investors are urged to consult their own
tax advisors as to the effect of P.L. 103-66 on an investment in Units.
Any gain recognized on a sale or exchange of a Unit holder's
pro rata interest in a Bond, and not constituting a realization of accrued
"market discount", and any loss will be a capital gain or loss, except in
the case of a dealer or financial institution. Gain realized on the
disposition of the interest of a Unit holder in a market discount Bond is
treated as ordinary income to the extent the gain does not exceed the
accrued market discount. A Unit holder has an interest in a market
discount Bond in a case in which the tax cost for the Unit
holder's pro rata interest in the Bond is less than the stated redemption
price thereof at maturity ( or the issue price plus original issue discount
accrued up to the acquisition date, in the case of an original issue
discount Bond. Any capital gain or loss arising from the disposition of
a Unit holder's pro rata interest in a Bond will be a long-term capital
gain or loss if the Unit holder has held Units and the Trust has held the
Bond for more than one year. Under the Code, net capital gain (i.e. the
<PAGE>
excess of net long-term capital gain over net short-term capital loss) of
individuals, estates and trusts is subject to a maximum
nominal tax rate of 28%. Such net capital gain may, however, result in
a disallowance of itemized deductions and/or affect a personal exemption
phase-out.
In the case of certain of the underlying debt obligations
comprising the Portfolio of a Trust, the opinions of bond counsel indicate
that although interest on such underlying debt obligations is generally
exempt from Federal income tax, such underlying debt obligations are
"industrial development bonds" under the 1954 Code or "private activity
bonds" under the 1986 Code, and interest on such underlying debt
obligations will not be exempt from Federal
income tax for any period during which such underlying debt obligations
are held by a "substantial user" of the facilities financed by the proceeds
of such underlying debt obligations (or a "related person" to such a
"substantial user"). In the opinion of Messrs. Cahill Gordon & Reindel,
interest attributable to such underlying debt obligations (although not
subject to Federal income tax to a Trust), if received by a Unit holder
who is such a "substantial user" or "related person", will be taxable (i.e.,
not tax-exempt) to the Unit holder to the same extent as if such
underlying debt obligations were held directly by him as owner.
No investigation as to the users of the facilities financed by the
underlying debt obligations has been made by the Sponsors or their
counsel. Investors should consult their tax counsel for advise with
respect to the effect of these provisions on their particular tax situations.
Furthermore, exemption of interest on a Bond from regular
Federal income tax requires that the issuer of the Bond (or other user of
the Bond proceeds) meet certain ongoing compliance requirements.
Failure to meet these requirements could result in loss of the exemption
and such loss of exemption could apply retroactively from the date of
issuance. A Bond may provide that if a loss of exemption is determined
to have occurred, the Bond is immediately due and payable; and, in the
case of a secured Bond, that the security can be reached if the Bond is
not then paid. If such a loss of exemption were to occur and the Bond
did not contain such an acceleration clause, or if the
acceleration did not in fact result in payment of the Bond, the affected
bond would likely be sold as a taxable bond. Sale of a Bond as a taxable
bond would likely result in a realization of proceeds less than the cost of
the bond.
Persons in receipt of Social Security benefits should be aware
that a portion of such Social Security benefits may be includible in gross
income. For 1993, the includible amount is the lesser of (a) one-half of
the Social Security benefits or (b) one-half of the amount by which the
sum of "modified adjusted gross income" plus one-half of the Social
Security benefits exceeds a "base amount". The base amount is $25,000
for unmarried taxpayers, $32,000 for married taxpayers filling a joint
<PAGE>
return and zero for married taxpayers not living apart who file separate
returns.
For 1994 and subsequent taxable years, two threshold
amounts apply. The 1993 rule continues to apply t a taxpayer whose
modified adjusted gross income plus one-half of his or her Social
Security benefits does not exceed $34,000 ($44,000 for married
taxpayers filing a joint return) are, however,
required to include up to 85% of their Social Security benefits in gross
income.
Modified adjusted gross income is adjusted gross income
determined without regard to certain otherwise allowable deductions and
exclusions from gross income, plus tax exempt interest on municipal
obligations including interest on the Bonds. To the extent that Social
Security benefits are includible in gross income they will be treated as
any other item of gross income and therefore may be taxable. Although
tax exempt interest is included in modified adjusted gross income solely
for the purpose of determining what portion, if any, of Social Security
benefits will be included in gross income, no tax exempt interest,
including that received from the Trust, will be subject to
Federal income tax.
The exemption of interest on municipal obligations for
Federal income tax purposes does not necessarily result in exemption
under any other Federal tax law or under the income or other tax laws
of any state or city. The laws of the several states vary with respect to
the taxation of such obligations. (See "Rights of Unit Holders--Reports
and Records".)
Opinions relating to the validity of the underlying debt
obligations and the exemptions of interest thereon from Federal income
tax and specified state and local income taxes are rendered by bond
counsel to the issuing governmental authorities. Neither the Sponsors
nor their counsel have made any review of proceedings relating to the
issuance of underlying debt obligations or the bases for bond counsel's
opinions. It is the view of the Sponsors that interest on the Securities
will not be a tax preference item for purposes of the federal alternative
minimum tax. Unit holders are urged to consult their own tax advisors
concerning an investment in units.
The Code provides generally that adjustments to taxable
income to produce alternative minimum taxable income items for
corporations will include 75% of the amount by which adjusted current
earnings (which would include tax-exempt interest) of the taxpayer
exceeds the alternative minimum taxable income of the taxpayer before
any amount is added to alternative minimum taxable because of this
adjustment.
<PAGE>
The Code also imposes an additional 12/100% ($12.00 per
$10,000) environmental tax on the alternative minimum taxable income
(determined without regard to any alternative tax net operating loss
deduction) of a corporation in excess of $2,000,000 for each taxable year
beginning before January 1, 1996. The environment tax is an excise tax
and is deductible for United States federal income tax purposes (but not
for purposes of the environment tax itself). Although the environment
tax is based on alternative minimum taxable income, the environmental
tax must be paid in addition to any Federal income taxes payable by the
corporation.
For Federal income tax purposes, Trust expenses of
producing or collecting Trust income are not deductible because the
income derived by a Trust is exempt from Federal income tax. A state
or local income tax may provide for a deduction for the portion of such
Trust expenses attributable to the production or collection of income
derived by a Trust and taxed by the state or locality. The effect on any
such deduction of the 1986 Act rules whereby investment expenses and
other miscellaneous deductions are deductible only to
the extent in excess of 2% of adjusted gross income would depend upon
the law of the particular state or locality involved.
From time to time proposals have been introduced before
Congress the purpose of which is to restrict or eliminate the Federal
income tax exemption for interest on debt obligations similar to the
Bonds in a Trust or to require treatment of such interest generally as a
"tax preference" for alternative minimum tax purposes, and it can be
expected that similar proposals may be introduced in the future. The
Trusts and the Sponsors cannot predict what legislation, if any, in respect
of the tax status of interest on debt obligations may
be proposed by the Executive Branch or by members of Congress, nor
can they predict which proposals, if any, might be enacted or whether
any legislation if enacted would apply to the Bonds in a Trust.
The Portfolio of a Trust may contain one or more Bonds
which were originally issued at a discount ("original issue discount").
In general, original issue discount can be defined as the difference
between the price at which a Bond was issued and its stated redemption
price at maturity. In the case of a Bond issued before July 2, 1982,
original issue discount is deemed to accrue (be "earned") as tax-exempt
interest ratably over the period from the date of issuance of the Bond to
the date of maturity and is apportioned among the original holder of the
obligation and subsequent purchasers in accordance with
a ratio the numerator of which is the number of calendar days the
obligation was owned by the holder and the denominator of which is the
total number of calendar days from the date of issuance of the obligation
to its date of maturity.
<PAGE>
Gain or loss upon the disposition of an original issue discount Bond in
the Portfolio is measured by the difference between the amount realized
upon disposition of and the amount paid for such obligation. A holder
may, however, exclude from gross income that portion of such gain
attributable to accrued interest and the "earned" portion of original issue
discount.
In the case of a Bond issued after July 1 1982, original issue
discount is deemed to accrue on a constant interest method which
corresponds, in general, to the economic accrual of interest (adjusted to
eliminate proportionately on an elapsed-time basis any excess of the
amount paid for the Bond by the Trust over the sum of the issue price
and the accrued original issue discount on the acquisition date). The
Unit holder's tax basis with regard to such a Bond is increased by the
amount of original issue discount that is deemed
to accrue and is included in gross income by the Unit holder while the
Unit holder holds his units and the Trust holds the Bond. The difference
between the amount realized on a disposition of the Bond will give rise
to taxable gain or deductible loss upon a disposition of the Bond by a
Trust (or a sale or redemption of Units by a Unit holder).
In addition, investors should be aware that no deduction is
allowed for Federal income tax purposes for interest on indebtedness
incurred or continued to purchase or carry Units. Under rules used by
the Internal Revenue Service for determining when borrowed funds are
considered used for the purpose of purchasing or carrying particular
assets, the purchase of Units may be considered to have been made with
borrowed funds even though the borrowed funds are not directly
traceable to the purchase of the Units.
All taxpayers are required to report for information purposes
on their Federal income tax returns the amount of tax-exempt interest
they receive.
Investors should consult their tax counsel for advice with
respect to the effect, if any, of the foregoing tax considerations as they
relate to their particular tax situation and as respects to state and local tax
consequences of an investment in Units.
The description of Federal tax consequences under "Tax
Exempt Securities Trust- Tax Status" applies separately for each Trust.
Below, arranged alphabetically by state, is a description of certain state
and local tax consequences for residents of the state and locality for
which such Trust's portfolio of investments contains bonds of such states.
California Trust
Messrs. Morgan, Lewis & Bockius acted as special California
counsel to Insured Trust 9 and all prior Insured Trusts. Messrs. Adams,
<PAGE>
Duque and Hazeltine, special California counsel to Insured Trust 21 and
New York 14. At the time of the Closing for each Insured Trust, the
respective counsel to the Trusts rendered an opinion under the existing
law substantially to the effect that:
The Insured California Trust is not an association taxable as a
corporation under the income tax laws of the State of California;
The income, deductions and credits against tax of the Insured
California Trust will be treated as the income, deductions and credits
against tax of the holders of Units in the Insured California Trust under
the income tax laws of the State of California;
Interest on the bonds held by the Insured California Trust, and any
interest income received by the Insured California Trust from its
investments in units of previously formed California trusts included
within a Multistate Series of Tax Exempt Securities Trust (the
"Previously Formed Trusts"), to the extent that
such interest is exempt from taxation under California law will not lose
its character as tax-exempt income merely because that income is passed
through to the holders of Units; however, a corporation subject to the
California franchise tax is required to include that interest income in its
gross income for purposes of determining its franchise tax liability;
Each holder of a Unit in the Insured California Trust will have a
taxable event when the Insured California Trust disposes of a bond
(whether by sale, exchange, redemption, or payment at maturity) or
when the Unit holder redeems or sells his Units. The total tax cost of
each Unit to a holder of a Unit in the Insured California Trust is
allocated among each of the bond issues held in the
Insured California Trust (in accordance with the proportion of the
Insured California Trust comprised by each bond issue) in order to
determine the holder's per Unit tax cost for each bond issue, and the tax
cost reduction requirements relating to amortization of bond premium
will apply separately to the per Unit tax cost of each bond issue.
Therefore, under some circumstances, a holder of a Unit may realize a
taxable gain when the Insured California Trust which issued such Unit
disposes of a bond or the holder's Units are sold or
redeemed for an amount equal to or less than his original cost of the
bond or Unit. Similarly, each Unit holder will have a taxable event (i)
when a Previously Formed Trust disposes of a bond, and (ii) when the
Insured California Trust disposes of any of its ownership interests in a
Previously Formed Trust;
Each holder of a Unit in the Insured California Trust is deemed to
be the owner of a pro rata portion of the Insured California Trust under
the personal property tax laws of the State of California; and
<PAGE>
The pro rata ownership of the bonds held by the Insured California
Trust, as well as the interest income therefrom, are exempt from
California personal property taxes.
Massachusetts Trust
At the time of the closing for each Massachusetts Trust,
Messrs. Palmer & Dodge, special Massachusetts counsel on
Massachusetts tax matters, rendered an opinion under then existing
Massachusetts law substantially to the effect that:
Tax-exempt interest for federal income tax purposes
(including insurance payments to the extent they are treated as
tax-exempt interest for federal income tax purposes) received by or
through the Massachusetts Trust, or by or through a Previous Trust in
which the Massachusetts Trusts owns an interest, on obligations issued
by Massachusetts its counties, municipalities, authorities, political
subdivisions, or instrumentalities, by the government of
Puerto Rico or by its authority or by the government of Guam or by its
authority, will not result in a Massachusetts income tax liability for the
Massachusetts Trust or for Unitholders who are subject to Massachusetts
income taxation under Massachusetts General Laws, Chapter 62.
Capital gain and capital loss realized by the Massachusetts
Trust and included in the Federal gross income of Unitholders who are
subject to Massachusetts income taxation under General Laws, Chapter
62 will be included as capital gains and losses in the Unit holder's
Massachusetts gross income, except where capital gain is specifically
exempted from income taxation under the Massachusetts statute
authorizing issuance of the obligations held by the
Massachusetts Trust or held by the Previous Trusts in which the
Massachusetts Trust owns an interest, and will not result in a
Massachusetts income tax liability for the Massachusetts Trust.
Gains and losses realized upon sale or redemption of Units by
Unitholders who are subject to Massachusetts income taxation under
Massachusetts General Law, Chapter 62 will be includible in their
Massachusetts gross income.
Pennsylvania Trust
At the time of the closing for each Pennsylvania Trust,
Messrs. Drinker Biddle & Reath, special Pennsylvania counsel on
Pennsylvania tax matters, rendered an opinion under then existing
Pennsylvania law substantially to the effect that:
<PAGE>
Units evidencing fractional undivided interests in the
Pennsylvania Trust are not subject to any of the personal property taxes
presently in effect in Pennsylvania to the extent that the Trust is
comprised of bonds issued by the Commonwealth of Pennsylvania, any
public authority, commission, board or other agency created by the
Commonwealth of Pennsylvania, any political subdivision of the
Commonwealth of Pennsylvania or any public authority created by any
such political subdivision ("Pennsylvania Bonds"). The taxes referred to
include the County Personal Property Tax imposed on residents of
Pennsylvania by the Act of June 17, 1913, P.L. 507,
as amended, and the additional personal property taxes imposed on
Pittsburgh residents by the School District of Pittsburgh under the Act of
June 20, 1947, P.L. 733, as amended, and by the City of Pittsburgh
under Ordinance No. 599 of December 28, 1967. The portion, if any,
representing Pennsylvania Bonds held by Units in a Prior Trust are also
not subject to such taxes. The portion, if any, of such Units representing
bonds or other obligations issued by the Government of Guam or by its
authority and bonds issued by the Government of Puerto Rico or by its
authority and bonds issued by the Government of the Virgin Islands or
by a municipality thereof (collectively, "Possession Bonds")
is not expressly exempt from taxation under the foregoing Acts, but
because such bonds are expressly relieved from state taxation by United
States statutes, the Commonwealth of Pennsylvania and its political
subdivisions are precluded from imposing any direct tax on Possession
Bonds, and, therefore, such bonds are not subject to Personal Property
Tax.
Pennsylvania Trust Units may be subject to tax in the estate
of a resident decedent under the Pennsylvania inheritance and estate tax.
Income received by a Unit holder attributable to interest
realized by the Pennsylvania Trust from Pennsylvania Bonds, Possession
Bonds and Prior Trust Units or attributable to insurance proceeds on
account of such interest, is not taxable to individuals, estates or trusts
under the Personal Income Tax imposed by Article III of the Tax Reform
Code of 1971. Neither is such income taxable to corporations under the
Corporate Net Income Tax imposed by Article IV of the Tax Reform
Code of 1971 (in the case of insurance proceeds
to the extent that they are exempt for Federal Income Tax purposes); nor
to individuals under the Pennsylvania School District Net Income Tax
("School District Tax") imposed on Philadelphia resident individuals
under authority of the Act of August 9, 1963, P.L. 640.
Income received by a Unit Holder attributable to gain on the
sale or other disposition by the Pennsylvania Trust of Pennsylvania
Bonds, Possession Bonds and Prior Trust Units is not taxable to
individuals, estates or trusts under the Personal Income Tax. Such gain
is also not taxable under the Corporate Net Income Tax or under the
School District Tax, except that gain on the sale or other disposition of
<PAGE>
Possession Bonds and that portion of Prior Trust Units attributable to
such bonds held for six months or less may be taxable
under the School District Tax.
To the extent that gain on the disposition of a Unit represents
gain realized on Pennsylvania or Possession Bonds held by the
Pennsylvania Trust or held by Prior Trust Units, such gain may be
subject to the Personal Income Tax and Corporate Net Income Tax.
Such gain may also be subject to the School District Tax, except the gain
realized with respect to a Unit held for more than six months is not
subject to the School District Tax.
No opinion is expressed regarding the extent, if any, to which
Units, or interest and gain thereon, is subject to, or included in the
measure of, the special taxes imposed by the Commonwealth of
Pennsylvania on banks and other financial institutions or any privilege,
excise, franchise or other tax imposed on business entities not discussed
herein (including the Corporate Capital Stock/Foreign Franchise Tax).
Insurance on the Bonds in the Portfolio of a Trust
Insurance guaranteeing the scheduled payment to maturity of
all principal and interest ("Insurance to Maturity") has been obtained for
some or all of the Bonds in each Trust at the cost of the issuer of the
Bond, a previous holder or the Sponsors as of the first business day after
the Date of Deposit. Insurance to Maturity was obtained from the
Municipal Bond Insurance Association ("MBIA"), as of the Date of
Deposit, for all the Bonds in the Portfolios of Insured Series 1-4,
Insurance to Maturity was obtained for all the
Bonds in the Portfolios of Insured Series 5-9 from one or more of the
following insurers; MBIA, AMBAC Indemnity Corporation
("AMBAC"), Municipal Bond Investors Assurance Corporation
("MBIAC"), Capital Guaranty Insurance Company ("CGIC") or
Financial Guaranty Insurance Company ("Financial
Guaranty") (collectively, the "Insurance Companies".) For Insured
Series 5 and subsequent Insured Series, the description of the Bonds
under "Portfolio of Securities" in Part A indicates which Insurance
Company has issued Insurance to Maturity with respect to each Bond.
The insurance policies are non-cancelable and will continue
in force so long as Bonds are outstanding and the insurers remain in
business. The respective insurance policies guarantee the scheduled
payment of principal and interest on but do not guarantee the market
value of the Bonds covered by each policy or the value of the Units. In
the event the issuer of an insured Bond defaults in payment of interest or
principal the insurance company insuring the Bond will be required to
pay to the trustee any interest or principal payments
due. Payment under each of the insurance policies is to be made in
respect of principal of and interest on Bonds covered thereby which
becomes due for payment but is unpaid. Each such policy provides for
<PAGE>
payment of the defaulted principal or interest due to a trustee or paying
agent. In turn, such trustee or paying agent will make payment to the
bondholder (in this case, the Trustee) upon presentation of satisfactory
evidence of such bondholder's rights to receive such payment.
As a result of the insurance on the Bonds of each Trust, the
Units thereof received a rating of AAA by Standard & Poor's
Corporation as of the Date of Deposit for each such Trust. There can
be no assurance that Units of a Trust will retain this AAA rating.
Insurance is not a substitute for the basic credit of an issuer, but
supplements the issuer's existing credit and provides
additional security therefor. No representation is made as to the
Insurance Companies' abilities to meet their commitments.
A description of each of the insurers follows:
AMBAC Indemnity Corporation
AMBAC Indemnity Corporation ("AMBAC-Indemnity") is a
Wisconsin-domiciled stock insurance company, regulated by the
Insurance Department of Wisconsin. Such regulation, however, is no
guarantee that AMBAC Indemnity would be able to perform on its
contracts in the event a claim should be made thereunder at some time
in the future. AMBAC Indemnity is a wholly-owned subsidiary of
AMBAC Inc., a 100% publicly-held company.
AMBAC Indemnity is licensed to do business in 50 states, the
District of Columbia and the Commonwealth of Puerto Rico, with
admitted assets (unaudited) of approximately $1,884,000,000 and
statutory capital (unaudited) of approximately $1,038,000,000 as of June
30, 1993. Statutory capital consists of statutory contingency reserve and
AMBAC Indemnity's policyholders' surplus.
CGIC
CGIC, a California-domiciled insurance company, is a
wholly-owned subsidiary of Capital Guaranty Corporation and
commenced its operations in November 1986. Capital Guaranty
Corporation is owned by Constellation Investments Inc. (an affiliate of
Baltimore Gas & Electric Company), Fleet/Norstar Financial Group Inc.,
Safeco Corp., Sibag Finance Corp., an affiliate of Siemens A.G., and
United States Fidelity and Guaranty Company ("USF&G"). Other than
their capital commitment to Capital Guaranty Corporation the investors
of Capital Guaranty Corporation are not obligated to
pay the debts of, or claim against, CGIC. CGIC, a Maryland
corporation headquartered in San Francisco, is a monoline financial
guaranty insurer engaged in the underwriting and development of
<PAGE>
financial guaranty insurance.
CGIC insures general obligation, tax supported and revenue bonds
structured as tax-exempt and taxable securities as well as selectively
insures taxable corporate/asset backed securities. As of June 30, 1993,
CGIC had total admitted assets of $264,075,675 (unaudited), and
policyholder surplus of $173,660,432. Standard & Poor's Corporation
has rated the claims-paying ability of CGIC "AAA".
Financial Guaranty
Financial Guaranty is a wholly-owned subsidiary of FGIC
Corporation (the "Corporation"), a Delaware holding company.
Financial Guaranty, domiciled in the State of New York and located at
175 Water Street, New York, New York, 10038, commenced its
business of providing insurance and financial guaranties for a variety of
investment instruments in January, 1984. The Corporation is a
wholly-owned subsidiary of General Electric Capital Corporation. The
Corporation and General Electric Capital Corporation are not obligated
to pay the debts of Financial Guaranty or the claims against Financial
Guaranty. Neither the National Insured Trust nor the Units nor the
portfolio is insured directly or indirectly by the Corporation.
Financial Guaranty, in addition to providing insurance for the
payment of interest and principal of municipal bonds and notes held in
unit investment trust portfolios, provides insurance for all or a portion
of new issues of municipal bonds and notes and for municipal bonds and
notes held by mutual funds. Financial Guaranty expects to provide other
forms of financial guaranties in the future. It is also authorized to write
fire, property damage liability, workman's compensation and employers'
liability and fidelity and surety insurance. As of September 30, 1993,
the total capital and surplus of Financial Guaranty was approximately
$744,722,000. Although the Sponsors have not undertaken an
independent investigation of Financial Guaranty, the Sponsors are
not aware that the information herein is inaccurate or incomplete.
Standard & Poor's Corporation and Moody's Investors Service have
rated the claims-paying ability of Financial Guaranty "AAA" and "Aaa",
respectively.
Financial Guaranty is currently licensed to provide insurance
in 49 states and the District of Columbia, files reports with state
insurance regulatory agencies and is subject to audit and review by such
authorities. Financial Guaranty is also subject to regulation by the State
of New York Insurance Department. Such regulation, however, is no
guarantee that Financial Guaranty will be able to perform on its contracts
of insurance in the event a claim should be made thereunder.
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The information relating to Financial Guaranty contained
above has been furnished by Financial Guaranty. The financial
information contained herein with respect to Financial Guaranty is
unaudited but appears in reports filed with state insurance regulatory
authorities and is subject to audit and review by such authorities. No
representation is made herein as to the accuracy or adequacy of such
information or as to the absence of material adverse changes
in such information subsequent to the dates thereof.
MBIA
The insurance companies comprising MBIA and their
respective percentage liabilities are as follows: The Aetna Casualty and
Surety Company, thirty-three percent (33%); The Fund American
Companies, Inc., thirty percent (30%); The Travelers Indemnity
Company, fifteen percent (15%); Cigna Property and Casualty Company,
twelve percent (12%); and The Continental Insurance Company, ten
percent (10%). Each insurance company comprising MBIA is licensed
to do business in various states. Such state regulation,
however, is no guarantee that any of the insurance companies comprising
MBIA will be able to perform on its contract of insurance in the event
a claim should be made thereunder. All policies are individual
obligations of the participating insurance companies and their obligations
thereunder cannot be increased beyond their percentage commitment;
therefore, each company will not be obligated to pay any unpaid
obligation of any other member of MBIA. However, each
insurance company is a multiline insurer involved in several lines of
insurance other than municipal bond insurance, and the assets of each
insurance company also secure all of its other insurance policy and surety
bond obligations. The MBIA companies listed above or their parent
organizations have been in the insurance business from seventy to well
over a hundred years. Standard & Poor's Corporation rates all new
issues insured by MBIA, "AAA" and Moody's Investors Service rates all
bond issues insured by MBIA, "Aaa".
MBIAC
MBIAC is the principal operating subsidiary of MBIA, Inc.
The principal shareholders of MBIA, Inc. are The Aetna Casualty and
Surety Company, The Fund American Companies, Inc., subsidiaries of
CIGNA Corporation and Credit Local de France, CAECL S.A., and they
own approximately 35% of the outstanding common stock of MBIA Inc.
Neither MBIA, Inc. nor its shareholders are obligated to pay the debts
of or claims against MBIAC. MBIAC, is a limited liability corporation
rather than a several liability association. MBIAC is domiciled in the
State of New York and licensed to do business in all 50 states, the
District of Columbia and the Commonwealth of Puerto Rico. As of
<PAGE>
December 31, 1992, MBIAC had admitted assets of $2.6 billion
(unaudited), total liabilities of $1.7 billion
(unaudited), and total capital and surplus of $896 million (unaudited), in
accordance with statutory accounting practices prescribed or permitted
by insurance regulatory authorities. Standard & Poor's Corporation rates
all new issues insured by MBIAC and Moody's Investors Service rates
all bond issues insured by MBIAC, "AAA" and "Aaa", respectively.
The financial information relating to AMBAC, CGIC, MBIA
and MBIAC has been obtained from publicly available sources. No
representation is made herein as to the accuracy or adequacy of such
information or as to the absence of material adverse changes in such
information subsequent to the dates thereof, but the Sponsor is not aware
that the information herein is inaccurate or incomplete.
Insurance Premiums
The cost of the insurance (the "Insurance Premiums") for
Insurance to Maturity has been paid by the issuers at the time of
issuance, by a previous holder of a Bond or by the Sponsors on the first
business day after the Date of Deposit. The Insurance Premiums paid by
the Sponsors were paid from the acquisition profit of the Sponsors (see
"Public Offering--Sponsors' and Underwriters' Profits"), and, if such
profit was not sufficient to cover the cost of said Insurance Premiums,
from the sales charge imposed on the purchasers of Units or from other
general funds of the Sponsors.
Expenses and Charges
At no cost to the Trusts, the Sponsors have borne all the
expenses of creating and establishing the Trusts, including the cost of the
initial preparation and execution of the Trust Agreements, initial
preparation and printing of the certificates for Units, the fees of the
Evaluator, legal expenses, advertising and selling expenses and other
out-of-pocket expenses. The cost of maintaining the secondary market,
such as printing, legal and accounting, will be borne by the Sponsors
except as otherwise provided in the Trust Agreements.
Trustee's, Sponsor's and Evaluator's Fees -- The Trustee will
receive for its ordinary recurring services to the Trusts an annual fee in
the amount set forth in Part A -- "Summary of Essential Information".
For a discussion of the services performed by the Trustee pursuant to its
obligation under the Trust Agreements, see "Rights of Unit Holders".
The Trustee will receive the benefit of any reasonable cash balances in
the Interest and Principal Accounts.
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The Portfolio supervision fee (the "Supervision Fee"), which
is earned for Portfolio supervisory services is based upon the greatest
face amount of Bonds in the Trust at any time during the calendar year
with respect to which the fee is being computed. The Supervision Fee
has been incurred by Portfolios which have come into existence after
August 14, 1991, beginning with Series 345 initially, and each series, in
existence, thereafter.
The Supervision Fee, which is not to exceed the amount set
forth in Part A--"Summary of Essential Information," may exceed the
actual costs of providing Portfolio supervisory services for such Trust,
but at no time will the total amount the Sponsors receive for Portfolio
supervisory services rendered to all series of Tax Exempt Securities
Trust in any calendar year exceed the aggregate cost to them of
supplying such services in such year. In addition, the Sponsors may also
be reimbursed for bookkeeping and other administrative services
provided to the Trust in amounts not exceeding their
costs of providing these services.
The Evaluator determines the aggregate bid price of the
underlying securities in the Trusts on a daily basis at a fee in the amount
set forth under Part A, "Summary of Essential Information", for each
evaluation of the Bonds in a Trust. For a discussion of the services
performed by the Evaluator pursuant to its obligations under the Trust
Agreements, see "Evaluator--Responsibility" and "Public
Offering--Offering Price".
Any of such fees may be increased without approval of the
Unit holders by amounts not exceeding proportionate increases in
consumer prices for services as measured by the United States
Department of Labor's Consumer Price Index entitled "All Services Less
Rent" or, if such Index in no longer published, in a similar Index to be
determined by the Trustee and the Sponsors.
In addition, at the time of any such increase, the Trustee shall also be
entitled to charge thereafter an additional fee at a rate or amount to be
determined by the Trustee and the Sponsors based upon the face amount
of Deposited Units in a Trust, for the Trustee's services in maintaining
such Deposited Units. The approval of Unit holders shall not be
required for charging of such additional fee.
Other Charges -- The following additional charges are or may
be incurred by a Trust: all expenses (including counsel fees and expenses
of counsel and auditors) of the Trustee incurred in connection with its
activities under the Trust Agreements, including reports and
communications to Unit holders; the expenses and costs of any action
undertaken by the Trustee to protect the Trusts and the rights and
interests of the Unit holders; fees of the Trustee for any extraordinary
services performed under the Trust Agreements, indemnification of a
Trustee for any loss or liability accruing to it without gross
<PAGE>
negligence, bad faith or willful misconduct on its part, arising out of or
in connection with its acceptance or administration of a Trust; in the case
of certain Trusts, to the extent lawful, expenses (including legal,
accounting and printing expenses) of maintaining registration or
qualification of the Units and/or the Trust under Federal or state
securities laws subsequent to initial registration so
long as the Sponsors are maintaining a market for the Units; and all taxes
and other governmental charges imposed upon the Securities or any part
of the Trusts (no such taxes or charges are being levied or made or, to
the knowledge of the Sponsors, contemplated). The above expenses,
including the Trustee's fee, when paid by or owing to the Trustee, are
secured by a lien on the Trust. In addition, the Trustee is empowered to
sell Bonds in order to make funds available to pay all expenses.
PUBLIC OFFERING
Offering Price
The Public Offering Price of the Units of the Trusts is
determined by adding to the Evaluator's determination of the aggregate
bid price of the Bonds per Unit a sales charge equal to the percentage of
the Public Offering Price indicated for the Trust in Part A, "Summary
of Essential Information". The aggregate bid price of the underlying
Bonds may be expected to be less than the aggregate offering price of the
Bonds. (See "Method of Evaluation".) A proportionate share of accrued
and undistributed interest on the Bonds in a Trust at the date of delivery
of the Units of such Trust to the purchaser is also added to the Public
Offering Price.
Pursuant to employee benefit plans, Units of the Trusts are
available to employees of the Sponsors, at a Public Offering Price equal
to the Evaluator's determination of the aggregate bid price of Bonds of
a Trust per Unit plus a sales charge of 1.25% of the Public Offering
Price and after the Initial Public Offering period, at a Public Offering
Price equal to the Evaluator's determination of the aggregate bid price
of the Bonds of a Trust per Unit plus a sales charge of 1.25% of the
Public Offering Price. Sales through such plans to employees of the
Sponsors result in less selling effort and selling expenses
than sales to the general public.
Method of Evaluation
The aggregate bid price of the Bonds (which is used to
calculate the price at which the Sponsors repurchase and sell Units in the
secondary market and the Redemption Price at which Units may be
redeemed) will be determined by the Evaluator (1) on the basis of the
current bid prices for the Bonds, (2) if bid prices are not available for
<PAGE>
any bonds, on the basis of current bid prices of comparable securities,
(3) by appraisal, or (4) by any combination of the above. Such
determinations will be made each business day as of the
Evaluation Time set forth in the "Summary of Essential Information" in
Part A, effective for all sales made subsequent to the last preceding
determination. The term "business day" as used herein shall exclude
Saturdays, Sundays and any other day on which the New York Stock
Exchange is closed. The difference between the bid and offering prices
of the Bonds may be expected to average approximately 1.5% of
principal amount. In the case of actively traded
securities, the difference may be as little as 0.5 of 1%, and in the case of
inactively traded securities such difference will usually not exceed 3%.
The price at which Units may be repurchased by the Sponsors in the
secondary market could be less than the price paid by the Unit holder.
For information relating to the calculation of the Redemption Price per
Unit, which is also based upon the aggregate bid price of the underlying
Bonds and which may be expected to be less than the Public Offering
Price per Unit, see "Rights of Unit Holders--Redemption of Units".
In determining the bid prices of Bonds covered by Insurance
of Maturity, the evaluator took into account the insurance issued in
respect of those Bonds and the AAA rating assigned to certain of those
Bonds as a result of the insurance. In making its evaluation, the
Evaluator first determined the quality of the insurance issued by the
Insurance Companies and then compared the Bonds to other securities
which had comparable insurance and which were of
comparable quality. In addition, the Evaluator, in accordance with its
practice, obtained from dealers and brokers two sets of bid prices for the
Bonds: one based on actual bid prices for such Bonds (without
insurance) and the other based on said dealer's or broker's estimation of
such bid prices as if such Bonds were insured.
Distribution of Units
Units acquired in the secondary market (see "Public
Offering--Market for Units") may be offered by this Prospectus at the
Public Offering Price determined in the manner provided above (see
"Public Offering--Offering Price"). The Sponsors will allow a discount
on Units sold to members of the National Association of Securities
Dealers, Inc. Such discount is subject to change from time to time.
Sales will be made only with respect to whole Units, and the
Sponsors reserve the right to reject, in whole or in part, any order for
the purchase of Units. A purchaser does not become a Unit holder
(Certificate holder) or become entitled to exercise the rights of a Unit
holder (including the right to redeem his Units) until he has paid for his
Units. Generally, such payment must be made within five business days
<PAGE>
after an order for the purchase of Units has been placed. The price paid
by a Unit holder is the Public Offering Price in effect at the time his
order is received, plus accrued interest (see
"Public Offering-Method of Evaluation"). This price may be different
from the Public Offering price in effect on any other day, including the
day on which the Unit holder made payment for the Units.
Market for Units
Although not obligated to do so, the Sponsors presently intend
to maintain a market for the Units of the respective Trusts and to
continuously offer to purchase such Units at prices based upon the
aggregate bid price of the underlying Bonds which may be less than the
price paid by the Unit holder. For information relating to the method
and frequency of the Evaluator's determination of the aggregate bid
price of the underlying Bonds. (See "Public Offering-Method of
Evaluation".) The costs of maintaining the
secondary market, such as printing, legal and accounting, will be borne
by the Sponsors except as otherwise provided in the Trust Agreements.
The Sponsors may cease to maintain such a market at any time and from
time to time, without notice if the supply of Units of any of the
respective Trusts exceeds demand, or for any other reason. In this event
the Sponsors may nonetheless purchase Units, as a service to Unit
holders, at prices based on the current Redemption
Price of those Units. In the event that a market is not maintained for the
Units of any of the Trusts, a Unit holder of such a Trust desiring to
dispose of his Units may be able to do so only by tendering such Units
to the Trustee for redemption at the Redemption Price, which is also
based upon the aggregate bid price of the underlying Bonds. (See
"Rights of Unit Holders--Redemption of Units".)
Exchange Option
Unit holders may elect to exchange any or all of their Units
in this series of a Trust for units of one or more of any series of Tax
Exempt Securities Trust (the "Exchange Trust") available for sale in the
state in which the Unit holder resides at a Public Offering Price for the
units of the Exchange Trust to be acquired based on a fixed sales charge
of $25 per unit. The Sponsors reserve the right to modify, suspend or
terminate this plan at any time without further notice to Unit holders.
Therefore, there is no assurance that a market for units will in fact exist
on any given date on which a Unit holder wishes to sell his Units of this
series and thus there is no assurance that the
Exchange Option will be available to a Unit holder. Exchanges will be
effected in whole units only. Any excess proceeds from Unit holders'
Units being surrendered will be returned and Unit holders will not be
permitted to advance any new money in order to complete an exchange.
<PAGE>
An exchange of Units pursuant to the Exchange Option for
units of an Exchange Trust will generally constitute a "taxable event"
under the Code i.e. a Unit holder will recognize gain or loss at the time
of exchange. However, an exchange of Units of this Trust for units of
any other similar series of the Tax Exempt Securities Trust which are
grantor trusts for U.S. Federal income tax purposes will not constitute
a taxable event to the extent that the underlying
securities in each trust do not differ materially either in kind or in extent.
Unit holders are urged to consult their own tax advisors as to the tax
consequences to them of exchanging Units in particular cases.
Units of the Exchange Trust will be sold under the Exchange
Option at the bid prices of the underlying securities in the particular
portfolio involved per unit plus a fixed charge of $25 per unit. As an
example, assume that a Unit holder, who has three units of a trust with
a current price of $1,020 per unit based on the bid prices of the
underlying securities, desires to exchange
his units for units of a series of an Exchange Trust with a current price
of $880 per unit based on the bid prices of the underlying securities. In
this example, the proceeds from the Unit holder's units will aggregate
$3,060. Since only whole units of an Exchange Trust may be purchased
under the Exchange Option, the Unit holder would be able to acquire
three units in the Exchange Trust for a total cost of $2,715 ($2,640 for
the units and $75 for the sales charge). The
remaining $345 would be returned to the Unit holder in cash.
Reinvestment Programs
Distributions of interest and principal, if any, are made to
Unit holders monthly. The Unit holder will have the option of either
receiving his monthly income check from the Trustee or participating in
one of the reinvestment programs offered by certain of the Sponsors
provided such Unit holder meets the minimum qualifications of the
reinvestment program and such program lawfully qualifies for sale in the
jurisdiction in which the Unit holder resides. Upon enrollment in a
reinvestment program, the Trustee will direct monthly interest
distributions and principal distributions, if any, to the
reinvestment program selected by the Unit holder. Since each Sponsor
has arranged for different reinvestment alternatives, Unit holders should
contact the Sponsors for more complete information, including charges
and expenses. The appropriate prospectus will be sent to the Unit
holder. The unit holder should read the prospectus for a reinvestment
program carefully before deciding to participate. Participation in the
reinvestment program will apply to all Units of
a Trust owned by the Unit holder and may be terminated at any time by
the Unit holder, or the program may be modified or terminated by the
Trustee or the program's Sponsor.
<PAGE>
Sponsors' Profits
For their services, the Sponsors receive a gross commission
equal to a percentage of the Public Offering Price of the Units. In
maintaining a market for the Units of the respective Trusts (see "Public
Offering--Market for Units"), the Sponsors also realize profits or sustain
losses in the amount of any difference between the price at which they
buy such Units and the price at which they resell or redeem such Units
(see "Public Offering--Offering Price").
RIGHTS OF UNIT HOLDERS
Certificates
Ownership of Units of the respective Trusts is evidenced by
registered certificates executed by the Trustee and the Sponsors.
Certificates are transferable by presentation and surrender to the Trustee
of the certificate properly endorsed or accompanied by a written
instrument or instruments of transfer.
Certificates may be issued in denominations of one Unit or
any multiple thereof. A Unit holder may be required to pay $2.00 per
certificate reissued or transferred, and to pay any governmental charge
that may be imposed in connection with each such transfer or
interchange. For new certificates issued to replace destroyed, stolen or
lost certificates, the Unit holder must furnish indemnity satisfactory to
the Trustee and must pay such expenses as the Trustee may incur.
Mutilated certificates must be surrendered to the
Trustee for replacement.
Distribution of Interest and Principal
Interest and principal received by each Trust will be
distributed on each monthly Distribution Date on a pro rata basis to Unit
holders in such Trust of record as of the preceding Record Date. All
distributions will be net of applicable expenses and funds required for the
redemption of Units and, if applicable, reimbursements to the Trustee for
interest payments advanced to Unit holders on previous Monthly
Distribution Dates. (See Part A, "Summary of
Essential Information" and "Tax Exempt Securities Trust--Expenses and
Charges" and "Rights of Unit Holders--Redemption of Units" in this
section.)
The Trustee will credit to the Interest Account of each
respective Trust all interest received by such Trust, including that part
of the proceeds of any disposition of Bonds of such Trust which
<PAGE>
represents accrued interest and including all moneys paid pursuant to any
insurance contract representing interest on any Bond in the Trusts. Other
receipts will be credited to the Principal Account of the affected Trust.
The pro rata share of the Interest Account and the pro rata share of cash
in the Principal Account represented by each Unit of a Trust will be
computed by the Trustee each month as of the Record Date. (See Part
A, "Summary of Essential Information".) Proceeds
received from the disposition of any of the Bonds subsequent to a Record
Date and prior to the next succeeding Distribution Date will be held in
the Principal Account and will not be distributed until the following
Distribution Date. The distribution to the Unit holders as of each Record
Date will be made on the following Distribution Date or shortly
thereafter and shall consist of an amount
substantially equal to one-twelfth of such holder's pro rata share of the
estimated annual income to the Interest Account after deducting estimated
expenses (the "Monthly Interest Distribution") plus such holder's pro rata
share of the cash balance in the Principal Account computed as of the
close of business on the preceding Record Date. Persons who purchase
Units between a Record Date and a Distribution Date will receive their
first distribution on the second Distribution Date following their purchase
of Units. No distribution need be made from the Principal Account if
the balance therein is less than an amount sufficient to distribute $1.00
per Unit. The Monthly Interest Distribution per Unit as of the date of
this Prospectus is shown in the "Summary of Essential
Information" in Part A for the particular Trust and will change as the
income and expenses of the respective Trusts change and as Bonds are
exchanged, redeemed, paid or sold.
Normally, interest on the Bonds in the Portfolio of each Trust
is paid on a semi-annual basis. Because Bond interest is not received by
the Trusts at a constant rate throughout the year, any Monthly Interest
Distribution may be more or less than the amount credited to the Interest
Account as of the Record Date. In order to eliminate fluctuations in
Monthly Interest Distributions resulting from such variances, the Trustee
is required by the Trust Agreement to advance such amounts as may be
necessary to provide Monthly Interest Distributions of approximately
equal amounts. The Trustee will be reimbursed,
without interest, for any such advances from funds available from the
Interest Account on the next ensuing Record Date or Record Dates, as
the case may be. If all or a portion of the Bonds for which advances
have been made subsequently fail to pay interest when due and if one or
more of the insurers of such Bonds fails to meet its obligation under its
policy of insurance, the Trustee may recoup
advances made by it in anticipation of receipt of interest payments on
such Bonds by reducing the amount distributed per Unit in one or more
Monthly Interest Distributions. If units are redeemed subsequent to such
advances by the Trustee, but prior to receipt by the Trustee of actual
notice of the failure of the issuer to pay the interest due on the
underlying Bond and the concurrent failure of the respective insurance
<PAGE>
company to meet its obligation under its insurance policy, each
remaining Unit holder will be subject to a greater pro rata reduction
in his Monthly Interest Distribution than would have occurred absent
such redemptions. Funds which are available for future distributions,
payments of expenses and redemptions are in accounts which are
non-interest bearing to Unit holders and are available for use by United
States Trust Company of New York, pursuant to normal banking
procedures. The Trustee is entitled to the benefit
of holding any reasonable cash balances in the Interest and Principal
Accounts. The Trustee anticipates that the average cash balance in the
Interest Account will be approximately 2% in excess of the amounts
anticipated to be required for Monthly Distributions to Unit holders. In
addition, because of the varying interest payment dates of the Bonds
comprising each Trust Portfolio, accrued interest at any point in time
will be greater than the amount of interest actually
received by a particular Trust and distributed to Unit holders.
Therefore, there will always remain an item of accrued interest that is
added to the value of the Units. This excess accrued but undistributed
interest amount is known as the accrued interest carryover. If a Unit
holder sells all or redeems a portion of his
Units, a portion of his sale proceeds will be allocable to his proportionate
share of the accrued interest carryover. Similarly, if a Unit holder sells
or redeems all or a portion of his Units, the Redemption Price per Unit
which he is entitled to receive from the Trustee will include accrued
interest carryover on the Bonds. (See "Rights of Unit Holders
- --Redemption of Units--Computation of Redemption Price per Unit".)
As of the first day of each month the Trustee will deduct
from the Interest Account of each Trust and, to the extent funds are not
sufficient therein, from the Principal Account of such Trust, amounts
necessary to pay the expenses of such Trust. (See "Tax Exempt
Securities Trust--Expenses and Charges".) The Trustee also may
withdraw from said account such amounts,
if any, as it deems necessary to establish a reserve for any governmental
charges payable out of the Trust. Amounts so withdrawn shall not be
considered a part of the Trust's assets until such time as the Trustee shall
return all or any part of such amounts to the appropriate account. In
addition, the Trustee may withdraw from the Interest Account and the
Principal Account such amounts as
may be necessary to cover redemption of Units by the Trustee. (See
"Rights of Unit Holders--Redemption of Units".) The Trustee is also
entitled to withdraw from the Interest Account, and, to the extent funds
are not sufficient therein, from the Principal Account, on one or more
Record Dates as may be appropriate, amounts sufficient to recoup
advances which it has made in anticipation of the receipt by a Trust of
interest in respect of Bonds which subsequently fail to pay interest when
due.
<PAGE>
Reports and Records
The Trustee shall furnish Unit holders in connection with each
distribution a statement of the amount of interest, if any, and the amount
of other receipts, if any, which are being distributed, expressed in each
case as a dollar amount per Unit. In the event that the issuer of any of
the Bonds fails to make payment when due of any interest or principal
and such failure results in a change in the amount that would otherwise
be distributed as a monthly distribution, the Trustee will, with the first
such distribution following such failure, set forth in an accompanying
statement, the issuer and the Bonds, the
amount of the reduction in the distribution per Unit resulting from such
failure, the percentage of the aggregate principal amount of Bonds which
such Bond represents and, to the extent then determined, information
regarding any disposition or legal action with respect to such Bond.
Within a reasonable time after the end of each calendar year, the Trustee
will furnish to each person who
at any time during the calendar year was a Unit holder of record, a
statement (1) as to the Interest Account: interest received (including
amounts representing interest received upon any disposition of Bonds),
deductions for payment of applicable taxes and for fees and expenses of
the Trust, redemption of Units and
the balance remaining after such distributions and deductions, expressed
both as a total dollar amount and as a dollar amount representing the pro
rata share of each Unit outstanding on the last business day of such
calendar year; (2) as to the Principal Account: the dates of disposition of
any Bonds and the net proceeds received therefrom (excluding any
portion representing interest), deductions for payments of applicable
taxes and for fees and expenses of the
Trust, redemptions of Units, and the balance remaining after such
distributions and deductions, expressed both as a total dollar amount and
as a dollar amount representing the pro rata share of each Unit
outstanding on the last business day
of such calendar year; (3) a list of Bonds held and the number of Units
outstanding on the last business day of such calendar year; (4) the
Redemption Price per Unit based upon the last computation thereof made
during such calendar year; and (5) amounts actually distributed during
such calendar year from the Interest Account and from the Principal
Account, separately stated, expressed both as total dollar amounts and as
dollar amounts representing the pro rata share of each Unit outstanding.
The accounts of Trusts will be audited
not less frequently than annually by independent auditors designated by
the Sponsors, and the report of such auditors shall be furnished by the
Trustee to Unit holders of such Trusts upon request.
The Trustee shall keep available for inspection by Unit
holders at all reasonable times during the usual business hours, books of
record and account of its transactions as Trustee including records of the
names and addresses of Unit holders, certificates issued or held, a
<PAGE>
current list of Bonds in the Portfolio and a copy of the Trust Agreement.
Redemption of Units
Units may be tendered to the Trustee for redemption at its
unit investment trust office at 770 Broadway, New York, New York
10003, upon payment of any relevant tax. At the present time there are
no specific taxes related to the redemption of the Units. No redemption
fee will be charged by the Sponsors or the Trustee. Units redeemed by
the Trustee will be cancelled.
Certificates for Units to be redeemed must be properly
endorsed or accompanied by a written instrument of transfer. Unit
holders must sign exactly as their name appears on the face of the
certificate with the signature guaranteed by an officer of a national bank
or trust company or by a member of either the New York, Midwest or
Pacific Stock Exchange. In certain instances the Trustee may require
additional documents such as, but not limited
to, trust instruments, certificates of death, appointments as executor or
administrator or certificates of corporate authority.
Within seven calendar days following such tender, the Unit
holder will be entitled to receive in cash an amount for each Unit
tendered equal to the Redemption Price per Unit computed as of the
Evaluation Time set forth in the "Summary of Essential Information" of
Part A on the date of tender. (See "Redemption of Units--Computation
of Redemption Price per Unit".) The "date of tender" is deemed to be
the date on which Units are received by the Trustee, except as regards
Units received after the close of trading on the New
York Stock Exchange, the date of tender is the next day on which such
Exchange is open for trading, and such Units will be deemed to have
been tendered to the Trustee on such day for redemption at the
Redemption Price computed on that day. For information relating to the
purchase by the Sponsors of Units tendered to the Trustee for redemption
at prices which may, in certain circumstances, be in excess of the
Redemption Price, see "Redemption of Units-
- -Purchase by the Sponsors of Units Tendered for Redemption."
Accrued interest paid on redemption shall be withdrawn from
the Interest Account, or, if the balance therein is insufficient, from the
Principal Account. All other amounts paid on redemption shall be
withdrawn from the Principal Account. The Trustee is empowered to
sell Bonds in order to make funds available for redemption. Such sales,
if required, could result in a sale of Bonds by the Trustee at a loss. To
the extent Bonds are sold, the size and diversity of each Trust will be
reduced.
<PAGE>
The Trustee reserves the right to suspend the right of
redemption and to postpone the date of payment of the Redemption Price
per Unit for any period during which the New York Stock Exchange is
closed, other than weekend and holiday closings, or trading on that
Exchange is restricted or during which (as determined by the Securities
and Exchange Commission) an emergency exists as a result of which
disposal or evaluation of the underlying Bonds is not reasonably
practicable, or for such other periods as the Securities
and Exchange Commission has by order permitted.
Computation of Redemption Price per Unit - The Redemption
Price per Unit of a Trust is determined by the Trustee on the basis of the
bid prices of the Bonds in such Trust as of the Evaluation Time on the
date any such determination is made. The Redemption Price per Unit of
a Trust is each Unit's pro rata share, determined by the Trustee, of: (1)
the aggregate value of the Bonds in such Trust on the bid side of the
market (determined by the Evaluator as set forth under "Public Offering
Prices--Method of Evaluation"), (2) cash on hand in such Trust, and
accrued and unpaid interest on the Bonds as of the date
of computation, less (a) amounts representing taxes or governmental
charges payable out of such Trust, (b) the accrued expenses of such
Trust, and (c) cash held for distribution to Unit holders of such Trust of
record as of a date prior to the evaluation.
Purchase by the Sponsors of Units Tendered for Redemption--
The Trust Agreement requires that the Trustee notify the Sponsors of any
tender of Units for redemption. So long as the Sponsors are maintaining
a bid in the secondary market, the Sponsors, prior to the close of
business on the second succeeding business day, will purchase any Units
tendered to the Trustee for redemption at the price so bid by making
payment therefore to the Unit holder in an amount not less than the
Redemption Price not later than the day on which
the Units would otherwise have been redeemed by the Trustee. (See
"Public Offering--Market for Units".) Units held by the Sponsors may
be tendered to the Trustee for redemption as any other Units, provided
that the Sponsors shall not receive for Units purchased as set forth above
a higher price than it paid, plus accrued interest.
The offering price of any Units resold by the Sponsors will
be the Public Offering Price determined in the manner provided in this
Prospectus. (See "Public Offering--Offering Price".) Any profit resulting
from the resale of such Units will belong to the Sponsors which likewise
will bear any loss resulting from a lower offering or redemption price
subsequent to their acquisition of such Units. (See "Public
Offering--Sponsors' Profits".)
<PAGE>
SPONSORS
Smith Barney Shearson Inc. and Kidder, Peabody & Co.
Incorporated are sponsors for Insured Series 1-9, 21 and New York 14.
Smith Barney Shearson Inc. is the sole sponsor for Insured Series 10-20.
Smith Barney Shearson Inc., 1345 Avenue of the Americas,
New York, New York 10105 ("Smith Barney"), was incorporated in
Delaware in 1960 and traces its history through predecessor partnerships
to 1873. Smith Barney, an investment banking and securities
broker-dealer firm, is a member of the New York Stock Exchange, Inc.
and other major securities and commodities exchanges, the National
Association of Securities Dealers, Inc. and the Securities Industry
Association. Smith Barney is an indirect, wholly-owned
subsidiary of The Travelers Inc. (formerly, Primerica Corporation).
Kidder, Peabody & Co. Incorporated, 10 Hanover Square,
New York, New York 10005 ("Kidder, Peabody"), was incorporated in
Delaware in 1956 and traces its history through predecessor partnerships
to 1865. Kidder, Peabody, an investment banking and securities
broker-dealer firm, is a member of the New York Stock Exchange, Inc.
and other major securities and option exchanges, the National
Association of Securities Dealers, Inc. and the
Securities Industry Association.
On May 26, 1989 the Commission granted Kidder, Peabody
a permanent exemption from certain provisions of the Investment
Company Act of 1940 which otherwise would have rendered Kidder,
Peabody ineligible to serve as sponsor, depositor or underwriter of the
Trust, as a result of an injunction entered against Kidder, Peabody. The
injunction arose out of certain alleged activities of Kidder, Peabody not
involving the Trust or any other investment company and which are
described below. In order to obtain the permanent exemption, Kidder,
Peabody retained a consultant (at its own expense) to review the policies
and procedures utilized by it to prevent violations
of the federal securities laws in connection with its investment company
business, and to recommend, where appropriate, changes in policies,
procedures and staffing necessary to assure ongoing compliance. The
Commission considered the application of Kidder, Peabody for a
permanent exemption after the Commission had received a copy of the
consultant's report and recommendations and reports from Kidder,
Peabody setting forth the actions it
had taken or proposed to take in respect of the implementation of the
consultant's recommendations.
On June 4, 1987 the Commission filed a complaint (the
"Complaint") in the United States District Court for the Southern District
of New York, in a civil action entitled Securities and Exchange
Commission v. Kidder, Peabody & Co. Incorporated, 87 Civ. 3869 (RO)
(the "SEC Action"). On the same day, Kidder, Peabody entered into, and
the parties filed in the SEC Action, a related Consent and Undertakings,
in which Kidder, Peabody neither admitted nor denied any of the
allegations in the Complaint except as to
jurisdiction, and pursuant to which Consent and Undertakings the District
Court entered a Final Judgment of Permanent Injunction and other relief
as to Kidder, Peabody, (the "Final Judgment"). The exemption from the
Act was requested by Kidder, Peabody as a result of the Final Judgment.
The Complaint in the injunctive action brought by the
Commission alleges that Kidder, Peabody violated sections 10(b) and
14(e) of the Securities Exchange Act of 1934 (the "Exchange Act") and
rules promulgated thereunder by engaging, for its own account, in
purchases or sales of the securities of six named companies while in the
possession of material, non-public information concerning tender offers
or other extraordinary corporate transactions concerning such companies.
The Complaint asserts that such information was obtained by a former
executive of Kidder, Peabody as part of
a scheme for the exchange of non-public information with a partner at
another investment banking firm. These allegations are directed to
events in 1984 and 1985; the executive ceased employment with Kidder,
Peabody in February, 1986. Other allegations of the Complaint allege
violations by Kidder, Peabody of sections 7(c) and 17(a)(1) of the
Exchange Act and various rules promulgated thereunder and aiding and
abetting in violations by another entity of sections
15(c)(3) and 17(a)(1) of the Exchange Act and various rules promulgated
thereunder. These provisions relate to the maintenance and preservation
of accurate books and records, adherence to margin requirements
prescribed by the Federal Reserve Board and compliance with net capital
requirements applicable to broker-dealers. The violations alleged in the
Complaint with respect to all of these provisions stem from several
transactions in 1984 and 1985 involving another broker-dealer.
According to the Complaint, oral understandings
between Kidder, Peabody and the other broker-dealer enabled the other
broker-dealer to avoid adherence to the net capital requirements and
constituted an impermissible extension of credit to such entity by Kidder,
Peabody.
Among other provisions, the Final Judgment enjoins Kidder,
Peabody from engaging in certain transactions, acts, practices or courses
of business which constitute or would constituted violations of Sections
7(c), 10(b), 14(e) and 17(a)(1), or constitute or would constitute aiding
an abetting violations of Sections 15(c)(3) and 17(a)(1), of the Exchange
Act and various rules promulgated thereunder. The Final Judgment also
requires that Kidder, Peabody pay a penalty of approximately $11.6
million to the U.S. Treasury under the Insider Trading Sanctions Act of
1984, and establish a fund of approximately $13.7 million which would
be available to compensate anyone with valid claims
of injury from the conduct alleged.
<PAGE>
Also, on June 4, 1987, the Commission instituted
administrative proceedings against Kidder, Peabody pursuant to Section
15(b)(4) of the Exchange Act, entitled In the Matter of Kidder, Peabody
& Co. Incorporated. Administrative Proceeding File No. 3-6855 (the
"SEC Order"). On the same day, Kidder, Peabody filed an Offer of
Settlement (the "Offer") with respect to the SEC Order, which was
accepted by the Commission and incorporated into
the SEC Order. The Final Judgment was the basis for the SEC Order.
In the SEC Order, the Commission censured Kidder, Peabody and
ordered that Kidder, Peabody comply with its undertakings (consisting
of certain remedial measures to be taken by Kidder, Peabody designed
to prevent future occurrence of the conduct alleged in the Complaint and
to ensure Kidder, Peabody's compliance on an ongoing basis with the
federal securities laws and the rules and regulations
of self-regulatory organizations) set forth in the Order.
None of the allegations in the Complaint related to any of
Kidder, Peabody's activities in connection with any unit investment trust,
or any other investment company.
Smith Barney sponsors seven open-end investment companies;
Smith Barney Equity Funds, Inc., Smith Barney Funds, Inc., Smith
Barney Variable Account Funds, Smith Barney Tax Free Money Funds,
Inc., Smith Barney Money Funds, Inc. Smith Barney Muni Funds and
Smith Barney World Funds, Inc. and four closed-end investment
companies, Smith Barney Intermediate Municipal Fund, Inc., Smith
Barney Municipal Fund, Inc., The Inefficient Market Fund, Inc and
Smith Barney High Income Opportunity Fund
Inc. Smith Barney also sponsors all Series of Corporate Securities Trust,
Government Securities Trust and Harris, Upham Tax-Exempt Fund and
acts as co-sponsor of certain trusts of The Equity Income Fund, Concept
Series. Kidder, Peabody sponsors Target Corporate High Yield Series
Unit Trust and twelve open-end investment companies; Kidder, Peabody
Government Money Fund, Inc., Kidder, Peabody Premium Account
Fund, Kidder, Peabody Tax Exempt Money Fund, Inc., Kidder, Peabody
Cash Reserve Fund, Inc., Kidder, Peabody Exchange Money Fund,
Kidder, Peabody Equity Income Fund, Inc.,
Kidder, Peabody Government Income Fund, Inc., Kidder, Peabody
Global Equity Fund, Kidder, Peabody Tax-Free Income Fund, Liquid
Institutional Reserves, Kidder, Peabody Intermediate Term Fixed
Income, Kidder, Peabody Asset Allocation Fund and Kidder, Peabody
California Tax Exempt Money Fund, Inc. Kidder, Peabody Asset
Management Inc., subsidiary of Kidder, Peabody, is the investment
adviser and administrator of each of the twelve open-
end investment companies. The Sponsors have acted previously as
managing underwriters of other investment companies. In addition to
participating as a member of various underwriting and selling groups or
as agent of other investment companies, the Sponsors also execute orders
for the purchase and sale of securities of investment companies and sell
<PAGE>
securities to such companies in their capacities as brokers or dealers in
securities.
Limitations on Liability
The Sponsors are jointly and severally liable for the
performance of their obligations arising from their responsibilities under
the Trust Agreement, but will be under no liability to Unit holders for
taking any action of refraining from any action in good faith or for errors
in judgment or responsible in any way for depreciation or loss incurred
by reason of the sale of any Bonds, except in cases of willful
misfeasance, bad faith, gross negligence or reckless disregard of their
obligations and duties. (See "Tax Exempt, Securities Trust--Portfolio"
and "Sponsors -- Responsibility".)
Responsibility
The Sponsors are empowered to direct the Trustee to dispose
of Bonds or deposited Units of other Trusts when certain events occur
that adversely affect the value of the Bonds, if the Sponsors determine
that any insurance that may be applicable to the Bonds cannot be relied
upon to maintain the interests of the Trusts to at least as great an extent
as such disposition, including default in payment of interest or principal,
default in payment of interest or principal on other obligations of the
same issuer, institution of legal proceedings, default under other
documents adversely affecting debt service, decline in price or the
occurrence of other market or credit factors, or decline
in projected income pledged for debt service on revenue Bonds and
advanced refunding that, in the opinion of the Sponsors, may be
detrimental to the interests of the Unit Holders.
The Sponsors intend to provide portfolio services for each
Trust in order to determine whether the Trustee should be directed to
dispose of any such Bonds.
It is the responsibility of the Sponsors to instruct the Trustee
to reject any offer made by an issuer of any of the Bonds to issue new
obligations in exchange and substitution for any Bonds pursuant to a
refunding or refinancing plan, except that the Sponsors may instruct the
Trustee to accept such an offer or to take any other action with respect
thereto as the Sponsors may deem proper if the issuer is in default with
respect to such Bonds or in the judgment of the Sponsors the issuer will
probably default in respect to such Bonds in the foreseeable future. Any
obligations so received in exchange or substitution will be held by the
Trustee subject to the terms and conditions of the
Trust Agreement to the same extent as Bonds originally deposited
thereunder.
<PAGE>
Within five days after the deposit of obligations in exchange or
substitution for underlying Bonds, the Trustee is required to give notice
thereof to each Unit holder, identifying the Bonds eliminated and the
Bonds substituted therefor.
Except as stated in this paragraph, the acquisition by the Trust of any
securities other than the Bonds initially deposited in each respective Trust
is prohibited.
Smith Barney Shearson Inc. has been appointed by Kidder,
Peabody & Co. Incorporated as agent for purposes of taking any action
required or permitted to be taken by the Sponsors under the Trust
Agreement. If the Sponsors are unable to agree with respect to action
to be taken jointly by them under the Trust Agreement and they cannot
agree as to which Sponsor shall act as sole Sponsor, then Smith Barney
Shearson Inc. shall act as sole Sponsor. If
one of the Sponsors fails to perform its duties under the Trust Agreement
or becomes incapable of acting or becomes bankrupt or its affairs are
taken over by public authorities, that Sponsor is automatically discharged
under the Trust Agreement and the remaining Sponsor acts as Sponsor.
Resignation
Any Sponsor may resign provided that at the time of such
resignation each remaining Sponsor maintains a net worth of $1,000,000
and is agreeable to such resignation. Concurrently with or subsequent
to such resignation a new Sponsor may be appointed by the remaining
Sponsor and the Trustee to assume the duties of the resigning Sponsor.
If all Sponsors resign or otherwise fail or become unable to perform their
duties under the Trust Agreement, and no express provision is made for
action by the Trustee in such event, the Trustee may appoint a successor
sponsor or terminate the Trust Agreement and liquidate the affected
Trusts.
TRUSTEE
The Trustee is the United States Trust Company of New
York, with its principal place of business at 114 West 47th Street, New
York, New York 10036. United States Trust Company of New York
has, since its establishment in 1853, engaged primarily in the
management of trust and agency accounts for individuals and
corporations. The Trustee is a member of the New
York Clearing House Association and is the subject to supervision and
examination by the Superintendent of Banks of the State of New York,
the Federal Deposit Insurance Corporation and the Board of Governors
of the Federal Reserve System. In connection with the storage and
handling of certain Bonds deposited in the Trust, the Trustee may use the
services of The Depository Trust Company. These services may include
safekeeping of the Bonds and coupon-clipping, computer book-entry
transfer and institutional delivery services. The Depository Trust
Company is a limited purpose trust company organized under the
Banking Law of the State of New York, a member of the Federal
Reserve System and a clearing agency registered under the
Securities Exchange Act of 1934.
Limitations on Liability
The Trustee shall not be liable or responsible in any way for
depreciation or loss incurred by reason of the disposition of any moneys,
securities or certificates or in respect of any evaluation or for any action
taken in good faith reliance on prima facie properly executed documents
except in cases of willful misfeasance, bad faith, gross negligence or
reckless disregard for its obligations and duties. In addition, the Trustee
shall not be personally liable for any taxes or other governmental charges
imposed upon or in respect of a Trust which the Trustee may be required
to pay under current or future law of the United States or any other
taxing authority having jurisdiction. (See "Tax
Exempt Securities Trust -- Portfolio".) For information relating to the
responsibilities and indemnification of the Trustee under the Trust
Agreement, reference is made to the material set forth under "Rights of
Unit Holders", "Sponsors -- Resignation" and "Other Charges".
Resignation
By executing an instrument in writing and filing the same
with the Sponsors, the Trustee and any successor may resign. In such
an event the Sponsors are obligated to appoint a successor trustee as soon
as possible. If the Trustee becomes incapable of acting or becomes
bankrupt or its affairs are taken over by public authorities, the Sponsors
may remove the Trustee and appoint a successor as provided in the Trust
Agreement. Such resignation or removal shall become effective upon the
acceptance of appointment by the successor trustee. If no successor has
accepted the appointment within thirty days after notice of resignation,
the retiring trustee may apply to a court of competent
jurisdiction for the appointment of a successor. The resignation or
removal of a trustee becomes effective only when the successor trustee
accepts its appointment as such or when a court of competent jurisdiction
appoints a successor trustee.
EVALUATOR
The Evaluator is Kenny S&P Evaluation Services, a division
of Kenny Information, Systems, Inc., with main offices located at 65
Broadway, New York, New York 10006.
<PAGE>
Limitations on Liability
The Trustee, Sponsors and Unit holders may rely on any
evaluation furnished by the Evaluator and shall have no responsibility for
the accuracy thereof. Determinations by the Evaluator under the Trust
Agreement shall be made in good faith upon the basis of the best
information available to it; provided, however, that the Evaluator shall
be under no liability to the Trustee, the Sponsors, or Unit holders for
errors in judgment. But this provision shall not protect the Evaluator in
cases of willful misfeasance, bad faith, gross negligence or reckless
disregard of its obligations and duties.
Responsibility
The Trust Agreement requires the Evaluator to evaluate the
Bonds of a Trust on the basis of their bid prices on the last business day
of June and December in each year, on the day on which any Unit of
such Trust is tendered for redemption and on any other day such
evaluation is desired by the Trustee or is requested by the Sponsors. For
information relating to the responsibility of the Evaluator to evaluate the
Bonds on the basis of their bid prices see "Public Offering -- Offering
Price".
Resignation
The Evaluator may resign or may be removed by the joint
action of the Sponsors and the Trustee, and in such event, the Sponsors
and the Trustee are to use their best efforts to appoint a satisfactory
successor. Such resignation or removal shall become effective upon the
acceptance of appointment by a successor evaluator. If upon resignation
of the Evaluator no successor has accepted appointment within thirty
days after notice of resignation, the Evaluator may apply to a court of
competent jurisdiction for the appointment of a successor.
AMENDMENT AND TERMINATION OF THE TRUST
AGREEMENT
Amendment
The Sponsors and the Trustees have the power to amend the
Trust Agreement without the consent of any of the Unit holders when
such an amendment is (1) to cure any ambiguity or to correct or
supplement any provision of the Trust Agreement which may be
defective or inconsistent with any other provision contained therein, or
(2) to make such other provisions as shall not adversely affect the
interests of the Unit holders; provided, that the
<PAGE>
Trust Agreement is not amended to increase the number of Units issuable
thereunder or to permit the deposit or acquisition of securities either in
addition to or in substitution for any of the Bonds initially deposited in
the respective Trusts, except for the substitution of certain refunding
securities for such Bonds or to permit the Trustee to engage in business
or in investment activities not specifically authorized in the Trust
Agreement as originally adopted. In the event of any amendment, the
Trustee is obligated to notify promptly all Unit
holders of the substance of such amendment.
Termination
The Trust Agreement provides that if the principal amount of
Bonds is less than 50% of the principal amount of the Bonds originally
deposited in such Trust, the Trustee may in its discretion and will, when
directed by the Sponsors, terminate such Trust. Each Trust may be
terminated at any time by 100% of the Unit holders. See Part A for
additional mandatory and optional termination provisions. However, in
no event may any trust continue beyond the Mandatory Termination Date
set forth in Part A of this Prospectus under
"Summary of Essential Information". In the event of termination,
written notice thereof will be sent by the Trustee to all Unit holders.
Within a reasonable period after termination, the Trustee will sell any
Bonds remaining in the affected Trust, and, after paying all expenses and
charges incurred by such Trust, will distribute to each Unit holder, upon
surrender for cancellation of his certificate for Units, his pro rata share
of the balances remaining in the Interest Account and Principal Account
of such Trust.
LEGAL OPINIONS
Certain legal matters in connection with the Trust have been
passed upon by Messrs. Cahill Gordon & Reindel, a partnership
including professional corporations, 80 Pine Street, New York, New
York 10005, as special counsel for the Sponsors and as special counsel
on New York tax matters. Messrs. Brown & Wood, One World Trade
Center, New York, New York 10048, have previously acted as special
tax counsel to Financial Guaranty for certain Insured Series.
AUDITORS
The Statements of Financial Condition and Portfolio of
Securities of each Trust included in this Prospectus have been audited by
KPMG Peat Marwick, independent auditors, as indicated in their report
with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said report.
RATINGS
Standard & Poor's Corporation
A Standard & Poor's corporate or municipal bond rating is
a current assessment of the creditworthiness of an obligor with respect
to a specific debt obligation. This assessment of creditworthiness may
take into consideration obligors such as guarantors, insurers, or lessees.
The bond rating is not a recommendation to purchase or sell
a security, inasmuch as it does not comment as to market price or
suitability for a particular investor.
The ratings are based on current information furnished to
Standard & Poor's by the issuer and obtained by Standard & Poor's from
other sources it considers reliable. Standard & Poor's does not perform
any audit in connection with any rating and may, on occasion, rely on
unaudited financial information. The ratings may be changed, suspended
or withdrawn as a result of changes in, or unavailability of, such
information.
The ratings are based, in varying degrees, on the following
considerations:
I. Likelihood of default-capacity and willingness of the
obligor as to the timely payment of interest and
repayment of principal in accordance with the terms of
the obligation;
II. Nature of and provisions of the obligation; and
III. Protection afforded by, and relative position of, the
obligation in the event of bankruptcy, reorganization or
other arrangement under the laws of bankruptcy and
other laws affecting creditors' rights.
A summary of the meaning of the applicable rating symbols
as
published by Standard & Poor's follows:
AAA--Debt rated AAA has the highest rating assigned by
Standard & Poor's. Capacity to pay interest and repay
principal is extremely strong.
AA--Debt rated AA has a very strong capacity to pay interest
and repay principal and differs from the higher rated issues
only in small degree.
A--Debt rated A has a strong capacity to pay interest and
<PAGE>
repay principal although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt
in higher rated categories.
BBB--Bonds rated BBB are regarded as having an adequate
capacity to pay interest and repay principal. Whereas they normally
exhibit adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to weakened capacity to
pay interest and repay principal for bonds in this category than for bonds
in higher-rated categories.
BB,B,CCC,CC,C--Debt rated BB,B,CCC,CC and C is
regarded, on balance, as predominantly speculative with respect to
capacity to pay interest and repay principal in accordance with the terms
of the obligation. BB indicates the lowest degree of speculation and C the
highest degree of speculation. While such debt will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
D--Debt rated D is in default, and payment of interest and/or
repayment of principal is in arrears.
Plus (+) or Minus (-): To provide more detailed indications
of credit quality, the ratings from "AA" to "CCC" may be
modified by the addition of a plus or minus sign to show
relative standing within the major rating
categories.
Provisional Ratings: The letter "p" following a rating
indicates that the rating is provisional. A provisional rating
assumes the successful completion of the project being
financed by the debt being rated and indicates
that payment of debt service requirements is largely or
entirely dependent upon the successful and timely completion
of the project. This rating, however, while
addressing credit quality subsequent to completion of the
project, makes no comment on the likelihood of, or the risk
of, default upon failure of such completion. Accordingly, the
investor should exercise his own judgment with
respect to such likelihood and risk.
Conditional rating(s), indicated by "Con" are given to bonds
for which the continuance of the security rating is contingent
upon Standard & Poor's receipt of an executed copy or
closing documentation confirming investments and cash flows
and/or the security rating is conditional upon the
issuance of insurance by the respective insurance company.
<PAGE>
Moody's Investors Service
A summary of the meaning of the applicable Moody's Investors Service's
rating symbols and their meanings is as follows:
Aaa--Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and are
generally referred to as "gilt edge". Interest payments are protected by
a large or an exceptionally stable margin and principal is secure. While
the various protective elements are likely to change, such changes as can
be visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa--Bonds which are rated Aa are judged to be of a high
quality by all standards. Together with the Aaa group they comprise
what are generally known as high grade bonds. Aa bonds are rated
lower than the best bonds because margins of protection may not be as
large as in Aaa securities or fluctuations of protective elements may be
of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
A--Bonds which are rated A possess many favorable
investment attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest are
considered adequate, but elements may be present which suggest a
susceptibility to impairment sometime in the future.
Baa--Bonds which are rated Baa are considered s medium
grade obligations; i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear adequate for the
present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds
lack outstanding investment characteristics and in fact have speculative
characteristics as well.
Ba--Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and
thereby not well safeguarded during both good and bad times over the
future. Uncertainty of position characterizes bonds in this class.
B--Bonds which are rated B generally lack the characteristics
of the desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract over any long
period of time may be small.
Caa--Bonds which are rated Caa are of poor standing. Such
issues may be in default or there may be present elements of danger with
respect to principal or interest.
<PAGE>
Ca--Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have
other marked shortcomings.
C--Bonds which are rated C are the lowest rated class of
bonds and issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
Note: Those municipal bonds in the Aa, A, Baa, Ba and B
groups which Moody's believes possess the strongest investment
attributes are designated by the symbols Aa1, A1, Baa1, Ba1 and B1,
respectively. In addition, Moody's applies numerical modifiers, 1, 2,
and 3 in each generic rating classification from Aa through B in its
corporate bond rating system. The modifier 1 indicates that the security
ranks in the higher end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category. Although Industrial Revenue Bonds and Environmental Control
Revenue Bonds are tax-exempt issues, they are included in the corporate
bond rating system.
Conditional ratings, indicated by "Con" are given to bonds
for which the security depends upon the completion of some act or the
fulfillment of some condition. These are bonds secured by (a) earnings
of projects under construction, (b) earnings of projects unseasoned in
operating experience, (c) rentals which begin when facilities are
completed, or (d) payments to which some other limiting condition
attaches. A parenthetical rating denotes probable
credit stature upon completion of construction or elimination of basis of
condition.
Note: NR indicates, among other things, that no rating has
been requested, that there is insufficient information on which to base a
rating, or that Standard & Poor's Corporation and Moody's Investors
Service do not rate a particular type of obligation as a matter of policy.
Subsequent to the Date of Deposit the credit characteristics of the Issuers
of Securities may have changed. Currently, certain of the Securities in
the portfolio of a Trust may be unrated and have credit characteristics
comparable to securities rated below the minimum requirements of such
Trust for acquisition of a Security. See Part A-"Portfolio of Securities"
herein to ascertain the ratings on the Securities, if any,
on the date of the Portfolio of Securities.
Fitch Investors Service, Inc.
A brief description of the applicable Fitch Investors Service,
Inc. rating symbols and their meanings is as follows:
<PAGE>
AAA--Bonds which are considered to be investment grade and
of the highest credit quality. The obligor has an exceptionally strong
ability to pay interest and repay principal, which is unlikely to be
affected by reasonably foreseeable events.
AA--Bonds which are considered to be investment grade and
of very high credit quality. The obligor's ability to pay interest and
repay principal is very strong although not quite as strong as bonds rated
AAA.
A--Bonds which are considered to be investment grade and of
high credit quality. The obligor's ability to pay interest and repay
principal is considered to be strong, but may be more vulnerable to
adverse changes in economic conditions and circumstances than bonds
with higher ratings.
BBB-Bonds which are considered to be investment grade and
of satisfactory credit quality. The obligor's ability to pay interest and
repay principal is considered to be adequate. Adverse changes in
economic conditions and circumstances, however, are more likely to
have adverse impact on these bonds, and therefore impair timely
payment. The likelihood that these bonds will fall below investment
grade is higher than for bonds with higher ratings.
Plus (+) Minus (-)--Plus and minus signs are used with a
rating symbol to indicate the relative position of a credit within the rating
category. Plus and minus signs, however, are not used in the 'AAA',
'DDD', 'DD' or 'D' categories.
Conditional--A conditional rating is promised on the
successful completion of a project of the occurrence of a specific event.
Duff & Phelps Credit Rating Co.
A brief description of the applicable Duff & Phelps Credit Rating Co.
rating symbols and their meanings is as follows:
AAA-Highest credit quality. The risk factors are negligible,
being only slightly more than for risk-free U.S. Treasury debt.
AA-High credit quality. Protection factors are strong. Risk is
modest but may vary slightly from time to time because of economic
conditions.
A-Protection factors are average but adequate. However, risk
factors are more variable and greater in periods of economic stress.
<PAGE>
BBB-Below average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.
NR-Not rated (credit characteristics comparable to A or better
on the Date of Deposit).
[/TEXT]
<PAGE>
Prospectus
This Prospectus contains information concerning the Trust and the
Sponsors, but does not contain all the information set forth in the
registration statements and exhibits relating thereto, which the Trust
has filed with the Securities and Exchange Commission, Washington,
D.C. under the Securities Act of 1933 and the Investment Company
Act of 1940, and to which reference is hereby made.
<TABLE>
<S>
<C>
Index:
Page
Summary of Essential Information. . . . . . . . . . . . . . . . . . . . . . . . . . . A-
2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Insured Series 18
Financial and Statistical Information . . . . . . . . . . . . . . . . . . . . . . . . A-
4
Report of Independent Auditors. . . . . . . . . . . . . . . . . . . . . . . . . . . . A-
3
Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-
4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Portfolios of Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-
6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9,840 Units
Tax Exempt Securities Trust - Insured Series. . . . . . . . . . . . . . . . . . . . . 1
The Trusts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Objectives. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Estimated Current Return and Estimated Long-Term Return . . . . . . . . . . . . . . 27
PROSPECTUS
Tax Status. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Dated February 17, 1994
Insurance on the Bonds in the Portfolio of a Trust. . . . . . . . . . . . . . . . . 34
Expenses and Charges. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Public Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Offering Price. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Method of Evaluation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Sponsor
Distribution of Units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Market for Units. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
SMITH BARNEY SHEARSON INC.
Exchange Option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Reinvestment Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Sponsor's Profits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Rights of Unit Holders. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Certificates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
1345 Avenue of the Americas
Distribution of Interest and Principal. . . . . . . . . . . . . . . . . . . . . . . 40
New York, New York 10105
Reports and Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
(800) 298-UNIT
Redemption of Units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Sponsor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Limitations on Liability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Responsibility. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Resignation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Limitations on Liability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Resignation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Evaluator . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Limitations on Liability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Responsibility. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Resignation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Amendment and Termination of the Trust Agreement. . . . . . . . . . . . . . . . . . . 48
Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Legal Opinions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Auditors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Ratings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
This Prospectus does not constitute an offer to sell, or a
solicitation of an offer to buy, securities in any state to any
person to whom it is not lawful to make such offer in such state.
<PAGE> PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
CONTENTS OF REGISTRATION STATEMENT
This Post-Effective Amendment to the Registration Statement
on Form S-6 comprises the following papers and documents:
The facing Sheet on Form S-6.
The cross-reference sheet.
The Prospectus consisting of pages A-1 - A- , and 1- , back cover.
Signatures.
Written consents of the following persons:
KPMG Peat Marwick
Kenny S&P Evaluation Services,
a division of Kenny Information Systems, Inc.
(included in Exhibit 4.6A)
The following exhibits:
*4.6A - Consent of Kenny S&P Evaluation Services, a division
of Kenny Information Systems, Inc. as Evaluator.
* Filed herewith.
II-1
<PAGE>
KENNY S&P EVALUATION SERVICES
A Division of Kenny Information Systems, Inc.
65 Broadway
New York, New York, 10006-2511
Telephone 212/770-4000
Smith Barney Shearson
Incorporated
1345 Avenue of the Americas
New York, NY 10105
RE:Tax Exempt Securities Trust
Insured Series 18
Gentlemen:
We have examined the post-effective Amendment to the
Registration Statement File No. 33-23873 for the above-captioned
trust. We hereby acknowledge that Kenny S&P Evaluation Services,
a division of Kenny Information Systems, Inc. is currently acting
as the evaluator for the trust. We hereby consent to the use in
the Amendment of the reference to Kenny S&P Evaluation Services,
a division of Kenny Information Systems, Inc. as evaluator.
In addition, we hereby confirm that the ratings
indicated in the above-referenced Amendment to the Registration
Statement for the respective bonds comprising the trust portfolio
are the ratings currently indicated in our KENNYBASE database.
You are hereby authorized to file a copy of this letter
with the Securities and Exchange Commission.
Sincerely,
F.A. Shinal
Senior Vice President
Chief Financial Officer
tru:l-31
<PAGE>
CONSENT OF COUNSEL
The consent of counsel to
the use of their name in the Prospectus included in this Post-
Effective Amendment to the Registration Statement ("Post-
Effective Amendment") is contained in their opinion filed as
Exhibit 3.1 to the Registration Statement.
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of
our report dated January 14, 1994 included herein and to the
reference to our firm under the heading "AUDITORS" in the
prospectus.
KPMG PEAT MARWICK
New York, New York
January 19, 1994
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933,
the registrant, Tax Exempt Securities Trust, Insured Series 18,
certifies that it meets all the requirements for
effectiveness of this Post-Effective Amendment pursuant to Rule
485(b) under the Securities Act of 1933 and has duly caused this
Post-Effective Amendment to be signed on its behalf by the
undersigned thereunto duly authorized, in the City of New York,
and State of New York on the 19th day of January, 1994.
Signatures appear on pages II-3 and II-4.
A majority of the members of the Board of Directors of Smith
Barney Shearson Incorporated have signed this Post-Effective
Amendment pursuant to Powers of Attorney authorizing the person
signing this Post-Effective Amendment to do so on behalf of such
members.
These Powers of Attorney were filed with the Securities
and Exchange Commission under the Securities Act of 1933 with the
Registration Statement of Tax Exempt Securities Trust,
Appreciation Series 7, Registration No. 2-78499 and with the
Registration Statement of Tax Exempt Securities Trust, Series
110, Intermediate Term Series 15 and Short-Intermediate Term
Series 13, Registration Nos. 2-97179, 2-95591 and 2-96184,
respectively, with the Registration Statement of Tax Exempt
Securities Trust, Series 284, Amendment No. 2, Registration No.
33-22777, with the Registration Statement of Tax Exempt
Securities Trust, Series 295, Amendment No. 1, Registration No.
33-26376, and with the Registration Statement of Tax Exempt
Securities Trust, Series 335, Amendment No. 1, Registration No.
33-37952.
A majority of the members of the Board of Directors of
Kidder, Peabody & Co. Incorporated have signed this Post-
Effective Amendment pursuant to Powers of Attorney authorizing
the person signing this Post-Effective Amendment to do so on
behalf of such members. These Powers of Attorney were filed with
the Securities and Exchange Commission under the Securities Act
of 1933 as an exhibit to the Registration Statement of Tax Exempt
Securities Trust, Series 303, Post-Effective Amendment No. 1,
Registration No. 33-28378.
<PAGE>
TAX EXEMPT SECURITIES TRUST
BY SMITH BARNEY SHEARSON INC.
By
(George S. Michinard, Jr.)
By the following persons,* who constitute a majority of
the directors of Smith Barney Shearson Incorporated:
Steven D. Black
James S. Boshart III
Robert K. Difazio
James Dimon
Robert Druskin
Toni A. Elliot
Lewis L. Glucksman
John B. Hoffman
A. Richard Janiak, Jr.
Robert Q. Jones
Robert B. Kane
Jeffrey B. Lane
Thomas A. Maguire
Howard D. Marsh
William J. Mills II
John C. Morris
A. George Saks
Bruce D. Sargent
Melvin B. Taub
Jacques S. Theriot
Stephen J. Treadway
Paul Underwood
Philip M. Waterman, Jr.
By
(George S. Michinard, Jr.
Attorney-in-Fact)
* Pursuant to Powers of Attorney previously filed.
II-3
<PAGE>
TAX EXEMPT SECURITIES TRUST
By Kidder, Peabody & Co. Incorporated
By
(Gilbert R. Ott, Jr.)
By the following persons*, who constitute a majority
of the directors of Kidder, Peabody & Co. Incorporated:
Edward A. Cerullo
Michael A. M. Keehner
John M. Liftin
James A. Mullin
Richard W. O'Donnell
Thomas F. Ryan, Jr.
By
(Gilbert R. Ott, Jr.
Attorney-in-Fact)
___
* Pursuant to Powers of Attorney previously filed.
II-4
</TABLE>
