File No. 33-51086 CIK #890930
Securities and Exchange Commission
Washington, D. C. 20549
Post-Effective
Amendment No. 8
to
Form S-6
For Registration under the Securities Act of 1933
of Securities of Unit Investment Trusts Registered
on Form N-8B-2
Kemper Tax-Exempt Insured Income Trust, Series A-84, Kemper Tax-Exempt Insured
Income Trust Multi-State, Series 54 and Kemper Tax-Exempt Income Trust Multi-
State, Series 48
Name and executive office address of Depositor:
Ranson & Associates, Inc.
250 North Rock Road, Suite 150
Wichita, Kansas 67206
Name and complete address of agent for service:
Robin Pinkerton
Ranson & Associates, Inc.
250 North Rock Road, Suite 150
Wichita, Kansas 67206
( X ) Check box if it is proposed that this filing will become
effective at 2:00 p.m. on December 29, 2000 pursuant to paragraph (b)
of Rule 485.
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KEMPER TAX-EXEMPT INSURED INCOME TRUST
NATIONAL SERIES
KEMPER DEFINED FUNDS
INSURED NATIONAL SERIES
EVEREN UNIT INVESTMENT TRUSTS
INSURED NATIONAL SERIES
PART ONE
The date of this Part One is that date
which is set forth in Part Two of the Prospectus
Kemper Tax-Exempt Insured Income Trust, Kemper Defined Funds Insured
National Series and EVEREN Unit Investment Trusts Insured National Series
(the "Trusts" and each a "Trust") were formed for the purpose of gaining
interest income free from Federal income taxes while conserving capital
and diversifying risks by investing in an insured, fixed portfolio
consisting of obligations issued by or on behalf of states of the United
States or counties, municipalities, authorities or political subdivisions
thereof.
Units of the Trust are not deposits or obligations of, or guaranteed
by, any bank, and Units are not federally insured or otherwise protected
by the Federal Deposit Insurance Corporation and involve investment risk
including loss of principal.
Insurance guaranteeing the scheduled payment of principal and
interest on all of the Municipal Bonds in the portfolio listed in Part
Two has been obtained from an independent company by either the Trust,
the Sponsor or the issuer of the Municipal Bonds involved. Insurance
obtained by the Sponsor or a Municipal Bond issuer is effective so long
as such Bonds are outstanding. The insurance, in any case, does not
relate to the Units offered hereby or to their market value. As a result
of such insurance, the Units of the Trust received on the Date of Deposit
a rating of "AAA" by Standard & Poor's, a Division of The McGraw-Hill
Companies, Inc. ("Standard & Poor's") or "Aaa" by Moody's Investors
Service, Inc. See "Insurance on the Portfolio" and "Description of
Municipal Bond Ratings." No representation is made as to any insurer's
ability to meet its commitments.
This Prospectus is in two parts.
Read and retain both parts for future reference.
SPONSOR: RANSON & ASSOCIATES, INC.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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TABLE OF CONTENTS
PAGE
SUMMARY 3
THE TRUST 5
PORTFOLIOS 6
RISK FACTORS 8
INSURANCE ON THE PORTFOLIOS 14
DISTRIBUTION REINVESTMENT 20
INTEREST AND ESTIMATED LONG-TERM
AND CURRENT RETURNS 21
TAX STATUS OF THE TRUST 21
TAX REPORTING AND REALLOCATION 26
PUBLIC OFFERING OF UNITS 26
PUBLIC OFFERING PRICE 26
ACCRUED INTEREST 29
PURCHASED AND DAILY ACCRUED INTEREST 30
ACCRUED INTEREST 30
PUBLIC DISTRIBUTION OF UNITS 31
PROFITS OF SPONSOR 32
MARKET FOR UNITS 32
REDEMPTION 32
COMPUTATION OF REDEMPTION PRICE 34
UNITHOLDERS 34
OWNERSHIP OF UNITS 34
DISTRIBUTIONS TO UNITHOLDERS 35
STATEMENT TO UNITHOLDERS 36
RIGHTS OF UNITHOLDERS 38
INVESTMENT SUPERVISION 38
ADMINISTRATION OF THE TRUST 40
THE TRUSTEE 40
THE EVALUATOR 41
AMENDMENT AND TERMINATION 41
LIMITATIONS ON LIABILITY 42
EXPENSES OF THE TRUST 43
THE SPONSOR 44
LEGAL OPINIONS 45
INDEPENDENT AUDITORS 45
DESCRIPTION OF MUNICIPAL BOND RATINGS 45
Essential Information*
Report of Independent Auditors*
Statement of Assets and Liabilities*
Statement of Operations*
Statement of Changes in Net Assets*
Schedule of Investments*
Notes to Schedules of Investments*
Notes to Financial Statements*
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* INFORMATION ON THESE ITEMS APPEARS IN
PART TWO
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KEMPER TAX-EXEMPT INSURED INCOME TRUST
KEMPER DEFINED FUNDS INSURED NATIONAL SERIES
EVEREN UNIT INVESTMENT TRUSTS INSURED NATIONAL SERIES
SUMMARY
The Trust. Kemper Tax-Exempt Insured Income Trust, Kemper Defined
Funds Insured National Series and EVEREN Unit Investment Trusts Insured
National Series (the "Trusts" and each a "Trust") are each a unit
investment trust consisting of a number of diversified portfolios (the
"Series"), each portfolio consisting of obligations ("Municipal Bonds,"
"Securities" or "Bonds") issued by or on behalf of states of the United
States or counties, municipalities, authorities or political subdivisions
thereof. Ranson & Associates, Inc. is the Sponsor and Evaluator of the
Trusts and is successor sponsor and evaluator of all unit investment
trusts formerly sponsored by EVEREN Unit Investment Trusts, a service of
EVEREN Securities, Inc. The Bank of New York is the Trustee of the
Trusts as successor to Investors Fiduciary Trust Company.
The objective of each Series of the Trust is tax-exempt income and
conservation of capital with diversification of risk through investment
in an insured, fixed portfolio of Municipal Bonds. Interest on certain
Municipal Bonds in certain of the Trusts will be a preference item for
purposes of the alternative minimum tax. Accordingly, such Trusts may be
appropriate only for investors who are not subject to the alternative
minimum tax. There is, of course, no guarantee that the Trusts'
objective will be achieved.
All of the Municipal Bonds in a Series of the Trust were rated in
the category "BBB" or better by Standard & Poor's ("Standard & Poor's")
or "Baa" by Moody's Investors Service, Inc. ("Moody's") on the date such
Series was established (the "Date of Deposit"). Ratings of the Municipal
Bonds may have changed since the Date of Deposit. See "Description of
Municipal Bond Ratings" herein and the "Schedule of Investments" in Part
Two.
The Units, each of which represents a pro rata undivided fractional
interest in the Municipal Bonds deposited in the appropriate Series of
the Trust, are issued and outstanding Units which have been reacquired by
the Sponsor either by purchase of Units tendered to the Trustee for
redemption or by purchase in the open market. No offering is being made
on behalf of the Trust and any profit or loss realized on the sale of
Units will accrue to the Sponsor and/or the firm reselling such Units.
Insurance. Insurance guaranteeing the scheduled payment of
principal and interest on all of the Municipal Bonds in the portfolio of
each Series of the Trust has been obtained by the Trust, the Sponsor or
directly by the issuer from an independent insurance company. Series A
through A-24 of the Kemper Tax-Exempt Insured Income Trust are insured by
AMBAC Indemnity Corporation ("AMBAC Indemnity") and Series A-25 and
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subsequent Series of the Kemper Tax-Exempt Insured Income Trust, Kemper
Defined Funds Insured National Series and EVEREN Unit Investment Trusts
Insured National Series are insured by Financial Guaranty Insurance
Company ("Financial Guaranty"), Municipal Bond Investor Assurance
Corporation ("MBIA") or other insurers. Insurance obtained directly by
the issuer may be from such companies or other insurers. See "Insurance
on the Portfolio" herein and "Schedule of Investments" in Part Two.
Insurance obtained by the Trust remains in effect only while the insured
Municipal Bonds are retained in the Trust, while insurance obtained by a
Municipal Bond issuer is effective so long as such Bonds are outstanding.
Pursuant to an irrevocable commitment of Financial Guaranty, in the event
of a sale of any Bond from Series A-25 or subsequent Series of the Kemper
Tax-Exempt Insured Income Trust covered under the Trust's insurance
policy, the Trustee has the right to obtain permanent insurance for such
Municipal Bond upon the payment of a single predetermined insurance
premium from the proceeds of the sale of such Municipal Bond. The
insurance, in either case, does not relate to the Units offered hereby or
to their market value. As a result of such insurance, the Units of each
Series of the Trust received on the original Date of Deposit a rating of
"AAA" from Standard & Poor's. See "Insurance on the Portfolio." No
representation is made as to AMBAC Indemnity's, Financial Guaranty's,
MBIA's or any other insurer's ability to meet its commitments.
Public Offering Price. The Public Offering Price per Unit of a
Series of the Trust is equal to a pro rata share of the aggregate bid
prices of the Municipal Bonds in such Series (plus or minus a pro rata
share of cash, if any, in the Principal Account, held or owned by the
Series) plus Purchased Interest, if any, plus a sales charge shown under
"Public Offering of Units." In addition, there will be added to each
transaction an amount equal to the accrued interest from the last Record
Date of such Series to the date of settlement (three business days after
order)(such amount is referred to as Daily Accrued Interest in the case
of certain Series). The sales charge is reduced on a graduated scale as
indicated under "Public Offering of Units - Public Offering Price."
Interest and Principal Distributions. Distributions of the
estimated annual interest income to be received by a Series of the Trust,
after deduction of estimated expenses, will be made monthly unless the
Unitholder elects to receive such distributions quarterly or semi-
annually. Distributions will be paid on the Distribution Dates to
holders of record of such Series on the Record Dates set forth for the
applicable option. See "Essential Information" in Part Two. The
distribution of funds, if any, in the Principal Account of each Series,
will be made semi-annually to Unitholders of Record on the appropriate
dates. See "Essential Information" in Part Two. Unitholders of Kemper
Defined Funds and EVEREN Unit Investment Trusts receive monthly
distributions of interest and principal.
Reinvestment. Distributions of interest and principal, including
capital gains, if any, made by a Series of the Trust will be paid in cash
unless a Unitholder elects to reinvest such distributions. See
"Distribution Reinvestment."
Estimated Current Return and Estimated Long-Term Return. The
Estimated Current Return is calculated by dividing the estimated net
annual interest income per Unit by the Public Offering Price of such
Trust. The estimated net annual interest income per Unit will vary with
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changes in fees and expenses of such Trust and with the principal
prepayment, redemption, maturity, exchange or sale of Securities while
the Public Offering Price will vary with changes in the bid price of the
underlying Securities and with changes in the Purchased Interest, if any;
therefore, there is no assurance that the present Estimated Current
Return will be realized in the future. Estimated Long-Term Return is
calculated using a formula which (1) takes into consideration, and
determines and factors in the relative weightings of, the market values,
yields (which takes into account the amortization of premiums and the
accretion of discounts) and estimated retirements of all of the
Securities in the Trust and (2) takes into account the expenses and sales
charge associated with each Trust Unit. Since the market values and
estimated retirements of the Securities and the expenses of the Trust
will change, there is no assurance that the present Estimated Long-Term
Return will be realized in the future. Estimated Current Return and
Estimated Long-Term Return are expected to differ because the calculation
of Estimated Long-Term Return reflects the estimated date and amount of
principal returned while Estimated Current Return calculations include
only net annual interest income and Public Offering Price.
Market for Units. While under no obligation to do so, the Sponsor
intends, subject to change at any time, to maintain a market for the
Units of each Series of the Trust and to continuously offer to repurchase
such Units at prices which are based on the aggregate bid side evaluation
of the Municipal Bonds in such Series of the Trust. If such a market is
not maintained and no other over-the-counter market is available,
Unitholders will still be able to dispose of their Units through
redemption by the Trustee at prices based upon the aggregate bid price of
the Municipal Bonds in such Series of the Trust. See "Redemption."
Risk Factors. An investment in the Trusts should be made with an
understanding of the risks associated therewith, including, among other
factors, the inability of the issuer or an insurer to pay the principal
of or interest on a bond when due, volatile interest rates, early call
provisions, and changes to the tax status of the Municipal Bonds. See
"Portfolios - Risk Factors."
THE TRUST
Each Series of the Trust is one of a series of unit investment
trusts created by the Sponsor under the name Kemper Tax-Exempt Insured
Income Trust, Kemper Defined Funds Insured National Series or EVEREN Unit
Investment Trusts Insured National Series, all of which are similar, and
each of which was created under the laws of the State of Missouri or New
York pursuant to a Trust Agreement* (the "Agreement"). Ranson &
Associates, Inc. is the Sponsor and Evaluator of the Trusts and is
successor sponsor and evaluator of all unit investment trusts formerly
sponsored by EVEREN Unit Investment Trusts, , a ,service of EVEREN
Securities, Inc. , The Bank of ,New York is the Trustee of the ,Trusts as
successor to Investors Fiduciary Trust Company.
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* Reference is made to the Trust Agreement, and any statements contained
herein are qualified in their entirety by the provisions of the Trust
Agreement.
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The objectives of the Trust are tax-exempt income and conservation
of capital with diversification of risk through investment in an insured,
fixed portfolio of Municipal Bonds. Interest on certain Municipal Bonds
in the Trusts will be a preference item for purposes of the alternative
minimum tax. Accordingly, such Trusts may be appropriate only for the
investors who are not subject to the alternative minimum tax. There is,
of course, no guarantee that the Trusts' objectives will be achieved.
A Series of the Trust may be an appropriate investment vehicle for
investors who desire to participate in a portfolio of insured, tax-
exempt, fixed income securities with greater diversification than they
might be able to acquire individually. In addition, Municipal Bonds of
the type deposited in the Trust are often not available in small amounts.
Each Series of the Trust consists of an insured portfolio of
interest bearing obligations issued by or on behalf of states of the
United States or counties, municipalities, authorities or political
subdivisions thereof the interest on which is, in the opinion of bond
counsel to the issuing authorities, exempt from all Federal income taxes
under existing law, but may be subject to state and local taxes.
Proceeds from the maturity, redemption or sale of the Municipal Bonds in
a Series of the Trust, unless used to pay for Units tendered for
redemption, will be distributed to Unitholders of such Series and will
not be utilized to purchase replacement or additional Municipal Bonds for
the Series.
The Units, each of which represents a pro rata undivided fractional
interest in the principal amount of Municipal Bonds deposited in a Series
of the Trust, are issued and outstanding Units which have been reacquired
by the Sponsor either by purchase of Units tendered to the Trustee for
redemption or by purchase in the open market. No offering is being made
on behalf of the Trust or any Series thereof and any profit or loss
realized on the sale of Units will accrue to the Sponsor and/or the firm
reselling such Units. To the extent that Units of a Series of the Trust
are redeemed, the principal amount of Municipal Bonds in such Series will
be reduced and the undivided fractional interest represented by each
outstanding Unit of the Series will increase. See "Redemption."
PORTFOLIOS
In selecting the Municipal Bonds which comprise the portfolio of a
Series of the Trust the following requirements, were deemed to be of
primary importance: (a) a minimum rating of "BBB" by Standard & Poor's
or "Baa" by Moody's Investors Service, Inc. (see "Description of
Municipal Bond Ratings"); (b) the price of the Municipal Bonds relative
to other issues of similar quality and maturity; (c) the diversification
of the Municipal Bonds as to purpose of issue; (d) the income to the
Unitholders of the Series; (e) whether such Municipal Bonds were insured,
or the availability and cost of insurance for the prompt payment of
principal and interest, when due, on the Municipal Bonds; and (f) the
dates of maturity of the Municipal Bonds.
Subsequent to the Date of Deposit, a Municipal Bond may cease to be
rated or its rating may be reduced below the minimum required as of the
Date of Deposit. Neither event requires the elimination of such
investment from the portfolio, but may be considered in the Sponsor's
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determination to direct the Trustee to dispose of the investment. See
"Investment Supervision" herein and "Schedule of Investments" in Part
Two.
The Sponsor may not alter the portfolio of a Series of the Trust,
except that certain of the Municipal Bonds may be sold upon the happening
of certain extraordinary circumstances. See "Investment Supervision."
Certain Series of the Trust contain Municipal Bonds which may be
subject to redemption prior to their stated maturity date pursuant to
sinking fund provisions, call provisions or extraordinary optional or
mandatory redemption provisions or otherwise. A sinking fund is a
reserve fund accumulated over a period of time for retirement of debt. A
callable debt obligation is one which is subject to redemption or
refunding prior to maturity at the option of the issuer. A refunding is
a method by which a debt obligation is redeemed at or before maturity, by
the proceeds of a new debt obligation. In general, call provisions are
more likely to be exercised when the offering side valuation is at a
premium over par than when it is at a discount from par. Accordingly,
any such call, redemption, sale or maturity will reduce the size and
diversity of such Series, and the net annual interest income of the
Series and may reduce the Estimated Long-Term Returns and/or Estimated
Current Return. See "Interest and Estimated Long-Term and Current
Returns." Each Trust portfolio contains a listing of the sinking fund
and call provisions, if any, with respect to each of the debt
obligations. Extraordinary optional redemptions and mandatory
redemptions result from the happening of certain events. Generally,
events that may permit the extraordinary optional redemption of Municipal
Bonds or may require the mandatory redemption of Municipal Bonds include
among others: a final determination that the interest on the Municipal
Bonds is taxable; the substantial damage or destruction by fire or other
casualty of the project for which the proceeds of the Municipal Bonds
were used; an exercise by a local, state or Federal governmental unit of
its power of eminent domain to take all or substantially all of the
project for which the proceeds of the Municipal Bonds were used; changes
in the economic availability of raw materials, operating supplies or
facilities or technological or other changes which render the operation
of the project for which the proceeds of the Municipal Bonds were used
uneconomic; changes in law or an administrative or judicial decree which
renders the performance of the agreement under which the proceeds of the
Municipal Bonds were made available to finance the project impossible or
which creates unreasonable burdens or which imposes excessive
liabilities, such as taxes not imposed on the date the Municipal Bonds
are issued on the issuer of the Municipal Bonds or the user of the
proceeds of the Municipal Bonds; an administrative or judicial decree
which requires the cessation of a substantial part of the operations of
the project financed with the proceeds of the Municipal Bonds; an
overestimate of the costs of the project to be financed with proceeds of
the Municipal Bonds resulting in excess proceeds of the Municipal Bonds
which may be applied to redeem Municipal Bonds; or an underestimate of a
source of funds securing the Municipal Bonds resulting in excess funds
which may be applied to redeem Municipal Bonds. The Sponsor is unable to
predict all of the circumstances which may result in such redemption of
an issue of Municipal Bonds.
The Sponsor and the Trustee shall not be liable in any way for any
default, failure or defect in any Municipal Bond.
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Risk Factors. An investment in Units of a Series of the Trust
should be made with an understanding of the risks which an investment in
fixed rate debt obligations may entail, including the risk that the value
of the portfolio and hence of the Units will decline with increases in
interest rates. The value of the underlying Municipal Bonds will
fluctuate inversely with changes in interest rates. The uncertain
economic conditions experienced in the past, together with the fiscal
measures adopted to attempt to deal with them, have resulted in wide
fluctuations in interest rates and, thus, in the value of fixed rate debt
obligations generally and long term obligations in particular. The
Sponsor cannot predict whether such fluctuations will continue in the
future.
Certain Series of the Trust contain Municipal Bonds which are
general obligations of a governmental entity that are backed by the
taxing power of such entity. All other Municipal Bonds in the Series of
the Trust are revenue bonds payable from the income of a specific project
or authority and are not supported by the issuer's power to levy taxes.
General obligation bonds are secured by the issuer's pledge of its faith,
credit and taxing power for the payment of principal and interest.
Revenue bonds, on the other hand, are payable only from the revenues
derived from a particular facility or class of facilities or, in some
cases, from the proceeds of a special excise or other specific revenue
source. There are, of course, variations in the security of the
different Municipal Bonds in the Series of the Trust, both within a
particular classification and between classifications, depending on
numerous factors.
Certain Series of the Trust contain Municipal Bonds which are
obligations of issuers whose revenues are derived from services provided
by hospitals and other health care facilities, including nursing homes.
In view of this an investment in such Series should be made with an
understanding of the characteristics of such issuers and the risks that
such an investment may entail. Ratings of bonds issued for health care
facilities are often based on feasibility studies that contain
projections of occupancy levels, revenues and expenses. A facility's
gross receipts and net income available for debt service will be affected
by future events and conditions including, among other things, demand for
services and the ability of the facility to provide the services
required, physicians' confidence in the facility, management
capabilities, economic developments in the service area, competition,
efforts by insurers and governmental agencies to limit rates, legislation
establishing state rate-setting agencies, expenses, the cost and possible
unavailability of malpractice insurance, the funding of Medicare,
Medicaid and other similar third party payor programs, and government
regulation. Federal legislation has been enacted which implemented a
system of prospective Medicare reimbursement which may restrict the flow
of revenues to hospitals and other facilities which are reimbursed for
services provided under the Medicare program. Future legislation or
changes in the areas noted above, among other things, would affect all
hospitals to varying degrees and, accordingly, any adverse changes in
these areas may adversely affect the ability of such issuers to make
payment of principal and interest on Municipal Bonds held in such Series.
Such adverse changes also may adversely affect the ratings of the
Municipal Bonds held in such Series of the Trust. Hospitals and other
health care facilities are subject to claims and legal actions by
patients and others in the ordinary course of business. Although these
claims are generally covered by insurance, there can be no assurance that
a claim will not exceed the insurance coverage of a health care facility
or that insurance coverage will be available to a facility. In addition,
a substantial increase in the cost of insurance could adversely affect
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the results of operations of a hospital or other health care facility.
Certain hospital bonds may provide for redemption at par at any time upon
the sale by the issuer of the hospital facilities to a non-affiliated
entity or in other circumstances. For example, certain hospitals may
have the right to call bonds at par if the hospital may legally be
required because of the bonds to perform procedures against specified
religious principles. Certain FHA-insured bonds may provide that all or
a portion of those bonds, otherwise callable at a premium, can be called
at par in certain circumstances. If a hospital defaults upon a bond
obligation, the realization of Medicare and Medicaid receivables may be
uncertain and, if the bond obligation is secured by the hospital
facilities, legal restrictions on the ability to foreclose upon the
facilities and the limited alternative uses to which a hospital can be
put may reduce severely its collateral value.
Certain Series of the Trust contain Municipal Bonds which are single
family mortgage revenue bonds, which are issued for the purpose of
acquiring from originating financial institutions notes secured by
mortgages on residences located within the issuer's boundaries and owned
by persons of low or moderate income. Mortgage loans are generally
partially or completely prepaid prior to their final maturities as a
result of events such as sale of the mortgaged premises, default,
condemnation or casualty loss. Because these Municipal Bonds are subject
to extraordinary mandatory redemption in whole or in part from such
prepayments of mortgage loans, a substantial portion of such Municipal
Bonds will probably be redeemed prior to their scheduled maturities or
even prior to their ordinary call dates. The redemption price of such
issues may be more or less than the offering price of such Municipal
Bonds. Extraordinary mandatory redemption without premium could also
result from the failure of the originating financial institutions to make
mortgage loans in sufficient amounts within a specified time period or,
in some cases, from the sale by the Municipal Bond issuer of the mortgage
loans. Failure of the originating financial institutions to make
mortgage loans would be due principally to the interest rates on mortgage
loans funded from other sources becoming competitive with the interest
rates on the mortgage loans funded with the proceeds of the single family
mortgage revenue bonds. Additionally, unusually high rates of default on
the underlying mortgage loans may reduce revenues available for the
payment of principal of or interest on such mortgage revenue bonds.
Single family mortgage revenue bonds issued after December 31, 1980 were
issued under Section 103A of the Internal Revenue Code, which Section
contains certain ongoing requirements relating to the use of the proceeds
of such Bonds in order for the interest on such Municipal Bonds to retain
its tax-exempt status. In each case, the issuer of the Municipal Bonds
has covenanted to comply with applicable ongoing requirements and bond
counsel to such issuer has issued an opinion that the interest on the
Municipal Bonds is exempt from Federal income tax under existing laws and
regulations. There can be no assurances that the ongoing requirements
will be met. The failure to meet these requirements could cause the
interest on the Municipal Bonds to become taxable, possibly retroactively
from the date of issuance.
Certain Series of the Trust contain Municipal Bonds which are
obligations of issuers whose revenues are primarily derived from mortgage
loans to housing projects for low to moderate income families. The
ability of such issuers to make debt service payments will be affected by
events and conditions affecting financed projects, including, among other
things, the achievement and maintenance of sufficient occupancy levels
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and adequate rental income, increases in taxes, employment and income
conditions prevailing in local labor markets, utility costs and other
operating expenses, the managerial ability of project managers, changes
in laws and governmental regulations, the appropriation of subsidies and
social and economic trends affecting the localities in which the projects
are located. The occupancy of housing projects may be adversely affected
by high rent levels and income limitations imposed under Federal and
state programs. Like single family mortgage revenue bonds, multi-family
mortgage revenue bonds are subject to redemption and call features,
including extraordinary mandatory redemption features, upon prepayment,
sale or non-origination of mortgage loans as well as upon the occurrence
of other events. Certain issuers of single or multi-family housing bonds
have considered various ways to redeem bonds they have issued prior to
the stated first redemption dates for such bonds. In connection with the
housing Municipal Bonds held by the Trust, the Sponsor has not had any
direct communications with any of the issuers thereof, but at the initial
Date of Deposit it was not aware that any of the respective issuers of
such Municipal Bonds were actively considering the redemption of such
Municipal Bonds prior to their respective stated initial call dates.
However, there can be no assurance that an issuer of a Municipal Bond in
the Trust will not attempt to so redeem a Municipal Bond in the Trust.
Certain Series of the Trust contain Municipal Bonds which are
obligations of issuers whose revenues are derived from the sale of water
and/or sewerage services. Water and sewerage bonds are generally payable
from user fees. Problems faced by such issuers include the ability to
obtain timely and adequate rate increases, a decline in population
resulting in decreased user fees, the difficulty of financing large
construction programs, the limitations on operations and increased costs
and delays attributable to environmental considerations, the increasing
difficulty of obtaining or discovering new supplies of fresh water, the
effect of conservation programs and the impact of "no-growth" zoning
ordinances. Issuers may have experienced these problems in varying
degrees. Because of the relatively short history of solid waste disposal
bond financing, there may be technological risks involved in the
satisfactory construction or operation of the projects exceeding those
associated with most municipal enterprise projects. Increasing
environmental regulation on the federal, state and local level has a
significant impact on waste disposal facilities. While regulation
requires more waste producers to use waste disposal facilities, it also
imposes significant costs on the facilities. These costs include
compliance with frequently changing and complex regulatory requirements,
the cost of obtaining construction and operating permits, the cost of
conforming to prescribed and changing equipment standards and required
methods of operation and the cost of disposing of the waste residue that
remains after the disposal process in an environmentally safe manner. In
addition, waste disposal facilities frequently face substantial
opposition by environmental groups and officials to their location and
operation, to the possible adverse effects upon the public health and the
environment that may be caused by wastes disposed of at the facilities
and to alleged improper operating procedures. Waste disposal facilities
benefit from laws which require waste to be disposed of in a certain
manner but any relaxation of these laws could cause a decline in demand
for the facilities' services. Finally, waste disposal facilities are
concerned with many of the same issues facing utilities insofar as they
derive revenues from the sale of energy to local power utilities.
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Certain Series of the Trust contain Municipal Bonds which are
obligations of issuers whose revenues are primarily derived from the sale
of electric energy or natural gas. Utilities are generally subject to
extensive regulation by state utility commissions which, among other
things, establish the rates which may be charged and the appropriate rate
of return on an approved asset base. The problems faced by such issuers
include the difficulty in obtaining approval for timely and adequate rate
increases from the governing public utility commission, the difficulty in
financing large construction programs, the limitations on operations and
increased costs and delays attributable to environmental considerations,
increased competition, recent reductions in estimates of future demand
for electricity in certain areas of the country, the difficulty of the
capital market in absorbing utility debt, the difficulty in obtaining
fuel at reasonable prices and the effect of energy conservation. Issuers
may have experienced these problems in varying degrees. In addition,
Federal, state and municipal governmental authorities may from time to
time review existing and impose additional regulations governing the
licensing, construction and operation of nuclear power plants, which may
adversely affect the ability of the issuers of such Municipal Bonds to
make payments of principal and/or interest on such Municipal Bonds. The
ability of state and local joint action power agencies to make payments
on bonds they have issued is dependent in large part on payments made to
them pursuant to power supply or similar agreements. Courts in
Washington and Idaho have held that certain agreements between the
Washington Public Power Supply System ("WPPSS") and the WPPSS
participants are unenforceable because the participants did not have the
authority to enter into the agreements. While these decisions are not
specifically applicable to agreements entered into by public entities in
other states, they may cause a reexamination of the legal structure and
economic viability of certain projects financed by joint action power
agencies, which might exacerbate some of the problems referred to above
and possibly lead to legal proceedings questioning the enforceability of
agreements upon which payment of these bonds may depend.
Certain Series of the Trust contain Municipal Bonds which are
industrial revenue bonds ("IRBs"), including pollution control revenue
bonds, which are tax-exempt securities issued by states, municipalities,
public authorities or similar entities to finance the cost of acquiring,
constructing or improving various industrial projects. These projects
are usually operated by corporate entities. Issuers are obligated only
to pay amounts due on the IRBs to the extent that funds are available
from the unexpended proceeds of the IRBs or receipts or revenues of the
issuer under an arrangement between the issuer and the corporate operator
of a project. The arrangement may be in the form of a lease, installment
sale agreement, conditional sale agreement or loan agreement, but in each
case the payments to the issuer are designed to be sufficient to meet the
payments of amounts due on the IRBs. Regardless of the structure,
payment of IRBs is solely dependent upon the creditworthiness of the
corporate operator of the project or corporate guarantor. Corporate
operators or guarantors may be affected by many factors which may have
an adverse impact on the credit quality of the particular company or
industry. These include cyclicality of revenues and earnings, regulatory
and environmental restrictions, litigation resulting from accidents or
environmentally-caused illnesses, extensive competition and financial
deterioration resulting from leveraged buy-outs or takeovers. The IRBs
in the Series of the Trust may be subject to special or extraordinary
redemption provisions which may provide for redemption at par or, with
respect to original issue discount bonds, at issue price plus the amount
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of original issue discount accreted to the redemption date plus, if
applicable, a premium. The Sponsor cannot predict the causes or
likelihood of the redemption of IRBs or other Municipal Bonds in the
Series of the Trust prior to the stated maturity of such Municipal Bonds.
Certain Series of the Trust contain Municipal Bonds which are
obligations which are payable from and secured by revenues derived from
the ownership and operation of facilities such as airports, bridges,
turnpikes, port authorities, convention centers and arenas. The major
portion of an airport's gross operating income is generally derived from
fees received from signatory airlines pursuant to use agreements which
consist of annual payments for leases, occupancy of certain terminal
space and service fees. Airport operating income may therefore be
affected by the ability of the airlines to meet their obligations under
the use agreements. The air transport industry is experiencing
significant variations in earnings and traffic, due to increased
competition, excess capacity, increased costs, deregulation, traffic
constraints and other factors, and several airlines are experiencing
severe financial difficulties. The Sponsor cannot predict what effect
these industry conditions may have on airport revenues which are
dependent for payment on the financial condition of the airlines and
their usage of the particular airport facility. Similarly, payment on
Municipal Bonds related to other facilities is dependent on revenues from
the projects, such as user fees from ports, tolls on turnpikes and
bridges and rents from buildings. Therefore, payment may be adversely
affected by reduction in revenues due to such factors as increased cost
of maintenance, decreased use of a facility, lower cost of alternative
modes of transportation, scarcity of fuel and reduction or loss of rents.
Certain Series of the Trusts contain Municipal Bonds which are
obligations of issuers which are, or which govern the operation of,
schools, colleges and universities and whose revenues are derived mainly
from ad valorem taxes, or for higher education systems, from tuition,
dormitory revenues, grants and endorsements. General problems relating
to school bonds include litigation contesting the state constitutionality
of financing public education in part from ad valorem taxes, thereby
creating a disparity in educational funds available to schools in wealthy
areas and schools in poor areas. Litigation or legislation on this issue
may affect the sources of funds available for the payment of school bonds
in the Trusts. General problems relating to college and university
obligations would include the prospect of a declining percentage of the
population consisting of "college" age individuals, possible inability to
raise tuition and fees sufficiently to cover increased operating costs,
the uncertainty of continued receipt of Federal grants and state funding
and new government legislation or regulations which may adversely affect
the revenues or costs of such issuers. All of such issuers have been
experiencing certain of these problems in varying degrees. In addition,
the ability of universities and colleges to meet their obligations is
dependent upon various factors, including the size and diversity of their
sources of revenues, enrollment, reputation, management expertise, the
availability and restrictions on the use of endowments and other funds,
the quality and maintenance costs of campus facilities, and, in the case
of public institutions, the financial condition of the relevant state or
other governmental entity and its policies with respect to education.
The institution's ability to maintain enrollment levels will depend on
such factors as tuition costs, geographic location, geographic diversity
and quality of student body, quality of the faculty and the diversity of
program offerings.
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Certain Series of the Trust contain Municipal Bonds which are Urban
Redevelopment Bonds ("URBs"). URBs have generally been issued under bond
resolutions pursuant to which the revenues and receipts payable under the
arrangements with the operator of a particular project have been assigned
and pledged to purchasers. In some cases, a mortgage on the underlying
project may have been granted as security for the URBs. Regardless of
the structure, payment of the URBs is solely dependent upon the
creditworthiness of the operator of the project.
Certain of the Municipal Bonds in the Trust may be lease revenue
bonds whose revenues are derived from lease payments made by a
municipality or other political subdivision which is leasing equipment or
property for use in its operation. The risks associated with owning
Municipal Bonds of this nature include the possibility that appropriation
of funds for a particular project or equipment may be discontinued. The
Sponsor cannot predict the likelihood of nonappropriation of funds for
these types of lease revenue Municipal Bonds.
Certain Series of the Trust contain "zero coupon" bonds, i.e., an
original issue discount bond that does not provide for the payment of
current interest. Zero coupon bonds are purchased at a deep discount
because the buyer receives only the right to receive a final payment at
the maturity of the bond and does not receive any periodic interest
payments. The effect of owning deep discount bonds which do not make
current interest payments (such as the zero coupon bonds) is that a fixed
yield is earned not only on the original investment but also, in effect,
on all discount earned during the life of such obligation. This implicit
reinvestment of earnings at the same rate eliminates the risk of being
unable to reinvest the income on such obligation at a rate as high as the
implicit yield on the discount obligation, but at the same time
eliminates the holder's ability to reinvest at higher rates in the
future. For this reason, zero coupon bonds are subject to substantially
greater price fluctuations during periods of changing market interest
rates than are securities of comparable quality which pay interest
currently. For the Federal tax consequences of original issue discount
bonds such as the zero coupon bonds, see "Tax Status of the Trust."
Investors should be aware that many of the Municipal Bonds in the
Series of the Trust are subject to continuing requirements such as the
actual use of Municipal Bond proceeds or manner of operation of the
project financed from Municipal Bond proceeds that may affect the
exemption of interest on such Municipal Bonds from Federal income
taxation. Although at the time of issuance of each of the Municipal
Bonds in the Series of the Trust an opinion of bond counsel was rendered
as to the exemption of interest on such obligations from Federal income
taxation, there can be no assurance that the respective issuer or other
obligors on such obligations will fulfill the various continuing
requirements established upon issuance of the Municipal Bonds. A failure
to comply with such requirements may cause a determination that interest
on such obligations is subject to Federal income taxation, perhaps even
retroactively from the date of issuance of such Municipal Bonds, thereby
reducing the value of the Municipal Bonds and subjecting Unitholders to
unanticipated tax liabilities.
Federal bankruptcy statutes relating to the adjustment of debts of
political subdivisions and authorities of states of the United States
provide that, in certain circumstances, such subdivisions or authorities
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may be authorized to initiate bankruptcy proceedings without prior notice
to or consent of creditors, which proceedings could result in material
and adverse modification or alteration of the rights of holders of
obligations issued by such subdivisions or authorities.
Certain issues of the Municipal Bonds in some Series of the Trust
represent "moral obligations" of a governmental entity other than the
issuer. In the event that the issuer of the Municipal Bond defaults in
the repayment thereof, such other governmental entity lawfully may, but
is not obligated to, discharge the obligation of the issuer to repay such
Municipal Bond. If an issuer of moral obligation bonds is unable to meet
its obligations, the repayment of such Municipal Bonds becomes a moral
commitment but not a legal obligation of the state or municipality in
question. Even though the state may be called on to restore any deficits
in capital reserve funds of the agencies or authorities which issued the
bonds, any restoration generally requires appropriation by the State
legislature and accordingly does not constitute a legally enforceable
obligation or debt of the state. The agencies or authorities generally
have no taxing power.
To the best of the Sponsor's knowledge, as of the date of the
Prospectus, there is no litigation pending with respect to any Municipal
Bond which might reasonably be expected to have a material adverse effect
on the Trust or any Series thereof. Although the Sponsor is unable to
predict whether any litigation may be instituted, or if instituted,
whether such litigation might have a material adverse effect on the Trust
or any Series, the Trust received copies of the opinions of bond counsel
given to the issuing authorities at the time of original delivery of each
of the Municipal Bonds to the effect that the Municipal Bonds had been
validly issued and that the interest thereon is exempt from Federal
income taxes.
INSURANCE ON THE PORTFOLIOS
All Municipal Bonds in the portfolios of each Series of the Trust
are insured as to payment of interest and principal, when due, either by
a policy obtained by the Trust, the Sponsor or by the Bond issuer.
Series A through A-24 of the Kemper Tax-Exempt Insured Income Trust are
insured by AMBAC Indemnity and Series A-25 and subsequent Series of the
Kemper Tax-Exempt Insured Income Trust, Kemper Defined Funds Insured
National Series and EVEREN Unit Investment Trusts Insured National Series
are insured by Financial Guaranty, MBIA and other insurers. The
insurance policy obtained by the Trust for a Series is non-cancelable and
will continue in force so long as such Series of the Trust is in
existence, the insurer and/or the reinsures referred to below remain in
business and the Municipal Bonds described in the policy continue to be
held in such Series of the Trust. The premium for any insurance policy
or policies obtained by an issuer of Municipal Bonds has been paid in
advance by such issuer and any such policy or policies are non-cancelable
and will remain in force so long as the Municipal Bonds so insured are
outstanding and the insurer and/or insurers referred to below remain in
business. In those instances where Municipal Bond insurance is obtained
by the Sponsor or the issuer directly from an insurer, no premiums for
insurance are paid by the Trust and such bonds are not covered by the
Trust's policy. Non-payment of premiums on the policy obtained by the
Trust will not result in the cancellation of such insurance but will
force the insurer to take action against the Trustee to recover premium
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payments due it. Premium rates for each issue of Municipal Bonds
protected by the policy obtained by the Trust are fixed for the life of
the appropriate Series of the Trust.
The aforementioned insurance guarantees the scheduled payment of
principal and interest on all of the Municipal Bonds as they fall due.
It does not guarantee the market value of the Municipal Bonds or the
value of the Units of a Series of the Trust. The insurance obtained by
the Trust is only effective as to Municipal Bonds owned by and held in a
Series of the Trust and the price which an individual pays on acquisition
of Units, or receives on redemption or resale of Units, does not, except
as indicated below, include any element of value for the insurance
obtained by the Trust. Unitholders should recognize that in order to
receive any benefit from the portfolio insurance obtained by the Trust
they must be owners of the Units of a Series of the Trust at the time the
Trustee becomes entitled to receive any payment from the insurer for such
Series. Insurance obtained by the issuer of a Municipal Bond is
effective so long as the Municipal Bond is outstanding, whether or not
held by a Series of the Trust.
Pursuant to an irrevocable commitment of Financial Guaranty, the
Trustee, upon the sale of a Municipal Bond from Series A-25 (or any
subsequent Series) of the Kemper Tax-Exempt Insured Income Trust, Kemper
Defined Funds Insured National Series or EVEREN Unit Investment Trusts
covered under the Trust's insurance policy, has the right to obtain
permanent insurance (the "Permanent Insurance") with respect to such
Municipal Bond (i.e., insurance to the maturity of the Municipal Bond
regardless of the identity of the holder thereof) upon the payment of a
single predetermined insurance premium from the proceeds of the sale of
such Municipal Bond. Accordingly, every Municipal Bond in Series A-25
(or subsequent Series) of the Kemper Tax-Exempt Insured Income Trust,
Kemper Defined Funds Insured National Series or EVEREN Unit Investment
Trusts is eligible to be sold on an insured basis. It is expected that
the Trustee will exercise the right to obtain Permanent Insurance with
respect to Municipal Bonds in such Series only if upon such exercise the
Trust would receive net proceeds (i.e., the value of such Municipal Bond
if sold as an insured Municipal Bond less the insurance premium
attributable to the Permanent Insurance) from such sale in excess of the
sale proceeds if such Municipal Bond was sold on an uninsured basis. The
insurance premium with respect to each Municipal Bond is determined based
upon the insurability of each Municipal Bond as of the Date of Deposit
and will not be increased or decreased for any change in the
creditworthiness of such Municipal Bond's issuer.
Insurance obtained by the Trust, under normal circumstances, has no
effect on the price or redemption value of Units. It is the present
intention of the Evaluator to attribute a value to such insurance for the
purpose of computing the price or redemption value of Units only in
circumstances where the credit quality of an underlying Municipal Bond
has significantly deteriorated. Insurance obtained by the issuer of a
Municipal Bond is effective so long as such Municipal Bond is
outstanding. Therefore, any such insurance may be considered to
represent an element of market value in regard to the Municipal Bonds
thus insured, but the exact effect, if any, of this insurance on such
market value cannot be predicted.
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The value to be added to such Municipal Bonds shall be an amount
equal to the excess, if any, by which the net proceeds realized from the
sale of the Municipal Bonds on an insured basis exceeds the sum of
(i) the net proceeds realizable from the sale of the Municipal Bonds on
an uninsured basis plus (ii) in the case of Series A-25 and subsequent
Series of the Kemper Tax-Exempt Insured Income Trust, Kemper Defined
Funds Insured National Series or EVEREN Unit Investment Trusts the
premium attributable to the Permanent Insurance. The portfolio insurance
obtained by the Trust from AMBAC Indemnity for Series A through A-24 of
the Kemper Tax-Exempt Insured Income Trust is applicable only while the
Municipal Bonds remain in the Trust's portfolio. Consequently, the price
received by the Trust upon the disposition of any such Municipal Bond
will reflect a value placed upon it by the market as an uninsured
obligation rather than a value resulting from the insurance. Due to this
fact, the Sponsor will not direct the Trustee to dispose of Municipal
Bonds in Series A through A-24 of the Kemper Tax-Exempt Insured Income
Trust which are in default or imminent danger of default but to retain
such Municipal Bonds in the portfolio so that if a default in the payment
of interest or principal occurs the Trust may realize the benefits of the
insurance.
The Sponsor will instruct the Trustee not to sell Municipal Bonds
from Series A-25 or subsequent Series of the Kemper Tax-Exempt Insured
Income Trust, Kemper Defined Funds Insured National Series or EVEREN Unit
Investment Trusts Insured National Series to effect redemptions or for
any reason but rather to retain them in the portfolio unless value
attributable to the Permanent Insurance can be realized upon sale. See
"Investment Supervision."
Financial Guaranty Insurance Company. Financial Guaranty is a
wholly-owned subsidiary of FGIC Corporation (the "Corporation"), a
Delaware holding company. The Corporation is a wholly-owned subsidiary
is General Electric Capital Corporation ("GECC"). Neither the
Corporation nor GECC is obligated to pay the debt of or the claims
against Financial Guaranty. Financial Guaranty is domiciled in the State
of New York and is subject to regulation by the State of New York
Insurance Department. As of June 30, 1996, the total capital and surplus
of Financial Guaranty was approximately $1,069,597,000. Copies of
Financial Guaranty's financial statements, prepared on the basis of
statutory accounting principles, and the Corporation's financial
statements, prepared on the basis of generally accepted accounting
principles, may be obtained by writing to Financial Guaranty at 115
Broadway, New York, New York 10006, Attention: Communications Department
or to the New State Insurance Department at 160 West Broadway, 18th
Floor, New York, New York 10013, Attention: Property Companies Bureau
(telephone number (212) 621-0389). Financial Guaranty's telephone number
is (212) 312-3000.
In addition, Financial Guaranty Insurance Company is currently
authorized to write insurance in all 50 states and the District of
Columbia.
The information relating to Financial Guaranty contained above has
been furnished by such corporation. The financial information contained
herein with respect to such corporation is unaudited but appears in
reports or other materials filed with state insurance regulatory
authorities and is subject to audit and review by such authorities. No
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representation is made herein as to the accuracy or adequacy of such
information or as to the absence of material adverse changes in such
information subsequent to the date thereof but the Sponsor is not aware
that the information herein is inaccurate or incomplete.
AMBAC Indemnity Corporation. AMBAC Indemnity Corporation ("AMBAC")
is a Wisconsin-domiciled stock insurance company, regulated by the office
of Commissioner of Insurance of Wisconsin, and licensed to do business in
50 states, the District of Columbia and the Commonwealth of Puerto Rico,
with admitted assets (unaudited) of approximately $2,440,000,000 and
statutory capital (unaudited) of approximately $1,387,000,000 as of
March 31, 1996. Statutory capital consists of statutory contingency
reserve and policyholders' surplus. AMBAC Indemnity is a wholly-owned
subsidiary of AMBAC Inc., a 100% publicly held company. Moody's
Investors Service, Inc. and Standard & Poor's Corporation have both
assigned a AAA claims-paying ability rating to AMBAC. Copies of AMBAC's
financial statements prepared in accordance with statutory accounting
standards are available from AMBAC. The address of AMBAC's
administrative offices and its telephone number are One State Street
Plaza, 17 Floor, New York, New York 10004 and (212) 668-0340. AMBAC has
entered into quota share reinsurance agreements under which a percentage
of the insurance underwritten pursuant to certain municipal bank
insurance programs of AMBAC Indemnity has been and will be assumed by a
number of foreign and domestic unaffiliated reinsures.
MBIA Insurance Corporation. MBIA Insurance Corporation ("MBIA
Corporation") is the principal operating subsidiary of MBIA, Inc., a New
York Stock Exchange listed Company. MBIA, Inc. is obligated to pay the
debts of or claims against MBIA Corporation. MBIA Corporation, which
commenced municipal bond insurance operations on January 5, 1987, is a
limited liability corporation rather than a several liability
association. MBIA Corporation is domiciled in the State of New York and
licensed to do business in all 50 states, the District of Columbia and
the Commonwealth of Puerto Rico.
As of September 30, 1996 MBIA Corporation had admitted assets of
$4.3 billion (unaudited), total liabilities of $2.9 billion (unaudited),
and total capital and surplus of $1.4 billion (unaudited) prepared in
accordance with statutory accounting practices prescribed or permitted by
insurance regulatory authorities. Standard & Poor's has rated the claims-
paying ability of MBIA "AAA." Copies of MBIA Corporation's financial
statements prepared in accordance with statutory accounting practices are
available from MBIA Corporation. The address of MBIA Corporation is 113
King Street, Armonk, New York 10504.
Effective December 31, 1993, MBIA, Inc. acquired Bond Investors
Group, Inc. On January 5, 1990, the Insurer acquired all of the
outstanding stock of Bond Investors Group, Inc., the parent of BIG, now
known as MBIA Insurance Corp. of Illinois. Through a reinsurance
agreement, BIG has ceded all of its net insured risks, as well as its
unearned premium and contingency reserves, to the Insurer and the Insurer
has reinsured BIG's net outstanding exposure.
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Moody's Investors Service rates all bonds issues insured by MBIA
"Aaa" and short-term loans "MIG1," both designated to be of the highest
quality. Standard & Poor's rates all new issues insured by MBIA "AAA."
Financial Security Assurance, Inc.. Financial Security Assurance
("Financial Security" or "FSA") is a monoline insurance company
incorporated on March 16, 1984 under the laws of the State of New York.
The operations of Financial Security commenced on July 25, 1985, and
Financial Security received its New York State insurance license on
September 23, 1985. Financial Security is licensed to engage in
financial guaranty insurance business in 50 states, the District of
Columbia and Puerto Rico.
Financial Security and its subsidiaries are engaged in the business
of writing financial guaranty insurance, principally in respect of asset-
backed and other collateralized securities offered in domestic and
foreign markets. Financial Security and its subsidiaries also write
financial guaranty insurance in respect of municipal and other
obligations and reinsure financial guaranty insurance policies written by
other leading insurance companies. In general, financial guaranty
insurance consists of the issuance of a guaranty of scheduled payments of
an issuer's securities, thereby enhancing the credit rating of these
securities, in consideration for payment of a premium to the insurer.
Financial Security insures both newly issued securities sold in the
primary market and outstanding securities sold in the secondary market
that satisfy Financial Security's underwriting criteria.
Financial Security is a wholly owned subsidiary of Financial
Security Assurance Holdings Ltd. ("Holdings"), a New York Stock Exchange
listed company. Major shareholders of Holdings include Fund American
Enterprises Holdings, Inc., U S WEST Capital Corporation and The Tokio
Marine and Fire Insurance Co., Ltd. No shareholder of Holdings is
obligated to pay any debt of Financial Security or any claim under any
insurance policy issued by Financial Security or to make any additional
contribution to the capital of Financial Security. Financial Security is
domiciled in the State of New York and is subject to regulation by the
State of New York Insurance Department.
As of March 31, 1996 the total policyholders' surplus and
contingency reserves and the total unearned premium reserve,
respectively, of Financial Security and its consolidated subsidiaries
were, in accordance with generally accepted accounting principles,
approximately $650,052,000 (unaudited) and $387,239,000 (unaudited), and
the total shareholders' equity and the unearned premium reserve,
respectively, of Financial Security and its consolidated subsidiaries
were, in accordance with generally accepted accounting principles,
approximately $779,177,000 (unaudited) and $340,226,000 (unaudited).
Copies of Financial Security's financial statements may be obtained
by writing of Financial Security at 350 Park Avenue, New York, New York
10022, attention Communications Department. Financial Security's and its
telephone number is (212) 826-0100.
Pursuant to an intercompany agreement, liabilities on financial
guaranty insurance written by Financial Security or any of its domestic
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operating insurance company subsidiaries are reinsured among such
companies on an agreed-upon percentage substantially proportional to
their respective capital, surplus and reserves, subject to applicable
statutory risk limitations. In addition, Financial Security reinsures a
portion of its liabilities under certain of its financial guaranty
insurance policies with unaffiliated reinsures under various quota share
treaties and on a transaction-by-transaction basis. Such reinsurance is
utilized by Financial Security as a risk management device and to comply
with certain statutory and rating agency requirements; it does not alter
or limit Financial Security's obligations under any financial guaranty
insurance policy.
Financial Security's claims-paying ability is rated "Aaa" by Moody's
Investors Service, Inc., and "AAA" by Standard & Poor's, Nippon Investors
Service Inc. and Standard & Poor's (Australia) Pty. Ltd. Such ratings
reflect only the views of the respective rating agencies, are not
recommendations to buy, sell or hold securities and are subject to
revision or withdrawal at any time by such rating agencies.
Capital Guaranty Insurance Company. Capital Guaranty Insurance
Company ("Capital Guaranty" or "CGIC") is a "Aaa/AAA" rated monoline
stock insurance company incorporated in the State of Maryland, and is a
wholly owned subsidiary of Capital Guaranty Corporation, a Maryland
insurance holding company. Capital Guaranty Corporation is a publicly
owned company whose shares are traded on the New York Stock Exchange.
Capital Guaranty is authorized to provide insurance in all 50
states, the District of Columbia, the Commonwealth of Puerto Rico, Guam
and the U.S. Virgin Islands. Capital Guaranty focuses on insuring
municipal securities and provides policies which guaranty the timely
payment of principal and interest when due for payment on new issue and
secondary market issue municipal bond transactions. Capital Guaranty's
claims-paying ability is rated "Triple-A" by both Moody's and Standard &
Poor's.
As of September 30, 1995, Capital Guaranty had more than $19.0
billion in net exposure outstanding (excluding defeased issues). The
total statutory policyholders' surplus and contingency reserve of Capital
Guaranty was $204,642,000 and the total admitted assets were $326,802,226
as reported to the Insurance Department of the State of Maryland as of
September 30, 1995.
Financial statements for Capital Guaranty Insurance Company, that
have been prepared in accordance with statutory insurance accounting
standards, are available upon request. The address of Capital Guaranty's
headquarters is Steuart Tower, 22nd Floor, One Market Plaza, San
Francisco, CA 94105-1413 and the telephone number is (415) 955-8000.
In order to be in a Series of the Trust, Municipal Bonds must be
insured by the issuer thereof or be eligible for the insurance obtained
by the Series of the Trust. In determining eligibility, the company
insuring the portfolio has applied its own standards which correspond
generally to the standards it normally uses in establishing the
insurability of new issues of municipal bonds and which are not
necessarily the criteria used in regard to the selection of Municipal
Bonds by the Sponsor. To the extent the standards of the insurer are
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more restrictive than those of the Sponsor, the previously stated Trust
investment criteria have been limited.
On the date shown under "Essential Information" in Part Two, the
Estimated Long-Term and Current Returns per Unit for the Trust, after
payment of the insurance premium, if any, were as indicated. The
Estimated Long-Term and Current Returns per Unit for a trust with an
identical portfolio without the insurance obtained by the Trust would
have been higher on such date.
An objective of the portfolio insurance obtained by the Trust is to
obtain a higher yield on the portfolio of the Series of the Trust than
would be available if all the Municipal Bonds in such portfolio had
Standard & Poor's "AAA" rating and/or Moody's "Aaa" rating(s), while
having the protection of insurance of prompt payment of interest and
principal, when due, on the Municipal Bonds. There is, of course, no
certainty that this result will be achieved. Municipal Bonds in a Series
of the Trust which have been insured by the issuer (all of which are
rated "AAA" by Standard & Poor's and/or "Aaa" by Moody's) may or may not
have a higher yield than uninsured bonds rated "AAA" by Standard & Poor's
or "Aaa" by Moody's. In selecting such Municipal Bonds for the
portfolio, the Sponsor has applied the criteria described above.
In the event of nonpayment of interest or principal, when due, in
respect of a Municipal Bond, the appropriate insurer shall make such
payment not later than 30 days after it has been notified that such
nonpayment has occurred or is threatened (but not earlier than the date
such payment is due). The insurer, as regards any payment it may make,
will succeed to the rights of the Trustee in respect thereof.
The Internal Revenue Service has issued a letter ruling which holds,
in effect, that insurance proceeds representing maturity interest on
defaulted municipal obligations paid to municipal bond funds
substantially similar to the Trust, under policy provisions substantially
identical to the policies described herein, will be excludable from
Federal gross income under Section 103(a)(1) of the Internal Revenue
Code. Holders of Units in the Trust should discuss with their tax
advisers the degree of reliance which they may place on this letter
ruling. Furthermore, Chapman and Cutler, Counsel for the Sponsor, have
given an opinion to the effect that such payment of proceeds would be
excludable from Federal gross income to the same extent that such
interest would have been so excludable if paid by the issuer of the
defaulted obligations. See "Tax Status of the Trust."
DISTRIBUTION REINVESTMENT
Each Unitholder of a Trust Fund may elect to have distributions of
principal (including capital gains, if any) or interest or both
automatically invested without charge in shares of any mutual fund
registered in such Unitholder's state of residence which is underwritten
or advised by Zurich Kemper Investments, Inc. (the "Kemper Funds"), other
than those Kemper Funds sold with a contingent deferred sales charge.
Since the portfolio securities and investment objectives of such Kemper
Funds may differ significantly from that of the Trust Funds, Unitholders
should carefully consider the consequences, including the fact that
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distributions from such Kemper Funds may be taxable, before selecting
such Kemper Funds for reinvestment. Detailed information with respect to
the investment objectives and the management of the Funds is contained in
their respective prospectuses, which can be obtained from and appropriate
Trust Fund Underwriter upon request. An investor should read the
prospectus of the reinvestment fund selected prior to making the election
to reinvest. Unitholders who desire to have such distributions
automatically reinvested should inform their broker at the time of
purchase or should file with the Program Agent referred to below a
written notice of election.
Unitholders who are receiving distributions in cash may elect to
participate in distribution reinvestment by filing with the Program Agent
an election to have such distributions reinvested without charge. Such
election must be received by the Program Agent at least ten days prior to
the Record Date applicable to any distribution in order to be in effect
for such Record Date. Any such election shall remaining effect until a
subsequent notice is received by the Program Agent (See "Distributions to
Unitholders").
The Program Agent is the Trustee. All inquiries concerning
participation in distribution reinvestment should be directed to the
Program Agent at its unit investment trust division office.
INTEREST AND ESTIMATED LONG-TERM AND CURRENT RETURNS
As of the opening of business on the date indicated therein, the
Estimated Current Returns, if applicable, and the Estimated Long-Term
Returns for the Trust were as set forth under "Essential Information" in
Part Two of this Prospectus. Estimated Current Returns are calculated by
dividing the estimated net annual interest income per Unit by the Public
Offering Price. The estimated net annual interest income per Unit will
vary with changes in fees and expenses of the Trust and with the
principal prepayment, redemption, maturity, exchange or sale of
Securities while the Public Offering Price will vary with changes in the
offering price of the underlying Securities and with changes in Purchased
Interest, if any; therefore, there is no assurance that the present
Estimated Current Returns will be realized in the future. Estimated Long-
Term Returns are calculated using a formula which (1) takes into
consideration, and determines and factors in the relative weightings of,
the market values, yields (which takes into account the amortization of
premiums and the accretion of discounts) and estimated retirements of all
of the Securities in the Trust and (2) takes into account the expenses
and sales charge associated with the Trust Unit. Since the market values
and estimated retirements of the Securities and the expenses of the Trust
will change, there is no assurance that the present Estimated Long-Term
Returns will be realized in the future. Estimated Current Returns and
Estimated Long-Term Returns are expected to differ because the
calculation of Estimated Long-Term Returns reflects the estimated date
and amount of principal returned while Estimated Current Returns
calculations include only net annual interest income and Public Offering
Price.
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TAX STATUS OF THE TRUST
All Municipal Bonds in the Trust were accompanied by copies of
opinions of bond counsel given to the issuers thereof at the time of
original delivery of the Municipal Bonds to the effect that the interest
thereon is exempt from all Federal income taxes. In connection with the
offering of Units of the Trust Funds, neither the Sponsor, the Trustee,
the auditors nor their respective counsel have made any review of the
proceedings relating to the issuance of the Municipal Bonds or the basis
for such opinions. Gain realized on the sale or redemption of the
Municipal Bonds by the Trustee or of a Unit by a Unitholder is, however,
includable in gross income for Federal income tax purposes (subject to
various non-recognition provisions of the Internal Revenue Code of 1986,
as amended (the "Code")). Such gain does not include any amounts
received in respect of accrued interest or earned original issue
discount, if any. It should be noted that, as further described below,
accretion of market discount on tax-exempt bonds to taxation as ordinary
income. Market discount can arise based on the price a Trust Fund pays
for Municipal Bonds or the price a Unitholder pays for his or her Units.
In addition, bond counsel to the issuing authorities rendered opinions as
to the exemption of interest on such Bonds, when held by residents of the
state in which the issuers of such bonds are located, from state income
taxes and, where applicable, local income taxes.
In the opinion of Chapman and Cutler, counsel for the Sponsor:
Each series of the Trust is not an association taxable as a
corporation for federal income tax purposes and interest and accrued
original issue discount on Bonds which is excludable from gross
income under the Code will retain its status when distributed to
Unitholders; however, such interest may be taken into account in
computing the alternative minimum tax, an additional tax on branches
of foreign corporations and the environmental tax (the "Superfund
Tax"), as noted below.
Exemption of interest and accrued original issue discount on
any Municipal Bonds for Federal income tax purposes does not
necessarily result in tax-exemption under the laws of the several
states as such laws vary with respect to the taxation of such
securities and in many states all or part of such interest and
accrued original issue discount may be subject to tax.
Each Unitholder is considered to be the owner of a pro rata
portion of each asset of the respective Series of the Trust in the
proportion that the number of Units of such Trust held by him bears
to the total number of Units outstanding of such Trust under subpart
E, subchapter J of chapter 1 of the Code and will have a taxable
event when such Trust disposes of a Bond, or when the Unitholder
redeems or sells his Units. Unitholders must reduce the tax basis
of their Units for their share of accrued interest received by a
Trust, if any, on Bonds delivered after the Unitholders pay for
their Units to the extent that such interest accrued on such Bonds
during the period from the Unitholder's settlement date to the date
such Bonds are delivered to a Trust and, consequently, such
Unitholders may have an increase in taxable gain or reduction in
capital loss upon the disposition of such Units. Gain or loss upon
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the sale or redemption of Units is measured by comparing the
proceeds of such sale or redemption with the adjusted basis of the
Units. If the Trustee disposes of Bonds (whether by sale, payment
on maturity, redemption or otherwise), gain or loss is recognized to
the Unitholder (subject to various non-recognition provisions of the
Code). The amount of any such gain or loss is measured by comparing
the Unitholder's pro rata share of the total proceeds from such
disposition with the Unitholder's basis for his or her fractional
interest in the asset disposed of. In the case of a Unitholder who
purchases Units, such basis (before adjustment for earned original
issue discount and amortized bond premium, if any) is determined by
apportioning the cost of the Units among each of the Trust's assets
ratably according to value as of the date of acquisition of the
Units. The basis of each Unit and of each Municipal Bond which was
issued with original issue discount must be increased by the amount
of the accrued original issue discount (and market discount, if the
Unitholder elects to include market discount in income as it
accrues) and the basis of each Unit and of the Unitholder's interest
in each Municipal Bond which was acquired by such Unitholder at a
premium must be reduced by the annual amortization of Municipal Bond
premium. The tax basis reduction requirements of the Code relating
to amortization of bond premium may, under some circumstances,
result in the Unitholder realizing a taxable gain when his Units are
sold or redeemed for an amount equal to his original cost.
Any proceeds paid under individual insurance policies obtained
by issuers of Bonds or under any insurance policies obtained by the
Trust or the Sponsor which represent maturing interest on defaulted
obligations held by the Trustee will be excludable from Federal
gross income if, and to the same extent as, such interest would have
been so excludable if paid in the normal course by the issuer of the
defaulted obligations; provided that, at the time such policies are
purchased, the amounts paid for such policies are reasonable,
customary and consistent with the reasonable expectation that the
issuer of the obligations, rather than the insurer, will pay debt
service on the obligations.
Sections 1288 and 1272 of the Code provide a complex set of rules
governing the accrual of original issue discount. These rules provide
that original issue discount accrues either on the basis of a constant
compound interest rate or ratably over the term of the Municipal Bond,
depending on the date the Municipal Bond was issued. In addition,
special rules apply if the purchase price of a Municipal Bond exceeds the
original issue price plus the amount of original issue discount which
would have previously accrued based upon its issue price (its "adjusted
issue price") to prior owners. The application of these rules will also
vary depending on the value of the Municipal Bond on the date a
Unitholder acquires his Units, and the price the Unitholder pays for his
Units. Unitholders should consult with their tax advisers regarding
these rules and their application.
"The Revenue Reconciliation Act of 1993" (the "Tax Act") subjects
tax-exempt bonds to the market discount rules of the Code effective for
bonds purchased after April 30, 1993. In general, market discount is the
amount (if any) by which the stated redemption price at maturity exceeds
an investor's purchase price (except to the extent that such difference,
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if any, is attributable to original issue discount not yet accrued)
subject to a statutory "de minimis" rule. Market discount can arise
based on the price a Trust pays for Municipal Bonds or the price a
Unitholder pays for his or her Units. Under the Tax Act, accretion of
market discount is taxable as ordinary income; under prior law the
accretion had been treated as capital gain. Market discount that
accretes while a Trust Fund holds a Municipal Bond would be recognized as
ordinary income by the Unitholders when principal payments are received
on the Municipal Bond, upon sale or at redemption (including early
redemption), or upon sale or redemption of his or her Units, unless a
Unitholder elects to include market discount in taxable income as it
accrues. The market discount rules are complex and Unitholders should
consult their tax advisers regarding these rules and their application.
In the case of certain corporations, the alternative minimum tax and
the Superfund Tax depend upon the corporation's alternative minimum
taxable income, which is the corporation's taxable income with certain
adjustments. One of the adjustment items used in computing the
alternative minimum taxable income and the Superfund Tax of a corporation
(other than an S Corporation, Regulated Investment Company, Real Estate
Investment Trust, or REMIC) is an amount equal to 75% of the excess of
such corporation's "adjusted current earnings" over an amount equal to
its alternative minimum taxable income (before such adjustment item and
the alternative tax net operating loss deduction). "Adjusted current
earnings" includes all tax-exempt interest, including interest on all of
the Bonds in a Trust and tax-exempt original issue discount. Unitholders
should consult their tax advisers with respect to the particular tax
consequences to them including the corporate alternative minimum tax, the
Superfund Tax and the branch profits tax imposed by Section 884 of the
Code.
Counsel for the Sponsor has also advised that under Section 265 of
the Code, interest on indebtedness incurred or continued to purchase or
carry Units of a Trust is not deductible for Federal income tax purposes.
The Internal Revenue Service has taken the position that such
indebtedness need not be directly traceable to the purchase or carrying
of Units (however, these rules generally do not apply to interest paid on
indebtedness incurred to purchase or improve a personal residence or to
purchase goods or services for personal consumption). Also, under
Section 265 of the Code, certain financial institutions that acquire
units would generally not be able to deduct any of the interest expense
attributable to ownership of such Units. On December 7, 1995 the U.S.
Treasury Department released proposed legislation that, if adopted, would
generally extend the financial institution rules to all corporations,
effective for obligations acquired after the date of announcement.
Investors with questions regarding these issues should consult with their
tax advisers.
In the case of certain Municipal Bonds in certain Series of the
Trust, the opinions of bond counsel indicate that interest on such
securities received by a "substantial user" of the facilities being
financed with the proceeds of these securities or persons related
thereto, for periods while such securities are held by such a user or
related person, will not be excludable from Federal gross income,
although interest on such securities received by others would be
excludable from Federal gross income. "Substantial user" and "related
person" are defined under the Code and U.S. Treasury Regulations. Any
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<PAGE>
person who believes that he or she may be a "substantial user" or a
"related person" as so defined should contact his or her tax adviser.
In the case of corporations, the alternative tax rate applicable to
long-term capital gains is 35% effective for long-term capital gains
realized in taxable years beginning on or after January 1, 1993. For
taxpayers other than corporations, net capital gains are subject to a
maximum marginal stated tax rate of 28%. However, it should be noted
that legislative proposals are introduced from time to time that affect
tax rates and could affect relative differences at which ordinary income
and capital gains are taxed. Under the Code, taxpayers must disclose to
the Internal Revenue Service the amount of tax-exempt interest earned
during the year.
All statements of law in the Prospectus concerning exclusion from
gross income for Federal, state or other tax purposes are the opinions of
counsel and are to be so construed.
At the respective times of issuance of the Bonds, opinions relating
to the validity thereof and to the exclusion of interest thereon from
Federal gross income are rendered by bond counsel to the respective
issuing authorities. Neither the Sponsor nor Chapman and Cutler has made
any special review for the Trust Funds of the proceedings relating to the
issuance of the Bonds or of the basis for such opinions.
Section 86 of the Code, in general, provides that fifty percent of
Social Security benefits are includible in gross income to the extent
that the sum of "modified adjusted gross income" plus fifty percent of
the Social Security benefits received exceeds a "base amount." The base
amount is $25,000 for unmarried taxpayers, $32,000 for married taxpayers
filing a joint return and zero for married taxpayers who do not live
apart at all times during the taxable year and who file separate returns.
Modified adjusted gross income is adjusted gross income determined
without regard to certain otherwise allowable deductions and exclusions
from gross income and by including tax-exempt interest. To the extent
that Social Security benefits are includible in gross income, they will
be treated as any other item of gross income.
In addition, under the Tax Act, for taxable years beginning after
December 31,1993, up to eighty-five percent of Social Security benefits
are includible in gross income to the extent that the sum of "modified
adjusted gross income" plus fifty percent of Social Security benefits
received exceeds an "adjusted base amount." The adjusted base amount is
$34,000 for married taxpayers, $44,000 for married taxpayers filing a
joint return and zero for married taxpayers who do not live apart at all
times during the taxable year and who file separate returns.
Although tax-exempt interest is included in modified adjusted gross
income solely for the purpose of determining what portion, if any, of
Social Security benefits will be included in gross income, no tax-exempt
interest, including that received from the Trust, will be subject to tax.
A taxpayer whose adjusted gross income already exceeds the base amount or
the adjusted base amount must include fifty percent or eighty-five
percent, respectively of his Social Security benefits in gross income
whether or not he receives any tax-exempt interest. A taxpayer whose
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modified adjusted gross income (after inclusion of tax-exempt interest)
does not exceed the base amount need not include any Social Security
benefits in gross income.
Ownership of the Units may result in collateral federal income tax
consequences to certain taxpayers, including, without limitation,
corporations subject to either the environmental tax or the branch
profits tax, financial institutions, certain insurance companies, certain
S corporations, individual recipients of Social Security or Railroad
Retirement benefits and taxpayers who may be deemed to have incurred (or
continued) indebtedness to purchase or carry tax-exempt obligations.
Prospective investors should consult their tax advisors as to the
applicability of any collateral consequences. On December 7, 1995, the
U.S. Treasury Department released proposed legislation that, if adopted,
could affect the United States federal income taxation of non-United
States Unitholders and the portion of the Trusts' income allocable to non-
United States Unitholders.
The exemption of interest on state and local obligations for Federal
income tax purposes discussed above does not necessarily result in
exemption under the income or other tax laws of any state or city. The
laws of the several states vary with respect to the taxation of such
obligations.
TAX REPORTING AND REALLOCATION
Because the Trust receives interest and makes monthly distributions
based upon such Trust's expected total collections of interest and any
anticipated expenses, certain tax reporting consequences may arise. The
Trust is required to report Unitholder information to the Internal
Revenue Service ("IRS"), based upon the actual collection of interest by
such Trust on the securities in such Trust, without regard to such Trust,
without regard to such Trust's expenses or to such Trust's payments to
Unitholders during the year. If distributions to Unitholders exceed
interest collected, the difference will be reported as a return of
principal which will reduce a Unitholder's cost basis in its Units (and
its pro rata interest in the securities in the Trust). A Unitholder must
include in taxable income the amount of income reported by a Trust to the
IRS regardless of the amount distributed to such Unitholder. If a
Unitholder's share of taxable income exceeds income distributions made by
a Trust to such Unitholder, such excess is in all likelihood attributable
to the payment of miscellaneous expenses of such Trust which will not be
deductible by an individual Unitholder as an itemized deduction except to
the extent that the total amount of certain itemized deductions, such as
investments expenses (which would include the Unitholder's share of Trust
expenses), tax return preparation fees and employee business expenses,
exceeds 2% of such Unitholder's adjusted gross income. Alternatively, in
certain cases, such excess may represent an increase in the Unitholder's
tax basis in the Units owned. Investors with questions regarding these
issues should consult with their tax advisors.
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PUBLIC OFFERING OF UNITS
Public Offering Price. Units of each Series of the Trust are
offered at the Public Offering Price, plus accrued interest to the
expected settlement date (Daily Accrued Interest for certain Series).
The Public Offering Price per Unit of a Series is equal to the aggregate
bid side evaluation of the Municipal Bonds in the Series' portfolio (as
determined pursuant to the terms of a contract with the Evaluator, by
Cantor Fitzgerald & Co., a non-affiliated firm regularly engaged in the
business of evaluating, quoting or appraising comparable securities),
plus or minus cash, if any, in the Principal Account, held or owned by
the Series, divided by the number of outstanding Units of that Series of
the Trust, plus Purchased Interest, if any, plus the sales charge
applicable. The sales charge is based upon the dollar weighted average
maturity of the Trust and is determined in accordance with the table set
forth below. For purposes of this computation, Municipal Bonds will be
deemed to mature on their expressed maturity dates unless: (a) the
Municipal Bonds have been called for redemption or funds or securities
have been placed in escrow to redeem them on an earlier call date, in
which case such call date will be deemed to be the date upon which they
mature; or (b) such Municipal Bonds are subject to a "mandatory tender,"
in which case such mandatory tender will be deemed to be the date upon
which they mature. The effect of this method of sales charge computation
will be that different sales charge rates will be applied to the Trust
based upon the dollar weighted average maturity of such Trust's
portfolio, in accordance with the following schedule:
<TABLE>
<CAPTION>
PERCENT OF
DOLLAR PUBLIC PERCENT OF NET
WEIGHTED AVERAGE OFFERING AMOUNT
YEARS TO MATURITY PRICE INVESTED
----------------- ------------- --------------
<S> <C> <C>
1 to 3.99 years 2.00% 2.041%
4 to 7.99 years 3.50 3.627
8 to 14.99 years 4.50 4.712
15 or more years 5.50 5.820
</TABLE>
The sales charge per Unit will be reduced as set forth below:
<TABLE>
<CAPTION>
DOLLAR WEIGHTED AVERAGE
YEARS TO MATURITY*
4 TO 7.99 8 TO 14.99 15 OR MORE
--------- ---------- ----------
AMOUNT OF INVESTMENT SALES CHARGE (% OF PUBLIC OFFERING PRICE)
-------------------- -----------------------------------------
<S> <C> <C> <C>
$1,000 to $99,999 3.50% 4.50% 5.50%
$100,000 to $499,999 3.25 4.25 5.00
$500,000 to $999,999 3.00 4.00 4.50
$1,000,000 or more 2.75 3.75 4.00
</TABLE>
-----------------
* If the dollar weighted average maturity of a Trust is from 1 to 3.99
years, the sales charge is 2% and 1.5% of the Public Offering Price for
purchases of $1 to $249,999 and $250,000 or more, respectively.
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The reduced sales charge as shown on the preceding charts will apply
to all purchases of Units on any one day by the same purchases from the
same dealer, and for this purpose, purchases of Units of a Series of the
Trust will be aggregated with concurrent purchases of Units of any other
unit investment trust that may be offered by the Sponsor. Additionally,
Units purchased in the name of a spouse or child (under 21) of such
purchaser will be deemed to be additional purchases by such purchaser.
The reduced sales charge will also be applicable to a trust or other
fiduciary purchasing for a single trust estate or single fiduciary
account.
The Sponsor intends to permit officers, directors and employees of
the Sponsor and Evaluator and, at the discretion of the Sponsor,
registered representatives of selling firms to purchase Units of the
Trusts without a sales charge, although a transaction processing fee may
be imposed on such trades.
Units may be purchased at the Public Offering Price less the
concession the Sponsor typically allows to dealers and other selling
agents for purchases (see "Public Distribution of Units") by investors
who purchase Units through registered investment advisers, certified
financial planners or registered broker-dealers who in each case either
charge periodic fees for financial planning, investment advisory or asset
management services, or provide such services in connection with the
establishment of an investment account for which a comprehensive "wrap
fee" charge is imposed.
The Public Offering Price on the date shown on the cover page of
Part Two of the Prospectus or on any subsequent date will vary from the
amounts stated under "Essential Information" in Part Two in accordance
with fluctuations in the prices of the underlying Municipal Bonds. The
aggregate bid side evaluation of the Municipal Bonds shall be determined
(a) on the basis of current bid prices of the Municipal Bonds, (b) if bid
prices are not available for any particular Municipal Bond, on the basis
of current bid prices for comparable bonds, (c) by determining the value
of the Municipal Bonds on the bid side of the market by appraisal, or
(d) by any combination of the above. Except as described in "Insurance
on the Portfolios" above, the Evaluator will not attribute any value to
the insurance obtained by the Trust. On the other hand, the value of
insurance obtained by an issuer of Municipal Bonds or by the Sponsor is
reflected and included in the market value of such Municipal Bonds.
In any case, the Evaluator will consider the ability of an insurer
to meet its commitments under the Trust's insurance policy (if any). For
example, if the Trust were to hold the Municipal Bonds of a municipality
which had significantly deteriorated in credit quality, the Evaluator
would first consider in its evaluation the market price of the Municipal
Bonds at their lower credit rating. The Evaluator would also attribute a
value to the insurance feature of the Municipal Bonds which would be
equal to the difference between the market value of such Municipal Bonds
and the market value of bonds of a similar nature which were of
investment grade rating. It is the position of the Sponsor that this is
a fair method of valuing insured Municipal Bonds and reflects a proper
valuation method in accordance with the provisions of the Investment
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Company Act of 1940. For a description of the circumstances under which
a full or partial suspension of the right of Unitholders to redeem their
Units may occur, see "Redemption."
The foregoing evaluations and computations shall be made as of the
Evaluation Time stated under "Essential Information" in Part Two, on each
business day effective for all sales made during the preceding 24-hour
period, and for purposes of resales and repurchases of Units.
The interest on the Municipal Bonds in each Series of the Trust,
less the estimated fees and expenses, is estimated to accrue in the
annual amounts per Unit set forth under "Essential Information" in Part
Two. The amount of net interest income which accrues per Unit may change
as Municipal Bonds mature or are redeemed, exchanged or sold, or as the
expenses of a Series of the Trust change or as the number of outstanding
Units of such Series changes.
Payment for Units must be made on or before the third business day
following purchase (the "settlement date"). A purchaser becomes the
owner of Units on the settlement date. If a Unitholder desires to have
certificates representing Units purchased, such certificates will be
delivered as soon as possible following his written request therefor.
For information with respect to redemption of Units purchased, but as to
which certificates requested have not been received, see "Redemption"
below.
Accrued Interest. Included in the Public Offering Price of Units of
Kemper Tax-Exempt Insured Income Trust is accrued interest as described
herein. Accrued Interest consists of two elements. The first arises as
a result of accrued interest which is the accumulation of unpaid interest
on a bond from the last day on which interest thereon was paid. Interest
on Bonds in the Trust Funds is actually paid either monthly or semi-
annually to the Trust Fund. However, interest on the Bonds in the Trust
Funds is accounted for daily on an accrual basis. Because of this, a
Trust Fund always has an amount of interest earned but not yet collected
by the Trustee because of coupons that are not yet due. For this reason,
the Public Offering Price of Units will have added to it the
proportionate share of accrued and undistributed interest to the date of
settlement.
The Trustee will advance the amount of accrued interest as of the
First Settlement Date and the same will be distributed to Sponsor. Such
advance will be repaid to the Trustee through the first receipts of
interest received on the Municipal Bonds. Consequently, the amount of
accrued interest to be added to the Public Offering Price of Units will
include only accrued interest arising after the First Settlement Date of
a Trust Fund, less any distributions from the Interest Account subsequent
to this First Settlement Date. Since the First Settlement Date is the
date of settlement for anyone ordering Units on the Date of Deposit, no
accrued interest will be added to the Public Offering Price of Units
ordered on the Date of Deposit.
The second element of accrued interest arises because of the
structure of the Interest Account. The Trustee has no cash for
distribution to Unitholders until it receives interest payments on the
Bonds in a Trust Fund. The Trustee is obligated to provide its own
funds, at times, in order to advance interest distributions. The
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Trustee will recover these advancements when such interest is received.
Interest Account balances are established so that it will not be
necessary on a regular basis for the Trustee to advance its own funds in
connection with such interest distributions. The Interest Account
balances are also structured so that there will generally be positive
cash balances and since the funds held by the Trustee will be used by it
to earn interest thereon, it benefits thereby (see "Expenses of the
Trust").
Accrued interest is computed as of the initial Record Date of the
Trust Funds. On the date of the first distribution of interest to
Unitholders after the First Settlement Date, the interest collected by
the Trustee will be sufficient to repay its advances, to allow for
accrued interest under the monthly, quarterly and semi-annual plans of
distribution and to generate enough cash to commence distributions to
Unitholders. If a Unitholder sells or redeems all or a portion of his
Units or if the Bonds in a Trust Fund are sold or otherwise removed or if
a Trust Fund is liquidated, he will receive at that time his
proportionate share of the accrued interest computed to the settlement
date in the case of sale or liquidation and to the of tender in the case
of redemption in such Trust Fund.
Purchased and Daily Accrued Interest. Included in the Public
Offering Price of Units for Kemper Defined Funds Insured National Series
1-13 is Purchased and Daily Accrued Interest as described herein.
Accrued interest consist of two elements. The first element arises as a
result of accrued interest which is the accumulation of unpaid interest
on a bond from the later of the last day on which interest thereon was
paid or the date of original issuance of the bond. Interest on the
coupon Bonds in the Trust fund is paid semi-annually to the Trust. A
portion of the aggregate amount of such accrued interest on the Bonds in
the Trust to the First Settlement Date of the Trust Units is the
Purchased Interest. In an effort to reduce the amount of Purchased
Interest which would otherwise have to be paid by Unitholders, the
Trustee may advance a portion of the accrued interest to the Sponsor as
the Unitholder of record as of the First Units in the Trust Fund is
accounted for daily on an accrual basis (herein referred to as "Daily
Accrued Interest"). Because of this, the Units always have an amount of
interest earned but not yet paid or reserved for payment. For this
reason, the Public Offering Price of Units will include the proportionate
share of Daily Accrued Interest to the date of settlement.
If a Unitholder sells or redeems all or a portion of his Units or if
the bonds are sold or otherwise removed or if the Trust Fund is
liquidated, he will receive at that time his proportionate share of the
Purchase Interest and Daily Accrued Interest computed to the settlement
date in the case of sale or liquidation and to the date of tender in the
case of redemption in the Trust Fund.
Accrued Interest. Included in the Public Offering Price of Units
for Kemper Defined Funds Insured National Series 14 and subsequent series
and all EVEREN Unit Investment Trusts Insured National Series is accrued
interest as described herein. Accrued interest is the accumulation of
unpaid interest on a security from the last day on which interest thereon
was paid. Interest on Securities generally is paid semi-annually
although a Trust accrues such interest daily. Because of this, a Trust
always has an amount of interest earned but not yet collected by the
Trustee. For this reason, with respect to sales settling subsequent to
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the First Settlement Date, the Public Offering Price of Units will have
added to it the proportionate share of accrued interest to the date of
settlement. Unitholders will receive on the next distribution date of a
Trust the amount, if any, of accrued interest paid on their Units.
In an effort to reduce the amount of accrued interest which would
otherwise have to be paid in addition to the Public Offering Price in the
sale of Units to the public, the Trustee will advance the amount of
accrued interest as of the First Settlement Date and the same will be
distributed to the Sponsor as the Unitholder of record as of the First
Settlement Date. Consequently, the amount of accrued interest to be
added to the Public Offering Price of Units will include only accrued
interest from the First Settlement Date to the date of settlement, less
any distributions from the Interest Account subsequent to the First
Settlement Date.
Because of the varying interest payment dates of the Securities,
accrued interest at any point in time will be greater than the amount of
interest actually received by the Trusts and distributed to Unitholders.
Therefore, there will always remain an item of accrued interest that is
added to the value of the Units. If a Unitholder sells or redeems all or
a portion of his Units, he will be entitled to receive his proportionate
share of the accrued interest from the purchaser of his Units. Since the
Trustee has the use of the funds held in the Interest Account for
distributions to Unitholders and since such Account is non-interest-
bearing to Unitholders, the Trustee benefits thereby.
Public Distribution of Units. The Sponsor has qualified Units for
sale in all states. Units will be sold through dealers who are members
of the National Association of Securities Dealers, Inc. and through
others. Sales may be made to or through dealers at prices which
represent discounts from the Public Offering Price as set forth in the
table below. Certain commercial banks are making Units of the Trust
available to their customers on an agency basis. A portion of the sales
charge paid by their customers is retained by or remitted to the banks,
in the amount shown in the table below. Under the Glass-Steagall Act,
banks are prohibited from underwriting Trust Units; however, the Glass-
Steagall Act does permit certain agency transactions and the banking
regulators have indicated that these particular agency transactions are
permitted under such Act. In addition, state securities laws on this
issue may differ from the interpretations of Federal law expressed herein
and banks and financial institutions may be required to register as
dealers pursuant to state law.
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<TABLE>
<CAPTION>
DOLLAR WEIGHTED AVERAGE
YEARS TO MATURITY*
4 TO 7.99 8 TO 14.99 15 OR MORE
--------- ---------- ----------
AMOUNT OF INVESTMENT Discount per Unit (% of Public Offering Price)
-------------------- ----------------------------------------------
<S> <C> <C> <C>
$1,000 to $99,999 2.00% 3.00% 4.00%
$100,000 to $499,999 1.75 2.75 3.50
$500,000 to $999,999 1.50 2.50 3.00
$1,000,000 or more 1.25 2.25 2.50
</TABLE>
---------------------
* If the dollar weighted average maturity of a Trust is from 1 to 3.99
years, the concession or agency commission is 1.00% of the Public
Offering Price.
In addition to such discounts, the Sponsor may, from time to time,
pay or allow an additional discount, in the form of cash or other
compensation, to dealers employing registered representatives who sell,
during a specified time period, a minimum dollar amount of Units of the
Trusts and other unit investment trusts underwritten by the Sponsor.
The Sponsor reserves the right to change the levels of discounts at
any time. The difference between the discount and the sales charge will
be retained by the Sponsor.
The Sponsor reserves the right to reject, in whole or in part, any
order for the purchase of Units.
Profits of Sponsor. The Sponsor will retain a portion of the sales
charge on each Unit sold, representing the difference between the Public
Offering Price of the Units and the discounts allowed to firms selling
such Units. The Sponsor may realize additional profit or loss as a
result of the possible change in the daily evaluation of the Municipal
Bonds in the Trust, since the value of its inventory of Units may
increase or decrease.
MARKET FOR UNITS
While not obligated to do so, the Sponsor intends to, and certain of
the Underwriters may, subject to change at any time, maintain a market
for Units of each Series of the Trust offered hereby and to continuously
offer to purchase said Units at prices, as determined by the Evaluator,
based on the aggregate bid prices of the underlying Municipal Bonds of
such Series, together with accrued interest to the expected date of
settlement. Unitholders who wish to dispose of their Units should
inquire of their broker or bank as to the current market price of the
Units in order to determine whether there is in existence any price in
excess of the Redemption Price and, if so, the amount thereof.
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REDEMPTION
A Unitholder who does not dispose of Units in the secondary market
described above may cause their Units to be redeemed by the Trustee by
making a written request to the Trustee, The Bank of New York, 101
Barclay Street, New York, New York 10286 and, in the case of Units
evidenced by a certificate, by tendering such certificate to the Trustee,
properly endorsed or accompanied by a written instrument or instruments
of transfer in form satisfactory to the Trustee. Unitholders must sign
the request, and such certificate or transfer instrument, exactly as
their names appear on the records of the Trustee and on any certificate
representing the Units to be redeemed. If the amount of the redemption
is $25,000 or less and the proceeds are payable to the Unitholder(s) of
record at the address of record, no signature guarantee is necessary for
redemptions by individual account owners (including joint owners).
Additional documentation may be requested, and a signature guarantee is
always required, from corporations, executors, administrators, trustees,
guardians or associations. The signatures must be guaranteed by a
participant in the Securities Transfer Agents Medallion Program ("STAMP")
or such other guarantee program in addition to, or in substitution for,
STAMP, as may be accepted by the Trustee. A certificate should only be
sent by registered or certified mail for the protection of the
Unitholder. Since tender of the certificate is required for redemption
when one has been issued, Units represented by a certificate cannot be
redeemed until the certificate representing such Units has been received
by the purchaser.
Redemption shall be made by the Trustee on the third business day
following the day on which a tender for redemption is received (the
"Redemption Date"), by payment of cash equivalent to the Redemption Price
for that Series of the Trust, determined as set forth below under
"Computation of Redemption Price," as of the evaluation time stated under
"Essential Information" in Part Two, next following such tender,
multiplied by the number of Units being redeemed. Any Units redeemed
shall be cancelled and any undivided fractional in the Trust Fund
extinguished. The price received upon redemption might be more or less
than the amount paid by the Unitholder depending on the value of the
Municipal Bonds in the portfolio at the time of redemption. Any Units
redeemed shall be cancelled and any undivided fractional interest in that
Series of the Trust will be extinguished.
Under regulations issued by the Internal Revenue Service, the
Trustee is required to withhold a specified percentage of the principal
amount of a Unit redemption if the Trustee has not been furnished the
redeeming Unitholder's tax identification number in the manner required
by such regulations. Any amount so withheld is transmitted to the
Internal Revenue Service and may be recovered by the Unitholder only when
filing a tax return. Under normal circumstances the Trustee obtains the
Unitholder's tax identification number from the selling broker. However,
any time a Unitholder elects to tender Units for redemption, such
Unitholder should make sure that the Trustee has been provided a
certified tax identification number in order to avoid this possible "back-
up withholding." In the event the Trustee has not been previously
provided such number, one must be provided at the time redemption is
requested.
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<PAGE>
Any amounts paid on redemption representing interest shall be
withdrawn from the Interest Account of such Series to the extent that
funds are available for such purpose. All other amounts paid on
redemption shall be withdrawn from the Principal Account of such Series.
The Trustee is empowered to sell Municipal Bonds from the portfolio of a
Series in order to make funds available for the redemption of Units of
such Series. Such sale may be required when Municipal Bonds would not
otherwise be sold and might result in lower prices than might otherwise
be realized. To the extent Municipal Bonds are sold, the size and
diversity of that Series of the Trust will be reduced.
The Trustee is irrevocably authorized in its discretion, if an
Underwriter does not elect to purchase any Units tendered for redemption,
in lieu of redeeming such Units, to sell such Units in the over-the-
counter market for the account of tendering Unitholders at prices which
will return to such Unitholders amounts in cash, net after brokerage
commissions, transfer taxes and other charges, equal to or in excess of
the Redemption Price for such Units. In the event of any such sale, the
Trustee shall pay the net proceeds thereof to the Unitholders on the day
they would otherwise be entitled to receive payment of the Redemption
Price.
The right of redemption may be suspended and payment postponed
(1) for any period during which the New York Stock Exchange is closed,
other than customary weekend and holiday closings, or during which (as
determined by the Securities and Exchange Commission) trading on the New
York Stock Exchange is restricted; (2) for any period during which an
emergency exists as a result of which disposal by the Trustee of
Municipal Bonds is not reasonably practicable or it is not reasonably
practicable to fairly determine the value of the underlying Municipal
Bonds in accordance with the Trust Agreements; or (3) for such other
period as the Securities and Exchange Commission may by order permit.
Because insurance obtained by certain Series of the Trust terminates as
to Bonds which are sold by the Trustee and because the insurance obtained
by such Series of the Trust does not have a realizable cash value which
can be used by the Trustee to meet redemptions of Units, under certain
circumstances the Sponsor may apply to the Securities and Exchange
Commission for an order permitting a full or partial suspension of the
right of Unitholders to redeem their Units if a significant portion of
the Bonds in the portfolio is in default in payment of principal or
interest or in significant risk of such default. The Trustee is not
liable to any person or in any way for any loss or damage which may
result from any such suspension or postponement.
Computation of Redemption Price. The Redemption Price for Units of
each Series of the Trust is computed by the Evaluator as of the
evaluation time stated under "Essential Information" in Part Two next
occurring after the tendering of a Unit for redemption and on any other
business day desired by it, by:
A. adding (1) the cash on hand in such Series of the Trust
other than cash depositor in the Trust Funds to purchase Municipal
Bonds not applied to the purchase of such Bonds; (2) the aggregate
value of the Municipal Bonds held in such Series of the Trust, as
determined by the Evaluator on the basis of bid prices therefor; and
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<PAGE>
(3) interest accrued and unpaid on the Municipal Bonds in that
Series of the Trust as of the date of computation; and
B. deducting therefrom (1) amounts representing any
applicable taxes or governmental charges payable out of that Series
of the Trust and for which no deductions have been previously made
for the purpose of additions to the Reserve Account described under
"Expenses of the Trust"; (2) amounts representing estimated accrued
expenses of that Series of the Trust including, but not limited to,
fees and expenses of the Trustee (including legal and auditing fees
and insurance costs), the Evaluator, the Sponsor and bond counsel,
if any; (3) cash held for distribution to Unitholders of record as
of the business day prior to the evaluation being made; and
(4) other liabilities incurred by such Series of the Trust; and
C. finally, dividing the results of such computation by the
number of Units of such Series of the Trust outstanding as of the
date thereof.
UNITHOLDERS
Ownership of Units. Ownership of Units of a Trust will not be
evidenced by certificates unless a Unitholder, the Unitholder's
registered broker/dealer or the clearing agent makes a written request to
the Trustee. Units are transferable by making a written request to the
Trustee and, in the case of Units evidenced by a certificate, by
presenting and surrendering such certificate to the Trustee properly
endorsed or accompanied by a written instrument or instruments of
transfer which should be sent registered or certified mail for the
protection of the Unitholder. Unitholders must sign such written
request, and such certificate or transfer instrument, exactly as their
names appear on the records of the Trustee and on any certificate
representing the Units to be transferred. Such signatures must be
guaranteed by a participant in the Securities Transfer Agents Medallion
Program ("STAMP") or such other signature guarantee program in addition
to, or in substitution for, STAMP, as may be accepted by the Trustee.
Units may be purchased and certificates, if requested, will be
issued in denominations of one Unit or any multiple thereof subject to
any minimum investment requirement established by the Sponsor from time
to time. Any Certificate issued will be numbered serially for
identification, issued in fully registered form and will be transferable
only on the books of the Trustee. The Trustee may require a Unitholder
to pay a reasonable fee, to be determined in the sole discretion of the
Trustee, for each certificate re-issued or transferred, and to pay any
governmental charge that may be imposed in connection with each such
transfer or interchange. The Trustee at the present time does not intend
to charge for the normal transfer or interchange of certificates.
Destroyed, stolen, mutilated or lost certificates will be replaced upon
delivery to the Trustee of satisfactory indemnity (generally amounting to
3% of the market value of the Units), affidavit of loss, evidence of
ownership and payment of expenses incurred.
Distributions to Unitholders. Interest received by a Series of the
Trust, including any portion of the proceeds from a disposition of
Municipal Bonds which represents accrued interest, is credited by the
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<PAGE>
Trustee to the Interest Account for such Series. All other receipts are
credited by the Trustee to a separate Principal Account for such Series.
During each year the distributions to the Unitholders of each Series of
the Trust as of each Record Date (see "Essential Information" in Part
Two) will be made on the following Distribution Date or shortly
thereafter and shall consist of an amount substantially equal to one-
twelfth, one-fourth or one-half (depending on the distribution option
selected except in Series of Kemper Defined Funds and EVEREN Unit
Investment Trusts in which case only monthly distributions are available)
of such Unitholders' pro rata share of the estimated net annual interest
income to the Interest Account for such Series of the Trust. However, the
interest to which Unitholders of a Series of the Trust are entitled will
at most times exceed the amount available for distribution, there will
almost always remain an item of accrued interest that is added to the
daily value of the Units of such Series. If Unitholders of a Series sell
or redeem all or a portion of their Units they will be paid their
proportionate share of the accrued interest of such Series to, but not
including, the fifth business day after the date of sale or to the date
of tender in the case of a redemption.
Persons who purchase Units between a Record Date and a Distribution
Date will receive their first distribution on the Second Distribution
Date following the purchase of their Units. Since interest on Municipal
Bonds in each Series of the Trust is payable at varying intervals,
usually in semiannual installments, and distributions of income are made
to Unitholders of a Series of the Trust at what may be different
intervals from receipt of interest, the interest accruing to such Series
of the Trust may not be equal to the amount of money received and
available for distribution from the Interest Account of such Series.
Therefore, on each Distribution Date the amount of interest actually on
deposit in the Interest Account and available for distribution may be
slightly more or less than the interest distribution made. In order to
eliminate fluctuations in interest distributions resulting from such
variances, the Trustee is authorized by the Agreement to advance such
amounts as may be necessary to provide interest distributions of
approximately equal amounts. The Trustee will be reimbursed, without
interest, for any such advances from funds available in the Interest
Account of such Series.
Unitholders purchasing Units will initially receive distributions in
accordance with the election of the prior owner. Unitholders desiring to
change their distribution option, if applicable, may do so by sending
written notice to the Trustee, together with their certificate (if one
was issued). Certificates should only be sent by registered or certified
mail to minimize the possibility of loss. If written notice and any
certificate are received by the Trustee not later than January 1 of a
year, the change will become effective on January 2 for distributions
commencing with February 15 of that year. If notice is not received by
the Trustee, the Unitholder will be deemed to have elected to continue
with the same option for the subsequent twelve months.
The Trustee will distribute on each semi-annual Distribution Date
(or in the case of Kemper Defined Funds and EVEREN Unit Investment
Trusts, on each Distribution Date) or shortly thereafter, to each
Unitholder of Record of the Trust on the preceding Record Date, an amount
substantially equal to such Unitholder's pro rata share of the cash
balance, if any, in the Principal Account of such Trust computed as of
the close of business on the preceding Record Date. However, no
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<PAGE>
distribution will be required if the balance in the Principal Account is
less than $1.00 per Unit (or $.001 per Unit for certain Series). Except
for Series of Kemper Tax-Exempt Insured Income Trust, if such balance is
between $5.00 and $10.00 per Unit, distributions will be made on each
quarterly Distribution Date; and if such balance exceeds $10.00 per Unit,
such amounts will be distributed on the next monthly Distribution Date.
Statement to Unitholders. With each distribution, the Trustee will
furnish or cause to be furnished each Unitholder a statement of the
amount of interest and the amount of other receipts, if any, which are
being distributed, expressed in each case as a dollar amount per Unit.
The accounts of each Series of the Trust are required to be audited
annually, at the Series' expense, by independent auditors designated by
the Sponsor, unless the Trustee determines that such an audit would not
be in the best interest of the Unitholders of such Series of the Trust.
The accountants' report will be furnished by the Trustee to any
Unitholder of such Series of the Trust upon written request.
Within a reasonable period of time after the end of each calendar
year, the Trustee shall furnish to each person who at any time during the
calendar year was a Unitholder of a Series of the Trust a statement
covering the calendar year, setting forth:
A. As to the Interest Account:
1. The amount of interest received on the Municipal
Bonds in such Series and the percentage of such amount by
states and territories in which the issuers of such Municipal
Bonds are located;
2. The amount paid from the Interest Account of such
Series representing accrued interest of any Units redeemed;
3. The deductions from the Interest Account of such
Series for applicable taxes, if any, fees and expenses
(including insurance costs and auditing fees) of the Trustee,
the Evaluator, the Sponsor and bond counsel, if any;
4. Any amounts credited by the Trustee to a Reserve
Account for such Series described under "Expenses of the
Trust"; and
5. The net amount remaining after such payments and
deductions, expressed both as a total dollar amount and a
dollar amount per Unit outstanding on the last business day of
such calendar year.
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<PAGE>
B. As to the Principal Account:
1. The dates of the maturity, liquidation or redemption
of any of the Municipal Bonds in such Series and the net
proceeds received therefrom excluding any portion credited to
the Interest Account;
2. The amount paid from the Principal Account of such
Series representing the principal of any Units redeemed;
3. The deductions from the Principal Account of such
Series for payment of applicable taxes, if any, fees and
expenses (including insurance costs and auditing expenses) of
the Trustee, the Evaluator, the Sponsor and of bond counsel, if
any;
4. Any amounts credited by the Trustee to a Reserve
Account for such Series described under "Expenses of the
Trust"; and
5. The net amount remaining after distributions of
principal and deductions, expressed both as a dollar amount and
as a dollar amount per Unit outstanding on the last business
day of such calendar year.
C. The following information:
1. A list of the Municipal Bonds in such Series as of
the last business day of such calendar year;
2. The number of Units of such Series outstanding on the
last business day of such calendar year;
3. The Redemption Price of such Series based on the last
Trust Evaluation made during such calendar year; and
4. The amount actually distributed during such calendar
year from the Interest and Principal Accounts of such Series
separately stated, expressed both as total dollar amounts and
as dollar amounts per Unit of such Series outstanding on the
Record Date for each such distribution.
Rights of Unitholders. A Unitholder may at any time tender Units to
the Trustee for redemption. No Unitholder of a Series shall have the
right to control the operation and management of such Series or of the
Trust in any manner, except to vote with respect to amendment of the
Trust Agreements or termination of such Series of the Trust. The death
or incapacity of any Unitholder will not operate to terminate the Series
or the Trust nor entitle legal representatives or heirs to claim an
accounting or to bring any action or proceeding in any court for
partition or winding up of such Series or the Trust.
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<PAGE>
INVESTMENT SUPERVISION
The Sponsor may not alter the portfolio of the Trust by the
purchase, sale or substitution of Municipal Bonds, except in the special
circumstances noted below. Thus, with the exception of the redemption or
maturity of Municipal Bonds in accordance with their terms, and/or the
sale of Municipal Bonds to meet redemption requests, the assets of the
Trust will remain unchanged under normal circumstances.
The Sponsor may direct the Trustee to dispose of Municipal Bonds the
value of which has been affected by certain adverse events, including
institution of certain legal proceedings, a decline in their price or the
occurrence of other market factors, including advance refunding, so that
in the opinion of the Sponsor the retention of such Municipal Bonds in a
Series of the Trust would be detrimental to the interest of the
Unitholders of such Series. The proceeds from any such sales, exclusive
of any portion which represents accrued interest, will be credited to the
Principal Account for distribution to the Unitholders.
The portfolio insurance obtained by the Trust from AMBAC Indemnity
for Series A through A-24 of the Kemper Tax-Exempt Insured Income Trust
is applicable only while the Municipal Bonds remain in the portfolio of a
Series of the Trust. Consequently, the price received by such Series of
the Trust upon the disposition of any such Municipal Bond will reflect a
value placed upon it by the market as an uninsured obligation rather than
a value resulting from the insurance. Due to this fact, the Sponsor will
not direct the Trustee to dispose of Municipal Bonds in Series A
through A-24 of the Kemper Tax-Exempt Insured Income Trust which are in
default or imminent danger of default but to retain such Municipal Bonds
in the portfolio so that if a default in the payment of interest or
principal occurs, the Trust may realize the benefits of the insurance.
Pursuant to an irrevocable commitment of Financial Guaranty, the
Trustee, at the time of the sale of a Municipal Bond covered under the
Trust's insurance policy with respect to Series A-25 and subsequent
Series of the Kemper Tax-Exempt Insured Income Trust, has the right to
obtain permanent insurance with respect to such Municipal Bond (i.e.,
insurance to maturity of the Municipal Bond regardless of the identity of
the holder thereof) (the "Permanent Insurance") upon the payment of a
single predetermined insurance premium from the proceeds of the sale of
such Municipal Bond. Accordingly, every Municipal Bond in such Series of
the Trust is eligible to be sold on an insured basis. It is expected
that the Trustee will exercise the right to obtain Permanent Insurance
for Municipal Bonds in Series A-25 and subsequent Series of the Kemper
Tax-Exempt Insured Income Trust only if upon such exercise a Series of
the Trust would receive net proceeds (i.e., the value of such Municipal
Bond if sold as an insured bond less the insurance premium attributable
to the Permanent Insurance) from such sale in excess of the sale proceeds
if such Municipal Bond were sold on an uninsured basis. The insurance
premium with respect to each Municipal Bond in such Series is determined
based upon the insurability of each Municipal Bond as of the initial Date
of Deposit and will not be increased or decreased for any change in the
creditworthiness of such Municipal Bond's issuer.
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<PAGE>
The Trustee is permitted to utilize the option to obtain Permanent
Insurance available on Series A-25 and subsequent Series of the Kemper
Tax-Exempt Insured Income Trust only in circumstances where the value
added to the Municipal Bonds exceeds the costs of acquiring such
Permanent Insurance. Unless such Permanent Insurance may be obtained at
an acceptable price, the Sponsor will not direct the Trustee to dispose
of Municipal Bonds which are in default or imminent danger of default but
to retain such Municipal Bonds in the portfolio so that the Trust may
realize the benefits of the insurance on the portfolio.
The Sponsor is required to instruct the Trustee to reject any offer
made by an issuer of Municipal Bonds to issue new obligations in exchange
or substitution for any of such Municipal Bonds pursuant to a refunding
financing plan except that the Sponsor may instruct the Trustee to accept
or reject such an offer or to take any other action with respect thereto
as the Sponsor may deem proper if (1) the issuer is in default with
respect to such Bonds or (2) in the written opinion of the Sponsor the
issuer will probably default with respect to such Bonds in the reasonably
foreseeable future. Any obligation so received in exchange or
substitution will be held by the Trustee subject to the terms and
conditions of the Trust Agreement to the same extent as Bonds originally
deposited thereunder. Within five days after the deposit of obligations
in exchange or substitution for underlying Bonds, the Trustee is required
to give notice thereof to each Unitholder, identifying the Bonds
eliminated and the Bonds substituted therefor.
The Trustee may sell Municipal Bonds designated by the Sponsor from
a Series of the Trust for the purpose of redeeming Units of such Series
tendered for redemption and the payment of expenses. See "Redemption."
ADMINISTRATION OF THE TRUST
The Trustee. The Trustee is The Bank of New York, a trust company
organized under the laws of New York. The Bank of New York has its unit
investment trust division offices at 101 Barclay Street, New York, New
York 10286, telephone 1-800-701-8178. The Bank of New York is subject to
supervision and examination by the Superintendent of Banks of the State
of New York and the Board of Governors of the Federal Reserve System, and
its deposits are insured by the Federal Deposit Insurance Corporation to
the extent permitted by law.
The Trustee, whose duties are ministerial in nature, has not
participated in selecting the portfolio of any Series of the Trust. For
information relating to the responsibilities of the Trustee under the
Agreement, reference is made to the material set forth under
"Unitholders."
In accordance with the Trust Agreements, the Trustee shall keep
records of all transactions at its office. Such records shall include
the name and address of, and the number of Units held by, every
Unitholder of each Series. The books and records with respect to a
Series of the Trust shall be open to inspection by any Unitholder of such
Series at all reasonable times during the usual business hours. The
Trustee shall make such annual or other reports as may from time to time
be required under any applicable state or Federal statute, rule or
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<PAGE>
regulation. The Trustee shall keep a certified copy or duplicate
original of the Trust Agreements on file in its office available for
inspection at all reasonable times during usual business hours by any
Unitholder, together with a current list of the Municipal Bonds held in
each Series of the Trust. Pursuant to the Trust Agreements, the Trustee
may employ one or more agents for the purpose of custody and safeguarding
of Municipal Bonds comprising the portfolios.
Under the Trust Agreements, the Trustee or any successor trustee may
resign and be discharged of its duties created by the Trust Agreements by
executing an instrument in writing and filing the same with the Sponsor.
The Trustee or successor trustee must mail a copy of the notice of
resignation to all Unitholders then of record, not less than sixty days
before the date specified in such notice when such resignation is to take
effect. The Sponsor upon receiving notice of such resignation is
obligated to appoint a successor trustee promptly. If, upon such
resignation, no successor trustee has been appointed and has accepted the
appointment within thirty days after notification, the retiring Trustee
may apply to a court of competent jurisdiction for the appointment of a
successor. The Sponsor may at any time remove the Trustee with or
without cause and appoint a successor trustee as provided in the Trust
Agreements. Notice of such removal and appointment shall be mailed to
each Unitholder by the Sponsor. Upon execution of a written acceptance
of such appointment by a successor trustee, all the rights, powers,
duties and obligations of the original Trustee shall vest in the
successor. The Trustee shall be a corporation organized under the laws
of the United States or any state thereof, which is authorized under such
laws to exercise trust powers. The Trustee shall have at all times an
aggregate capital, surplus and undivided profits of not less than
$5,000,000.
The Evaluator. Ranson & Associates, Inc., the Sponsor, also serves
as Evaluator. The Evaluator may resign or be removed by the Trustee, in
which event the Trustee is to use its best efforts to appoint a
satisfactory successor. Such resignation or removal shall become
effective upon acceptance of appointment by the successor evaluator. If,
upon resignation of the Evaluator, no successor has accepted appointment
within thirty days after notice of resignation, the Evaluator may apply
to a court of competent jurisdiction for the appointment of a successor.
Notice of such resignation or removal and appointment shall be mailed by
the Trustee to each Unitholder. At the present time, pursuant to a
contract with the Evaluator, Cantor Fitzgerald & Co., a non-affiliated
firm regularly engaged in the business of evaluating, quoting or
appraising comparable securities, provides portfolio evaluations of the
Municipal Bonds in the Trust which are then reviewed by the Evaluator.
In the event the Sponsor is unable to obtain current evaluations from
Cantor Fitzgerald & Co., it may make its own evaluations or it may
utilize the services of any other non-affiliated evaluator or evaluators
it deems appropriate.
Amendment and Termination. The Trust Agreements may be amended by
the Trustee and the Sponsor without the consent of any of the
Unitholders: (1) to cure any ambiguity or to correct or supplement any
provision which may be defective or inconsistent; (2) to change any
provision thereof as may be required by the Securities and Exchange
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Commission or any successor governmental agency; or (3) to make such
provisions as shall not adversely affect the interests of the
Unitholders. The Trust Agreements may also be amended in any respect by
the Sponsor and the Trustee, or any of the provisions thereof may be
waived, with the consent of the holders of Units representing 66-2/3% of
the Units then outstanding, provided that no such amendment or waiver
will reduce the interest in a Series of the Trust of any Unitholder
without the consent of such Unitholder or reduce the percentage of Units
required to consent to any such amendment or waiver without the consent
of all Unitholders. In no event shall the Trust Agreements be amended to
increase the number of Units issuable thereunder or to permit, except in
accordance with the provisions of the Trust Agreements, the acquisition
of any Municipal Bonds in addition to or in substitution for those in the
Trust. The Trustee shall promptly notify Unitholders of the substance of
any such amendment.
The Trust Agreements provide that a Series of the Trust shall
terminate upon the maturity, redemption or other disposition, of the last
of the Municipal Bonds held in such Series. If the value of a Series of
the Trust shall be less than the applicable minimum Trust value stated
under "Essential Information" in Part Two the Trustee may, in its
discretion, and shall, when so directed by the Sponsor, terminate such
Series of the Trust. A Series of the Trust may be terminated at any time
by the holders of Units representing 66-2/3% of the Units of such Series
then outstanding. In the event of termination, written notice thereof
will be sent by the Trustee to all Unitholders of such Series. Within a
reasonable period after termination, the Trustee will sell any Municipal
Bonds remaining in such Series of the Trust and, after paying all
expenses and charges incurred by such Series of the Trust, will
distribute to Unitholders of such Series (upon surrender for cancellation
of certificates for Units, if issued) their pro rata share of the
balances remaining in the Interest and Principal Accounts of such Series.
Notwithstanding the foregoing, in connection with final
distributions to Unitholders, it should be noted that because the
portfolio insurance obtained by Series A through A-24 of the Kemper Tax-
Exempt Insured Income Trust is applicable only while Bonds so insured are
held by such Series of the Trust, the price to be received by such Series
of the Trust upon the disposition of any such Bond which is in default by
reason of nonpayment of principal or interest, will not reflect any value
based on such insurance. Therefore, in connection with any liquidation
of such Series it shall not be necessary for the Trustee to, and the
Trustee does not currently intend to, dispose of any Bond or Bonds if
retention of such Bond or Bonds, until due, shall be deemed to be in the
best interest of Unitholders, including, but not limited to situations in
which a Bond or Bonds so insured are in default and situations in which a
Bond or Bonds so insured have a deteriorated market price resulting from
a significant risk of default. All proceeds received, less applicable
expenses, from insurance on defaulted Bonds not disposed of at the date
of termination will ultimately be distributed to Unitholders of record as
of such date of termination as soon as practicable after the date such
defaulted Bond or Bonds become due and applicable insurance proceeds have
been received by the Trustee.
LIMITATIONS ON LIABILITY.
-42-
<PAGE>
The Sponsor. The Sponsor is liable for the performance of its
obligations arising from its responsibilities under the Trust Agreements,
but will be under no liability to the Unitholders for taking any action
or refraining from any action in good faith pursuant to the Trust
Agreements or for errors in judgment, except in cases of its own gross
negligence, bad faith or willful misconduct. The Sponsor shall not be
liable or responsible in any way for depreciation or loss incurred by
reason of the sale of any Municipal Bonds.
The Trustee. The Trust Agreements provide that the Trustee shall be
under no liability for any action taken in good faith in reliance upon
prima facie properly executed documents or for the disposition of monies,
Municipal Bonds, or certificates except by reason of its own negligence,
bad faith or willful misconduct, nor shall the Trustee be liable or
responsible in any way for depreciation or loss incurred by reason of the
sale by the Trustee of any Municipal Bonds. In the event that the
Sponsor shall fail to act, the Trustee may act and shall not be liable
for any such action taken by it in good faith. The Trustee shall not be
personally liable for any taxes or other governmental charges imposed
upon or in respect of the Municipal Bonds or upon the interest thereon.
In addition, the Trust Agreements contain other customary provisions
limiting the liability of the Trustee.
The Evaluator. The Trustee and Unitholders may rely on any
evaluation furnished by the Evaluator and shall have no responsibility
for the accuracy thereof. The Trust Agreements provide that the
determinations made by the Evaluator shall be made in good faith upon the
basis of the best information available to it, provided, however, that
the Evaluator shall be under no liability to the Trustee or Unitholders
for errors in judgment, but shall be liable only for its gross
negligence, lack of good faith or willful misconduct.
EXPENSES OF THE TRUST
The Sponsor will charge each Series a surveillance fee for services
performed for such Series in an amount not to exceed that amount set
forth in "Essential Information" in Part Two but in no event will such
compensation, when combined with all compensation received from other
unit investment trusts for which the Sponsor both acts as sponsor and
provides portfolio surveillance, exceed the aggregate cost to the Sponsor
for providing such services. Such fee shall be based on the total number
of Units of each Series outstanding as of the January Record Date for any
annual period. The Sponsor paid all the expenses of creating and
establishing the Trust, including the cost of the initial preparation,
printing and execution of the Prospectus, Agreement and the certificates,
legal and accounting expenses, advertising and selling expenses, payment
of closing fees, expenses of the Trustee, initial evaluation fees and
other out-of-pocket expenses.
The Trustee receives for its services a fee calculated on the basis
of the annual rate set forth under "Essential Information" in Part Two,
based on the largest aggregate principal amount of Municipal Bonds in
such Series at any time during the monthly, quarterly or semi-annual
period, as appropriate. Funds that are available for future
distributions, redemptions and payment of expenses are held in accounts
which are non-interest bearing to Unitholders and are available for use
by the Trustee pursuant to normal banking procedures; however, the
Trustee is also authorized by the Trust Agreements to make from time to
-43-
<PAGE>
time certain non-interest bearing advances to the Trust Funds. The
Trustee also receives indirect benefits to the extent that it holds funds
on deposit in the various non-interest bearing accounts created pursuant
to the Agreement; however, the Trustee is also authorized by the
Agreement to make from time to time certain non-interest bearing advances
to the Trust. See "Unitholders-Distributions to Unitholders."
For evaluation of Municipal Bonds in a Series of the Trust, the
Evaluator receives a fee, payable monthly, calculated on the basis of an
annual rate as set forth under "Essential Information" in Part Two, based
upon the largest aggregate principal amount of Municipal Bonds in such
Series of the Trust at any time during such monthly period.
The Trustee's and Evaluator's fees are payable monthly on or before
each Distribution Date by deductions from the Interest Account of each
Series to the extent funds are available and then from the Principal
Account of such Series. Such fees may be increased without approval of
Unitholders by amounts not exceeding a proportionate increase in the
Consumer Price Index entitled "All Services Less Rent of Shelter,"
published by the United States Department of Labor, or any equivalent
index substituted therefor.
The following additional charges are or may be incurred by a Series
of the Trust: (a) fees for the Trustee's extraordinary services;
(b) expenses of the Trustee (including legal and auditing expenses and
insurance costs, but not including any fees and expenses charged by any
agent for custody and safeguarding of Municipal Bonds) and of bond
counsel, if any; (c) various governmental charges; (d) expenses and costs
of any action taken by the Trustee to protect the Trust or such Series,
or the rights and interests of the Unitholders; (e) indemnification of
the Trustee for any loss, liability or expense incurred by it in the
administration of such Series of the Trust without gross negligence, bad
faith or willful misconduct on its part; (f) indemnification of the
Sponsor for any loss, liability or expense incurred in acting in that
capacity without gross negligence, bad faith or willful misconduct; and
(g) expenditures incurred in contacting Unitholders upon termination of
the Series. The fees and expenses set forth herein are payable out of
such Series of the Trust and, when owed to the Trustee, are secured by a
lien on the assets of the Series of the Trust. Fees or charges relating
to the Trust shall be allocated to each Trust Fund in the same ratio as
the principal amount of such Trust Fund bears to the total principal
amount of all Trust Funds in the Trust. Fees or charges relating solely
to a particular Trust Fund shall be charged only to such Trust Fund.
Fees and expenses of a Series of the Trust shall be deducted from
the Interest Account of such Series, or, to the extent funds are not
available in such Account, from the Principal Account of such Series.
The Trustee may withdraw from the Principal Account or the Interest
Account of such Series such amounts, if any, as it deems necessary to
establish a reserve for any taxes or other governmental charges or other
extraordinary expenses payable out of that Series of the Trust. Amounts
so withdrawn shall be credited to a separate account maintained for such
Series known as the Reserve Account and shall not be considered a part of
such Series when determining the value of the Units of such Series until
such time as the Trustee shall return all or any part of such amounts to
the appropriate account.
-44-
<PAGE>
THE SPONSOR
Ranson & Associates, Inc., the Sponsor of the Trusts, is an
investment banking firm created in 1995 by a number of former owners and
employees of Ranson Capital Corporation. On November 26, 1996, Ranson &
Associates, Inc. purchased all existing unit investment trusts sponsored
by EVEREN Securities, Inc. Accordingly, Ranson & Associates is the
successor sponsor to unit investment trusts formerly sponsored by EVEREN
Unit Investment Trusts, a service of EVEREN Securities, Inc. Ranson &
Associates, is also the sponsor and successor sponsor of Series of The
Kansas Tax-Exempt Trust and Multi-State Series of The Ranson Municipal
Trust. Ranson & Associates, Inc. is the successor to a series of
companies, the first of which was originally organized in Kansas in 1935.
During its history, Ranson & Associates, Inc. and its predecessors have
been active in public and corporate finance and have sold bonds and unit
investment trusts and maintained secondary market activities relating
thereto. At present, Ranson & Associates, Inc., which is a member of the
National Association of Securities Dealers, Inc., is the sponsor to each
of the above-named unit investment trusts and serves as the financial
advisor and as an underwriter for issuers in the Midwest and Southwest,
especially in Kansas, Missouri and Texas. The Company's offices are
located at 250 North Rock Road, Suite 150, Wichita, Kansas 67206-2241.
If at any time the Sponsor shall of fail to perform any of its
duties under the Agreement or shall become incapable of acting or shall
be adjudged a bankrupt or insolvent or its affairs are taken over by
public authorities, then the Trustee may (a) appoint a successor sponsor
at rates of compensation deemed by the Trustee to be reasonable and not
exceeding such reasonable amounts as may be prescribed by the Securities
and Exchange Commission, or (b) terminate the Agreement and liquidate the
Trust or any Series thereof as provided therein or (c) continue to act as
Trustee without terminating the Agreement.
The foregoing financial information with regard to the Sponsor
relates to the Sponsor only and not to this Trust or any Series. Such
information is included in this Prospectus only for the purposes of
informing investors as to the financial responsibility of the Sponsor and
its ability to carry out its contractual obligations with respect to the
Series of the Trust. More comprehensive financial information can be
obtained upon request from the Sponsor.
LEGAL OPINIONS
The legality of the Units offered hereby and certain matters
relating to Federal tax law were originally passed upon by Chapman and
Cutler, 111 West Monroe Street, Chicago, Illinois 60603, as counsel for
the Sponsor.
INDEPENDENT AUDITORS
The statement of net assets, including the schedule of investments,
appearing in Part Two of this Prospectus and Registration Statement, with
information pertaining to the specific Series of the Trust to which such
statement relates, has been audited by Ernst & Young LLP, independent
-45-
<PAGE>
auditors, as set forth in their report appearing in Part Two and is
included in reliance upon such report given upon the authority of such
firm as experts in accounting and auditing.
DESCRIPTION OF MUNICIPAL BOND RATINGS*
Standard & Poor's - A brief description of the applicable Standard
& Poor's rating symbols and their meanings follows:
A Standard & Poor's corporate or municipal bond rating is a current
assessment of the creditworthiness of an obligor with respect to a
specific debt obligation. This assessment may take into consideration
obligors such as guarantors, insurers, or lessees.
The bond rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or
suitability for a particular investor.
The ratings are based on current information furnished by the issuer
and obtained by Standard & Poor's from other sources it considers
reliable. Standard & Poor's does not perform an audit in connection with
any rating and may, on occasion, rely on unaudited financial information.
The ratings may be changed, suspended, or withdrawn as a result of
changes in, or unavailability of, such information, or for other
circumstances.
The ratings are based, in varying degrees, on the following
considerations:
I. Likelihood of default - capacity and willingness of the
obligor as to the timely payment of interest and repayment of
principal in accordance with the terms of the obligation;
II. Nature of and provisions of the obligation; and
III. Protection afforded by, and relative position of, the
obligation in the event of bankruptcy, reorganization or other
arrangement, under the laws of bankruptcy and other laws affecting
creditors' rights.
AAA - Bonds rated AAA have the highest rating assigned by Standard &
Poor's to a debt obligation. Capacity to pay interest and repay
principal is extremely strong.
AA - Bonds rated AA have a very strong capacity to pay interest and
repay principal and differ from the highest rated issues only in small
degree.
A - Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than bonds in
higher rated categories.
--------------
* As published by the rating companies.
-46-
<PAGE>
BBB - Bonds rated BBB are regarded as having an adequate capacity to
pay interest and repay principal. Whereas they normally exhibit
adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for bonds in this category than for bonds in
higher rated categories.
Plus (+) or Minus (-): The ratings from "AA" to "A" may be modified
by the addition of a plus or minus sign to show relative standing within
the major rating categories.
Provisional Ratings: The letter "p" indicates the rating is
provisional. A provisional rating assumes the successful completion of
the project being financed by the bonds being rated and indicates that
payment of debt service requirements is largely or entirely dependent
upon the successful and timely completion of the project. This rating,
however, while addressing credit quality subsequent to completion of the
project, makes no comment on the likelihood of, or the risk of default
upon failure of, such completion. The investor should exercise his own
judgment with respect to such likelihood and risk.
Moody's Investors Service, Inc. - A brief description of the
applicable Moody's Investors Service, Inc. rating symbols and their
meanings follow:
Aaa - Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and are
generally referred to as "gilt edge." Interest payments are protected by
a large or by an exceptionally stable margin and principal is secure.
While the various protective elements are likely to change, such changes
as can be visualized are most unlikely to impair the fundamentally strong
position of such issues. Their safety is so absolute that with the
occasional exception of oversupply in a few specific instances,
characteristically, their market value is affected solely by money market
fluctuations.
Aa - Bonds which are rated Aa are judged to be of high quality by
all standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than the best
bonds because margins of protection may not be as large as in Aaa
securities or fluctuations of protective elements may be of greater
amplitude or there may be other elements present which make the long term
risks appear somewhat larger than in Aaa securities. Their market value
is virtually immune to all but money market influences, with the
occasional exception of oversupply in a few specific instances.
A - Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations.
Factors giving security to principal and interest are considered
adequate, but elements may be present which suggest a susceptibility to
impairment sometime in the future. The market value of A-rated bonds may
be influenced to some degree by economic performance during a sustained
period of depressed business conditions, but, during periods of normalcy,
A-rated bonds frequently move in parallel with Aaa and Aa obligations,
with the occasional exception of oversupply in a few specific instances.
-47-
<PAGE>
A1 - Bonds which are rated A1 offer the maximum in security within
their quality group, can be bought for possible upgrading in quality, and
additionally, afford the investor an opportunity to gauge more precisely
the relative attractiveness of offerings in the market place.
Baa - Bonds which are rated Baa are considered as lower medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present
but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds
lack outstanding investment characteristics and, in fact, have
speculative characteristics as well. The market value of Baa-rated bonds
is more sensitive to changes in economic circumstances and, aside from
occasional speculative factors applying to some bonds of this class, Baa
market valuations move in parallel with Aaa, Aa and A obligations during
periods of economic normalcy, except in instances of oversupply.
Conditional Ratings: Bonds rated "Con(-)" are ones for which the
security depends upon the completion of some act or the fulfillment of
some condition. These are bonds secured by (a) earnings of projects
under construction, (b) earnings of projects unseasoned in operation
experience, (c) rentals which begin when facilities are completed, or
(d) payments to which some other limiting condition attaches.
Parenthetical rating denotes probable credit stature upon completion of
construction or elimination of basis of condition.
Note: Moody's applies numerical modifiers, 1, 2, and 3 in each
generic rating classification from Aa through B in certain areas of its
bond rating system. The modifier 1 indicates that the security ranks in
the higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the issue ranks in
the lower end of its generic rating category.
-48-
<PAGE>
Kemper Tax-Exempt Insured Income Trust
Series A-84
Part Two
Dated December 28, 2000
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
NOTE: Part Two of this Prospectus May Not Be Distributed Unless Accompanied by
Part One.
<PAGE>
Kemper Tax-Exempt Insured Income Trust
Series A-84
Essential Information
As of August 31, 2000
Sponsor and Evaluator: Ranson & Associates, Inc.
Trustee: The Bank of New York Co.
<TABLE>
<CAPTION>
General Information
<S> <C>
Principal Amount of Municipal Bonds $5,180,000
Number of Units 5,751.235
Fractional Undivided Interest in the Trust per Unit 1/5,751.235
Principal Amount of Municipal Bonds per Unit $900.676
Public Offering Price:
Aggregate Bid Price of Municipal Bonds in the Portfolio $5,260,271
Aggregate Bid Price of Municipal Bonds per Unit $914.633
Cash per Unit (1) $(8.136)
Sales Charge of 4.712% (4.50% of Public Offering Price) $42.714
Public Offering Price per Unit (exclusive of accrued
interest) (2) $949.211
Redemption Price per Unit (exclusive of accrued interest) $906.497
Excess of Public Offering Price per Unit Over Redemption
Price per Unit $42.714
Minimum Value of the Trust under which Trust Agreement
may be terminated $1,466,000
</TABLE>
Date of Trust September 16, 1992
Mandatory Termination Date December 31, 2042
Evaluations for purpose of sale, purchase or redemption of Units are made as
of the close of business of the Sponsor next following receipt of an order for
a sale or purchase of Units or receipt by The Bank of New York Co. of Units
tendered for redemption.
[FN]
1. This amount, if any, represents principal cash or overdraft which is an
asset or liability of the Trust and is included in the Public Offering Price.
2. Units are offered at the Public Offering Price plus accrued interest to the
date of settlement (three business days after purchase). On August 31, 2000,
there was added to the Public Offering Price of $949.21, accrued interest to
the settlement date of September 6, 2000 of $9.37, $18.02 and $17.81 for a total
price of $958.58, $967.23 and $967.02 for the monthly, quarterly and semiannual
distribution options, respectively.
<PAGE>
Kemper Tax-Exempt Insured Income Trust
Series A-84
Essential Information (continued)
As of August 31, 2000
Sponsor and Evaluator: Ranson & Associates, Inc.
Trustee: The Bank of New York Co.
<TABLE>
<CAPTION>
Special Information Based on Various Distribution Options
Monthly Quarterly Semiannual
<S> <C> <C> <C>
--------- --------- ---------
Calculation of Estimated Net Annual
Interest Income per Unit (3):
Estimated Annual Interest Income $55.383105 $55.383105 $55.383105
Less: Estimated Annual Expense 2.191330 1.969484 1.687107
--------- --------- ---------
Estimated Net Annual Interest Income $53.191775 $53.413621 $53.695998
========= ========= =========
Calculation of Interest Distribution
per Unit:
Estimated Net Annual Interest Income $53.191775 $53.413621 $53.695998
Divided by 12, 4 and 2, respectively $4.432648 $13.353405 $26.847999
Estimated Daily Rate of Net Interest
Accrual per Unit $.147755 $.148371 $.149156
Estimated Current Return Based on Public
Offering Price (3) 5.60% 5.63% 5.66%
Estimated Long-Term Return (3) 2.63% 2.65% 2.68%
Trustee's Annual Fees per
$1,000 Principal Amount $1.020900 $.819000 $.572100
Evaluation Fees per $1,000 Principal Amount $.300000 $.300000 $.300000
Trustee's Miscellaneous Expenses per Unit $.662526 $.622526 $.562526
Surveillance Fees per Unit $.200000 $.200000 $.200000
</TABLE>
Record and Computation Dates: First day of the month, as follows: monthly - each
month; quarterly - January, April, July and October; semiannual - January and
July.
Distribution Dates: Fifteenth day of the month, as follows: monthly - each
month; quarterly - January, April, July and October; semiannual - January and
July.
[FN]
3. The Estimated Long-Term Return and Estimated Current Return will vary. For
detailed explanation, see Part One of this prospectus.
<PAGE>
Report of Independent Auditors
Unitholders
Kemper Tax-Exempt Insured Income Trust
Series A-84
We have audited the accompanying statement of assets and liabilities of Kemper
Tax-Exempt Insured Income Trust Series A-84, including the schedule of
investments, as of August 31, 2000, and the related statements of operations and
changes in net assets for each of the three years in the period then ended.
These financial statements are the responsibility of the Trust's sponsor. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
Our procedures included confirmation of investments owned as of August 31, 2000,
by correspondence with the custodial bank. An audit also includes assessing the
accounting principles used and significant estimates made by the sponsor, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Kemper Tax-Exempt Insured
Income Trust Series A-84 at August 31, 2000, and the results of its operations
and changes in its net assets for the periods indicated above in conformity with
accounting principles generally accepted in the United States.
Ernst & Young LLP
Kansas City, Missouri
December 14, 2000
<PAGE>
Kemper Tax-Exempt Insured Income Trust
Series A-84
Statement of Assets and Liabilities
August 31, 2000
<TABLE>
<CAPTION>
<S> <C> <C>
Assets
Municipal Bonds, at value (cost $5,089,947) $5,260,271
Interest receivable 67,407
---------
Total assets 5,327,678
Liabilities and net assets
Cash overdraft 32,356
Accrued liabilities 2,501
---------
34,857
Net assets, applicable to 5,751 Units outstanding:
Cost of Trust assets, exclusive of interest $5,089,947
Unrealized appreciation 170,324
Distributable funds 32,550
--------- ---------
Net assets $5,292,821
=========
</TABLE>
[FN]
See accompanying notes to financial statements.
<PAGE>
Kemper Tax-Exempt Insured Income Trust
Series A-84
Statements of Operations
<TABLE>
<CAPTION>
Year ended August 31
2000 1999 1998
<S> <C> <C> <C>
--------- --------- ---------
Investment income - interest $362,499 $389,952 $423,142
Expenses:
Trustee's fees and related expenses 9,680 9,839 9,143
Evaluator's and portfolio
surveillance fees 2,987 3,184 3,441
--------- --------- ---------
Total expenses 12,667 13,023 12,584
--------- --------- ---------
Net investment income 349,832 376,929 410,558
Realized and unrealized gain (loss) on
investments:
Realized gain (loss) on investments (4,253) 16,893 25,867
Unrealized appreciation (depreciation)
during the year (64,693) (235,573) 164,033
--------- --------- ---------
Net gain (loss) on investments (68,946) (218,680) 189,900
--------- --------- ---------
Net increase in net assets resulting
from operations $280,886 $158,249 $600,458
========= ========= =========
</TABLE>
[FN]
See accompanying notes to financial statements.
<PAGE>
Kemper Tax-Exempt Insured Income Trust
Series A-84
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Year ended August 31
2000 1999 1998
<S> <C> <C> <C>
--------- --------- ---------
Operations:
Net investment income $349,832 $376,929 $410,558
Realized gain (loss) on investments (4,253) 16,893 25,867
Unrealized appreciation (depreciation)
on investments during the year (64,693) (235,573) 164,033
--------- --------- ---------
Net increase in net assets resulting
from operations 280,886 158,249 600,458
Distributions to Unitholders:
Net investment income (362,591) (382,704) (414,857)
Capital transactions:
Redemption of Units (557,967) (351,254) (512,475)
Principal Distribution (461,954) - -
--------- --------- ---------
Total decrease in net assets (1,101,626) (575,709) (326,874)
Net assets:
At the beginning of the year 6,394,447 6,970,156 7,297,030
--------- --------- ---------
At the end of the year (including
distributable funds applicable to
Trust Units of $32,550, $87,959
and $92,219 at August 31, 2000,
1999 and 1998, respectively) $5,292,821 $6,394,447 $6,970,156
========= ========= =========
Trust Units outstanding at the end of
the year 5,751 6,330 6,672
========= ========= =========
Net asset value per Unit at the end of
the year:
Monthly $919.08 $1,008.99 $1,043.43
========= ========= =========
Quarterly $923.31 $1,013.47 $1,048.09
========= ========= =========
Semiannual $923.10 $1,013.26 $1,047.81
========= ========= =========
</TABLE>
[FN]
See accompanying notes to financial statements.
<PAGE>
<TABLE>
Kemper Tax-Exempt Insured Income Trust
Series A-84
Schedule of Investments
August 31, 2000
<CAPTION>
Coupon Maturity Redemption Principal
Name of Issuer and Title of Bond (4)(6) Rate Date Provisions(2) Rating(1) Amount Value(3)
<S> <C> <C> <C> <C> <C> <C>
--------------------- --- --- ----- --- --------- ---
Alabama Water Pollution Control Authority, Revolving 6.250% 8/15/2014 2007 @ 100 S.F. AAA $475,000 $479,418
Fund Loan Bonds, Series 1991. Insured by AMBAC. 2001 @ 100
+City of Austin, Texas, Combined Utility System 6.250 11/15/2019 2004 @ 100 AAA 470,000 498,656
Revenue Bonds, Series 1989. Insured by MBIA.
+City of Detroit, Michigan, Sewage Disposal System 6.625 7/01/2021 2001 @ 102 AAA 470,000 488,010
Revenue Bonds, Series 1991. Insured by FGIC.
+Greenville County, South Carolina Certificates of 6.250 3/01/2012 2001 @ 100 AAA 450,000 454,343
Participation, Greenville County Public Facilities
Corporation (Detention Center Facilities Project),
Series 1991. Insured by AMBAC.
The Health Care Authority of the City of Huntsville 6.375 6/01/2022 2013 @ 100 S.F. AAA 480,000 492,250
(Alabama), Health Care Facilities Revenue Bonds, 2002 @ 102
Series 1992-A. Insured by MBIA.
Michigan State Hospital Finance Authority, Hospital 6.250 2/15/2022 2010 @ 100 S.F. AAA 250,000 255,090
Revenue and Refunding Bonds (Sisters of Mercy Health 2002 @ 102
Corp. Obligated Group), 1992 Series M. Insured by
FSA.
Piedmont Municipal Power Agency (South Carolina), 6.250 1/01/2018 2012 @ 100 S.F. AAA 440,000 450,111
Electric Revenue Bonds, 1991 Refunding Series. 2001 @ 102
Insured by FGIC.
Regional Transportation Authority, Cook, DuPage, 6.125 6/01/2022 2016 @ 100 S.F. AAA 470,000 480,556
Lake, McHenry and Will Counties, Illinois, General 2002 @ 100
Obligation Bonds, Series 1992A. Insured by AMBAC.
+Rhode Island Depositors Economic Protection 6.625 8/01/2019 2002 @ 102 AAA 475,000 503,196
Corporation, Special Obligation Bonds, 1992
Series A. Insured by FSA.
</TABLE>
<PAGE>
<TABLE>
Kemper Tax-Exempt Insured Income Trust
Series A-84
Schedule of Investments (continued)
August 31, 2000
<CAPTION>
Coupon Maturity Redemption Principal
Name of Issuer and Title of Bond (4)(6) Rate Date Provisions(2) Rating(1) Amount Value(3)
<S> <C> <C> <C> <C> <C> <C>
--------------------- --- --- ----- --- --------- ---
Municipality of Metropolitan Seattle (Seattle, 6.200% 1/01/2032 2017 @ 100 S.F. AAA $470,000 $479,879
Washington), Sewer Refunding Revenue Bonds, 2002 @ 102
Series V. Insured by MBIA.
Washington Health Care Facilities Authority, 6.250 12/01/2021 2012 @ 100 S.F. AAA 120,000 121,681
Revenue Bonds (Group Health Cooperative of 2000 @ 102
Puget Sound), Series 1991. Insured by MBIA.
Crowley Independent School District (Tarrant 0.000 8/01/2014 Non-Callable AAA 155,000 73,202
and Johnson Counties, Texas), Unlimited Tax
Refunding and School Buildings Bonds, Series 1991.
Insured by FGIC. (5)
+Massachusetts Health and Educational Facilities 6.500 11/15/2018 2002 @ 102 AAA 455,000 483,879
Authority, Revenue Bonds, Metro West Health Inc.
Issue, Series C. Insured by AMBAC.
--------- ---------
$5,180,000 $5,260,271
========= =========
</TABLE>
[FN]
See accompanying notes to Schedule of Investments.
<PAGE>
Kemper Tax-Exempt Insured Income Trust
Series A-84
Notes to Schedule of Investments
1. All ratings are by Standard & Poor's Corporation, unless marked with the
symbol "*", in which case the rating is by Moody's Investors Service, Inc. The
symbol "NR" indicates Bonds for which no rating is available.
2. There is shown under this heading the year in which each issue of Bonds is
initially redeemable and the redemption price for that year or, if currently
redeemable, the redemption price currently in effect; unless otherwise
indicated, each issue continues to be redeemable at declining prices thereafter,
but not below par value. In addition, certain Bonds in the Portfolio may be
redeemed in whole or in part other than by operation of the stated redemption or
sinking fund provisions under certain unusual or extraordinary circumstances
specified in the instruments setting forth the terms and provisions of such
Bonds. "S.F." indicates a sinking fund is established with respect to an issue
of Bonds. Redemption pursuant to call provisions generally will, and redemption
pursuant to sinking fund provisions may, occur at times when the redeemed Bonds
have a valuation which represents a premium over the call price or par.
To the extent that the Bonds were deposited in the Trust at a price higher
than the price at which they are redeemed, this will represent a loss of capital
when compared with the original Public Offering Price of the Units. To the
extent that the Bonds were acquired at a price lower than the redemption price,
this may represent an increase in capital when compared with the original Public
Offering Price of the Units. Distributions of net income will generally be
reduced by the amount of the income which would otherwise have been paid with
respect to redeemed Bonds and, unless utilized to pay for Units tendered for
redemption, there will be distributed to Unitholders the principal amount and
any premium received on such redemption. In this event the estimated current
return and estimated long-term return may be affected by such redemptions.
3. See Note 1 to the accompanying financial statements for a description of the
method of determining cost and value.
4. Insurance on the Bonds in the Trust was obtained by the issuers of such
Bonds.
5. This Bond has been purchased at a discount from the par value because there
is no stated interest income thereon. Such Bond is normally described as a
"zero coupon" Bond. Over the life of the Bond the value increases, so that upon
maturity, the holders of the Bond will receive 100% of the principal amount
thereof.
6. The securities preceded by (+) are secured by, and payable from, escrowed
U.S. Government securities.
See accompanying notes to financial statements.
<PAGE>
Kemper Tax-Exempt Insured Income Trust
Series A-84
Notes to Financial Statements
1. Significant Accounting Policies
Trust Sponsor and Evaluator
Ranson & Associates, Inc. serves as the Trust's sponsor and evaluator.
Valuation of Municipal Bonds
Municipal Bonds (Bonds) are stated at bid prices as determined by Ranson &
Associates, Inc., the "Evaluator" of the Trust. The aggregate bid prices of the
Bonds are determined by the Evaluator based on (a) current bid prices of the
Bonds, (b) current bid prices for comparable bonds, (c) appraisal, (d)
insurance, or (e) any combination of the above (See Note 4 - Insurance).
Cost of Municipal Bonds
Cost of the Trust's Bonds was based on the offering prices of the Bonds on
September 16, 1992 (Date of Deposit). The premium or discount (including any
original issue discount) existing at September 16, 1992, is not being
amortized. Realized gain (loss) from Bond transactions is reported on an
identified cost basis.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires the Trust's sponsor to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from such
estimates.
2. Unrealized Appreciation and Depreciation
Following is an analysis of net unrealized appreciation at August 31, 2000:
<TABLE>
<CAPTION>
<S> <C>
Gross unrealized appreciation $170,324
Gross unrealized depreciation -
----------
Net unrealized appreciation $170,324
=========
</TABLE>
3. Federal Income Taxes
The Trust is not an association taxable as a corporation for federal income tax
purposes. Each Unitholder is considered to be the owner of a pro rata portion
of the Trust under Subpart E, Subchapter J of Chapter 1 of the Internal Revenue
Code of 1986, as amended. Accordingly, no provision has been made for federal
income taxes.
<PAGE>
Kemper Tax-Exempt Insured Income Trust
Series A-84
Notes to Financial Statements (continued)
4. Other Information
Cost to Investors
The cost to original investors of Units of the Trust was based on the aggregate
offering price of the Bonds on the date of an investor's purchase, plus a sales
charge of 3.90% of the Public Offering Price (equivalent to 4.058% of the net
amount invested). The Public Offering Price for secondary market transactions
is based on the aggregate bid price of the Bonds plus or minus a pro rata share
of cash or overdraft in the Principal Account, if any, and daily accrued
interest on the date of an investor's purchase, plus a sales charge of 4.50% of
the Public Offering Price (equivalent to 4.712% of the net amount invested).
Insurance
Insurance guaranteeing the payment of all principal and interest on the Bonds in
the portfolio has been obtained from independent companies by the respective
issuers of such Bonds. Insurance obtained by a Bond issuer is effective as long
as such Bonds are outstanding. As a result of such insurance, the Units of the
Trust have received a rating of "AAA" by Standard & Poor's Corporation. No
representation is made as to any insurer's ability to meet its commitments.
Distributions
Distributions of net investment income to Unitholders are declared and paid in
accordance with the option (monthly, quarterly or semiannual) selected by the
investor. Income distributions, on a record date basis, are as follows:
<TABLE>
<CAPTION>
Year ended Year ended Year ended
Distribution August 31, 2000 August 31, 1999 August 31, 1998
Plan Per Unit Total Per Unit Total Per Unit Total
<S> <C> <C> <C> <C> <C> <C>
----- --------- ---------- --------- ---------- --------- ----------
Monthly $58.15 $251,134 $58.29 $267,725 $58.26 $289,051
Quarterly 58.63 32,977 58.71 33,021 58.80 34,105
Semiannual 58.93 70,940 58.94 77,079 58.96 83,898
---------- ---------- ----------
$355,051 $377,825 $407,054
========= ========= =========
</TABLE>
In addition, the Trust redeemed Units with proceeds from the sale of Bonds as
follows:
<TABLE>
<CAPTION>
Year ended August 31
2000 1999 1998
<S> <C> <C> <C>
---------- ---------- ----------
Principal portion $557,967 $351,254 $512,475
Net interest accrued 7,540 4,879 7,803
---------- ---------- ----------
$565,507 $356,133 $520,278
========= ========= =========
Units 579 342 498
========= ========= =========
</TABLE>
In addition, distribution of principal related to the sale or call of securities
is $78.41 per Unit for the year ended August 31, 2000.
<PAGE>
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Independent Auditors"
and to the use of our report dated December 14, 2000, in this Post-Effective
Amendment to the Registration Statement (Form S-6) and related Prospectus of
Kemper Tax-Exempt Insured Income Trust Series A-84 dated December 28, 2000.
Ernst & Young LLP
Kansas City, Missouri
December 28, 2000
<PAGE>
KEMPER TAX-EXEMPT INSURED INCOME TRUST
MULTI-STATE SERIES
OHIO TAX-EXEMPT BOND TRUST SERIES 11-22
KEMPER DEFINED FUNDS (TAX-EXEMPT PORTFOLIO)
EVEREN UNIT INVESTMENT TRUSTS (TAX-EXEMPT PORTFOLIO)
PART ONE
Each State Trust of the Kemper Tax-Exempt Insured Income Trust,
Multi-State Series, Series 11-22 of the Ohio Tax-Exempt Bond Trust,
Kemper Defined Funds (Tax-Exempt Portfolio) and EVEREN Unit Investment
Trusts (Tax-Exempt Portfolio) was formed for the purpose of gaining
interest income free from Federal, State and, where applicable, local
income taxes and/or property taxes, while conserving capital and
diversifying risks by investing in an insured, fixed portfolio of
Municipal Bonds consisting of obligations issued primarily by or on
behalf of the State for which such Trust is named or counties,
municipalities, authorities or political subdivisions thereof.
Insurance guaranteeing the scheduled payment of principal and
interest on all of the Municipal Bonds in the portfolio of each State
Trust has been obtained by the Trust from Financial Guaranty Insurance
Company ("Financial Guaranty") or other insurers or directly by the
issuer or the Sponsor from Financial Guaranty, MBIA Insurance Corporation
or other insurers. See "Insurance on the Portfolios" herein and the
"Schedule of Investments" in Part Two. Insurance obtained by the Trust
remains in effect only while the insured Municipal Bonds are retained in
such State Trust, while insurance obtained by a Municipal Bond issuer or
the Sponsor is effective so long as such Bonds are outstanding. Pursuant
to an irrevocable commitment of Financial Guaranty or such other
insurers, in the event of a sale of any Bond covered under the Trust's
insurance policy, the Trustee has the right to obtain permanent insurance
for such Bond upon the payment of a single predetermined insurance
premium from the proceeds of the sale of such Bond. The insurance, in
either case, does not relate to the Units offered hereby or to their
market value. As a result of such insurance, the Units of each State
Trust received on the original date of deposit a rating of either "AAA"
by Standard & Poor's, a division of The McGraw Hill Companies ("Standard
& Poor's") or "Aaa" by Moody's Investors Service, Inc. ("Moody's") and,
while held in a State Trust, the Municipal Bonds are rated either "Aaa"
by Moody's Investors Service, Inc. or "AAA" by Standard & Poor's. The
"AAA" Unit rating received by a State Trust from Standard & Poor's on the
original date of deposit will be in effect for a period of 13 months from
such date and will, unless renewed, terminate at the end of such period.
See "Insurance on the Portfolios" and "Description of Securities
Ratings." No representation is made as to Financial Guaranty's, MBIA
Insurance Corporation's or any other insurer's ability to meet its
commitments.
Units of the Trusts are not deposits or obligations of, or
guaranteed by, any bank, and Units are not federally insured or otherwise
protected by the Federal Deposit Insurance Corporation and involve
investment risk including loss of principal.
This Prospectus is in two parts.
Read and retain both parts for future reference.
The date of this Part One is that date
which is set forth in Part Two of the Prospectus.
------------------------------------------------------
SPONSOR: RANSON & ASSOCIATES, INC.
------------------------------------------------------
THE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
TABLE OF CONTENTS
PAGE
SUMMARY 1
The Trust 1
Insurance 1
Public Offering Price 1
Interest and Principal Distributions 1
Reinvestment 2
Estimated Current Return and
Estimated Long-Term Return 2
Market for Units 2
Risk Factors 2
THE TRUST 2
PORTFOLIOS 3
Risk Factors 4
INSURANCE ON THE PORTFOLIOS 9
Financial Guaranty Insurance Company 11
AMBAC Indemnity Corporation 11
MBIA Insurance Corporation 11
Financial Security Assurance Inc 12
Capital Guaranty Insurance Company 13
DISTRIBUTION REINVESTMENT 14
INTEREST, ESTIMATED CURRENT
RETURN AND ESTIMATED LONG-TERM RETURN 15
FEDERAL TAX STATUS OF THE STATE TRUSTS 15
DESCRIPTION AND STATE TAX STATUS
of the State Trusts 18
Alabama Trusts 18
Arizona Trusts 20
California Trusts 23
Colorado Trust 30
Florida Trusts 34
Louisiana Trusts 39
Massachusetts Trusts 43
Michigan Trusts 47
Minnesota Trusts 50
Missouri Trusts 53
New Jersey Trusts 55
New York Trusts 59
North Carolina Trusts 66
Ohio Trusts 71
Pennsylvania Trusts 75
Texas Trusts 80
PUBLIC OFFERING OF UNITS 84
Public Offering Price 84
Public Distribution of Units 87
Profits of Sponsor 88
MARKET FOR UNITS 88
REDEMPTION 88
Computation of Redemption Price 90
UNITHOLDERS 90
Ownership of Units 90
Distributions to Unitholders 90
Principal Distributions 92
Statements to Unitholders 92
Rights of Unitholders 92
INVESTMENT SUPERVISION 93
ADMINISTRATION OF THE TRUST 93
The Trustee 93
The Evaluator 94
Amendment and Termination 94
Limitations on Liability 95
EXPENSES OF THE TRUST 95
THE SPONSOR 96
LEGAL OPINIONS 97
AUDITORS 97
DESCRIPTION OF SECURITIES RATINGS 97
Essential Information*
Report of Certified Public Accountants*
Statement of Assets and Liabilities*
Statement of Operations*
Statement of Changes in Net Assets*
Schedule of Investments*
Notes to Schedules of Investments*
Notes to Financial Statements*
* Information on these items appears in Part Two for the
appropriate State Trust
<PAGE>
SUMMARY
The Trust. Kemper Tax-Exempt Insured Income Trust, Multi-State
Series, Ohio Tax-Exempt Bond Trust, Series 11-22, Kemper Defined Funds
(Tax-Exempt Portfolio) and EVEREN Unit Investment Trusts (Tax-Exempt
Portfolio) (collectively, the "Trust") are unit investment trusts
consisting of a number of diversified portfolios designated as the State
Trusts. Each State Trust consists of obligations ("Municipal Bonds,"
"Bonds" or "Securities") issued primarily by or on behalf of the State
for which such State Trust is named or counties, municipalities,
authorities or political subdivisions thereof.
Each State Trust's investment objective is interest income which is
exempt from Federal, State and, where applicable, local income taxes
and/or property taxes, while conserving capital and diversifying risks by
investing in an insured, fixed portfolio of Municipal Bonds consisting of
obligations issued primarily by or on behalf of the State for which such
State Trust is named or counties, municipalities, authorities or
political subdivisions thereof. There is, of course, no guarantee that
the State Trusts' objective will be achieved.
All of the Municipal Bonds in the State Trust portfolios were rated
in the category "BBB" or better by either Standard & Poor's or "Baa" by
Moody's on the date such State Trust was established (the "Date of
Deposit"). Ratings of the Municipal Bonds may have changed since the
Date of Deposit. See "Description of Securities Ratings" herein and the
"Schedule of Investments" in Part Two.
The Units, each of which represents a pro rata undivided fractional
interest in the principal amount of Municipal Bonds deposited in the
appropriate Trust, are issued and outstanding Units which have been
reacquired by the Sponsor either by purchase of Units tendered to the
Trustee for redemption or by purchase in the open market. No offering is
being made on behalf of the State Trust and any profit or loss realized
on the sale of Units will accrue to the Sponsor and/or the firm reselling
such Units.
Insurance. Insurance guaranteeing the scheduled payment of
principal and interest on all of the Municipal Bonds in the portfolio of
each State Trust has been obtained by the Trust from Financial Guaranty
Insurance Company ("Financial Guaranty"), MBIA Insurance Corporation
("MBIA Corporation" or "MBIA") or other insurers, or directly by the
issuer or the Sponsor from Financial Guaranty, MBIA or other insurers.
See "Insurance on the Portfolios" herein and the "Schedule of
Investments" in Part Two. Insurance obtained by the Trust remains in
effect only while the insured Municipal Bonds are retained in such State
Trust, while insurance obtained by a Municipal Bond issuer or the Sponsor
is effective so long as such Bonds are outstanding. Pursuant to an
irrevocable commitment of Financial Guaranty, MBIA or such other
insurers, in the event of a sale of any bond covered under the Trust's
insurance policy, the Trustee has the right to obtain permanent insurance
for such Municipal Bonds upon the payment of a single predetermined
insurance premium from the proceeds of the sale of such Municipal Bond.
The insurance, in either case, does not relate to the Units offered
hereby or to their market value. As a result of such insurance, the
Units of each State Trust received on the original Date of Deposit a
rating of "AAA" from Standard & Poor's and, while held in a State Trust,
the Municipal Bonds are rated "Aaa" by Moody's. See "Insurance on the
Portfolios." No representation is made as to Financial Guaranty's or any
other insurer's ability to meet its commitments.
Public Offering Price. The Public Offering Price per Unit of each
State Trust is equal to a pro rata share of the aggregate bid prices of
the Municipal Bonds in such State Trust plus or minus a pro rata share of
cash, if any, in the Principal Account, held or owned by the State Trust
plus a sales charge shown under "Public Offering of Units." In addition,
there will be added to each transaction in a State Trust an amount equal
to the accrued interest from the last Record Date of such State Trust to
the date of settlement (three business days after order). The sales
charge is reduced on a graduated scale for sales as indicated under
"Public Offering of Units."
Interest and Principal Distributions. Distributions of the
estimated annual interest income to be received by each State Trust,
after deduction of estimated expenses, will be made monthly unless the
<PAGE>
Unitholder elects to receive such distributions quarterly or semi-
annually. Distributions will be paid on the Distribution Dates to
holders of record of such State Trust on the Record Dates set forth for
the applicable option. See "Essential Information" in Part Two. Only
monthly distributions of estimated annual interest income will be
available for Kemper Defined Funds Unitholders. The distribution of
funds, if any, in the Principal Account of each State Trust, will be made
as provided in "Unitholders-Distributions to Unitholders."
Reinvestment. Each Unitholder of a State Trust offered herein may
elect to have distributions of principal or interest or both
automatically invested without charge in shares of certain mutual funds
sponsored by Zurich Kemper Investments, Inc. See "Distribution
Reinvestment."
Estimated Current Return and Estimated Long-Term Return. The
Estimated Current Return is calculated by dividing the estimated net
annual interest income per Unit by the Public Offering Price of the
applicable State Trust. The estimated net annual interest income per
Unit will vary with changes in fees and expenses of the Trusts and with
the principal prepayment, redemption, maturity, exchange or sale of Bonds
while the Public Offering Price will vary with changes in the bid price
of the underlying Bonds and with changes in accrued interest; therefore,
there is no assurance that the present Estimated Current Returns will be
realized in the future. Estimated Long-Term Return is calculated using a
formula which (1) takes into consideration, and determines and factors in
the relative weightings of, the market values, yields (which takes into
account the amortization of premiums and the accretion of discounts) and
estimated retirement dates of all of the Bonds in the State Trust and
(2) takes into account the expenses and sales charge associated with each
State Trust Unit. Since the market values and estimated retirement dates
of the Bonds and the expenses of the State Trust will change, there is no
assurance that the present Estimated Long-Term Return will be realized in
the future. Estimated Current Return and Estimated Long-Term Return are
expected to differ because the calculation of Estimated Long-Term Return
reflects the estimated date and amount of principal returned while
Estimated Current Return calculations include only net annual interest
income and Public Offering Price.
Market for Units. While under no obligation to do so and subject
to change at any time, the Sponsor intends to and certain Underwriters
may, maintain a market for the Units of each State Trust and continuously
offer to repurchase such Units at prices which are based on the aggregate
bid side evaluation of the Municipal Bonds in each State Trust plus
accrued interest to the date of settlement.
Risk Factors. An investment in the Trusts should be made with an
understanding of the risks associated therewith, including, among other
factors, the inability of the issuer or an insurer to pay the principal
of or interest on a bond when due, volatile interest rates, early call
provisions, and changes to the tax status of the Securities. See
"Portfolios-Risk Factors."
THE TRUST
Each State Trust Fund is one of a series of unit investment trusts
created by the Sponsor under the name Kemper Tax-Exempt Insured Income
Trust, Multi-State Series, Series 11-22 of Ohio Tax-Exempt Bond Trust,
Kemper Defined Funds (Tax-Exempt Portfolio) or EVEREN Unit Investment
Trusts (Tax-Exempt Portfolio), all of which are similar, and each of
which was created under the laws of the State of Missouri or the State of
New York pursuant to a Trust Agreement* (the "Agreement") (such "State
Trusts" being collectively referred to herein as the "Trust"). Ranson &
Associates, Inc. is the Sponsor and Evaluator of the Trusts and is
successor sponsor and evaluator of all unit investment trusts formerly
sponsored by EVEREN Unit Investment Trusts, a service of EVEREN
Securities, Inc. The Bank of New York is the Trustee of the Trusts as
successor to Investors Fiduciary Trust Company.
----------------
* Reference is hereby made to said Trust Agreement, and any statements
contained herein are qualified in there entirety by the provisions of
said Trust Agreement.
-2-
<PAGE>
A State Trust may be an appropriate investment vehicle for investors
who desire to participate in a portfolio of insured, tax-exempt, fixed
income securities with greater diversification than they might be able to
acquire individually. In addition, Municipal Bonds of the type deposited
in the State Trusts are often not available in small amounts. Each State
Trust was formed for the purpose of gaining interest income free from
Federal, State and, where applicable, local income and/or property taxes,
while conserving capital and diversifying risks by investing in an
insured, fixed portfolio of Municipal Bonds consisting of obligations
issued primarily by or on behalf of the State for which such State Trust
is named or counties, municipalities, authorities or political
subdivisions thereof. There is, of course, no guarantee that the State
Trusts' objective will be achieved. All of the Municipal Bonds in the
State Trusts' portfolios are rated "BBB" or better by Standard & Poor's
or "Baa" or better by Moody's. See "Description of Securities Ratings"
herein and the "Schedule of Investments" in Part Two.
Each State Trust consists of an insured portfolio of interest
bearing obligations issued by or on behalf of states of the United States
or counties, municipalities, authorities or political subdivisions
thereof the interest on which is, in the opinion of bond counsel to the
issuing authorities, exempt from all Federal income taxes under existing
law, but may not be subject to State and local taxes. Proceeds of the
maturity, redemption or sale of the Municipal Bonds in a State Trust,
unless used to pay for Units tendered for redemption, will be distributed
to Unitholders thereof and will not be utilized to purchase replacement
or additional Municipal Bonds for the State Trust.
The Units, each of which represents a pro rata undivided fractional
interest in the principal amount of Municipal Bonds deposited in the
appropriate State Trust, are issued and outstanding Units which have been
reacquired by the Sponsor either by purchase of Units tendered to the
Trustee for redemption or by purchase in the open market. No offering is
being made on behalf of the State Trusts and any profit or loss realized
on the sale of Units will accrue to the Sponsor and/or the firm reselling
such Units. To the extent that Units of any State Trust are redeemed,
the principal amount of Municipal Bonds in such State Trust will be
reduced and the undivided fractional interest represented by each
outstanding Unit of such State Trust will increase. See "Redemption."
PORTFOLIOS
The selection of Municipal Bonds for each State Trust was based
largely upon the experience and judgment of the Sponsor. In making such
selections, the Sponsor considered the following factors: (a) a minimum
rating in the category "BBB" by Standard & Poor's or "Baa" by Moody's
(see "Description of Securities Ratings") except that the Sponsor may,
from time to time, in specifically designated State Trusts, have deemed
it to be acceptable to acquire unrated municipal bonds which had, in the
opinion of the Sponsor, credit characteristics at least equal to
municipal bonds so rated; (b) the price of the Municipal Bonds relative
to other issues of similar quality and maturity; (c) the diversification
of the Municipal Bonds as to purpose of issue; (d) the income to the
Unitholders of the State Trust; (e) whether such Municipal Bonds were
insured, or the cost and availability of insurance for the scheduled
payment of principal and interest, when due, on the Municipal Bonds; and
(f) the dates of maturity of the Municipal Bonds.
Subsequent to the Date of Deposit, a Municipal Bond may cease to be
rated or its rating may be reduced below the minimum required as of the
Date of Deposit. Neither event requires the elimination of such
investment from a State Trust, but may be considered in the Sponsor's
determination to direct the Trustee to dispose of the investment. See
"Investment Supervision" herein and the "Schedule of Investments" in Part
Two. The Sponsor may not alter the portfolio of a State Trust except
that certain of the Municipal Bonds may be sold upon the happening of
certain extraordinary circumstances. See "Investment Supervision."
Certain of the Municipal Bonds in the State Trusts may be subject to
redemption prior to their stated maturity date pursuant to sinking fund
provisions, call provisions or extraordinary optional or mandatory
redemption provisions or otherwise. A sinking fund is a reserve fund
accumulated over a period of time for retirement of debt. A callable
debt obligation is one which is subject to redemption or refunding prior
to maturity at the option of the issuer. A refunding is a method by
which a debt obligation is redeemed, at or before maturity, by the
-3-
<PAGE>
proceeds of a new debt obligation. In general, call provisions are more
likely to be exercised when the offering side valuation is at a premium
over par than when it is at a discount from par. Accordingly, any such
call, redemption, sale or maturity will reduce the size and diversity of
such State Trust, and the net annual interest income of the State Trust
and may reduce the Estimated Current and Long-Term Returns. See
"Interest, Estimated Current Return and Estimated Long-Term Return."
Each State Trust portfolio contains a listing of the sinking fund and
call provisions, if any, with respect to each of the debt obligations.
Extraordinary optional redemptions and mandatory redemptions result from
the happening of certain events. Generally, events that may permit the
extraordinary optional redemption of Municipal Bonds or may require the
mandatory redemption of Municipal Bonds include, among others: a final
determination that the interest on the Municipal Bonds is taxable; the
substantial damage or destruction by fire or other casualty of the
project for which the proceeds of the Municipal Bonds were used; an
exercise by a local, State or Federal governmental unit of its power of
eminent domain to take all or substantially all of the project for which
the proceeds of the Municipal Bonds were used; changes in the economic
availability of raw materials, operating supplies or facilities or
technological or other changes which render the operation of the project
for which the proceeds of the Municipal Bonds were used uneconomic;
changes in law or an administrative or judicial decree which renders the
performance of the agreement under which the proceeds of the Municipal
Bonds were made available to finance the project impossible or which
creates unreasonable burdens or which imposes excessive liabilities, such
as taxes, not imposed on the date the Municipal Bonds are issued on the
issuer of the Municipal Bonds or the user of the proceeds of the
Municipal Bonds; an administrative or judicial decree which requires the
cessation of a substantial part of the operations of the project financed
with the proceeds of the Municipal Bonds; an overestimate of the costs of
the project to be financed with the proceeds of the Municipal Bonds
resulting in excess proceeds of the Municipal Bonds which may be applied
to redeem Municipal Bonds; or an underestimate of a source of funds
securing the Municipal Bonds resulting in excess funds which may be
applied to redeem Municipal Bonds. The Sponsor is unable to predict all
of the circumstances which may result in such redemption of an issue of
Municipal Bonds. The Sponsor and the Trustee shall not be liable in any
way for any default, failure or defect in any Municipal Bond.
Risk Factors. An investment in the Units of a State Trust should be
made with an understanding of the risks which an investment in fixed rate
debt obligations may entail, including the risk that the value of the
portfolio and hence of the State Trusts will decline with increases in
interest rates. The value of the underlying Municipal Bonds will
fluctuate inversely with changes in interest rates. The uncertain
economic conditions of recent years, together with the fiscal measures
adopted to attempt to deal with them, have resulted in wide fluctuations
in interest rates and, thus, in the value of fixed rate debt obligations
generally and long term obligations in particular. The Sponsor cannot
predict whether such fluctuations will continue in the future.
Certain of the Municipal Bonds in the State Trusts may be general
obligations of a governmental entity that are backed by the taxing power
of such entity. All other Municipal Bonds in the State Trusts are
revenue bonds payable from the income of a specific project or authority
and are not supported by the issuer's power to levy taxes. General
obligation bonds are secured by the issuer's pledge of its faith, credit
and taxing power for the payment of principal and interest. Revenue
bonds, on the other hand, are payable only from the revenues derived from
a particular facility or class of facilities or, in some cases, from the
proceeds of a special excise or other specific revenue source. There
are, of course, variations in the security of the different Municipal
Bonds in the State Trusts, both within a particular classification and
between classifications, depending on numerous factors.
Certain of the Municipal Bonds in the State Trusts may be
obligations of issuers whose revenues are derived from services provided
by hospitals and other health care facilities, including nursing homes.
Ratings of bonds issued for health care facilities are often based on
feasibility studies that contain projections of occupancy levels,
revenues and expenses. A facility's gross receipts and net income
available for debt service will be affected by future events and
conditions including, among other things, demand for services and the
ability of the facility to provide the services required, physicians'
confidence in the facility, management's capabilities, economic
developments in the service area, competition, efforts by insurers and
governmental agencies to limit rates, legislation establishing state rate-
setting agencies, expenses, the cost and possible unavailability of
malpractice insurance, the funding of Medicare, Medicaid and other
similar third party payor programs, and government regulation. Federal
-4-
<PAGE>
legislation has been enacted which implements a system of prospective
Medicare reimbursement which may restrict the flow of revenues to
hospitals and other facilities which are reimbursed for services provided
under the Medicare program. Future legislation or changes in the areas
noted above, among other things, would affect all hospitals to varying
degrees and, accordingly, any adverse changes in these areas may
adversely affect the ability of such issuers to make payment of principal
and interest on Municipal Bonds held in the State Trusts. Such adverse
changes also may adversely affect the ratings of the Municipal Bonds held
in the State Trusts.
Hospitals and other health care facilities are subject to claims and
legal actions by patients and others in the ordinary course of business.
Although these claims are generally covered by insurance, there can be no
assurance that a claim will not exceed the insurance coverage of a health
care facility or that insurance coverage will be available to a facility.
In addition, a substantial increase in the cost of insurance could
adversely affect the results of operations of a hospital or other health
care facility. Certain hospital bonds may provide for redemption at par
at any time upon the sale by the issuer of the hospital facilities to a
non-affiliated entity or in other circumstances. For example, certain
hospitals may have the right to call bonds at par if the hospital may
legally be required because of the bonds to perform procedures against
specified religious principles. Certain FHA-insured bonds may provide
that all or a portion of those bonds, otherwise callable at a premium,
can be called at par in certain circumstances. If a hospital defaults
upon a bond obligation, the realization of Medicare and Medicaid
receivables may be uncertain and, if the bond obligation is secured by
the hospital facilities, legal restrictions on the ability to foreclose
upon the facilities and the limited alternative uses to which a hospital
can be put may reduce severely its collateral value.
Certain of the Municipal Bonds in the State Trusts may be single
family mortgage revenue bonds, which are issued for the purpose of
acquiring from originating financial institutions notes secured by
mortgages on residences located within the issuer's boundaries and owned
by persons of low or moderate income. Mortgage loans are generally
partially or completely prepaid prior to their final maturities as a
result of events such as sale of the mortgaged premises, default,
condemnation or casualty loss. Because these Municipal Bonds are subject
to extraordinary mandatory redemption in whole or in part from such
prepayments of mortgage loans, a substantial portion of such Municipal
Bonds will probably be redeemed prior to their scheduled maturities or
even prior to their ordinary call dates. The redemption price of such
issues may be more or less than the offering price of such Municipal
Bonds. Extraordinary mandatory redemption without premium could also
result from the failure of the originating financial institutions to make
mortgage loans in sufficient amounts within a specified time period or,
in some cases, from the sale by the Municipal Bond issuer of the mortgage
loans. Failure of the originating financial institutions to make
mortgage loans would be due principally to the interest rates on mortgage
loans funded from other sources becoming competitive with the interest
rates on the mortgage loans funded with the proceeds of the single family
mortgage revenue bonds. Additionally, unusually high rates of default on
the underlying mortgage loans may reduce revenues available for the
payment of principal of or interest on such mortgage revenue bonds.
Single family mortgage revenue bonds issued after December 31, 1980 were
issued under Section 103A of the Internal Revenue Code of 1954, which
Section contains certain ongoing requirements relating to the use of the
proceeds of such Municipal Bonds in order for the interest on such
Municipal Bonds to retain its tax-exempt status. In each case, the
issuer of the Municipal Bonds has covenanted to comply with applicable
ongoing requirements and bond counsel to such issuer has issued an
opinion that the interest on the Municipal Bonds is exempt from Federal
income tax under existing laws and regulations. There can be no
assurances that the ongoing requirements will be met. The failure to
meet these requirements could cause the interest on the Municipal Bonds
to become taxable, possibly retroactively from the date of issuance.
Certain of the Municipal Bonds in the State Trusts may be
obligations of issuers whose revenues are primarily derived from mortgage
loans to housing projects for low to moderate income families. The
ability of such issuers to make debt service payments will be affected by
events and conditions affecting financed projects, including, among other
things, the achievement and maintenance of sufficient occupancy levels
and adequate rental income, increases in taxes, employment and income
conditions prevailing in local labor markets, utility costs and other
operating expenses, the managerial ability of project managers, changes
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in laws and governmental regulations, the appropriation of subsidies and
social and economic trends affecting the localities in which the projects
are located. The occupancy of housing projects may be adversely affected
by high rent levels and income limitations imposed under Federal and
State programs. Like single family mortgage revenue bonds, multi-family
mortgage revenue bonds are subject to redemption and call features,
including extraordinary mandatory redemption features, upon prepayment,
sale or non-origination of mortgage loans as well as upon the occurrence
of other events. Certain issuers of single or multi-family housing bonds
have considered various ways to redeem bonds they have issued prior to
the stated first redemption dates for such bonds. In connection with the
housing Municipal Bonds held by the State Trusts, the Sponsor has not had
any direct communications with any of the issuers thereof, but at the
Initial Date of Deposit it was not aware that any of the respective
issuers of such Municipal Bonds were actively considering the redemption
of such Municipal Bonds prior to their respective stated initial call
dates. However, there can be no assurance that an issuer of a Municipal
Bond in the State Trusts will not attempt to so redeem a Municipal Bond
in the State Trusts.
Certain of the Municipal Bonds in the State Trusts may be
obligations of issuers whose revenues are derived from the sale of water
and/or sewerage services. Water and sewerage bonds are generally payable
from user fees. Problems faced by such issuers include the ability to
obtain timely and adequate rate increases, a decline in population
resulting in decreased user fees, the difficulty of financing large
construction programs, the limitations on operations and increased costs
and delays attributable to environmental considerations, the increasing
difficulty of obtaining or discovering new supplies of fresh water, the
effect of conservation programs and the impact of "no-growth" zoning
ordinances. Issuers may have experienced these problems in varying
degrees.
Because of the relatively short history of solid waste disposal bond
financing, there may be technological risks involved in the satisfactory
construction or operation of the projects exceeding those associated with
most municipal enterprise projects. Increasing environmental regulation
on the Federal, State and local level has a significant impact on waste
disposal facilities. While regulation requires more waste producers to
use waste disposal facilities, it also imposes significant costs on the
facilities. These costs include compliance with frequently changing and
complex regulatory requirements, the cost of obtaining construction and
operating permits, the cost of conforming to prescribed and changing
equipment standards and required methods of operation and the cost of
disposing of the waste residue that remains after the disposal process in
an environmentally safe manner. In addition, waste disposal facilities
frequently face substantial opposition by environmental groups and
officials to their location and operation, to the possible adverse
effects upon the public health and the environment that may be caused by
wastes disposed of at the facilities and to alleged improper operating
procedures. Waste disposal facilities benefit from laws which require
waste to be disposed of in a certain manner but any relaxation of these
laws could cause a decline in demand for the facilities' services.
Finally, waste disposal facilities are concerned with many of the same
issues facing utilities insofar as they derive revenues from the sale of
energy to local power utilities.
Certain of the Municipal Bonds in the State Trusts may be
obligations of issuers whose revenues are primarily derived from the sale
of electric energy or natural gas. Utilities are generally subject to
extensive regulation by state utility commissions which, among other
things, establish the rates which may be charged and the appropriate rate
of return on an approved asset base. The problems faced by such issuers
include the difficulty in obtaining approval for timely and adequate rate
increases from the governing public utility commission, the difficulty in
financing large construction programs, the limitations on operations and
increased costs and delays attributable to environmental considerations,
increased competition, recent reductions in estimates of future demand
for electricity in certain areas of the country, the difficulty of the
capital market in absorbing utility debt, the difficulty in obtaining
fuel at reasonable prices and the effect of energy conservation. Issuers
may have experienced these problems in varying degrees. In addition,
Federal, state and municipal governmental authorities may from time to
time review existing and impose additional regulations governing the
licensing, construction and operation of nuclear power plants, which may
adversely affect the ability of the issuers of such Municipal Bonds to
make payments of principal and/or interest on such Municipal Bonds.
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The ability of state and local joint action power agencies to make
payments on bonds they have issued is dependent in large part on payments
made to them pursuant to power supply or similar agreements. Courts in
Washington and Idaho have held that certain agreements between the
Washington Public Power Supply System ("WPPSS") and the WPPSS
participants are unenforceable because the participants did not have the
authority to enter into the agreements. While these decisions are not
specifically applicable to agreements entered into by public entities in
other states, they may cause a reexamination of the legal structure and
economic viability of certain projects financed by joint action power
agencies, which might exacerbate some of the problems referred to above
and possibly lead to legal proceedings questioning the enforceability of
agreements upon which payment of these bonds may depend.
Certain of the Municipal Bonds in the State Trusts may be industrial
revenue bonds ("IRBs"), including pollution control revenue bonds, which
are tax-exempt securities issued by states, municipalities, public
authorities or similar entities to finance the cost of acquiring,
constructing or improving various industrial projects. These projects
are usually operated by corporate entities. Issuers are obligated only
to pay amounts due on the IRBs to the extent that funds are available
from the unexpended proceeds of the IRBs or receipts or revenues of the
issuer under an arrangement between the issuer and the corporate operator
of a project. The arrangement may be in the form of a lease, installment
sale agreement, conditional sale agreement or loan agreement, but in each
case the payments to the issuer are designed to be sufficient to meet the
payments of amounts due on the IRBs. Regardless of the structure,
payment of IRBs is solely dependent upon the creditworthiness of the
corporate operator of the project or corporate guarantor. Corporate
operators or guarantors may be affected by many factors which may have an
adverse impact on the credit quality of the particular company or
industry. These include cyclicality of revenues and earnings, regulatory
and environmental restrictions, litigation resulting from accidents or
environmentally-caused illnesses, extensive competition and financial
deterioration resulting from leveraged buy-outs or takeovers. The IRBs
in the State Trusts may be subject to special or extraordinary redemption
provisions which may provide for redemption at par or, with respect to
original issue discount bonds, at issue price plus the amount of original
issue discount accreted to the redemption date plus, if applicable, a
premium. The Sponsor cannot predict the causes or likelihood of the
redemption of IRBs or other Municipal Bonds in the State Trusts prior to
the stated maturity of such Municipal Bonds.
Certain of the Municipal Bonds in the State Trusts may be
obligations which are payable from and secured by revenues derived from
the ownership and operation of facilities such as airports, bridges,
turnpikes, port authorities, convention centers and arenas. The major
portion of an airport's gross operating income is generally derived from
fees received from signatory airlines pursuant to use agreements which
consist of annual payments for leases, occupancy of certain terminal
space and service fees. Airport operating income may therefore by
affected by the ability of the airlines to meet their obligations under
the use agreements. The air transport industry is experiencing
significant variations in earnings and traffic, due to increased
competition, excess capacity, increased costs, deregulation, traffic
constraints and other factors, and several airlines are experiencing
severe financial difficulties. The Sponsor cannot predict what effect
these industry conditions may have on airport revenues which are
dependent for payment on the financial condition of the airlines and
their usage of the particular airport facility. Similarly, payment on
Municipal Bonds related to other facilities is dependent on revenues from
the projects, such as user fees from ports, tolls on turnpikes and
bridges and rents from buildings. Therefore, payment may be adversely
affected by reduction in revenues due to such factors as increased cost
of maintenance, decreased use of a facility, lower cost of alternative
modes of transportation, scarcity of fuel and reduction or loss of rents.
Certain of the Municipal Bonds in the State Trusts may be
obligations of issuers which are, or which govern the operation of,
schools, colleges and universities and whose revenues are derived mainly
from ad valorem taxes, or for higher education systems, from tuition,
dormitory revenues, grants and endowments. General problems relating to
school bonds include litigation contesting the state constitutionality of
financing public education in part from ad valorem taxes, thereby
creating a disparity in educational funds available to schools in wealthy
areas and schools in poor areas. Litigation or legislation on this issue
may affect the sources of funds available for the payment of school bonds
in the Trust. General problems relating to college and university
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obligations would include the prospect of a declining percentage of the
population consisting of "college" age individuals, possible inability to
raise tuition and fees sufficiently to cover increased operating costs,
the uncertainty of continued receipt of Federal grants and state funding
and new government legislation or regulations which may adversely affect
the revenues or costs of such issuers. All of such issuers have been
experiencing certain of these problems in varying degrees.
In addition, the ability of universities and colleges to meet their
obligations is dependent upon various factors, including the size and
diversity of their sources of revenues, enrollment, reputation,
management expertise, the availability and restrictions on the use of
endowments and other funds, the quality and maintenance costs of campus
facilities, and, in the case of public institutions, the financial
condition of the relevant state or other governmental entity and its
policies with respect to education. The institution's ability to
maintain enrollment levels will depend on such factors as tuition costs,
geographic location, geographic diversity and quality of student body,
quality of the faculty and the diversity of program offerings.
Certain of the Municipal Bonds in the State Trusts may be Urban
Redevelopment Bonds ("URBs"). URBs have generally been issued under bond
resolutions pursuant to which the revenues and receipts payable under the
arrangements with the operator of a particular project have been assigned
and pledged to purchasers. In some cases, a mortgage on the underlying
project may have been granted as security for the URBs. Regardless of
the structure, payment of the URBs is solely dependent upon the
creditworthiness of the operator of the project.
Certain of the Municipal Bonds in the State Trusts may be lease
revenue bonds whose revenues are derived from lease payments made by a
municipality or other political subdivision which is leasing equipment or
property for use in its operation. The risks associated with owning
Municipal Bonds of this nature include the possibility that appropriation
of funds for a particular project or equipment may be discontinued. The
Sponsor cannot predict the likelihood of nonappropriation of funds for
these types of lease revenue Municipal Bonds.
Certain of the Bonds in the Trust Funds may be sales and/or use tax
revenue bonds whose revenues are derived from the proceeds of a special
sales or use tax. Such taxes are generally subject to continuing
Legislative approval. Payments may be adversely affected by reduction of
revenues due to decreased use of a facility or decreased sales.
Certain of the Municipal Bonds in the State Trusts may be "zero
coupon" bonds, i.e., an original issue discount bond that does not
provide for the payment of current interest. Zero coupon bonds are
purchased at a deep discount because the buyer receives a final payment
at the maturity of the bond and does not receive any periodic interest
payments. The effect of owning deep discount bonds which do not make
current interest payments (such as the zero coupon bonds) is that a fixed
yield is earned not only on the original investment but also, in effect,
on all discount earned during the life of such obligation. This implicit
reinvestment of earnings at the same rate eliminates the risk of being
unable to reinvest the income on such obligation at a rate as high as the
implicit yield on the discount obligation, but at the same time
eliminates the holder's ability to reinvest at higher rates in the
future. For this reason, zero coupon bonds are subject to substantially
greater price fluctuations during periods of changing market interest
rates than are securities of comparable quality which pay interest
currently. For the Federal tax consequences of original issue discount
bonds such as the zero coupon bonds, see "Federal Tax Status of the State
Trusts."
Investors should be aware that many of the Municipal Bonds in the
State Trusts are subject to continuing requirements such as the actual
use of Municipal Bond proceeds or manner of operation of the project
financed from Municipal Bond proceeds that may affect the exemption of
interest on such Municipal Bonds from Federal income taxation. Although
at the time of issuance of each of the Municipal Bonds in the State
Trusts an opinion of bond counsel was rendered as to the exemption of
interest on such obligations from Federal income taxation, there can be
no assurance that the respective issuers or other obligers on such
obligations will fulfill the various continuing requirements established
upon issuance of the Municipal Bonds. A failure to comply with such
requirements may cause a determination that interest on such obligations
is subject to Federal income taxation, perhaps even retroactively from
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the date of issuance of such Municipal Bonds, thereby reducing the value
of the Municipal Bonds and subjecting Unitholders to unanticipated tax
liabilities.
Federal bankruptcy statutes relating to the adjustment of debts of
political subdivisions and authorities of states of the United States
provide that, in certain circumstances, such subdivisions or authorities
may be authorized to initiate bankruptcy proceedings without prior notice
to or consent of creditors, which proceedings could result in material
and adverse modification or alteration of the rights of holders of
obligations issued by such subdivisions or authorities.
Certain issues of the Municipal Bonds in the State Trusts represent
"moral obligations" of another governmental entity. In the event that
the issuer of the Municipal Bond defaults in the repayment thereof, such
other governmental entity lawfully may, but is not obligated to,
discharge the obligation of the issuer to repay such Municipal Bond.
If an issuer of moral obligation bonds is unable to meet its
obligations, the repayment of such Municipal Bonds becomes a moral
commitment but not a legal obligation of the State or municipality in
question. Even though the State may be called on to restore any deficits
in capital reserve funds of the agencies or authorities which issued the
bonds, any restoration generally requires appropriation by the State
legislature and accordingly does not constitute a legally enforceable
obligation or debt of the State. The agencies or authorities generally
have no taxing power.
To the best of the Sponsor's knowledge, as of the date of this
Prospectus, there is no litigation pending with respect to any Municipal
Bond which might reasonably be expected to have a material adverse effect
on the Trust or any State Trust. Although the Sponsor is unable to
predict whether any litigation may be instituted, or if instituted,
whether such litigation might have a material adverse effect on the
Trust, the Trust received copies of the opinions of bond counsel given to
the issuing authorities at the time of original delivery of each of the
Municipal Bonds to the effect that the Municipal Bonds had been validly
issued and that the interest thereon is exempt from Federal income taxes.
INSURANCE ON THE PORTFOLIOS
All Municipal Bonds in the portfolio of the State Trusts are insured
as to the scheduled payment of interest and principal, when due, by
policies obtained directly by the Trust from Financial Guaranty Insurance
Company ("Financial Guaranty") or by the Sponsor or by the issuer from
Financial Guaranty, MBIA or other insurers. The insurance policies
obtained by the Trust for a Series are non-cancelable and will continue
in force so long as such State Trust is in existence, Financial Guaranty
remains in business and the Municipal Bonds described in the policy
continue to be held in such State Trusts. The premium for any insurance
policy or policies obtained by an issuer of Municipal Bonds or the
Sponsor has been paid in advance by such issuer or the Sponsor and any
such policy or policies are non-cancelable and will remain in force so
long as the Municipal Bonds so insured are outstanding and the insurer
and/or insurers referred to below remain in business. A monthly premium
is paid by each State Trust for the insurance obtained by the Trust,
which is payable from the interest received by such State Trust. In
those instances where Municipal Bond insurance is obtained by the issuer
or the Sponsor directly from an insurer, no premiums for insurance are
paid by the State Trust and such bonds are not covered by the State
Trust's policy. Nonpayment of premiums on the policy obtained by the
State Trust will not result in the cancellation of such insurance but
will force the insurer to take action against the Trustee to recover
premium payments due it. Premium rates for each issue of Municipal Bonds
protected by the policy obtained by the Trust are fixed for the life of
the appropriate State Trusts. If the provider of an original issuance
insurance policy is unable to meet its obligations under such policy or
if the rating assigned to the claims paying ability of any such insurer
deteriorates, no other insurer has an obligation to insure any issue
adversely affected by either of the above described events.
The aforementioned insurance guarantees the scheduled payment of
principal and interest on the Municipal Bonds of each State Trust. It
does not guarantee the market value of the Municipal Bonds or the value
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of the Units of a State Trust. The insurance obtained by the Trust is
only effective as to Municipal Bonds owned by and held in a State Trust
and the price which an individual pays on acquisition of Units, or
receives on redemption or resale of Units, does not, except as indicated
below, include any element of value for the insurance obtained by the
Trust. Unitholders should recognize that in order to receive any benefit
from the portfolio insurance obtained by the State Trust, they must be
owners of the Units of a State Trust at the time the Trustee becomes
entitled to receive any payment from the insurer for such State Trust.
Insurance obtained by the issuer or the Sponsor of a Municipal Bond is
effective so long as the Municipal Bond is outstanding, whether or not
held by the State Trust.
Pursuant to an irrevocable commitment of Financial Guaranty, upon
the sale of a Municipal Bond under the Trust's insurance policy, the
Trustee has the right to obtain permanent insurance with respect to such
Municipal Bond (i.e., insurance to the maturity of the Municipal Bond
regardless of the identity of the holder thereof) (the "Permanent
Insurance") upon the payment of a single predetermined insurance premium
from the proceeds of the sale of such Municipal Bond. Accordingly, every
Municipal Bond in the Trust is eligible to be sold on an insured basis.
It is expected that the Trustee will exercise the right to obtain
Permanent Insurance with respect to Municipal Bonds in the State Trust
only if upon such exercise the Trust would receive net proceeds (i.e.,
the value of such Municipal Bond if sold as an insured Municipal Bond
less the insurance premium attributable to the Permanent Insurance) from
such sale in excess of the sale proceeds if such Municipal Bond was sold
on an uninsured basis. The insurance premium with respect to each
Municipal Bond is determined based upon the insurability of each
Municipal Bond as of the Date of Deposit and will not be increased or
decreased for any change in the creditworthiness of such Municipal Bond's
issuer.
Insurance obtained for a State Trust, under normal circumstances,
has no effect on the price or redemption value of Units. It is the
present intention of the Evaluator to attribute a value to such insurance
for the purpose of computing the price or redemption value of Units only
in circumstances where the credit quality of an underlying Municipal Bond
has significantly deteriorated. Insurance obtained by the issuer of a
Municipal Bond is effective so long as such Municipal Bond is
outstanding. Therefore, any such insurance may be considered to
represent an element of market value in regard to the Municipal Bonds
thus insured, but the exact effect, if any, of this insurance on such
market value cannot be predicted.
The value to be added to such Municipal Bonds shall be an amount
equal to the excess, if any, by which the net proceeds realizable from
the sale of the Municipal Bond on an insured basis exceeds the sum of
(i) the net proceeds receivable from the sale of the Municipal Bonds on
an uninsured basis plus (ii) the insurance premium attributable to the
Permanent Insurance. Insurance obtained by the issuer of a Municipal
Bond is effective so long as such Municipal Bond is outstanding.
Therefore, any such insurance may be considered to represent an element
of market value in regard to the Municipal Bonds thus insured, but the
exact effect, if any, of this insurance on such market value cannot be
predicted.
Under the provisions of the aforementioned insurance, Financial
Guaranty unconditionally and irrevocably agrees to pay to Citibank, N.A.,
or its successor, as its agent (the "Fiscal Agent"), that portion of the
principal of and interest on the covered Municipal Bonds which shall
become due for payment but shall be unpaid by reason of nonpayment by the
issuer of the Municipal Bonds. The term "due for payment" means, when
referring to the principal of a Municipal Bond, its stated maturity date
or the date on which it shall have been called for mandatory sinking fund
redemption and does not refer to any earlier date on which payment is due
by reason of call for redemption (other than by mandatory sinking fund
redemption), acceleration or other advancement of maturity and means,
when referring to interest on a Municipal Bond, the stated date for
payment of interest. When the interest on a Municipal Bond shall have
been determined, as provided in the underlying documentation relating to
such Municipal Bond, to be subject to Federal income taxation, "due for
payment" also means, when referring to the principal of such Municipal
Bond, the date on which such Municipal Bond has been called for mandatory
redemption as a result of such determination of taxability, and when
referring to interest on such Municipal Bond, the accrued interest at the
rate provided in such documentation to the date on which such Municipal
Bond has been called for such mandatory redemption, together with any
applicable redemption premium.
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Financial Guaranty will make such payments to the Fiscal Agent on
the date such principal or interest becomes due for payment or on the
business day next following the day on which Financial Guaranty shall
have received notice of nonpayment, whichever is later. The Fiscal Agent
will disburse to the Trustee the face amount of principal and interest
which is then due for payment but is unpaid by reason of nonpayment and
interest which is then due for payment but is unpaid by reason of
nonpayment by the issuer but only upon receipt by the Fiscal Agent of
(i) evidence of the Trustee's right to receive payment of the principal
or interest due for payment and (ii) evidence, including any appropriate
instruments of assignment, that all of the rights to payment of such
principal or interest due for payment shall thereupon vest in Financial
Guaranty. Upon such disbursement, Financial Guaranty shall become the
owner of the Municipal Bond, appurtenant coupon or right to payment of
principal or interest on such Municipal Bond and shall be fully
subrogated to all the Trustee's rights thereunder, including the right to
payment thereof.
Financial Guaranty Insurance Company. Financial Guaranty is a
wholly-owned subsidiary of FGIC Corporation, a Delaware holding company
(the "Corporation"). The Corporation is a wholly owned subsidiary of
General Electric Capital Corporation ("GECC"). Neither the Corporation
nor GECC is obligated to pay the debts of or the claims against Financial
Guaranty. Financial Guaranty is domiciled in the State of New York and
is subject to regulation by the State of New York Insurance Department.
As of June 30, 1996 the total capital and surplus of Financial Guaranty
was approximately $1,069,597,000. Copies of Financial Guaranty's
financial statements, prepared on the basis of statutory accounting
principles, and the Corporation's financial statements, prepared on the
basis of generally accepted accounting principles, may be obtained by
writing to Financial Guaranty at 115 Broadway, New York, New York 10006,
Attention: Communications Department (telephone number is (212) 312-3000)
or to the New York State Insurance Department at 160 West Broadway, 18th
Floor, New York 10013, Attention: Property Companies Bureau (telephone
number (212) 621-0389).
In addition, Financial Guaranty is currently authorized to write
insurance in all 50 states and the District of Columbia.
The information relating to Financial Guaranty contained above has
been furnished by such corporation. The financial information contained
herein with respect to such corporation is unaudited but appears in
reports or other materials filed with state insurance regulatory
authorities and is subject to audit and review by such authorities. No
representation is made herein as to the accuracy or adequacy of such
information or as to the absence of material adverse changes in such
information subsequent to the date thereof but the Sponsor is not aware
that the information herein is inaccurate or incomplete.
AMBAC Indemnity Corporation. AMBAC Indemnity Corporation ("AMBAC")
is a Wisconsin-domiciled stock insurance company, regulated by the Office
of the Commissioner of Insurance of the State of Wisconsin, and licensed
to do business in 50 states, the District of Columbia and the
Commonwealth of Puerto Rico, with admitted assets (unaudited) of
approximately $2,440,000,000 and statutory capital (unaudited) of
approximately $1,387,000,000 as of March 31, 1996. Statutory capital
consists of AMBAC policyholders' surplus and statutory contingency
reserve. AMBAC is a wholly owned subsidiary of AMBAC Inc., a 100%
publicly-held company. Moody's Investors Service, Inc. and Standard &
Poor's have both assigned a AAA claims-paying ability rating to AMBAC.
Copies of AMBAC's financial statements prepared in accordance with
statutory accounting standards are available from AMBAC. The address of
AMBAC's administrative offices and its telephone number are One State
Street Plaza, 17th Floor, New York, New York 10004 and (212) 668-0340.
AMBAC has entered into quota share reinsurance agreements under which a
percentage of the insurance underwritten pursuant to certain municipal
bonds insurance programs of AMBAC has been and will be assumed by a
number of foreign and domestic unaffiliated reinsurers.
MBIA Insurance Corporation. MBIA Insurance Corporation ("MBIA
Corporation") is the principal operating subsidiary of MBIA, Inc., a New
York Stock Exchange listed company. MBIA, Inc. is not obligated to pay
the debts of or claims against MBIA Corporation. MBIA Corporation, which
commenced municipal bond insurance operations on January 5, 1987, is a
limited liability corporation rather than a several liability
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association. MBIA Corporation is domiciled in the State of New York and
licensed to do business in all 50 states, the District of Columbia, the
Commonwealth of the Northern Mariana Islands, the Commonwealth of Puerto
Rico, the Virgin Islands of the United States and the Territory of Guam.
As of September 30, 1996 MBIA Corporation had admitted assets of
$4.3 billion (unaudited), total liabilities of $2.9 billion (unaudited),
and total capital and surplus of $1.4 billion (unaudited) prepared in
accordance with statutory accounting practices prescribed or permitted by
insurance regulatory authorities. Standard & Poor's has rated the claims
paying ability of MBIA "AAA." Copies of MBIA Corporation's financial
statements prepared in accordance with statutory accounting practices are
available form MBIA Corporation. The address of MBIA Corporation is 113
King Street, Armonk, New York 10504.
Effective December 31, 1989 MBIA, Inc. acquired Bond Investors
Group, Inc. On January 5, 1990, the Insurer acquired all of the
outstanding stock of Bond Investors Group, Inc., the parent of BIG, now
known as MBIA Insurance Corp. of Illinois. Though a reinsurance
agreement, BIG has ceded all of its net insured risks, as well as its
unearned premium and contingency reserves, to the Insurer and the Insurer
has reinsured BIG's net outstanding exposure.
Moody's Investors Service rates all bonds issues insured by MBIA
"Aaa" and short-term loans "MIG-1," both designated to be of the highest
quality. Standard & Poor's rates all new issues insured by MBIA "AAA."
Financial Security Assurance Inc. Financial Security Assurance
("Financial Security" or "FSA") is a monoline insurance company
incorporated on March 16, 1984 under the laws of the State of New York.
The operations of Financial Security commenced on July 25, 1985, and
Financial Security received its New York State insurance license on
September 23, 1985. Financial Security is licensed to engage in
financial guaranty insurance business in 50 states, the District of
Columbia and Puerto Rico.
Financial Security and its subsidiaries are engaged in the business
of writing financial guaranty insurance, principally in respect of asset-
backed and other collateralized securities offered in domestic and
foreign markets. Financial Security and its subsidiaries also write
financial guaranty insurance in respect of municipal and other
obligations and reinsure financial guaranty insurance policies written by
other leading insurance companies. In general, financial guaranty
insurance consists of the issuance of a guaranty of scheduled payments of
an issuer's securities, thereby enhancing the credit rating of these
securities, in consideration for payment of a premium to the insurer.
Financial Security insures both newly issued securities sold in the
primary market and outstanding securities sold in the secondary market
that satisfy Financial Security's underwriting criteria.
Financial Security is a wholly owned subsidiary of Financial
Security Assurance Holdings Ltd. ("Holdings"), a New York Stock Exchange
listed company. Major shareholders of Holdings include Fund American
Enterprises Holdings, Inc., U S WEST Capital Corporation and The Tokio
Marine and Fire Insurance Co., Ltd. No shareholder of Holdings is
obligated to pay any debt of Financial Security or any claim under any
insurance policy issued by Financial Security or to make any additional
contribution to the capital of Financial Security. Financial Security is
domiciled in the State of New York and is subject to regulation by the
State of New York Insurance Department.
As of March 31, 1996, the total policyholders' surplus and
contingency reserves and the total unearned premium reserve,
respectively, of Financial Security and its consolidated subsidiaries
were, in accordance with generally accepted accounting principles,
approximately $650,052,000 (unaudited) and $387,239,000 (unaudited), and
the total shareholder's equity and the unearned premium reserve,
respectively, of Financial Security and its consolidated subsidiaries
were, in accordance with generally accepted accounting principles,
approximately $779,177,000 (unaudited) and $340,226,000 (unaudited).
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Copies of Financial Security's financial statements may be obtained
by writing to Financial Security at 350 Park Avenue, New York, New York
10022, Attention: Communications Department. Financial Security's
Telephone number is (212) 826-0100.
Pursuant to an intercompany agreement, liabilities on financial
guaranty insurance written by Financial Security or any of its domestic
operating insurance company subsidiaries are reinsured among such
companies on an agreed-upon percentage substantially proportional to
their respective capital, surplus and reserves, subject to applicable
statutory risk limitations. In addition, Financial Security reinsurers a
portion of its liabilities under certain of its financial guaranty
insurance policies with unaffiliated reinsurers under various quota share
treaties and on a transaction-by-transaction basis. Such reinsurance is
utilized by Financial Security as a risk management device and to comply
with certain statutory and rating agency requirements; it does not alter
or limit Financial Security's obligations under any financial guaranty
insurance policy.
Financial Security's claims-paying ability is rated "Aaa" by Moody's
Investors Service, Inc., and "AAA" by Standard & Poor's, A Division of
the McGraw-Hill Companies, Nippon Investors Service Inc. and Standard &
Poor's (Australia) Pty. Ltd. Such ratings reflect only the views of the
respective rating agencies, are not recommendations to buy, sell or hold
securities and are subject to revision or withdrawal at any time by such
rating agencies.
Capital Guaranty Insurance Company. Capital Guaranty Insurance
Company ("Capital Guaranty") was incorporated in Maryland on June 25,
1986, and is a wholly owned subsidiary of Capital Guaranty Corporation, a
Maryland insurance holding company. Capital Guaranty Corporation is a
publicly owned company whose shares are traded on the New York Stock
Exchange.
Capital Guaranty is authorized to provide insurance in all 50
states, the District of Columbia and three U.S. territories. Capital
Guaranty focuses on insuring municipal securities and provides policies
which guaranty the timely payment of principal and interest when due for
payment on new issue and secondary market issue municipal bond
transactions. Capital Guaranty's claims-paying ability is rated
"Triple-A" by both Moody's and Standard & Poor's.
As of September 30, 1995, Capital Guaranty had more than $19.0
billion in net exposure outstanding (excluding defeased issues). The
total policyholders' surplus and contingency reserve of Capital Guaranty
was $204,642,000 (unaudited), and the total admitted assets were
$326,802,226 (unaudited) as reported to the Insurance Department of the
State of Maryland. Financial statements for Capital Guaranty Insurance
Company, that have been prepared in accordance with statutory insurance
accounting standards, are available upon request. The address of Capital
Guaranty's headquarters is Steuart Tower, 22nd Floor, One Market Plaza,
San Francisco, CA 94105-1413 and the telephone number is (415) 995-8000.
Because the Municipal Bonds are insured as to the scheduled payment
of principal and interest and on the basis of the financial condition and
the method of operation of the insurance companies referred to above,
either Standard & Poor's or Moody's has assigned to the State Trusts'
Units its "AAA" or "Aaa" investment rating, respectively, and, in
addition, Moody's has assigned its "Aaa" investment rating to each of the
Municipal Bonds covered by the Financial Guaranty policy while held in
the Trust. These are the highest ratings assigned to securities by such
rating agencies. See "Description of Securities Ratings" herein. These
ratings should not be construed as an approval of the offering of the
Units by Standard & Poor's or Moody's or as a guarantee of the market
value of the State Trusts or the Units. There is no guarantee that the
"AAA" or "Aaa" investment ratings will be maintained. The "AAA" Unit
rating received by a State Trust from Standard & Poor's on the original
date of deposit will be in effect for a period of 13 months from such
date and will, unless renewed, terminate at the end of such period.
On the date shown under "Essential Information" in Part Two, the
Estimated Long-Term and Current Returns per Unit for the Trust, after
payment of the insurance premium, if any, were as indicated. The
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Estimated Long-Term and Current Returns per Unit for a trust with an
identical portfolio without the insurance obtained by the Trust would
have been higher on such date.
An objective of the portfolio insurance obtained by the Trust is to
obtain a higher yield on the portfolio of the Series of the Trust than
would be available if all the Municipal Bonds in such portfolios had
Standard & Poor's "AAA" rating and/or Moody's "Aaa" rating, and at the
same time to have the protection of insurance of prompt payment of
interest and principal, when due, on the Municipal Bonds. There is, of
course, no certainty that this result will be achieved. Municipal Bonds
in a Series of the Trust which have been insured by the issuer (all of
which are rated "AAA" by Standard & Poor's and/or "Aaa" by Moody's) may
or may not have a higher yield than uninsured bonds rated "AAA" by
Standard & Poor's or "Aaa" by Moody's. In selecting such Municipal Bonds
for the portfolio, the Sponsor has applied the criteria described above.
In the event of nonpayment of interest or principal, when due, in
respect of a Municipal Bond, the appropriate insurer shall make such
payment not later than 30 days after it has been notified that such
nonpayment has occurred or is threatened (but not earlier than the date
such payment is due). The insurer, as regards any payment it may make,
will succeed to the rights of the Trustee in respect thereof.
The Internal Revenue Service has issued a letter ruling which holds,
in effect, that insurance proceeds representing maturing interest on
defaulted municipal obligations paid to municipal bond funds
substantially similar to the Trust, under policy provisions substantially
identical to the policies described herein, will be excludable from
Federal gross income under Section 103(a)(1) of the Internal Revenue
Code. Holders of Units in the State Trust should discuss with their tax
advisers the degree of reliance which they may place on this letter
ruling. Furthermore, Chapman and Cutler, counsel for the Sponsor, has
given an opinion to the effect that such payment of proceeds would be
excludable from Federal gross income to the same extent that such
interest would have been so excludable if paid by the issuer of the
defaulted obligations. See "Federal Tax Status of the State Trusts."
DISTRIBUTION REINVESTMENT
Each Unitholder of a State Trust may elect to have distributions of
principal (including capital gains, if any) or interest or both
automatically invested without charge in shares of any mutual fund
underwritten or advised by Zurich Kemper Investments, Inc. (the "Kemper
Funds") which are registered in the Unitholder's State of Residence,
other than those Kemper Funds sold with a contingent deferred sales
charge. Since the portfolio securities and investment objectives of such
Kemper Funds may differ significantly from that of the Trust, Unitholders
should carefully consider the consequences, including the fact that
distributions from such Kemper Funds may be taxable, before selecting
such Kemper Funds for reinvestment. Detailed information with respect to
the investment objectives and the management of the Funds is contained in
their respective prospectuses, which can be obtained from the Sponsor,
and many investment firms, upon request. An investor should read the
appropriate prospectus prior to making the election to reinvest.
A Unitholder who desires to have such distributions automatically
reinvested without charge should file a written notice of election with
the Program Agent referred to below. Such election must be received by
the Program Agent at least ten days prior to the Record Date applicable
to any distribution in order to be in effect for such Record Date. Any
such election shall remain in effect until a subsequent notice is
received by the Program Agent. See "Unitholders-Distributions to
Unitholders."
The Program Agent is the Trustee. All inquiries concerning
participation in distribution reinvestment should be directed to the
Trustee at its unit investment trust office.
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INTEREST, ESTIMATED CURRENT RETURN AND ESTIMATED LONG-TERM RETURN
As of the opening of business on the date indicated therein, the
Estimated Current Returns and the Estimated Long-Term Returns for each
State Trust were as set forth under "Essential Information" for the
applicable State Trust in Part Two of this Prospectus. Estimated Current
Returns are calculated by dividing the estimated net annual interest
income per Unit by the Public Offering Price. The estimated net annual
interest income per Unit will vary with changes in fees and expenses of
the Trustee, the Sponsor and the Evaluator and with the principal
prepayment, redemption, maturity, exchange or sale of Securities while
the Public Offering Price will vary with changes in the offering price of
the underlying Securities and with changes in accrued interest;
therefore, there is no assurance that the present Estimated Current
Returns will be realized in the future. Estimated Long-Term Returns are
calculated using a formula which (1) takes into consideration, and
determines and factors in the relative weightings of, the market values,
yields (which takes into account the amortization of premiums and the
accretion of discounts) and estimated retirements of all of the
Securities in the State Trust and (2) takes into account the expenses and
sales charge associated with each State Trust Unit. Since the market
values and estimated retirements of the Securities and the expenses of
the State Trust will change, there is no assurance that the present
Estimated Long-Term Returns will be realized in the future. Estimated
Current Returns and Estimated Long-Term Returns are expected to differ
because the calculation of Estimated Long-Term Returns reflects the
estimated date and amount of principal returned while Estimated Current
Returns calculations include only net annual interest income and Public
Offering Price.
FEDERAL TAX STATUS OF THE STATE TRUSTS
All Municipal Bonds deposited in a Trust were accompanied by copies
of opinions of bond counsel to the issuers thereof, given at the time of
original delivery of the Municipal Bonds, to the effect that the interest
thereon is excludable from gross income for Federal income tax purposes.
In connection with the offering of Units of a Trust, neither the Sponsor,
the Trustee, the auditors nor their respective counsel have made any
review of the proceedings relating to the issuance of the Municipal Bonds
or the basis for such opinions.
With respect to each Trust, counsel for the Sponsor rendered an
opinion as of the Date of Deposit that:
The Trust is not an association taxable as a corporation for
Federal income tax purposes and interest and accrued original issue
discount on Bonds which is excludable from gross income under the
Internal Revenue Code of 1986, as amended (the "Code") will retain
its status when distributed to Unitholders; however, such interest
may be taken into account in computing the alternative minimum tax,
an additional tax on branches of foreign corporations and the
environmental tax (the "Superfund Tax"), as noted below.
Each Unitholder is considered to be the owner of a pro rata
portion of each asset of the respective Trust in the proportion that
the number of Units of such Trust held by him bears to the total
number of Units outstanding of such Trust under subpart E,
subchapter J of chapter 1 of the Code and will have a taxable event
when such Trust disposes of a Bond, or when the Unitholder redeems
or sells his Units. Unitholders must reduce the tax basis of their
Units for their share of accrued interest received by a Trust, if
any, on Bonds delivered after the date the Unitholders pay for their
Units to the extent that such interest accrued on such Bonds during
the period from the Unitholder's settlement date to the date such
Bonds are delivered to a Trust and, consequently, such Unitholders
may have an increase in taxable gain or reduction in capital loss
upon the disposition of such Units. Gain or loss upon the sale or
redemption of Units is measured by comparing the proceeds of such
sale or redemption with the adjusted basis of the Units. If the
Trustee disposes of Bonds (whether by sale, payment on maturity,
redemption or otherwise), gain or loss is recognized to the
Unitholder (subject to various non-recognition provisions of the
Code). The amount of any such gain or loss is measured by comparing
the Unitholder's pro rata share of the total proceeds from such
disposition with the Unitholder's basis for his or her fractional
interest in the asset disposed of. In the case of a Unitholder who
purchases Units, such basis (before adjustment for earned original
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issue discount and amortized bond premium, if any) is determined by
apportioning the cost of the Units among each of the Trust's assets
ratably according to their value as of the valuation date nearest
the date of acquisition of the Units. The tax basis reduction
requirements of the Code relating to amortization of bond premium
may, under some circumstances, result in the Unitholder realizing a
taxable gain when his Units are sold or redeemed for an amount equal
to or less than his original cost.
Any insurance proceeds paid under individual policies obtained
by issuers of Bonds which represent maturing interest on defaulted
obligations held by the Trustee will be excludable from Federal
gross income if, and to the same extent as, such interest would have
been so excludable if paid in the normal course by the issuer of the
defaulted obligations provided that, at the time such policies are
purchased, the amounts paid for such policies are reasonable,
customary and consistent with the reasonable expectation that the
issuer of the obligations, rather than the insurer, will pay debt
service on the obligations.
Sections 1288 and 1272 of the Code provide a complex set of rules
governing the accrual of original issue discount. These rules provide
that original issue discount accrues either on the basis of a constant
compound interest rate or ratably over the term of the Municipal Bond,
depending on the date the Municipal Bond was issued. In addition,
special rules apply if the purchase price of a Municipal Bond exceeds the
original issue price plus the amount of original issue discount which
would have previously accrued based upon its issue price (its "adjusted
issue price") to prior owners. The application of these rules will also
vary depending on the value of the Municipal Bond on the date a
Unitholder acquires his Units, and the price the Unitholder pays for his
Units. Unitholders should consult with their tax advisers regarding
these rules and their application.
The Revenue Reconciliation Act of 1993 (the "Tax Act") subjects tax-
exempt bonds to the market discount rules of the Code effective for bonds
purchased after April 30, 1993. In general, market discount is the
amount (if any) by which the stated redemption price at maturity exceeds
an investor's purchase price (except to the extent that such difference,
if any, is attributable to original issue discount not yet accrued)
subject to a statutory de minimis rule. Market discount can arise based
on the price a Trust pays for Municipal Bonds or the price a Unitholder
pays for his or her Units. Under the Tax Act, accretion of market
discount is taxable as ordinary income; under prior law the accretion had
been treated as capital gain. Market discount that accretes while a
Trust holds a Municipal Bond would be recognized as ordinary income by
the Unitholders when principal payments are received on the Municipal
Bond, upon sale or at redemption (including early redemption), or upon
the sale or redemption of his or her Units, unless a Unitholder elects to
include market discount in taxable income as it accrues. The market
discount rules are complex and Unitholders should consult their tax
advisers regarding these rules and their application.
In the case of certain corporations, the alternative minimum tax and
the Superfund Tax for taxable years beginning after December 31, 1986
depends upon the corporation's alternative minimum taxable income, which
is the corporation's taxable income with certain adjustments. One of the
adjustment items used in computing the alternative minimum taxable income
and the Superfund Tax of a corporation (other than an S Corporation,
Regulated Investment Company, Real Estate Investment Trust, or REMIC) is
an amount equal to 75% of the excess of such corporation's "adjusted
current earnings" over an amount equal to its alternative minimum taxable
income (before such adjustment item and the alternative tax net operating
loss deduction). "Adjusted current earnings" includes all tax-exempt
interest, including interest on all of the Bonds in a Trust. Under the
provisions of Section 884 of the Code, a branch profits tax is levied on
the "effectively connected earnings and profits" of certain foreign
corporations which include tax-exempt interest such as interest on the
Bonds in the Trust. Under current Code provisions, the Superfund Tax
does not apply to tax years beginning on or after January 1, 1996.
However, the Superfund Tax could be extended retroactively. Unitholders
should consult their tax advisers with respect to the particular tax
consequences to them including the corporate alternative minimum tax, the
Superfund Tax and the branch profits tax imposed by Section 884 of the
Code.
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Counsel for the Sponsor has also advised that under Section 265 of
the Code, interest on indebtedness incurred or continued to purchase or
carry Units of a Trust is not deductible for Federal income tax purposes.
The Internal Revenue Service has taken the position that such
indebtedness need not be directly traceable to the purchase or carrying
of Units (however, these rules generally do not apply to interest paid on
indebtedness incurred to purchase or improve a personal residence).
Also, under Section 265 of the Code, certain financial institutions that
acquire Units would generally not be able to deduct any of the interest
expense attributable to ownership of such Units. On December 7, 1995 the
U.S. Treasury Department released proposed legislation that, if enacted,
would generally extend the financial institution rules to all
corporations, effective for obligations acquired after the date of
announcement. Investors with questions regarding these issues should
consult with their tax advisers.
In the case of certain Municipal Bonds in a Trust, the opinions of
bond counsel indicate that interest on such Municipal Bonds received by a
"substantial user" of the facilities being financed with the proceeds of
these Municipal Bonds or persons related thereto, for periods while such
Municipal Bonds are held by such a user or related person, will not be
excludable from Federal gross income, although interest on such Municipal
Bonds received by others would be excludable from Federal gross income.
"Substantial user" and "related person" are defined under the Code and
U.S. Treasury Regulations. Any person who believes that he or she may be
a "substantial user" or a "related person" as so defined should contact
his or her tax adviser.
In the case of corporations, the alternative tax rate applicable to
long-term capital gains is 35% effective for long-term capital gains
realized in taxable years beginning on or after January 1, 1993. For
taxpayers other than corporations, net capital gains are subject to a
maximum marginal stated tax rate of 28%. However, it should be noted
that legislative proposals are introduced from time to time that affect
tax rates and could affect relative differences at which ordinary income
and capital gains are taxed. Under the Code, taxpayers must disclose to
the Internal Revenue Service the amount of tax-exempt interest earned
during the year.
All statements of law in the Prospectus concerning exclusion from
gross income for Federal, State or other tax purposes are the opinions of
counsel and are to be so construed.
At the respective times of issuance of the Bonds, opinions relating
to the validity thereof and to the exclusion of interest thereon from
Federal gross income are rendered by bond counsel to the respective
issuing authorities. Neither the Sponsor nor its counsel has made any
special review for the Trust of the proceedings relating to the issuance
of the bonds or of the basis for such opinions.
Section 86 of the Code, in general, provides that fifty percent of
Social Security benefits are includible in gross income to the extent
that the sum of "modified adjusted gross income" plus fifty percent of
the Social Security benefits received exceeds a "base amount." The base
amount is $25,000 for unmarried taxpayers, $32,000 for married taxpayers
filing a joint return and zero for married taxpayers who do not live
apart at all times during the taxable year and who file separate returns.
Modified adjusted gross income is adjusted gross income determined
without regard to certain otherwise allowable deductions and exclusions
from gross income and by including tax-exempt interest. To the extent
that Social Security benefits are includible in gross income, they will
be treated as any other item of gross income.
In addition, under the Tax Act, for taxable years beginning after
December 31, 1993, up to 85 percent of Social Security benefits are
includible in gross income to the extent that the sum of "modified
adjusted gross income" plus fifty percent of Social Security benefits
received exceeds an "adjusted base amount." The adjusted based amount is
$34,000 for unmarried taxpayers, $44,000 for married taxpayers filing a
joint return and zero for married taxpayers who do not live apart at all
times during the taxable year and who file separate returns.
Although tax-exempt interest is included in modified adjusted gross
income solely for the purpose of determining what portion, if any, of
Social Security benefits will be included in gross income, no tax-exempt
interest, including that received from the Trust, will be subject to tax.
A taxpayer whose adjusted gross income already exceeds the base amount or
the adjusted base amount must include 50% or 85%, respectively, of his or
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her Social Security benefits in gross income whether or not he or she
receives any tax-exempt interest. A taxpayer whose modified adjusted
gross income (after inclusion of tax-exempt interest) does not exceed the
base amount need not include any Social Security benefits in gross
income.
Ownership of the Units may result in collateral Federal income tax
consequences to certain taxpayers, including, without limitation,
corporations subject to either the environmental tax or the branch
profits tax, financial institutions, certain insurance companies, certain
S corporations, individual recipients of Social Security or Railroad
Retirement benefits and taxpayers who may be deemed to have incurred (or
continued) indebtedness to purchase or carry tax-exempt obligations.
Prospective investors should consult their tax advisors as to the
applicability of any collateral consequences.
For a discussion of the State tax status of income earned on Units
of a State trust, see the discussion of tax status for the applicable
trust. Except as noted therein, the exemption of interest on State and
local obligations for Federal income tax purposes discussed above does
not necessarily result in exemption under the income or other tax laws of
any State or city. The laws of the several States vary with respect to
the taxation of such obligations.
DESCRIPTION AND STATE TAX STATUS OF THE STATE TRUSTS
Alabama Trusts. Alabama's economy has experienced a
major trend toward industrialization over the past two decades. By 1990,
manufacturing accounted for 26.7% of Alabama's Real Gross State Product
(the total value of goods and services produced in Alabama). During the
1960s and 1970s, the State's industrial base became more diversified and
balanced, moving away from primary textiles (including apparel),
chemicals, rubber and plastics. Since the early 1980s, modernization of
existing facilities and an increase in direct foreign investments in the
State has made the manufacturing sector more competitive in domestic and
international markets.
Among several leading manufacturing industries have been pulp and
papers and chemicals, the development and growth of which have been made
possible by abundant rainfall (the mean annual average of which varies
between 52 and 68 inches) and a high pulpwood growth rate (averaging
approximately one-half cord per acre per year). In recent years, Alabama
has ranked as the fifth largest producer of timber in the nation.
Alabama has fresh water availability of twenty times present usage. The
State's growing chemical industry has been the natural complement of
production of wood pulp and paper. Mining, oil and gas production and
service industries are also important to Alabama's economy. Coal mining
is by far the most important mining activity.
In recent years, the importance of service industries to the State's
economy has increased significantly. The major service industries in the
State are the general healthcare industries, most notably represented by
the University of Alabama medical complex in Birmingham and the high
technology research and development industries concentrated in the
Huntsville area. The financial, insurance and real estate sectors have
also shown strong growth over the last several years.
The economy in the State of Alabama recovered quickly from the
recession of the early 1980s. Since 1983, the State has recovered and
moved forward faster than the national average. The Alabama Development
Office reported as of December 31, 1994, that for the eighth consecutive
year, more than two billion dollars were expended in Alabama for new and
expanded industries. The State had new and expanding capital investment
of $2.6 billion in 1994. These expenditures included 22,850 announced
jobs created by 942 separate companies for 1994.
The budget for fiscal year 1997 has been passed, with estimated
expenditures for the 1997 budget call at $3.5 billion from the Special
Education Trust Fund and $875.1 million from the General Fund. Revenues
from the two funds for 1995 were $4,078 million and are projected to be
over $4.2 billion for 1996.
Employment. Unemployment has declined slightly in the most recent
period, with the rate for November 1996 standing at 5.0%, compared to a
6.3% unemployment rate for November 1995. The 1995 annual unemployment
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rate was 6.3%. Total non-agricultural employment increased .77% from
November 1995 to November 1996; however, the goods-producing industry
decreased 1.53% during the same period. The service-producing industry
increased 1.61% from November 1995 to November 1996.
Transportation. Alabama contains one of the largest networks of
inland river systems in the nation. Across the northern section of the
State, through the heartland and down to the Gulf of Mexico flow the
waters of four major rivers offering barge transportation to industries
and businesses that depend on the movement of large, heavy or bulky
cargoes.
The Port of Mobile is one of the nation's busiest ports in tons of
cargo handled. During the fiscal year ending September 30, 1991, the
Port of Mobile handled approximately 35,031,521 tons of cargo. It has
been the largest port of entry in the United States for bauxite, a basic
ingredient in aluminum. Other significant imports handled at the Port of
Mobile are manganese, iron ore, chrome ore, newsprint, wire and nails.
In addition to coal, the State's most important export, the other
significant exports passing through the Port of Mobile are soybeans,
corn, flour, wheat, rice, lumber, scrap iron, paper and paper products,
creosoted timbers, dry milk, iron, steel and iron and steel products.
Political subdivisions of the State of Alabama have limited taxing
authority. In addition, the Alabama Supreme Court has held that a
governmental unit may first use its taxes and other revenues to pay the
expenses of providing necessary governmental services before paying debt
service on its bonds, warrants or other indebtedness. The State has
statutory budget provisions which result in a proration procedure in the
event estimated budget resources in a fiscal year are insufficient to pay
in full all appropriations for that year. Proration has a materially
adverse effect on public entities that are dependent upon State funds
subject to proration.
Deterioration of economic conditions could adversely affect both tax
and other governmental revenues, as well as revenues to be used to
service various revenue obligations, such as industrial development
obligations. Such difficulties could adversely affect the market value
of the bonds held by the Alabama Trust and thereby adversely affect
Unitholders.
The foregoing information constitutes only a brief summary of some
of the general factors which may impact certain issuers of Bonds and does
not purport to be a complete or exhaustive description of all adverse
conditions to which the issuers of Bonds held by the Alabama Trust are
subject. Additionally, many factors including national economic, social
and environmental policies and conditions, which are not within the
control of the issuers of the Bonds, could affect or could have an
adverse impact on the financial condition of the issuers. The Sponsor is
unable to predict whether or to what extent such factors or other factors
may affect the issuers of the Bonds, the market value or marketability of
the Bonds or the ability of the respective issuers of the Bonds acquired
by the Alabama Trust to pay interest on or principal of the Bonds.
At the time of the closing for each Alabama Trust, Special Counsel
to the Fund for Alabama tax matters rendered an opinion under then
existing Alabama income tax law applicable to taxpayers whose income is
subject to Alabama income taxation substantially to the effect that:
The Alabama Trust is not taxable as a corporation for purposes
of the Alabama income tax.
Income of the Alabama Trust, to the extent it is taxable, will
be taxable to the Unitholders, not the Alabama Trust.
Each Unitholder's distributive share of the Alabama Trust's net
income will be treated as the income of the Unitholder for purposes
of the Alabama income tax.
Interest on obligations of the State of Alabama and
subdivisions thereof and on bona fide tax-exempt obligations of the
United States' Possessions held by the Alabama Trust which is exempt
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from Alabama income tax will retain its tax-exempt character when
the distributive share thereof is distributed or deemed distributed
to each Unitholder. Any proceeds paid to the Alabama Trust under
insurance policies issued to the Sponsor or under individual
policies obtained by the Sponsor, the issuer or underwriter of the
respective obligations which represent maturing interest on
defaulted obligations held by the Trustee will be exempt from
Alabama income tax if and to the same extent as such interest would
be exempt from such taxes if paid directly by the issuer of such
obligations.
Each Unitholder will, for purposes of the Alabama income tax,
treat his distributive share of gains realized upon the sale or
other disposition of the Bonds held by the Alabama Trust as though
the Bonds were sold or disposed of directly by the Unitholders.
Gains realized on the sale or redemption of Units by
Unitholders, who are subject to the Alabama income tax, will be
includable in the Alabama income of such Unitholders.
Arizona Trusts. The following brief summary regarding
the economy of Arizona is based upon information drawn from publicly
available sources and is included for the purpose of providing the
information about general economic conditions that may or may not affect
issuers of the Arizona Bonds. The Sponsor has not independently verified
any of the information contained in such publicly available documents.
Arizona is the nation's sixth largest state in terms of area.
Arizona's main economic/employment sectors include services, tourism and
manufacturing. Mining and agriculture are also significant, although
they tend to be more capital than labor intensive. Services is the
single largest economic sector. Many of these jobs are directly related
to tourism.
The unemployment rate in Arizona as of October 1996 was 5.6%. This
is higher than the national rate in October 1996 of 4.9%. The annual
unemployment rate for the U.S. in 1996 was 5.4% (not seasonally
adjusted).
In 1986, the value of Arizona real estate began a steady decline,
reflecting a market which had been overbuilt in the previous decade with
a resulting surplus of completed inventory. This decline adversely
affected both the construction industry and those Arizona financial
institutions which had aggressively pursued many facets of real estate
lending. In the near future, Arizona's financial institutions are likely
to continue to experience problems until the excess inventories of
commercial and residential properties are absorbed. The problems of the
financial institutions have adversely affected employment and economic
activity. Longer-term prospects are brighter. Arizona has been, and is
projected to continue to be, one of the fastest growing areas in the
United States. Over the last several decades the State has outpaced most
other regions of the country in virtually every major category of growth,
including population, personal income, gross state product and job
creation.
Arizona's per capita personal income in 1994 and 1995 was $19,389
and $20,489, respectively, a 5.7% increase. The national increase for
the same period was 5.3%.
Budgetary Process. Arizona operates on a fiscal year beginning July
1 and ending June 30. Fiscal year 1995 refers to the year ending June
30, 1995.
Total General and Special Revenue Funds revenues of over $6.5
billion were expected during fiscal year 1994. Approximately 44.5% of
this budgeted revenue comes from sales and use taxes, 44.4% from income
taxes (both individual and corporate) and 4.4% from property taxes. All
taxes total approximately $4.0 billion, or 93% of General Fund revenues.
Non-tax revenue includes items such as income from the state lottery,
licenses, fees and permits, and interest.
For fiscal year 1994, the budget called for expenditures of
approximately $6.3 billion. These expenditures fell into the following
major categories: education (47.4%), health and welfare (26.3%),
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protection and safety (4.0%), general government (15.5%) and inspection
and regulation, natural resources, transportation and other (6.8%). The
State's general fund revenues for fiscal year 1995 were budgeted at
approximately $4.7 billion.
Most or all of the Bonds of the Arizona Trust are not obligations of
the State of Arizona, and are not supported by the State's taxing powers.
The particular source of payment and security for each of the Bonds is
detailed in the instruments themselves and in related offering materials.
There can be no assurances, however, with respect to whether the market
value or marketability of any of the Bonds issued by an entity other than
the State of Arizona will be affected by the financial or other condition
of the State or of any entity located within the State. In addition, it
should be noted that the State of Arizona, as well as counties,
municipalities, political subdivisions and other public authorities of
the state, are subject to limitations imposed by Arizona's constitution
with respect to ad valorem taxation, bonded indebtedness and other
matters. For example, the state legislature cannot appropriate revenues
in excess of 7% of the total personal income of the state in any fiscal
year. These limitations may affect the ability of the issuers to
generate revenues to satisfy their debt obligations.
Although most of the Bonds in the Arizona Trust are revenue
obligations of local governments or authorities in the State, there can
be no assurance that the fiscal and economic conditions referred to above
will not affect the market value or marketability of the Bonds or the
ability of the respective obligors to pay principal of and interest on
the Bonds when due.
On July 21, 1994, the Arizona Supreme Court rendered its opinion in
Roosevelt Elementary School District Number 66, et al. v.c. Dianne
Bishop, et al. (the "Roosevelt Opinion"). In this opinion, the Arizona
Supreme Court held that the present statutory financing scheme for public
education in the State of Arizona does not comply with the Arizona
constitution. Subsequently, the Arizona School Boards Association, with
the approval of the appellants and the appellees to the Roosevelt
Opinion, and certain Arizona school districts, filed with the Arizona
Supreme Court motions for clarification of the Roosevelt Opinion,
specifically with respect to seeking prospective application of the
Roosevelt Opinion. On July 29, 1994, the Arizona Supreme Court clarified
the Roosevelt Opinion to hold that such opinion will have prospective
effect only.
Certain other circumstances are relevant to the market value,
marketability and payment of any hospital and health care revenue bonds
in the Arizona Trust. The Arizona Legislature has in the past sought to
enact health care cost control legislation. Certain other health care
regulatory laws have expired. It is expected that the Arizona
legislature will at future sessions continue to attempt to adopt
legislation concerning health care cost control and related regulatory
matters. The effect of any such legislation or of the continued absence
of any legislation restricting hospital bed increases and limiting new
hospital construction on the ability of Arizona hospitals and other
health care providers to pay debt service on their revenue bonds cannot
be determined at this time.
Arizona does not participate in the federally administered Medicaid
program. Instead, the state administers an alternative program, Arizona
Health Care Cost Containment System ("AHCCCS"), which provides health
care to indigent persons meeting certain financial requirements, through
managed care programs. In fiscal year 1994, AHCCCS was financed
approximately 60% by federal funds, 29% by state funds, and 11% by county
funds.
Under state law, hospitals retain the authority to raise rates with
notification and review by, but not approval from, the Department of
Health Services. Hospitals in Arizona have experienced profitability
problems along with those in other states. At least two Phoenix-based
hospitals have defaulted on or reported difficulties in meeting their
bond obligations during the past three years.
Insofar as tax-exempt Arizona public utility pollution control
revenue bonds are concerned, the issuance of such bonds and the periodic
rate increases needed to cover operating costs and debt service are
subject to regulation by the Arizona Corporation Commission, the only
significant exception being the Salt River Project Agricultural
Improvement and Power District which, as a Federal instrumentality, is
exempt from rate regulation. On July 15, 1991, several creditors of
Tucson Electric Power Company ("Tucson Electric") filed involuntary
petitions under Chapter 11 of the U.S. Bankruptcy Code to force Tucson
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Power to reorganize under the supervision of the bankruptcy court. On
December 31, 1991, the Bankruptcy Court approved the utility's motion to
dismiss the July petition after five months of negotiations between
Tucson Electric and its creditors to restructure the utility's debts and
other obligations. In December 1992, Tucson Electric announced that it
had completed its financial restructuring. In January 1993, Tucson
Electric asked the Arizona Corporation Commission for a 9.3% average rate
increase. Tucson Electric serves approximately 270,000 customers,
primarily in the Tucson area. Inability of any regulated public utility
to secure necessary rate increases could adversely affect, to an
indeterminable extent, its ability to pay debt service on its pollution
control revenue bonds.
Based on a recent U.S. Supreme Court ruling, the State has
determined to refund $197 million, including statutory interest, in State
income taxes previously collected from Federal retirees on their
pensions. This payment will be made over a four-year period beginning
with approximately $14.6 million in tax refunds in fiscal year 1993-94.
A combination of tax refunds and tax credits will be used to satisfy this
liability.
The foregoing information constitutes only a brief summary of some
of the general factors which may impact certain issuers of Bonds and does
not purport to be a complete or exhaustive description of all adverse
conditions to which the issuers of Bonds held by the Arizona Trusts are
subject, Additionally, many factors including national economic, social
and environmental policies and conditions, which are not within the
control of the issuers of the Bonds, could affect or could have an
adverse impact on the financial condition of the issuers. The Sponsor is
unable to predict whether or to what extent such factors or other factors
may affect the issuers of the Bonds, the market value or marketability of
the Bonds or the ability of the respective issuers of the Bonds acquired
by the Arizona Trust to pay interest on or principal of the Bonds.
At the time of the closing for the Arizona Trust, Special Counsel to
the Fund for Arizona tax matters rendered an opinion under then existing
Arizona income tax law applicable to taxpayers whose income is subject to
Arizona income taxation substantially to the effect that:
For Arizona income tax purposes, each Unitholder will be treated as
the owner of a pro rata portion of the Arizona Trust, and the income of
the Trust therefore will be treated as the income of the Unitholder under
State law.
For Arizona income tax purposes, interest on the Bonds which is
excludable from Federal gross income and which is exempt from Arizona
income taxes when received by the Arizona Trust, and which would be
excludable from Federal gross income and exempt from Arizona income taxes
if received directly by a Unitholder, will retain its status as tax-
exempt interest when received by the Arizona Trust and distributed to the
Unitholders.
To the extent that interest derived from the Arizona Trust by a
Unitholder with respect to the Bonds is excludable from Federal gross
income, such interest will not be subject to Arizona income taxes;
Each Unitholder will receive taxable gain or loss for Arizona income
tax purposes when Bonds held in the Arizona Trust are sold, exchanged,
redeemed or paid at maturity, or when the Unitholder redeems or sells
Units, at a price that differs from original cost as adjusted for
accretion of any discount or amortization of any premium and other basis
adjustments, including any basis reduction that may be required to
reflect a Unitholder's share of interest, if any, accruing on Bonds
during the interval between the Unitholder's settlement date and the date
such Bonds are delivered to the Arizona Trust, if later.
Amounts paid by the Insurer under an insurance policy or policies
issued to the Trust, if any, with respect to the Bonds in the Trust which
represent maturing interest on defaulted obligations held by the Trustee
will be exempt from State income taxes if, and to the same extent as,
such interest would have been so exempt if paid by the issuer of the
defaulted obligations provided that, at the time such policies are
purchased, the amounts paid for such policies are reasonable, customary
and consistent with the reasonable expectation that the issuer of the
obligations, rather than the insurer, will pay debt service on the
obligations.
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Arizona law does not permit a deduction for interest paid or
incurred on indebtedness incurred or continued to purchase or carry Units
in the Arizona Trust, the interest on which is exempt from Arizona income
taxes.
Neither the Bonds nor the Units will be subject to Arizona property
taxes, sales taxes or use taxes.
Counsel to the Sponsor has expressed no opinion with respect to
taxation under any other provisions of Arizona law. Ownership of the
Units may result in collateral Arizona tax consequences to certain
taxpayers. Prospective investors should consult their tax advisors as to
the applicability of any such collateral consequences.
California Trusts. The Trust will invest
substantially all of its assets in California Municipal Obligations. The
Trust is therefore susceptible to political, economic or regulatory
factors affecting issuers of California Municipal Obligations. These
include the possible adverse effects of certain California constitutional
amendments, legislative measures, voter initiatives and other matters
that are described below. The following information provides only a
brief summary of the complex factors affecting the financial situation in
California (the "State") and is derived from sources that are generally
available to investors and are believed to be accurate. No independent
verification has been made of the accuracy or completeness of any of the
following information. It is based in part on information obtained from
various State and local agencies in California or contained in official
statements for various California Municipal Obligations.
There can be no assurance that future statewide or regional economic
difficulties, and the resulting impact on State or local governmental
finances generally, will not adversely affect the market value of
California Municipal Obligations held in the portfolio of the Trust or
the ability of particular obligors to make timely payments of debt
service on (or relating to) those obligations.
California's economy is the largest among the 50 states and one of
the largest in the world. The State's population of more than 32 million
represents over 12% of the total United States population and grew by 27%
in the 1980s. Total personal income in the State in 1995 of $760.4
billion accounts for almost 13% of all personal income in the nation.
Total employment is over 14 million, the majority of which is in the
service, trade, and manufacturing sectors.
From mid-1990 to late 1993, the State's economy suffered its worst
recession since the 1930s, with recovery starting later than for the
nation as a whole. The State has experienced the worst job losses of any
post-war recession. Prerecession job levels may not be realized until
near the end of the decade. The largest job losses have been in Southern
California, led by declines in the aerospace and construction industries.
Weakness statewide occurred in manufacturing, construction, services and
trade. Additional military base closures will have further adverse
effects on the State's economy later in the decade.
Since the start of 1994, the California economy has shown signs of
steady recovery and growth. The State Department of Finance reports net
job growth, particularly in construction and related manufacturing,
wholesale and retail trade, transportation, recreation and services.
This growth has offset the continuing but slowing job losses in the
aerospace industry and restructuring of the finance and utility sectors.
Unemployment in the State was down substantially in 1995 to 7.8% from its
10% peak in January, 1994, but remained higher than the national average
rate in 1995 of 5.6%. As of November 1996, the 11-month average
unemployment rate in California was 7.3%. This figure decreased from an
8.2% unemployment rate in January 1996 to 6.7% in November 1996. The
national unemployment rate in 1996 was 5.4%. Delay or slowdown in
recovery will adversely affect State revenues.
Certain California Municipal Obligations may be obligations of
issuers which rely in whole or in part, directly or indirectly, on ad
valorem property taxes as a source of revenue. The taxing powers of
California local governments and districts are limited by Article XIIIA
of the California Constitution, enacted by the voters in 1978 and
commonly known as "Proposition 13." Briefly, Article XIIIA limits to 1%
of full cash value the rate of ad valorem property taxes on real property
and generally restricts the reassessment of property to 2% per year,
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except upon new construction or change of ownership (subject to a number
of exemptions). Taxing entities may, however, raise ad valorem taxes
above the 1% limit to pay debt service on voter-approved bonded
indebtedness.
Under Article XIIIA, the basic 1% ad valorem tax levy is applied
against the assessed value of property as of the owner's date of
acquisition (or as of March 1, 1975, if acquired earlier), subject to
certain adjustments. This system has resulted in widely varying amounts
of tax on similarly situated properties. Several lawsuits have been
filed challenging the acquisition-based assessment system of Proposition
13, and on June 18, 1992, the U.S. Supreme Court announced a decision
upholding Proposition 13.
Article XIIIA prohibits local governments from raising revenues
through ad valorem property taxes above the 1% limit; it also requires
voters of any governmental unit to give two-thirds approval to levy any
"special tax." Court decisions, however, allowed non-voter approved levy
of "general taxes" which were not dedicated to a specific use. In
response to these decisions, the voters of the State in 1986 adopted an
initiative statute which imposed significant new limits on the ability of
local entities to raise or levy general taxes, except by receiving
majority local voter approval. Significant elements of this initiative,
"Proposition 62," have been overturned in recent court cases. An
initiative proposed to re-enact the provisions of Proposition 62 as a
constitutional amendment was defeated by the voters in November 1990, but
such a proposal may be renewed in the future.
California and its local governments are subject to an annual
"appropriations limit" imposed by Article XIIIB of the California
Constitution, enacted by the voters in 1979 and significantly amended by
Propositions 98 and 111 in 1988 and 1990, respectively. Article XIIIB
prohibits the State or any covered local government from spending
"appropriations subject to limitation" in excess of the appropriations
limit imposed. "Appropriations subject to limitation" are authorizations
to spend "proceeds of taxes," which consists of tax revenues and certain
other funds, including proceeds from regulatory licenses, user charges or
other fees, to the extent that such proceeds exceed the cost of providing
the product or service, but "proceeds of taxes" excludes most State
subventions to local governments. No limit is imposed on appropriations
of funds which are not "proceeds of taxes," such as reasonable user
charges or fees and certain other non-tax funds, including bond proceeds.
Among the expenditures not included in the Article XIIIB
appropriations limit are (1) the debt service cost of bonds issued or
authorized prior to January 1, 1979, or subsequently authorized by the
voters, (2) appropriations arising from certain emergencies declared by
the Governor, (3) appropriations for certain capital outlay projects,
(4) appropriations by the State of post-1989 increases in gasoline taxes
and vehicle weight fees, and (5) appropriations made in certain cases of
emergency.
The appropriations limit for each year is adjusted annually to
reflect changes in cost of living and population, and any transfers of
service responsibilities between government units. The definitions for
such adjustments were liberalized in 1990 by Proposition 111 to follow
more closely growth in California's economy.
"Excess" revenues are measured over a two-year cycle. With respect
to local governments, excess revenues must be returned by a revision of
tax rates or fee schedules within the two subsequent fiscal years. The
appropriations limit for a local government may be overridden by
referendum under certain conditions for up to four years at a time. With
respect to the State, 50% of any excess revenues is to be distributed to
K-12 school districts and community college districts (collectively,
"K-14 districts") and the other 50% is to be refunded to taxpayers. With
more liberal annual adjustment factors since 1988, and depressed revenues
since 1990 because of the recession, few governments, including the
State, are currently operating near their spending limits, but this
condition may change over time. Local governments may by voter approval
exceed their spending limits for up to four years. During Fiscal Year
1986-87, State receipts from proceeds of taxes exceeded its
appropriations limit by $1.1 billion, which was returned to taxpayers.
Since that year, appropriations subject to limitations have been under
the State limit. State appropriations were $6.5 billion under the limit
for Fiscal Year 1995-96.
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Because of the complex nature of Articles XIIIA and XIIIB of the
California Constitution, the ambiguities and possible inconsistencies in
their terms, and the impossibility of predicting future appropriations or
changes in population and cost of living, and the probability of
continuing legal challenges, it is not currently possible to determine
fully the impact of Article XIIIA or Article XIIIB on California
Municipal Obligations or on the ability of California or local
governments to pay debt service on such California Municipal Obligations.
It is not presently possible to predict the outcome of any pending
litigation with respect to the ultimate scope, impact or
constitutionality of either Article XIIIA or Article XIIIB, or the impact
of any such determinations upon State agencies or local governments, or
upon their ability to pay debt service on their obligations. Future
initiative or legislative changes in laws or the California Constitution
may also affect the ability of the State or local issuers to repay their
obligations.
Under the California Constitution, debt service on outstanding
general obligation bonds is the second charge to the General Fund after
support of the public school system and public institutions of higher
education. Total outstanding general obligation bond and lease purchase
debt of the State increased from $9.4 billion at June 30, 1987 to $23.8
billion at February 1, 1996. In FY 1994-95, debt service on general
obligation bonds and lease purchase debt was approximately 5.3% of
General Fund revenues.
The principal sources of General Fund revenues in 1994-95 were the
California personal income tax (43% of total revenues), the sales tax
(34%), bank and corporation taxes (13%), and the gross premium tax on
insurance (3%). California maintains a Special Fund for Economic
Uncertainties (the "Economic Uncertainties Fund"), derived from General
Fund revenues, as a reserve to meet cash needs of the General Fund, but
which is required to be replenished as soon as sufficient revenues are
available. Year-end balances in the Economic Uncertainties Fund are
included for financial reporting purposes in the General Fund balance.
In most recent years, the State has budgeted to maintain the Economic
Uncertainties Fund at around 3% of General Fund expenditures but
essentially no reserve was budgeted from 1992-93, to 1995-96 because
revenues had been reduced by the recession and an accumulated budget
deficit had to be repaid.
Throughout the 1980s, State spending increased rapidly as the State
population and economy also grew rapidly, including increased spending
for many assistance programs to local governments, which were constrained
by Proposition 13 and other laws. The largest State program is
assistance to local public school districts. In 1988, an initiative
(Proposition 98) was enacted which (subject to suspension by a two-thirds
vote of the Legislature and the Governor) guarantees local school
districts and community college districts a minimum share of State
General Fund revenues (currently about 35%).
Since the start of 1990-91 Fiscal Year, the State has faced adverse
economic, fiscal and budget conditions. The economic recession seriously
affected State tax revenues. It also caused increased expenditures for
health and welfare programs. The State is also facing a structural
imbalance in its budget with the largest programs supported by the
General Fund (education, health, welfare and corrections) growing at
rates significantly higher than the growth rates for the principal
revenue sources of the General Fund. These structural concerns will be
exacerbated in coming years by the expected need to substantially
increase capital and operating funds for corrections as a result of a
"Three Strikes" law enacted in 1994.
As a result of these factors, among others, from the late 1980's
until 1992-1993, the State had a period of nearly chronic budget
imbalance, with expenditures exceeding revenues in four out of six years,
and the State accumulated and sustained a budget deficit in the budget
reserve, the Special Fund for Economic Uncertainties ("SFEU") approaching
$2.8 billion at its peak at June 30, 1993. Starting in the 1990-91
Fiscal Year and for each year thereafter, each budget required
multibillion dollar actions to bring projected revenues and expenditures
into balance and to close large "budget gaps" which were identified. The
Legislature and Governor eventually agreed on a number of different steps
to produce Budget Acts in the years 1991-92 to 1995-96, including:
significant cuts in health and welfare program expenditures; transfers of
program responsibilities and some funding sources from the State to local
governments, coupled with some reduction in mandates on local government;
transfer of about $3.6 billion in annual local property tax revenues from
cities, counties, redevelopment agencies and some other districts to
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local school districts, thereby reducing State funding for schools;
reduction in growth of support for higher education programs, coupled
with increases in student fees; revenue increases (particularly in the
1992-93 Fiscal Year budget), most of which were for a short duration;
increased reliance on aid from the federal government to offset the costs
of incarcerating, educating and providing health and welfare services to
undocumented aliens (although these efforts have produced much less
federal aid than the State Administration had requested); and various one-
time adjustment and accounting changes.
Despite these budget actions, the effects of the recession led to
large, unanticipated deficits in the SFEU, as compared to projected
positive balances. By the start of the 1993-94 Fiscal Year, the
accumulated deficit was so large (almost $2.8 billion) that it was
impractical to budget to retire it in one year, so a two-year program was
implemented, using the issuance of revenue anticipation warrants to carry
a portion of the deficit over the end of the fiscal year. When the
economy failed to recover sufficiently in 1993-94, a second two-year plan
was implemented in 1994-95, to carry the final retirement of the deficit
into 1995-96.
The combination of stringent budget actions cutting State
expenditures, and the turnaround of the economy by late 1993, finally led
to the restoration of positive financial results. While General Fund
revenues and expenditures were essentially equal in FY 1992-93 (following
two years of excess expenditures over revenues), the General Fund had
positive operating results in FY 1993-94 and 1994-95, and 1995-96 which
have reduced the accumulated budget deficit to about $70 million as of
June 30, 1996.
A consequence of the accumulated budget deficits in the early
1990's, together with other factors such as disbursement of funds to
local school districts "borrowed" from future fiscal years and hence not
shown in the annual budget, was to significantly reduce the State's cash
resources available to pay its ongoing obligations. When the Legislature
and the Governor failed to adopt a budget for the 1992-93 Fiscal Year by
July 1, 1992, which would have allowed the State to carry out its normal
annual cash flow borrowing to replenish its cash reserves, the State
Controller was forced to issue approximately $3.8 billion of registered
warrants ("IOUs") over a 2-month period to pay a variety of obligations
representing prior years' or continuing appropriations, and mandates from
court orders.
The State's cash condition became so serious that from late spring
1992 until 1995, the State had to rely on issuance of short term notes
which matured in a subsequent Fiscal Year to finance its ongoing deficit,
and pay current obligations. With the repayment of the last of these
deficit notes in April, 1996, the State does not plan to rely further on
external borrowing across Fiscal Years, but will continue its normal cash
flow borrowings during a Fiscal Year.
For the first time in four years, the State entered the 1995-96
fiscal year with strengthening revenues based on an improving economy.
The major feature of the Governor's proposed Budget, a 15% phased tax
cut, was rejected by the Legislature.
The 1995-96 Budget Act was signed by the Governor on August 3, 1995,
34 days after the start of the fiscal year. The Budget Act projected
General Fund revenues and transfers of $44.1 billion, a 3.5% increase
from the prior years. Expenditures were budgeted at $43.4 billion, a 4%
increase. The principal features of the 1995-96 Budget Act are
additional cuts in health and welfare expenditures (some of which are
subject to approvals or waivers by the federal government); assumed
further federal aid for illegal immigrant costs; and an increase in per-
pupil funding for public schools and community colleges, the first such
significant increase in four years.
In its regular budget update in May, 1996, the Department of Finance
indicated that, with the strengthening economy, State General Fund
revenues for 1995-96 would be about $46.1 billion, some $2 billion higher
than originally estimated. Because of mandated spending for public
schools, the failure to receive expected federal aid for illegal
immigrants, and the failure of Congress to enact welfare reform which the
Administration had expected would reduce State costs, expenditures for
1995-96 were also increased, to about $45.4 billion. As a result, the
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Department estimated that the accumulated budget deficit would be reduced
to about $70 million as of June 30, 1996.
As a result of the improved revenues, that State's cash position has
substantially recovered. Only $2 billion of cash flow borrowing was
needed during 1995-96, and only about $3 billion is projected for
1996-97, with no external borrowing over the end of the Fiscal Year.
The Governor's proposed budget for 1996-97 projects $47.1 billion of
revenues and transfers, and $46.5 billion of expenditures, resulting in a
budget reserve at June 30, 1997 of about $500 million. A number of
issues related to the 1996-97 budget still have to be resolved, including
the Governor's tax reduction proposals, and his proposals for further
health and welfare cuts.
State general obligation bonds ratings were reduced in July, 1994 to
"A1" by Moody's and "A" by S&P. Both of these ratings were reduced from
"AAA" levels which the State held until late 1991. There can be no
assurance that such ratings will be maintained in the future. It should
be noted that the creditworthiness of obligations issued by local
California issuers may be unrelated to the creditworthiness of
obligations issued by the State of California, and that there is no
obligation on the part of the State to make payment on such local
obligations in the event of default.
The State is involved in certain legal proceedings (described in the
State's recent financial statements) that, if decided against the State,
may require the State to make significant future expenditures or may
substantially impair revenues. Trial courts have recently entered
tentative decisions or injunctions which would overturn several parts of
the State's recent budget compromises. The matters covered by these
lawsuits include a deferral of payments by the State to the Public
Employees Retirement System, reductions in welfare payments, and the use
of certain cigarette tax funds for health costs. All of these cases are
subject to further proceedings and appeals, and if the State eventually
loses, the final remedies may not have to be implemented in one year.
There are a number of State agencies, instrumentalities and
political subdivisions of the State that issue Municipal Obligations,
some of which may be conduit revenue obligations payable from payments
from private borrowers. These entities are subject to various economic
risks and uncertainties, and the credit quality of the securities issued
by them may vary considerably from the credit quality of the obligations
backed by the full faith and credit of the State.
Property tax revenues received by local governments declined more
than 50% following passage of Proposition 13. Subsequently, the
California Legislature enacted measures to provide for the redistribution
of the State's General Fund surplus to local agencies, the reallocation
of certain State revenues to local agencies and the assumption of certain
governmental functions by the State to assist municipal issuers to raise
revenues. Total local assistance from the State's General Fund was
budgeted at approximately 75% of General Fund expenditures in recent
years, including the effect of implementing reductions in certain aid
programs. To reduce State General Fund support for school districts, the
1992-93 and 1993-94 Budget Acts caused local governments to transfer $3.9
billion of property tax revenues to school districts, representing loss
of the post-Proposition 13 "bailout" aid. The largest share of these
transfers came from counties, and the balance from cities, special
districts and redevelopment agencies. In order to make up this
shortfall, the Legislature proposed and voters approved, in 1993,
dedicating 0.5% of the sales tax to counties and cities for public safety
purposes. In addition, the Legislature has changed laws to relieve local
governments of certain mandates, allowing them to reduce costs.
To the extent the State should be constrained by its Article XIIIB
appropriations limit, or its obligation to conform to Proposition 98, or
other fiscal considerations, the absolute level, or the rate of growth,
of State assistance to local governments may be further reduced. Any
such reductions in State aid could compound the serious fiscal
constraints already experienced by many local governments, particularly
counties. At least one rural county (Butte) publicly announced that it
might enter bankruptcy proceedings in August 1990, although such plans
were put off after the Governor approved legislation to provide
additional funds for the county. Other counties have also indicated that
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their budgetary condition is extremely grave. The Richmond Unified
School District (Contra Costa County) entered bankruptcy proceedings in
May, 1991, but the proceedings have been dismissed. Los Angeles County,
the largest in the State, has reported severe fiscal problems, leading to
a nominal $1.2 billion deficit in its 1995-96 budget, half of which was
in the County healthcare system. The gaps were closed only with
significant cuts in services and personnel, particularly in the health
care system, federal aid, and transfer of some funds from other local
governments to the County pursuant to special legislation. The County's
debt was downgraded by Moody's and S&P in the summer of 1995. Orange
County, just emerged from Federal Bankruptcy Court protection in June
1996, has significantly reduced county services and personnel, and faces
strict financial conditions following large investment fund losses in
1994 which resulted in bankruptcy.
California Municipal Obligations which are assessment bonds may be
adversely affected by a general decline in real estate values or a
slowdown in real estate sales activity. In many cases, such bonds are
secured by land which is undeveloped at the time of issuance but
anticipated to be developed within a few years after issuance. In the
event of such reduction or slowdown, such development may not occur or
may be delayed, thereby increasing the risk of a default on the bonds.
Because the special assessments or taxes securing these bonds are not the
personal liability of the owners of the property assessed, the lien on
the property is the only security for the bonds. Moreover, in most
cases, the issuer of these bonds is not required to make payments on the
bonds in the event of delinquency in the payment of assessments or taxes,
except from amounts, if any, in a reserve fund established for the bonds.
Certain California long-term lease obligations, though typically
payable from the general fund of the municipality, are subject to
"abatement" in the event the facility being leased is unavailable for
beneficial use and occupancy by the municipality during the term of the
lease. Abatement is not a default, and there may be no remedies
available to the holders of the certificates evidencing the lease
obligation in the event abatement occurs. The most common cases of
abatement are failure to complete construction of the facility before the
end of the period during which lease payments have been capitalized and
uninsured casualty losses to the facility (e.g., due to earthquake). In
the event abatement occurs with respect to a lease obligation, lease
payments may be interrupted (if all available insurance proceeds and
reserves are exhausted) and the certificates may not be paid when due.
Several years ago, the Richmond United School District (the
"District") entered into a lease transaction in which certain existing
properties of the District were sold and leased back in order to obtain
funds to cover operating deficits. Following a fiscal crisis in which
the District's finances were taken over by a State receiver (including a
brief period under bankruptcy court protection), the District failed to
make rental payments on this lease, resulting in a lawsuit by the Trustee
for the Certificate of Participation holders, in which the State was a
named defendant (on the grounds that it controlled the District's
finances). One of the defenses raised in answer to this lawsuit was the
invalidity of the original lease transaction. The trial court has upheld
the validity of the District's lease, and the case has been settled. Any
judgment in any future case against the position asserted by the Trustee
in the Richmond case may have adverse implications for lease transactions
of a similar nature by other California entities.
The repayment of industrial development securities secured by real
property may be affected by California laws limiting foreclosure rights
of creditors. Securities backed by healthcare and hospital revenues may
be affected by changes in State regulations governing cost reimbursements
to health care providers under Medi-Cal (the State's Medicaid program),
including risks related to the policy of awarding exclusive contracts to
certain hospitals.
Limitations on ad valorem property taxes may particularly affect
"tax allocation" bonds issued by California redevelopment agencies. Such
bonds are secured solely by the increase in assessed valuation of a
redevelopment project area after the start of redevelopment activity. In
the event that assessed values in the redevelopment project decline
(e.g., because of a major natural disaster such as an earthquake), the
tax increment revenue may be insufficient to make principal and interest
payments on these bonds. Both Moody's and S&P suspended ratings on
California tax allocation bonds after the enactment of Articles XIIIA and
XIIIB, and only resumed such ratings on a selective basis.
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Proposition 87, approved by California voters in 1988, requires that
all revenues produced by a tax rate increase go directly to the taxing
entity which increased such tax rate to repay that entity's general
obligation indebtedness. As a result, redevelopment agencies (which,
typically, are the issuers of tax allocation securities) no longer
receive an increase in tax increment when taxes on property in the
project area are increased to repay voter-approved bonded indebtedness.
The effect of these various constitutional and statutory changes
upon the ability of California municipal securities issuers to pay
interest and principal on their obligations remains unclear.
Furthermore. other measures affecting the taxing or spending authority of
California or its political subdivisions may be approved or enacted in
the future. Legislation has been or may be introduced which would modify
existing taxes or other revenue-raising measures or which either would
further limit or, alternatively, would increase the abilities of state
and local governments to impose new taxes or increase existing taxes. It
is not presently possible to determine the impact of any such legislation
on California Municipal Obligations in which the Fund may invest future
allocations of state revenues to local governments or the abilities of
state or local governments to pay the interest on, or repay the principal
of, such California Municipal Obligations.
Substantially all of California is within an active geologic region
subject to major seismic activity. Northern California in 1989 and
Southern California in 1994 experienced major earthquakes causing
billions of dollars in damages. The federal government provided more
than $13 billion in aid for both earthquakes, and neither event is
expected to have any long-term negative economic impact. Any California
Municipal Obligation in the Portfolio could be affected by an
interruption of revenues because of damaged facilities, or, consequently,
income tax deductions for casualty losses or property tax assessment
reductions. Compensatory financial assistance could be constrained by
the inability of (i) an issuer to have obtained earthquake insurance
coverage at reasonable rates; (ii) an insurer to perform on its contracts
of insurance in the event of widespread losses; or (iii) the Federal or
State government to appropriate sufficient funds within their respective
budget limitations.
At the time of the closing for each California Trust, Special
Counsel to the California Trust for California tax matters, rendered an
opinion under then existing California income and property tax law
applicable to taxpayers whose income is subject to California income
taxation substantially to the effect that:
(1) the California Trust is not an association taxable as a
corporation and the income of the California Trust will be treated
as the income of the Unitholders under the income tax laws of
California;
(2) amounts treated as interest on the underlying Securities
in the California Trust which are exempt from tax under California
personal income tax and property tax laws when received by the
California Trust will, under such laws, retain their status as tax-
exempt interest when distributed to Unitholders. However, interest
on the underlying Securities attributed to a Unitholder which is a
corporation subject to the California franchise tax laws may be
includable in its gross income for purposes of determining its
California franchise tax. Further, certain interest which is
attributable to a Unitholder subject to the California personal
income tax and which is treated as an item of tax preference for
purposes of the federal alternative minimum tax pursuant to Section
57(a)(5) of the Internal Revenue Code of 1986 may also be treated as
an item of tax preference that must be taken into account in
computing such Unitholder's alternative minimum taxable income for
purposes of the California alternative minimum tax enacted by 1987
California Statutes, chapter 1138. However, because of the
provisions of the California Constitution exempting the interest on
bonds issued by the State of California, or by local governments
within the state, from taxes levied on income, the application of
the new California alternative minimum tax to interest otherwise
exempt from the California personal income tax in some cases may be
unclear;
(3) under California income tax law, each Unitholder in the
California Trust will have a taxable event when the California Trust
disposes of a Security (whether by sale, exchange, redemption, or
payment at maturity) or when the Unitholder redeems or sells Units.
Because of the requirement that tax cost basis be reduced to reflect
amortization of bond premium, under some circumstances a Unitholder
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may realize taxable gains when Units are sold or redeemed for an
amount equal to, or less than, their original cost. The total cost
of each Unit in the California Trust to a Unitholder is allocated
among each of the Bond issues held in the California Trust (in
accordance with the proportion of the California Trust comprised by
each Bond issue) in order to determine his per Unit tax cost for
each Bond issue; and the tax cost reduction requirements relating to
amortization of bond premium will apply separately to the per Unit
tax cost of each Bond issue. Unitholders' bases in their units, and
the bases for their fractional interest in each Trust asset, may
have to be adjusted for their pro rata share of accrued interest
received, if any, on Securities delivered after the Unitholders'
respective settlement dates;
(4) under the California personal property tax laws, bonds
(including the Securities in the California Trust) or any interest
therein is exempt from such tax;
(5) any proceeds paid under the insurance policy issued to the
California Trust with respect to the Securities which represent
maturing interest on defaulted obligations held by the Trustee will
be exempt from California personal income tax if, and to the same
extent as, such interest would have been so exempt if paid by the
issuer of the defaulted obligations; and
(6) under Section 17280(b)(2) of the California Revenue and
Taxation Code, interest on indebtedness incurred or continued to
purchase or carry Units of the California Trust is not deductible
for the purposes of the California personal income tax. While there
presently is no California authority interpreting this provision,
Section 17280(b)(2) directs the California Franchise Tax Board to
prescribe regulations determining the proper allocation and
apportionment of interest costs for this purpose. The Franchise Tax
Board has not yet proposed or prescribed such regulations. In
interpreting the generally similar Federal provision, the Internal
Revenue Service has taken the position that such indebtedness need
not be directly traceable to the purchase or carrying of Units
(although the Service has not contended that a deduction for
interest on indebtedness incurred to purchase or improve a personal
residence or to purchase goods or services for personal consumption
will be disallowed). In the absence of conflicting regulations or
other California authority, the California Franchise Tax Board
generally has interpreted California statutory tax provisions in
accord with Internal Revenue Service interpretations of similar
Federal provisions.
At the respective times of issuance of the Securities, opinions
relating to the validity thereof and to the exemption of interest thereon
from Federal income tax and California personal income tax are rendered
by bond counsel to the respective issuing authorities. Except in certain
instances in which Special Counsel acted as bond counsel to issuers of
Securities, and as such made a review of proceedings relating to the
issuance of certain Securities at the time of their issuance, Special
Counsel has not made any special review for the California Trust of the
proceedings relating to the issuance of the Securities or of the basis
for such opinions.
Colorado Trust. Restrictions on Appropriations and
Revenues. The State Constitution requires that expenditures for any
fiscal year not exceed revenues for such fiscal year. By statute, the
amount of General Fund revenues available for appropriation is based upon
revenue estimates which, together with other available resources, must
exceed annual appropriations by the amount of the unappropriated reserve
(the "Unappropriated Reserve"). The Unappropriated Reserve requirement
for fiscal years 1991, 1992 and 1993 was set at 3% of total
appropriations from the General Fund. For fiscal years 1994 and
thereafter, the Unappropriated Reserve requirement is set at 4%. In
addition to the Unappropriated Reserve, a constitutional amendment
approved by Colorado voters in 1992 requires the State and each local
government to reserve a certain percentage of its fiscal year spending
(excluding bonded debt service) for emergency use (the "Emergency
Reserve"). The minimum Emergency Reserve was set at 2% for 1994 and 3%
for 1995 and later years. For fiscal year 1992 and thereafter, General
Fund appropriations are also limited by statute to an amount equal to the
cost of performing certain required reappraisals of taxable property plus
an amount equal to the lesser of (i) five percent of Colorado personal
income or (ii) 106% of the total General Fund appropriations for the
previous fiscal year. This restriction does not apply to any General
Fund appropriations which are required as a result of a new federal law,
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a final state or federal court order or moneys derived from the increase
in the rate or amount of any tax or fee approved by a majority of the
registered electors of the State voting at any general election. In
addition, the statutory limit on the level of General Fund appropriations
may be exceeded for a given fiscal year upon the declaration of a State
fiscal emergency by the State General Assembly.
The 1995 fiscal year ending General Fund balance was $486.7 million,
or $260.7 million over the Unappropriated Reserve and Emergency Reserve
requirement. The 1996 fiscal year ending General Fund balance was $368.5
million, or $211.8 million over the required Unappropriated Reserve and
Emergency Reserve. Based on December 20, 1996 estimates, the 1997 fiscal
year ending General Fund balance is expected to be $396.3 million, or
$230.2 million over the required Unappropriated Reserve and Emergency
Reserve.
On November 3, 1992, voters in Colorado approved a constitutional
amendment (the "Amendment") which, in general, became effective December
31, 1992, and could restrict the ability of the State and local
governments to increase revenues and impose taxes. The Amendment applies
to the State and all local governments, including home rule entities
("Districts"). Enterprises, defined as government-owned businesses
authorized to issue revenue bonds and receiving under 10% of annual
revenue in grants from all Colorado state and local governments combined,
are excluded from the provisions of the Amendment.
The provisions of the Amendment are unclear and will probably
require judicial interpretation. Among other provisions, beginning
November 4, 1992, the Amendment requires voter approval prior to tax
increases, creation of debt, or mill levy or valuation for assessment
ratio increases. The Amendment also limits increases in government
spending and property tax revenues to specified percentages. The
Amendment requires that District property tax revenues yield no more than
the prior year's revenues adjusted for inflation, voter approved changes
and (except with regard to school districts) local growth in property
values according to a formula set forth in the Amendment. School
districts are allowed to adjust tax levies for changes in student
enrollment. Pursuant to the Amendment, local government spending is to
be limited by the same formula as the limitation for property tax
revenues. The Amendment limits increases in expenditures from the State
General Fund and program revenues (cash funds) to the growth in inflation
plus the percentage change in State population in the prior calendar
year. The bases for initial spending and revenue limits are fiscal year
1992 spending and 1991 property taxes collected in 1992. The bases for
spending and revenue limits for fiscal year 1994 and later years will be
the prior fiscal year's spending and property taxes collected in the
prior calendar year. Debt service changes, reductions and voter-approved
revenue changes are excluded from the calculation bases. The Amendment
also prohibits new or increased real property transfer tax rates, new
State real property taxes and local District income taxes.
Litigation concerning several issues relating to the Amendment was
filed in the Colorado courts. The litigation dealt with three principal
issues: (i) whether Districts can increase mill levies to pay debt
service on general obligation bonds without obtaining voter approval;
(ii) whether a multi-year lease-purchase agreement subject to annual
appropriations is an obligation which requires voter approval prior to
execution of the agreement; and (iii) what constitutes an "enterprise"
which is excluded from the provisions of the Amendment. In September,
1994, the Colorado Supreme Court held that Districts can increase mill
levies to pay debt service on general obligation bonds issued after the
effective date of the Amendment; in June, 1995, the Colorado Supreme
Court validated mill levy increases to pay general obligation bonds
issued prior to the Amendment. In late 1994, the Colorado Court of
Appeals held that multi-year lease-purchase agreements subject to annual
appropriation do not require voter approval. The time to file an appeal
in that case has expired. Finally, in May, 1995, the Colorado Supreme
Court ruled that entities with the power to levy taxes may not themselves
be "enterprises" for purposes of the Amendment; however, the Court did
not address the issue of how valid enterprises may be created.
Litigation in the "enterprise" arena may be filed in the future to
clarify these issues.
According to the Colorado Economic Perspective, Second Quarter, FY
1996-97, December 20, 1996 (the "Economic Report"), inflation for 1995
was 4.3% and population grew at the rate of 2.3% in Colorado.
Accordingly, under the Amendment, increases in State expenditures during
the 1997 fiscal year will be limited to 6.6% over expenditures during the
1996 fiscal year. The limitation for the 1998 fiscal year is projected
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to be 5.9%, based on projected inflation of 3.9% for 1996 and projected
population growth of 2.0% during 1996. The 1996 fiscal year is the base
year for calculating the limitation for the 1997 fiscal year. For the
1996 fiscal year, General Fund revenues totalled $4,230.8 million and
program revenues (cash funds) totalled $1,893.5 million, resulting in
total estimated base revenues of $6,124.3 million. Expenditures for the
1997 fiscal year, therefore, cannot exceed $6,528.5 million. However,
the 1997 fiscal year General Fund and program revenues (cash funds) are
projected to be only $6,499.1 million, or $29.4 million less than
expenditures allowed under the spending limitation.
There is also a statutory restriction on the amount of annual
increases in taxes that the various taxing jurisdictions in Colorado can
levy without electoral approval. This restriction does not apply to
taxes levied to pay general obligation debt.
State Finances. As the State experienced revenue shortfalls in the
mid-1980s, it adopted various measures, including impoundment of funds by
the Governor, reduction of appropriations by the General Assembly, a
temporary increase in the sales tax, deferral of certain tax reductions
and inter-fund borrowings. On a GAAP basis, the State had unrestricted
General Fund balances at June 30 of approximately $133.3 million in
fiscal year 1992, $326.6 million in fiscal year 1993, $405.1 million in
fiscal year 1994 and $486.7 million in fiscal year 1995. The fiscal year
1996 unrestricted General Fund ending balance was $368.5 million with
projections for fiscal year 1997 at $396.3 million.
Revenues for the fiscal year ending June 30, 1996, showed Colorado's
general fund continuing to slow. Revenues grew by $272.3 million, to
$4,268.7 million, a 6.8% increase from 1995. However, this figure was
down from the fiscal year 1995 pace of 7.3%. General Fund expenditures
rose substantially and exceeded revenues by $142.5 million. Reasons for
this consist of a change in how the state manages its emergency reserve,
and a significant increase in the transfer of reserves to the Capital
Construction Fund, and the Police and Fire Pension Association (increases
of $29 million and $32 million, respectively).
For fiscal year 1996, the following tax categories generated the
following percentages of the State's $4,268.7 million total gross
receipts: individual income taxes represented 54.4% of gross fiscal year
1996 receipts; sales, use and other excise taxes represented 33.2% of
gross fiscal year 1996 receipts; and corporate income taxes represented
4.8% of gross fiscal year 1996 receipts. The final budget for fiscal
year 1997 projects General Fund revenues of approximately $4,565.0
million and appropriations (at the 6% expenditure limit) of approximately
$4,151.9 million. The percentages of General Fund revenue generated by
type of tax for fiscal year 1997 are not expected to be significantly
different from fiscal year 1996 percentages.
For fiscal year 1997, General Fund revenues are projected at
$4,565.0 million. Revenue growth is expected to increase 6.9% over
fiscal year 1996 actual revenues. Total general fund expenditures are
estimated at $4,422.2 million. The ending general fund balance, after
reserve set-asides, is $230.2 million.
State Debt. Under its constitution, the State of Colorado is not
permitted to issue general obligation bonds secured by the full faith and
credit of the State. However, certain agencies and instrumentalities of
the State are authorized to issue bonds secured by revenues from specific
projects and activities. The State enters into certain lease
transactions which are subject to annual renewal at the option of the
State. In addition, the State is authorized to issue short-term revenue
anticipation notes. Local governmental units in the State are also
authorized to incur indebtedness. The major source of financing for such
local government indebtedness is an ad valorem property tax. In
addition, in order to finance public projects, local governments in the
State can issue revenue bonds payable from the revenues of a utility or
enterprise or from the proceeds of an excise tax, or assessment bonds
payable from special assessments. Colorado local governments can also
finance public projects through leases which are subject to annual
appropriation at the option of the local government. Local governments
in Colorado also issue tax anticipation notes. The Amendment requires
prior voter approval for the creation of any multiple fiscal year debt or
other financial obligation whatsoever, except for refundings at a lower
rate or obligations of an enterprise.
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State Economy. Based on data published by the State of Colorado,
Office of State Planning and Budgeting as presented in the Economic
Report, Colorado gained 74,966 employees in 1995. The 1995 increase was
down about 10,000 from the 1994 gain, but mirrored the 1993 employment
increase. Services and retail trade were the number one and two largest
growing industries in Colorado in 1995, adding 28,766 (6.0% increase) and
20,905 (6.2% increase) employees, respectively. Transportation,
communications and public utilities reported the largest percentage gain
from 1994 to 1995, at 8.8%. Construction reported the fourth largest
employment gain over the year, at 5.2%, with increases about half of what
they had been in 1994 and 1993 due to the completion of the Denver
International airport. Mining continued to be the weakest industry
sector, with only a 0.5% increase.
The unemployment rate in Colorado remained stable at 4.2% during
both 1994 and 1995. In 1996, the Colorado unemployment rate dropped to
4.0% compared to the 5.4% rate for the nation. Colorado's job growth
rate increased 2.5% in 1996, a decrease from the 4.7% growth rate in
1995. In comparison, the job growth rate for the United States in 1995
and 1996 was 2.7% and 2.0%, respectively. The services sector comprised
28% of Colorado's 1995 employment and generated 38% of the State's
growth.
Personal income rose 8.0% in Colorado during 1995 as compared with
6.3% for the nation as a whole. In 1996, Colorado's personal income
dropped to 6.3%, while still higher than the nation's 1996 rate of 5.6%.
Economic conditions in the State may have continuing effects on
other governmental units within the State (including issuers of the
Colorado Bonds in the Colorado Trust), which, to varying degrees, have
also experienced reduced revenues as a result of recessionary conditions
and other factors.
The foregoing information constitutes only a brief summary of some
of the general factors which may impact certain issuers of Bonds and does
not purport to be a complete or exhaustive description of all adverse
conditions to which the issuers of Bonds held by the Colorado Trusts are
subject. Additionally, many factors including national economic, social
and environmental policies and conditions, which are not within the
control of the issuers of the Bonds, could affect or could have an
adverse impact on the financial condition of the issuers. The Sponsor is
unable to predict whether or to what extent such factors or other factors
may affect the issuers of the Bonds, the market value or marketability of
the Bonds or the ability of the respective issuers of the Bonds acquired
by the Colorado Trusts to pay interest on or principal of the Bonds.
At the time of the closing for each Colorado Trust, Special Counsel
to the Fund for Colorado tax matters rendered an opinion under then
existing Colorado income tax law applicable to taxpayers whose income is
subject to Colorado income taxation substantially to the effect that:
Because Colorado income tax law is based upon the Federal law, the
Colorado Trust is not an association taxable as a corporation for
purposes of Colorado income taxation.
With respect to Colorado Unitholders, in view of the relationship
between Federal and Colorado tax computations described above:
(1) Each Colorado Unitholder will be treated as owning a pro
rata share of each asset of the Colorado Trust for Colorado income
tax purposes in the proportion that the number of Units of such
Trust held by the Unitholder bears to the total number of
outstanding Units of the Colorado Trust, and the income of the
Colorado Trust will therefore be treated as the income of each
Colorado Unitholder under Colorado law in the proportion described
and an item of income of the Colorado Trust will have the same
character in the hands of a Colorado Unitholder as it would in the
hands of the Trustee;
(2) Interest on Bonds that would not be includable in income
for Colorado income tax purposes when paid directly to a Colorado
Unitholder will be exempt from Colorado income taxation when
received by the Colorado Trust and attributed to such Colorado
Unitholder and when distributed to such Colorado Unitholder;
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(3) Any proceeds paid under an insurance policy or policies,
if any, issued to the Colorado Trust with respect to the Bonds in
the Colorado Trust which represent maturing interest on defaulted
Bonds held by the Trustee will be excludable from Colorado adjusted
gross income if, and to the same extent as, such interest is so
excludable for federal income tax purposes if paid in the normal
course by the issuer notwithstanding that the source of payment is
from insurance proceeds provided that, at the time such policies are
purchased, the amounts paid for such policies are reasonable,
customary, and consistent with the reasonable expectation that the
issuer of the Bonds, rather than the insurer, will pay debt service
on the Bonds;
(4) Each Colorado Unitholder will realize taxable gain or loss
when the Colorado Trust disposes of a Bond (whether by sale,
exchange, redemption, or payment at maturity) or when the Colorado
Unitholder redeems or sells Units at a price that differs from
original cost as adjusted for amortization of bond discount or
premium and other basis adjustments (including any basis reduction
that may be required to reflect a Colorado Unitholder's share of
interest, if any, accruing on Bonds during the interval between the
Colorado Unitholder's settlement date and the date such Bonds are
delivered to the Colorado Trust, if later);
(5) Tax basis reduction requirements relating to amortization
of bond premium may, under some circumstances, result in Colorado
Unitholders realizing taxable gain when their Units are sold or
redeemed for an amount equal to or less than their original cost;
and
(6) If interest on indebtedness incurred or continued by a
Colorado Unitholder to purchase Units in the Colorado Trust is not
deductible for federal income tax purposes, it also will be non-
deductible for Colorado income tax purposes.
Unitholders should be aware that all tax-exempt interest, including
their share of interest on the Bonds paid to the Colorado Trust, is taken
into account for purposes of determining eligibility for the Colorado
Property Tax/Rent/Heat Rebate.
Counsel to the Sponsor has expressed no opinion with respect to
taxation under any other provision of Colorado law. Ownership of the
Units may result in collateral Colorado tax consequences to certain
taxpayers. Prospective investors should consult with tax advisors as to
the applicability of any such collateral consequences.
Florida Trusts. Population. In 1980, Florida was
the seventh most populous state in the United States. The State has
grown dramatically since then and as of April 1, 1995, ranks fourth with
an estimated population of 14.1 million. Florida's attraction, as both a
growth and retirement state, has kept net migration at an average of
227,000 new residents a year from 1985 through 1995. The U.S. average
population increase since 1984 is about 1% annually, while Florida's
average annual rate of increase is about 2.3%. Florida continues to be
the fastest growing of the eleven largest states. This strong population
growth is one reason the State's economy is performing better than the
nation as a whole. In addition to attracting senior citizens to Florida
as a place for retirement, the State is also recognized as attracting a
significant number of working age individuals. Since 1985, the prime
working age population (18-44) has grown at an average annual rate of
2.2%. The share of Florida's total working age population (18-59) to
total State population is approximately 54%. This share is not expected
to change appreciably into the twenty-first century.
Income. The State's personal income has been growing strongly the
last several years and has generally outperformed both the United States
as a whole and the southeast in particular, according to the U.S.
Department of Commerce and the Florida Consensus Economic Estimating
Conference. This is because Florida's population has been growing at a
very strong pace and, since the early 1970s, the State's economy has
diversified so as to provide a broader economic base. As a result,
Florida's real per capita personal income has tracked closely with the
national average and has tracked above the southeast. From 1985 through
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1995, the State's real per capita personal income rose at an average of
5.0% per year, while the national real per capita income increased at an
average of 4.9% per year.
Because Florida has a proportionately greater retirement age
population, property income (dividends, interest, and rent) and transfer
payments (Social Security and pension benefits, among other sources of
income) are relatively more important sources of income. For example,
Florida's total wages and salaries and other labor income in 1994 was
60.6% of total personal income, while a similar figure for the nation was
70.8%. Transfer payments are typically less sensitive to the business
cycle than employment income and, therefore, act as stabilizing forces in
weak economic periods.
The State's per capita personal income in 1995 of $22,916 was
slightly above the national average of $22,788 and significantly ahead of
that for the southeast United States, which was $20,645. Real personal
income in the State is estimated to increase 4.2% in 1996-97 and 4.4% in
1997-98. Real personal income per capita in the State is projected to
grow at 2.3% in 1996-97 and 2.6% in 1997-98. The Florida economy appears
to be performing in line with the U.S. economy and is expected to
experience steady if unspectacular growth over the next couple of years.
Employment. Since 1985, the State's population has increased an
estimated 26.1%. In the same period, Florida's total non-farm employment
has grown by over 36%. Since 1985, the job creation rate in the State is
more than twice that of the nation as a whole. Contributing to the
State's rapid rate of growth in employment and income is international
trade. Changes to its economy have also contributed to the State's
strong performance. The State is now less dependent on employment from
construction, construction-related manufacturing, and resource-based
manufacturing, which have declined as a proportion of total State
employment. The State's service sector employment is nearly 87% of total
non-farm employment. While the southeast and the nation have a greater
proportion of manufacturing jobs, which tend to pay higher wages, service
jobs tend to be less sensitive to swings in the business cycle. The
State has a concentration of manufacturing jobs in high-tech and high
value-added sectors, such as electrical and electronic equipment, as well
as printing and publishing. These types of manufacturing jobs tend to be
less cyclical. The State's unemployment rate throughout the 1980's
tracked below the nation's. As the State's economic growth has slowed,
its unemployment rate has tracked above the national average. The
average rate in Florida since 1986 has been 6.2%. The national average
also is 6.2%. According to the U.S. Department of Commerce, the Florida
Department of Labor and Employment Security, and the Florida Consensus
Economic Estimating Conference (together, the "Organization"), the
State's unemployment rate was 5.5% during 1995. As of November, 1996,
the Organization estimates that the unemployment rate will be 5.3% for
1996 and 5.3% in 1997.
The State's economy is expected to decelerate along with the nation,
but is expected to outperform the nation as a whole. Total non-farm
employment in Florida is expected to increase 2.9% in 1996-97 and 2.9% in
1997-98. Trade and services, the two largest, account for more than half
of the total non-farm employment. Employment in the service sectors
should experience an increase of 4.3% in 1996-97, and again growing 4.3%
in 1997-98. Trade is expected to expand 3.1% in 1997 and 2.9% in 1998.
The service sector is now the State's largest employment category.
Construction. The State's economy has in the past been highly
dependent on the construction industry and construction-related
manufacturing. This dependency has declined in recent years and
continues to do so as a result of continued diversification of the
State's economy. For example, in 1980, total contract construction
employment as a share of total non-farm employment was about 7.5%, and in
1995, the share had edged downward to 5.0%. This trend is expected to
continue as the State's economy continues to diversify. Florida,
nevertheless, has a dynamic construction industry, with single and multi-
family housing starts accounting for about 8.5% of total U.S. housing
starts in 1995 while the State's population is 5.4% of the U.S. total
population. Florida's housing starts in 1995 were 115,000, and since
1985 averaged 148,500 a year.
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A driving force behind the State's construction industry has been
the State's rapid rate of population growth. Although the State
currently is the fourth most populous state, its annual population growth
is now projected to slow somewhat as the number of people moving into the
State is expected to grow close to 230,000 annually throughout the 1990s.
This population trend should provide fuel for business and home builders
to keep construction activity lively in Florida for some time to come.
However, other factors do influence the level of construction in the
State. For example, federal tax reform in 1986 and other changes to the
federal income tax code have eliminated tax deductions for owners of more
than two residential real estate properties and have lengthened
depreciation schedules on investment and commercial properties. Economic
growth and existing supplies of homes and buildings also contribute to
the level of construction in the State.
Single and multi-family housing starts in 1996-97 are projected to
reach a combined level of 113,200, increasing to 116,000 next year.
Lingering recessionary effects on consumers and tight credit are some of
the reasons for relatively slow core construction activity, as well as
lingering effects from the 1986 tax reform legislation discussed above.
Total construction expenditures are forecasted to increase 5.9% this year
and increase 2.7% next year.
The State has continuously been dependent on the highly cyclical
construction and construction-related manufacturing industries. While
that dependency has decreased, the State is still somewhat at the mercy
of the construction and construction-related manufacturing industries.
The construction industry is driven to a great extent by the State's
rapid growth in population. There can be no assurance that population
growth will continue throughout the 1990s in which case there could be an
adverse impact on the State's economy through the loss of construction
and construction-related manufacturing jobs. Also, increases in interest
rates could significantly adversely impact the financing of new
construction within the State, thereby adversely impacting unemployment
and other economic factors within the State. In addition, available
commercial office space has tended to remain high over the past few
years. So long as this glut of commercial rental space continues,
construction of this type of space will likely continue to remain slow.
Tourism. Tourism is one of Florida's most important industries.
Approximately 40.7 million tourists visited the State in 1995, as
reported by the Florida Department of Commerce. In terms of business
activities and state tax revenues, tourists in Florida in 1995
represented an estimated 4.5 million additional residents. Visitors to
the State tend to arrive slightly more by air than by car. The State's
tourist industry over the years has become more sophisticated, attracting
visitors year-round and, to a degree, reducing its seasonality. Tourist
arrivals are expected to increase by 2.7% this fiscal year, and 3.2% next
fiscal year. Tourist arrivals to Florida by air are expected to decrease
by 5.2% this year and increase by 3.1% next year, while arrivals by car
are expected to fall by 0.3% in 1996-97 but increase 3.2% in 1997-98. By
the end of the State's current fiscal year, 42.6 million domestic and
international tourists are expected to have visited the State. In 1996-
97, tourist arrivals should approximate 43.9 million.
Revenues and Expenses. Estimated fiscal year 1995-96 General
Revenue plus Working Capital and Budget Stabilization funds available to
the State total $15,419.3 million, a 4.0% increase over 1994-95. Of the
total General Revenue plus Working Capital and Budget Stabilization funds
available to the State, $14,651.7 million of that is Estimated Revenues,
which represents an increase of 7.4% over the previous year's Estimated
Revenues. With effective General Revenues plus Working Capital Fund and
Budget Stabilization appropriations at $14,710.4 million, unencumbered
reserves at the end of 1995-96 are estimated at $697.8 million.
Estimated fiscal year 1996-97 General Revenue plus Working Capital and
Budget Stabilization funds available total $16,601.7 million, a 7.7%
increase over 1995-96. The $15,566.9 million in Estimated Revenues
(including recent Measures Affecting Revenues) represents an increase of
6.2% over the previous year's Estimated Revenues. With Combined General
Revenues, Working Capital Fund, and Budget Stabilization Fund
appropriations at $15,582.2 million, unencumbered reserves as of the end
of 1996-97 are estimated at $1,019.5 million.
In fiscal year 1994-95, approximately 66% of the State's total
direct revenue to its three operating funds was derived from State taxes
and fees, with Federal grants and other special revenue accounting for
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the balance. State sales and use tax, corporate income tax, intangible
personal property tax, and beverage tax amounted to 69%, 7%, 4% and 4%,
respectively, of total General Revenue Funds available during fiscal 1994-
95. In that same year, expenditures for education, health and welfare,
and public safety amounted to approximately 51%, 31%, and 14%,
respectively, of total expenditures from the General Revenue Fund.
The State's sales and use tax (6%) currently accounts for the
State's single largest source of tax receipts. Slightly less than 10% of
the State's sales and use tax is designated for local governments and is
distributed to the respective counties in which collected for such use by
the counties, and the municipalities therein. In addition to this
distribution, local governments may assess (by referendum) a 0.5% or a
1.0% discretionary sales surtax within their county. Proceeds from this
local option sales tax are earmarked for funding local infrastructure
programs and acquiring land for public recreation or conservation or
protection of natural resources as provided under applicable Florida law.
Certain charter counties have other additional taxing powers, and non-
consolidated counties with a population in excess of 800,000 may levy a
local option sales tax to fund indigent health care. It alone cannot
exceed 0.5% and when combined with the infrastructure surtax cannot
exceed 1.0%. For the fiscal year ended June 30, 1996, sales and use tax
receipts (exclusive of the tax on gasoline and special fuels) totalled
$11,461 million, an increase of 7.4% over fiscal year 1994-95.
The second largest source of State tax receipts is the tax on motor
fuels. However, these revenues are almost entirely dedicated trust funds
for specific purposes and are not included in the State's General Revenue
Fund.
The State imposes an alcoholic beverage wholesale tax (excise tax)
on beer, wine, and liquor. This tax is one of the State's major tax
sources, with revenues totalling $441.5 million in the fiscal year ending
June 30, 1996. Alcoholic beverage tax receipts increased about 1.0% from
the previous year's total. Ninety-eight percent of the revenues
collected from this tax are deposited into the State's General Revenue
Fund.
The State imposes a corporate income tax. All receipts of the
corporate income tax are credited to the General Revenue Fund. For the
fiscal year ended June 30, 1996, receipts from this source were $1,162.7
million, an increase of 9.3% from fiscal year 1994-95.
The State imposes a documentary stamp tax on deeds and other
documents relating to realty, corporate shares, bonds, certificates of
indebtedness, promissory notes, wage assignments, and retail charge
accounts. The documentary stamp tax collections totalled $775.2 million
during fiscal year 1995-96, an 11.5% increase from the previous fiscal
year. For fiscal year 1994-95, 62.63% of these taxes were deposited to
the General Revenue Fund.
The State imposes a gross receipts tax on electric, natural gas, and
telecommunications services. All gross receipts utilities tax
collections are credited to the State's Public Education Capital Outlay
and Debt Service Trust Fund. In fiscal year 1994-95, this amounted to
$543.3 million, an increase of 6.9% over the previous fiscal year.
The State imposes an intangible personal property tax on stocks,
bonds, including bonds secured by liens in Florida real property, notes,
governmental leaseholds, and certain other intangibles not secured by a
lien on Florida real property. The annual rate of tax is 2 mils. The
State also imposes a non-recurring 2 mil tax on mortgages and other
obligations secured by liens on Florida real property. In fiscal year
1995-96, total intangible personal property tax collections were $895.9
million, a 9.5% increase from the prior year. Of the net tax proceeds,
66.5% are distributed to the General Revenue Fund.
The State's severance tax taxes oil, gas, and sulphur production, as
well as the severance of phosphate rock and other solid minerals. Total
collections from severance taxes total $77.2 million during fiscal year
1995-96, up 26.1% from the previous year. Currently, 58% of this amount
is transferred to the General Revenue Fund.
The State began its own lottery in 1988. State law requires that
lottery revenues be distributed 50.0% to the public in prizes, 38.0% for
use in enhancing education, and the balance, 12.0%, for costs of
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administering the lottery. Fiscal year 1995-96 lottery ticket sales
totalled $2.07 billion, providing education with approximately $788.1
million.
Debt-Balanced Budget Requirement. At the end of fiscal 1995,
approximately $6.83 billion in principal amount of debt secured by the
full faith and credit of the State was outstanding. In addition, since
July 1, 1995, the State issued about $1.3 billion in principal amount of
full faith and credit bonds.
The State Constitution and statutes mandate that the State budget,
as a whole, and each separate fund within the State budget, be kept in
balance from currently available revenues each fiscal year. If the
Governor or Comptroller believes a deficit will occur in any State fund,
by statute, he must certify his opinion to the Administrative Commission,
which then is authorized to reduce all State agency budgets and releases
by a sufficient amount to prevent a deficit in any fund. Additionally,
the State Constitution prohibits issuance of State obligations to fund
State operations.
Litigation. Currently under litigation are several issues relating
to State actions or State taxes that put at risk substantial amounts of
General Revenue Fund monies. Accordingly, there is no assurance that any
of such matters, individually or in the aggregate, will not have a
material adverse affect on the State's financial position.
Florida law provides preferential tax treatment to insurers who
maintain a home office in the State. Certain insurers challenged the
constitutionality of this tax preference and sought a refund of taxes
paid. Recently, the Florida Supreme Court ruled in favor of the State.
This case and others, along with pending refund claims, total about $150
million.
Previously, the State imposed a $295 fee on the issuance of
certificates of title for motor vehicles previously titled outside the
State. The State was sued by plaintiffs alleging that this fee violated
the Commerce Clause of the U.S. Constitution. The Circuit Court in which
the case was filed granted summary judgment for the plaintiffs, enjoined
further collection of the impact fee and ordered refunds to all those who
have paid the fee since the collection of the fee went into effect. In
the State's appeal of the lower court's decision, the Florida Supreme
Court ruled that this fee was unconstitutional under the Commerce Clause.
Thus, the Supreme Court approved the lower court's order enjoining
further collection of the fee and required refund of the previously
collected fees. The refund exposure of the State has been estimated to
be in excess of $188 million.
The State maintains a bond rating of Aa, AA and AA from Moody's
Investors Service, Standard & Poor's Corporation and Fitch, respectively,
on the majority of its general obligation bonds, although the rating of a
particular series of revenue bonds relates primarily to the project,
facility, or other revenue source from which such series derives funds
for repayment. While these ratings and some of the information presented
above indicate that the State is in satisfactory economic health, there
can be no assurance that there will not be a decline in economic
conditions or that particular Florida Municipal Obligations purchased by
the Fund will not be adversely affected by any such changes.
The sources for the information presented above include official
statements and financial statements of the State of Florida. While the
Sponsor has not independently verified this information, it has no reason
to believe that the information is not correct in all material respects.
The foregoing information constitutes only a brief summary of some
of the general factors which may impact certain issuers of Bonds and does
not purport to be a complete or exhaustive description of all adverse
conditions to which the issuers of Bonds held by the Florida Trusts are
subject. Additionally, many factors including national economic, social
and environmental policies and conditions which are not within the
control of the issuers of the Bonds, could affect or could have an
adverse impact on the financial condition of the issuers. The Sponsor is
unable to predict whether or to what extent such factors or other factors
may affect the issuers of the Bonds, the market value or marketability of
the Bonds or the ability of the respective issuers of the Bonds acquired
by the Florida Trusts to pay interest on or principal of the Bonds.
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At the time of the closing for each Florida Trust, Counsel to the
Fund for Florida tax matters, rendered an opinion under then existing
Florida income tax law applicable to taxpayers whose income is subject to
Florida income taxation substantially to the effect that:
For Florida state income tax purposes, the Florida Trust will
not be subject to the Florida income tax imposed by Chapter 220,
Florida Statutes.
Because Florida does not impose an income tax on individuals,
Non-Corporate Unitholders residing in Florida will not be subject to
any Florida income taxation on income realized by the Florida Trust.
Any amounts paid to the Florida Trust or to Non-Corporate
Unitholders under an insurance policy issued to the Florida Trust or
the Sponsor which represent maturing interest on defaulted
obligations held by the Trustee will not be subject to the Florida
income tax imposed by Chapter 220, Florida Statutes.
Corporate Unitholders with commercial domiciles in Florida will
be subject to Florida income or franchise taxation on income
realized by the Florida Trust and on payments of interest pursuant
to any insurance policy to the extent such income constitutes "non-
business income" as defined by Chapter 220 or is otherwise allocable
to Florida under Chapter 220. Other Corporate Unitholders will be
subject to Florida income or franchise taxation on income realized
by the Florida Trust (or on payments of interest pursuant to any
insurance policy) only to the extent that the income realized does
not constitute "non-business income" as defined by Chapter 220 and
if such income is otherwise allocable to Florida under Chapter 220.
Units will be subject to Florida estate tax only if held by
Florida residents. However, the Florida estate tax is limited to
the amount of the credit for state death taxes provided for in
Section 2011 of the Internal Revenue Code.
Neither the Bonds nor the Units will be subject to the Florida
ad valorem property tax, the Florida intangibles personal property
tax or Florida sales or use tax.
Counsel to the Sponsor has expressed no opinion with respect to
taxation under any other provision of Florida law. Ownership of the
Units may result in collateral Florida tax consequences to certain
taxpayers. Prospective investors should consult their tax advisors as to
the applicability of any such collateral consequences.
Louisiana Trusts. The following discussion
regarding the financial condition of the state government may not be
relevant to general obligation or revenue bonds issued by political
subdivisions of and other issuers in the State of Louisiana (the
"State"). Such information, and the following discussion regarding the
economy of the State, is based upon information about general economic
conditions that may or may not affect issuers of the Louisiana
obligations. The Sponsor has not independently verified any of the
information contained in such publicly available documents, but is not
aware of any facts which would render such information inaccurate.
The current Standard & Poor's rating on the State's general
obligation bonds is A-. The current Moody's rating on the State's
general obligation bonds is Baa1.. There can be no assurance that the
economic conditions on which these ratings were based will continue or
that particular bond issues may not be adversely affected by changes in
economic or political conditions.
The Revenue Estimating Conference (the "Conference") was established
by Act No. 814 of the 1987 Regular Session of the State Legislature. The
Conference was established by the Legislature to provide an official
estimate of anticipated State revenues upon which the executive budget
shall be based, to provide for a more stable and accurate method of
financial planning and budgeting and to facilitate the adoption of a
balanced budget as is required by Article VII, Section 10(E) of the State
Constitution. In developing the official forecast, the Conference can
only consider revenues that are projected to accrue to the State as a
result of laws and rules enacted and in effect during the forecast
period. The Conference is prohibited from including revenues which would
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be raised by proposed legislation or rules. During the 1990 Regular
Session of the Louisiana Legislature, a constitutional amendment was
approved (Act No. 1096), granting constitutional status to the existence
of the Revenue Estimating Conference without altering its structure,
powers, duties or responsibilities which are currently provided by
statute.
The Conference is required to prepare and publish initial and
revised estimates of money to be received by the General Fund and
dedicated funds for the current and next fiscal years which are available
for appropriation. All Conference decisions to adopt these estimates
must be by unanimous vote of its members who meet four times annually:
October 15, January 1, the third Monday in March and August 15. The most
recently adopted estimate of money available for appropriation shall be
the official forecast. Appropriations by the Legislature from the
General Fund shall not exceed the official forecast in effect at the time
the appropriations are made.
The General Fund expenditure authorization necessary to provide
funds to continue all existing programs through Fiscal Year 1994-95 was
approximately $4.569 billion, while the official revised revenue estimate
adopted by the Revenue Estimating Conference at its June 22, 1994 meeting
for Fiscal Year 1994-95 was $4.545 billion. This $24 million shortfall
was recognized as supplementary appropriations which will not be funded
unless the revenue estimate is revised upwards.
Under the provisions of Louisiana Revised Statute 39:75 the division
of administration is required to submit budgetary status reports monthly
to the Joint Legislative Committee on the Budget. The Committee on
notification that a deficit shortfall is projected in turn shall
immediately notify the governor of the projected deficit. The governor
then has 30 days within which to take corrective actions to bring the
budget into balance within the limitations of the 10% aggregate rule
required in Louisiana Revised Statute 39:75(C)(1). If within thirty days
the necessary adjustments are not made to eliminate the projected
deficit, the governor must call a special session of the legislature for
this purpose.
From 1994-96, Louisiana experienced significant industrial
development; job opportunities continue to grow as Louisiana expands both
domestic and foreign markets.
In fiscal year 1994-95, the state spent $219.3 million (of which
$27.7 million came from the state's General Fund) for economic
development. This accounted for 1.8% of total state spending and 0.6% of
General Fund expenditures. Louisiana state government is expected to
spend $318.4 million for economic development activities in several
departments in fiscal year 1995-96; economic development will account for
2.7% of total expenditures and 0.6% of General Fund expenditures.
The 1996-97 budget was adopted without new taxes and without new
fees. Taxes will be reduced by 1% on food and utilities beginning July
1, 1997 and $110 million will be returned to the taxpayers.
The State General Fund is the principal operating fund of the State,
and was established administratively to provide for the distribution of
funds appropriated by the State Legislature for the ordinary expenses of
the State government. Revenue is provided from the direct deposit of
federal grants and the transfer of State revenues from the Bond Security
and Redemption Fund after general obligation debt requirements are met.
The Transportation Trust Fund was established pursuant to
(i) Section 27 of Article VII of the State Constitution and (ii) Act No.
16 of the First Extraordinary Session of the Louisiana Legislature for
the year 1989 (collectively, the "Act") for the purpose of funding
construction and maintenance of state and federal roads and bridges, the
statewide flood-control program, ports, airports, transit and state
police traffic control projects and to fund the Parish Transportation
Fund. The Transportation Trust Fund is funded by a levy of $0.20 per
gallon on gasoline and motor fuels and on special fuels (diesel, propane,
butane and compressed natural gas) used, sold or consumed in the state
(the "Gasoline and Motor Fuels Taxes and Special Fuels Taxes"). This
levy was increased from $0.16 per gallon (the "Existing Taxes") to the
current $0.20 per gallon pursuant to Act No. 16 of the First
Extraordinary Session of the Louisiana Legislature for the year 1989, as
amended. The additional tax of $0.04 per gallon (the "Act 16 Taxes")
became effective January 1, 1990 and will expire on the earlier of
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January 1, 2005 or the date on which obligations secured by the Act No.
16 taxes are no longer outstanding. The Transportation Infrastructure
Model for Economic Development Account (the "TIME Account") was
established in the Transportation Trust Fund. Moneys in the TIME Account
will be expended for certain projects identified in the Act aggregating
$1.4 billion and to fund not exceeding $160 million of additional capital
transportation projects. The State issued $263,902,639.95 of Gasoline
and Fuels Tax Revenue Bonds, 1990 Series A, dated April 15, 1990 payable
from the (i) Act No. 16 Taxes, (ii) any Act No. 16 Taxes and Existing
Taxes deposited in the Transportation Trust Fund, and (iii) any
additional taxes on gasoline and motor fuels and special fuels pledged
for the payment of said Bonds.
The Louisiana Recovery District (the "Recovery District") was
created pursuant to Act No. 15 of the First Extraordinary Session of the
Legislature of Louisiana of 1988 to assist the State in the reduction and
elimination of a deficit existing at that time and the delivery of
essential services to its citizens and to assist parishes, cities and
other units of local government experiencing cash flow difficulties. The
Recovery District is a special taxing district the boundaries of which
are coterminous with the State and is a body politic and corporate and a
political subdivision of the State. The Recovery District issued
$979,125,000 of Louisiana Recovery District Sales Tax Bonds, Series 1988,
dated July 1, 1988, secured by (i) the revenues derived from the
District's 1% statewide sales and use tax remaining after the costs of
collection and (ii) all funds and accounts held under the Recovery
District's General Bond Resolution and all investment earnings on such
funds and accounts. As of June 30, 1990, the principal amount
outstanding was $851,880,000.
The Legislature has passed several constitutional amendments which
were approved by the state electorate, resulting in comprehensive
budgetary reforms mandating that: both proposed and adopted budgets be
balanced in accordance with the official forecast of the Revenue
Estimating Conference; any new tax proposal be tied to specific
expenditures; all mineral revenues earned by the State in excess of $750
million be placed in the Revenue Stabilization Mineral Trust Fund, to be
used as a "rainy day fund"; and the regular legislative session must end
prior to the completion of the fiscal year in order to streamline
budgetary reporting and planning. The Legislature also adopted a
proposed constitutional amendment which was approved by the State
electorate permitting the creation of a Louisiana lottery. The lottery
is projected to generate approximately $111 million per year in net
revenues for the State.
Only local governmental units levy ad valorem taxes at present.
Under the 1921 State Constitution, a 5.75 mills ad valorem tax was being
levied by the State until January 1, 1973, at which time a constitutional
amendment to the 1921 Constitution abolished the ad valorem tax. Under
the 1974 State Constitution, a State ad valorem tax of up to 5.75 mills
was provided for but is not presently being levied. The property tax is
underutilized at the parish level due to a constitutional homestead
exemption from the property tax applicable to the first $75,000 of the
full market value of single family residences. Homestead exemptions do
not apply to ad valorem property taxes levied by municipalities, with the
exception of the City of New Orleans. Since local governments are also
prohibited from levying an individual income tax by the constitution,
their reliance on State government is increased under the existing tax
structure.
In 1993, Louisiana ranked 21st in the nation in population, at
4,290,400. In 1994, Louisiana's total personal income grew at a faster
rate (7%) than the nation as a whole (5%). Louisiana's per capita
personal income increased 4.9% from 1994 to 1995, from $17,615 to
$18,981. The 1995 figure is 82% of the national figure ($23,208).
As of November 1995, over 1.8 million were employed in the non-
agricultural sector in Louisiana. This was an increase of 41,200 from
1994. Approximately 1.4 million are employed in the service sector.
Manufacturing accounted for 10.6% of non-agricultural employment in
Louisiana in 1995. This was a slight decrease from the 10.9% rate in
1994. However, manufacturing jobs increased statewide by 3,300 positions
(or 1.79%) from January 1995 to January 1996. This compares to an
overall U.S. gain of just 0.01% during the same period. Petroleum
processing, chemical manufacturing, food processing, and forest products
(including paper, lumber and other wood products) are the leading
industries in Louisiana.
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The foregoing information constitutes only a brief summary of some
of the financial difficulties which may impact certain issuers of Bonds
and does not purport to be a complete or exhaustive description of all
adverse conditions to which the issuers of the Louisiana Trust are
subject. Additionally, many factors including national economic, social
and environmental policies and conditions, which are not within the
control of the issuers of Bonds, could affect or could have an adverse
impact on the financial condition of the State and various agencies and
political subdivisions located in the State. The Sponsor is unable to
predict whether or to what extent such factors may affect the issuers of
Bonds, the market value or marketability of the Bonds or the ability of
the respective issuers of the Bonds acquired by the Louisiana Trust to
pay interest on or principal of the Bonds.
At the time of the closing for each Louisiana Trust, Special Counsel
to each Louisiana Trust for Louisiana tax matters rendered an opinion
under then existing Louisiana income tax law applicable to taxpayers
whose income is subject to Louisiana income taxation substantially to the
effect that:
The State of Louisiana imposes a tax upon the net income of
resident individuals, and with certain exceptions, resident
corporations, estates and trusts, and upon the income from Louisiana
sources of nonresident individuals, corporations, estates and
trusts.
The mere ownership of Units will not subject a nonresident Unit
holder to the tax jurisdiction of Louisiana. Amounts received by a
nonresident Unit holder (who may for other reasons be subject to the
tax jurisdiction of Louisiana) with respect to Units held outside of
Louisiana will not constitute income from Louisiana sources, upon
which the Louisiana income tax would be imposed.
In the case of resident individuals, the calculation of
Louisiana tax table income begins with Federal adjusted gross income
with certain modifications, including the addition of interest on
obligations of a state or political subdivision thereof other than
Louisiana. However, Louisiana law specifically provides that
interest on obligations of the State of Louisiana, its political
subdivisions, public corporations created by them and constituted
authorities thereof authorized to issue obligations on their behalf,
title to which obligations are vested with a resident individual
shall be excluded from tax table income and are exempt from
Louisiana income taxation. In addition, to the extent that any such
interest paid to a Unit holder is derived from the proceeds of a
bond insurance policy issued to the Trustee of the Fund or under
individual policies obtained by the issuer of the Bonds, the
underwriter, the Sponsor or others, such interest would be exempt
from Louisiana income tax.
In the case of corporations, estates, trusts, insurance
companies and foreign corporations, interest received upon
obligations of the State of Louisiana, or any political or municipal
subdivision thereof, is exempt from Louisiana income taxation.
A Louisiana Trust is not an "association" taxable as a
corporation under Louisiana law with the result that income of a
Louisiana Trust will be deemed to be income of the Unit holders.
Interest on the Bonds that is exempt from Louisiana income tax
when received by a Louisiana Trust will retain its tax-exempt status
when received by the Unit holders.
As a general rule, to the extent that gain (or loss) from the
sale of obligations held by a Louisiana Trust (whether as a result
of the sale of such obligations by a Louisiana Trust or as a result
of the sale of a Unit by a Unit holder) is includable in (or
deductible in the calculation of) the Federal adjusted gross income
of a resident individual or the Federal taxable income of a resident
corporation, estate or trust, such gain will be included (or loss
deducted) in the calculation of the Unit holder's Louisiana taxable
income.
The State of Louisiana does not impose an intangible tax on
investments, and therefore, Unit holders will not be subject to
Louisiana intangibles tax on their Units of a Louisiana Trust.
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As no opinion is expressed regarding the Louisiana tax consequences
of Unitholders other than individuals who are Louisiana residents, tax
counsel should be consulted by other prospective Unitholders. The
Internal Revenue Code of 1986, as amended (the "1986 Code"), contains
provisions relating to investing in tax-exempt obligations (including,
for example, corporate minimum tax provisions which treat certain tax-
exempt interest and corporate book income which may include tax-exempt
interest, as tax preference items, provisions reducing the deductibility
of interest expense by financial institutions) which could have a
corresponding effect on the Louisiana tax liability of the Unitholders.
In rendering the opinions expressed above, counsel has relied upon
the opinion of Counsel to the Sponsor that the Louisiana Trust is not an
association taxable as a corporation for Federal income tax purposes,
that each Unitholder of the Louisiana Trust will be treated as the owner
of a pro rata portion of such Louisiana Trust under the 1986 Code and
that the income of the Louisiana Trust will be treated as income of the
Unitholders under the 1986 Code.
Tax counsel should be consulted as to the other Louisiana tax
consequences not specifically considered herein, and as to the Louisiana
tax status of taxpayers other than Louisiana resident individuals who are
Unitholders in the Louisiana Trust. In addition, no opinion is being
rendered as to Louisiana tax consequences resulting from any proposed or
future federal or state tax legislation.
Massachusetts Trusts. The Massachusetts Trust
will invest substantially all of its net assets in obligations issued by
or on behalf of the Commonwealth of Massachusetts, political subdivisions
thereof, or agencies or instrumentalities of the Commonwealth or its
political subdivisions (the "Bonds"). The Massachusetts Trust is
therefore susceptible to general or particular political, economic, or
regulatory factors that may affect issuers of such Massachusetts
investments. The following information constitutes only a brief summary
of some of the many complex factors that may have an effect. The
information may not be applicable to "conduit" obligations on which the
public issuer itself has no financial responsibility. This information
is derived from official statements of the Commonwealth and certain of
its agencies or instrumentalities in connection with the issuance of
securities, and from other publicly available documents, and is believed
to be accurate. No independent verification has been made of any of the
following information.
The Massachusetts Economy. After declining since 1987,
Massachusetts employment in 1993 has shown positive annual growth. While
Massachusetts has benefitted from an annual job growth rate of
approximately 2% since the early 1980s, by 1989, employment had started
to decline. Nonagricultural employment declined 0.7% in fiscal 1989,
4.0% in fiscal 1990, 5.5% in fiscal 1991, 0.9% in fiscal 1992, and 1.7%
in fiscal 1993. A comparison of total, nonagricultural employment in
November 1993 with that in November 1994 indicates an increase of 2.4%.
From 1980 to 1989, Massachusetts' unemployment rate was
significantly lower than the national average. By 1990, however,
unemployment reached 6.0%, exceeding the national average for the first
time since 1977. The Massachusetts unemployment rate peaked in 1991 at
9.0% and dropped to 6.9% in 1993. Since 1993, the average monthly
unemployment rate has declined steadily. The Massachusetts unemployment
rate in February 1996 was 5.0%, as compared with the United States
unemployment rate of 5.5% for the same period. Other factors which may
significantly and adversely affect the employment rate in the
Commonwealth include reductions in federal government spending on
defense-related industries. Due to this and other considerations, there
can be no assurance that unemployment in the Commonwealth will not
increase in the future.
In recent years, per capita personal income growth in Massachusetts
has remained among the highest in the nation. From 1994 to 1995, per
capita personal income increased 6.4%, from $26,343 to $28,021.
Massachusetts ranked third in the nation in 1995 in per capita personal
income, with the 1995 figure at 121% of the national figure ($23,208).
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The Commonwealth, while the third most densely populated state
according to the 1990 census, has experienced only a modest increase in
population from 1980 to 1990 at a rate equal to less than one-half the
rate of increase in the United States population as a whole.
Massachusetts possesses a diversified economic base which includes
traditional manufacturing, high technology and service industries, served
by an extensive transportation system and related facilities. The
Massachusetts service sector, at approximately 34.3% of the state work
force in November of 1994, is the largest sector in the Massachusetts
economy. Government employment is below the national average,
representing less than 14% of the Massachusetts work force. In recent
years, the construction, manufacturing and trade sectors have experienced
the greatest decreases in employment in Massachusetts, with more modest
declines taking place in the government, finance, insurance and real
estate, and service sectors. From 1990 to November of 1994,
manufacturing employment in Massachusetts declined by some 15.5%. At the
same time, there has occurred a reversal of the dramatic growth which
occurred during the 1980s in the finance, insurance and real estate
sector and in the construction sector of the Massachusetts economy.
Over the next decade, Massachusetts has a very full public
construction agenda which is expected not only to improve mobility, but
to provide a substantial number of construction and related employment
opportunities, including the major Central Artery/Tunnel project
involving the construction of a third tunnel under Boston Harbor linking
the MassPike and downtown Boston with Logan International Airport, and
the depression into tunnels of the Central Artery that traverses the City
of Boston. Federal funds are expected to cover approximately 90% of the
cost of this project. The Central Artery/Tunnel project is expected to
employ approximately 5,000 on-site workers and 10,000 auxiliary workers
during the peak years of construction in the mid-1990s.
1996 Fiscal Year Budget. On July 21, 1995, the Governor signed the
Commonwealth's budget for fiscal 1996. The fiscal 1996 budget is based
on estimated budgeted revenues and other sources of approximately $16.778
billion, which includes fiscal 1996 tax revenues of $11.653 billion.
Estimated fiscal 1996 tax revenues are approximately $490 million, or
4.3% higher than estimated fiscal 1995 tax revenues.
Fiscal 1996 non-tax revenues are projected to total $5.158 billion,
approximately $66 million, or 1.3% less than fiscal 1995 non-tax revenues
of approximately $5.224 billion. Federal reimbursements are projected to
decrease by approximately $1 million from approximately $2.970 billion in
fiscal 1995 to approximately $2.969 billion in fiscal 1996, primarily as
a result of increased reimbursements for Medicare spending, offset by a
reduction in reimbursements received in 1995 for one-time Medicare
expenses incurred in fiscal 1994 and fiscal 1995. Fiscal 1996
departmental revenues are projected to decline by approximately $94
million, or 7.4%, from approximately $1.273 billion in fiscal 1995 to
approximately $1.179 billion in fiscal 1996. Major changes in projected
non-tax received for fiscal 1996 include a decline in motor vehicle
license and registration fees, reduction of abandoned property revenues
and a decrease due to non-recurring revenues received in fiscal 1995 from
hospitals and nursing homes as part of Medicare fiscal rate settlements
and other reimbursements by municipal hospitals to the state.
Fiscal 1996 appropriations in the Annual Appropriations Act total
approximately $16.847 billion, including approximately $25 million in
gubernatorial vetoes overridden by the legislature. In the final
supplemental budget for fiscal 1995, approved on August 24, 1995, another
$71.1 million of appropriations were continued for use in 1996.
As of February 1, 1996, the Governor had signed into law fiscal 1996
supplemental appropriations totalling approximately $23.5 million,
including approximately $12.6 million to fund higher education collective
bargaining contracts and $5.6 million for the Department of Social
Services. These appropriations were offset by approximately $10.4
million in line item reductions, including a reduction of $9.8 million
for the state's debt service contract assistance to the MBTA. Both the
House and Senate have passed supplemental appropriation bills totalling
$64.8 million primarily relating to snow and ice removal costs incurred
by both the Commonwealth and cities and towns. The bills are currently
awaiting resolution by a conference committee of the House and Senate.
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On January 26, 1996 and February 9, 1996, the Governor filed additional
supplemental appropriation bills totalling approximately $7.3 million for
costs relating to prison overcrowding relief as well as reimbursement
costs associated with a court settlement. No action has been taken on
these bills by either branch of the Legislature.
As of May 28, 1996, fiscal 1996 projected spending is approximately
$16.963 billion, including approximately $153.2 million reserved for
contingencies. Projected revenues are approximately $16.851 billion.
The fiscal 1996 tax revenue projection is $11.684 billion, which
represents an increase of approximately $80 million from the earlier
estimate, based upon tax revenue collections through April 1996.
The fiscal 1996 budget is based on numerous spending and revenue
estimates the achievement of which cannot be assured.
1995 Fiscal Year. Budgeted revenues and other sources, including
non-tax revenues, collected in fiscal 1995 were approximately $16.387
billion, approximately $837 million, or 5.4% above fiscal 1994 revenues
of $15.550 billion. Fiscal 1995 tax revenues collections were
approximately $11.163 billion, approximately $12 million above the
Department of Revenue's revised fiscal year 1995 tax revenue estimate of
$10.151 billion and $556 million, or 5.2% above fiscal year tax revenues
of $10.607 billion.
Budgeted expenditures and other uses of funds in fiscal 1995 were
approximately $16.251 billion, approximately $728 million, or 4.7% above
fiscal 1994 budgeted expenditures and uses of $15.523 billion.
The Commonwealth ended fiscal 1995 with an operating gain of $137
million and an ending fund balance of $726 million.
Debt Ratings. S&P currently rates the Commonwealth's uninsured
general obligation bonds at A+. At the same time, S&P currently rates
state and agency notes at SP1. From 1989 through 1992, the Commonwealth
had experienced a steady decline in its S&P rating, with its decline
beginning in May 1989, when S&P lowered its rating on the Commonwealth's
general obligation bonds and other Commonwealth obligations from AA+ to
AA and continuing a series of further reductions until March 1992, when
the rating was affirmed at BBB.
Moody's currently rates the Commonwealth's uninsured general
obligation bonds at A1. From 1989 through 1992, the Commonwealth had
experienced a steady decline in its rating by Moody's since May 1989. In
May 1989, Moody's lowered its rating on the Commonwealth's notes from
MIG-1 to MIG-2, and its rating on the Commonwealth's commercial paper
from P-1 to P-2. On June 21, 1989, Moody's reduced the Commonwealth's
general obligation rating from Aa to A. On November 15, 1989, Moody's
reduced the rating on the Commonwealth's general obligations from A to
Baa1, and on March 9, 1990, Moody's reduced the rating of the
Commonwealth's general obligation bonds from Baa1 to Baa.
There can be no assurance that these ratings will continue.
In recent years, the Commonwealth and certain of its public bodies
and municipalities have faced serious financial difficulties which have
affected the credit standing and borrowing abilities of Massachusetts and
its respective entities and may have contributed to higher interest rates
on debt obligations. The continuation of, or an increase in, such
financial difficulties could result in declines in the market values of,
or default on, existing obligations including Massachusetts Obligations
in the Trust. Should there be during the term of the Trust a financial
crisis relating to Massachusetts, its public bodies or municipalities,
the market value and marketability of all outstanding bonds issued by the
Commonwealth and its public authorities or municipalities including the
Massachusetts Obligations in the Trust and interest income to the Trust
could be adversely affected.
Total Bond and Note Liabilities. The total general obligation bond
indebtedness of the Commonwealth (including Dedicated Income Tax Debt and
Special Obligation Debt) as of April 1, 1996 was approximately $10.093
billion. There were also outstanding approximately $240 million in
general obligation notes and other short term general obligation debt.
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The total bond and note liabilities of the Commonwealth as of April 1,
1996, including guaranteed bond and contingent liabilities, was
approximately $13.818 billion.
Litigation. The Commonwealth is engaged in various lawsuits
involving environmental and related laws, including an action brought on
behalf of the U.S. Environmental Protection Agency alleging violations of
the Clean Water Act and seeking to enforce the clean-up of Boston Harbor.
The MWRA, successor in liability to the Metropolitan District Commission,
has assumed primary responsibility for developing and implementing a
court-approved plan for the construction of the treatment facilities
necessary to achieve compliance with federal requirements. Under the
Clean Water Act, the Commonwealth may be liable for costs of compliance
in these or any other Clean Water cases if the MWRA or a municipality is
prevented from raising revenues necessary to comply with a judgment. The
MWRA currently projects that the total cost of construction of the
treatment facilities required under the court's order is approximately
$3.557 billion in current dollars, with approximately $1.046 billion to
be spent on or after June 30, 1995. On October 18, 1995, the court
entered an order which reduced the MWRA's obligation to build certain
additional secondary treatment facilities, which is estimated by the MWRA
will save ratepayers approximately $165 million.
In 1995, the Spaulding Rehabilitation Hospital ("Spaulding") filed
an action to enforce an agreement to acquire its property by eminent
domain in connection with the Central Artery/Third Harbor Tunnel Project.
If successful, Spaulding could recover the fair market value of its
property in addition to its relocation costs with respect to its personal
property. The Commonwealth estimates its potential liability at
approximately $50 million.
The Commonwealth faces an additional potential liability of
approximately $40 million in connection with a taking by the
Massachusetts Highway Department related to the relocation of Northern
Avenue in Boston.
The foregoing information constitutes only a brief summary of some
of the general factors which may impact certain issuers of Bonds and does
not purport to be a complete or exhaustive description of all adverse
conditions to which the issuers of obligations held by the Massachusetts
Trust are subject. Additionally, many factors including national
economic, social and environmental policies and conditions, which are not
within the control of the issuers of Bonds, could affect or could have an
adverse impact on the financial condition of the Commonwealth and various
agencies and political subdivisions located in the Commonwealth. The
Sponsor is unable to predict whether or to what extent such factors or
other factors may affect the issuers of the Bonds, the market value or
marketability of the Bonds or the ability of the respective issuers of
the Bonds acquired by the Massachusetts Trust to pay interest on or
principal of the Bonds.
At the time of the closing for each Massachusetts Trust, Special
Counsel to the Massachusetts Trust for Massachusetts tax matters rendered
an opinion under then existing Massachusetts income tax law applicable to
taxpayers whose income is subject to Massachusetts income taxation and
based on rulings of the Commissioner of Revenue substantially to the
effect that:
(1) For Massachusetts income tax purposes, the Massachusetts
Trust will be treated as a corporate trust under Section 8 of
Chapter 62 of the Massachusetts General Laws and not as a grantor
trust under Section 10(e) of Chapter 62 of the Massachusetts General
Laws.
(2) The Massachusetts Trust will not be held to be engaging in
business in Massachusetts within the meaning of said Section 8 and
will, therefore, not be subject to Massachusetts income tax.
(3) Massachusetts Unitholders who are subject to Massachusetts
income taxation under Chapter 62 of Massachusetts General Laws will
not be required to include their respective shares of the earnings
of or distributions from the Massachusetts Trust in their
Massachusetts gross income to the extent that such earnings or
distributions represent tax-exempt interest for federal income tax
purposes received by the Massachusetts Trust on obligations issued
by Massachusetts, its counties, municipalities, authorities,
political subdivisions or instrumentalities, or issued by United
States territories or possessions.
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(4) Any proceeds of insurance obtained by the Trustee of the
Trust or by the issuer of a Bond held by the Massachusetts Trust
which are paid to Massachusetts Unitholders and which represent
maturing interest on defaulted obligations held by the Trustee will
be excludable from Massachusetts gross income of a Massachusetts
Unitholder if, and to the same extent as, such interest would have
been so excludable if paid by the issuer of the defaulted Bond.
(5) The Massachusetts Trust's capital gains and/or capital
losses realized upon disposition of Bonds held by it will be
includable pro rata in the federal gross income of Massachusetts
Unitholders who are subject to Massachusetts income taxation under
Chapter 62 of the Massachusetts General Laws, and such gains and/or
losses will be included as capital gains and/or losses in the
Massachusetts Unitholders' Massachusetts gross income, except where
capital gain is specifically exempted from income taxation under
acts authorizing issuance of said Bonds.
(6) Gains or losses realized upon sale or redemption of Units
by Massachusetts Unitholders who are subject to Massachusetts income
taxation under Chapter 62 of the Massachusetts General Laws will be
includable in their Massachusetts gross income.
(7) In determining such gain or loss Massachusetts Unitholders
will, to the same extent required for Federal tax purposes, have to
adjust their tax bases for their Units for accrued interest
received, if any, on Bonds delivered to the Trustee after the
Unitholders pay for their Units and for amortization of premiums, if
any, on obligations held by the Massachusetts Trust.
(8) The Units of the Massachusetts Trust are not subject to
any property tax levied by Massachusetts or any political
subdivision thereof, nor to any income tax levied by any such
political subdivision. They are includable in the gross estate of a
deceased Massachusetts Unitholder who is a resident of Massachusetts
for purposes of the Massachusetts Estate Tax.
Michigan Trusts. Investors should be aware that the
economy of the State of Michigan has, in the past, proven to be cyclical,
due primarily to the fact that the leading sector of the State's economy
is the manufacturing of durable goods. While the State's efforts to
diversify its economy have proven successful, as reflected by the fact
that the share of employment in the State in the durable goods sector has
fallen from 33.1 percent in 1960 to 17.9 percent in 1990, durable goods
manufacturing still represents a sizable portion of the State's economy.
As a result, any substantial national economic downturn is likely to have
an adverse effect on the economy of the State and on the revenues of the
State and some of its local governmental units.
In July 1995, Moody's Investors Service, Inc. raised the State's
general obligation bond rating to "Aa." In October 1989, Standard &
Poor's raised its rating on the State's general obligation bonds to "AA."
The State's economy could continue to be affected by changes in the
auto industry, notably consolidation and plant closings resulting from
competitive pressures and over-capacity. Such actions could adversely
affect State revenues and the financial impact on the local units of
government in the areas in which plants are closed could be more severe.
In addition, as described in the State's comprehensive annual financial
report on file with the Nationally Recognized Municipal Securities
Information Repositories, the State is party to various legal
proceedings, some of which could, if unfavorably resolved from the point
of view of the State, substantially affect State programs or finances.
In recent years, the State has reported its financial results in
accordance with generally accepted accounting principles. For the fiscal
year ending September 30, 1991, the State reported a negative year-end
balance in the General Fund/School Aid Fund of $169.4 million. The State
ended each of the 1992, 1993, 1994 and 1995 fiscal years with its General
Fund/School Aid Fund in balance, after having made substantial transfers
to the Budget Stabilization Fund in 1993, 1994, and 1995. In the 1991
through 1993 fiscal years, the State experienced deteriorating cash
balances which necessitated short-term borrowing and the deferral of
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certain scheduled cash payments. The State did not borrow for cash flow
purposes in 1994, but borrowed $500 million on March 9, 1995, which was
repaid on September 29, 1995 and $900 million on February 20, 1996, with
a maturity date of September 30, 1996. The State's Budget Stabilization
Fund received transfers of $283 million in 1993, $464 million in 1994 and
$320 million in 1995, bringing the balance in the Budget Stabilization
Fund, after making certain transfers out, to $988 million at
September 30, 1995.
The Michigan Constitution of 1963 limits the amount of total
revenues of the State raised from taxes and certain other sources to a
level for each fiscal year equal to a percentage of the State's personal
income for the prior calendar year. In the event that the State's total
revenues exceed the limit by 1 percent or more, the Michigan Constitution
of 1963 requires that the excess be refunded to taxpayers.
On March 15, 1994, Michigan voters approved a school finance reform
amendment to the State's Constitution which, among other things,
increased the State sales tax rate from 4% to 6% and placed a cap on
property assessment increases for all property taxes. Concurrent
legislation cut the State's income tax rate from 4.6% to 4.4%, reduced
some property taxes and altered local school funding sources to a
combination of property taxes and state revenues, some of which is
provided from other new or increased State taxes. The legislation also
contained other provisions that alter (and, in some cases, may reduce)
the revenues of local units of government, and tax increment bonds could
be particularly affected. While the ultimate impact of the
constitutional amendment and related legislation cannot yet be accurately
predicted, investors should be alert to the potential effect of such
measures upon the operations and revenues of Michigan local units of
government.
In addition, the State Legislature recently adopted a package of
State tax cuts, including a phase out of the intangibles tax, an increase
in exemption amounts for personal income tax, and reductions in the
single business tax.
Although all or most of the Bonds in the Michigan Trust are revenue
obligations or general obligations of local governments or authorities
rather than general obligations of the State of Michigan itself, there
can be no assurance that any financial difficulties the State may
experience will not adversely affect the market value or marketability of
the Bonds or the ability of the respective obligors to pay interest on or
principal of the Bonds, particularly in view of the dependency of local
governments and other authorities upon State aid and reimbursement
programs and, in the case of bonds issued by the State Building
Authority, the dependency of the State Building Authority on the receipt
of rental payments from the State to meet debt service requirements upon
such bonds. In the 1991 fiscal year, the State deferred certain
scheduled cash payments to municipalities, school districts, universities
and community colleges. While such deferrals were made up at specified
later dates, similar future deferrals could have an adverse impact on the
cash position of some local governmental units. Additionally, the State
reduced revenue sharing payments to municipalities below that level
provided under formulas by $10.9 million in the 1991 fiscal year, $34.4
million in the 1992 fiscal year, $45.5 million in the 1993 fiscal year,
$54.5 million in the 1994 fiscal year, and $67.0 million (budgeted) in
the 1995 fiscal year.
The Michigan Trust may contain general obligation bonds of local
units of government pledging the full faith and credit of the local unit
which are payable from the levy of ad valorem taxes on taxable property
within the jurisdiction of the local unit. Such bonds issued prior to
December 22, 1978, or issued after December 22, 1978 with the approval of
the electors of the local unit, are payable from property taxes levied
without limitation as to rate or amount. With respect to bonds issued
after December 22, 1978, and which were not approved by the electors of
the local unit, the tax levy of the local unit for debt service purposes
is subject to constitutional, statutory and charter tax rate limitations.
In addition, several major industrial corporations have instituted
challenges of their ad valorem property tax assessments in a number of
local municipal units in the State. If successful, such challenges could
have an adverse impact on the ad valorem tax bases of such units which
could adversely affect their ability to raise funds for operation and
debt service requirements.
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At the time of the closing for each Michigan Trust, Special Counsel
to each Michigan Trust for Michigan tax matters rendered an opinion under
then existing Michigan income tax law applicable to taxpayers whose
income is subject to Michigan income taxation substantially to the effect
that:
The Michigan Trust and the owners of Units will be treated for
purposes of the Michigan income tax laws and the Single Business Tax in
substantially the same manner as they are for purposes of the Federal
income tax laws, as currently enacted. Accordingly, we have relied upon
the opinion of Counsel to the Sponsor as to the applicability of Federal
income tax laws under the Internal Revenue Code of 1986, as currently
amended, to the Michigan Trust and the Unitholders.
Under the income tax laws of the State of Michigan, the Michigan
Trust is not an association taxable as a corporation; the income of the
Michigan Trust will be treated as the income of the Unitholders of the
Michigan Trust and be deemed to have been received by them when received
by the Michigan Trust. Interest on the Bonds in the Michigan Trust which
is exempt from tax under the Michigan income tax laws when received by
the Michigan Trust will retain its status as tax exempt interest to the
Unitholders of the Michigan Trust.
For purposes of the Michigan income tax laws, each Unitholder of the
Michigan Trust will be considered to have received his pro rata share of
interest on each Bond in the Michigan Trust when it is received by the
Michigan Trust, and each Unitholder will have a taxable event when the
Michigan Trust disposes of a Bond (whether by sale, exchange, redemption
or payment at maturity) or when the Unitholder redeems or sells his Unit,
to the extent the transaction constitutes a taxable event for Federal
income tax purposes. The tax cost of each Unit to a Unitholder will be
established and allocated for purposes of the Michigan income tax laws in
the same manner as such cost is established and allocated for Federal
income tax purposes;
Under the Michigan Intangibles Tax, the Michigan Trust is not
taxable and the pro rata ownership of the underlying Bonds, as well as
the interest thereon, will be exempt to the Unitholders to the extent the
Michigan Trust consists of obligations of the State of Michigan or its
political subdivisions or municipalities, or of obligations of the
possessions of the United States. The Intangibles Tax is being phased
out, with reductions of twenty-five percent (25%) in 1994 and 1995, fifty
percent (50%) in 1996, and seventy-five percent (75%) in 1997, with total
repeal effective January 1, 1998.
The Michigan Single Business Tax replaced the tax on corporate and
financial institution income under the Michigan Income Tax, and the
Intangible Tax with respect to those intangibles of persons subject to
the Single Business Tax the income from which would be considered in
computing the Single Business Tax. Persons are subject to the Single
Business Tax only if they are engaged in "business activity," as defined
in the Act. Under the Single Business Tax, both interest received by the
Michigan Trust on the underlying Bonds and any amount distributed from
the Michigan Trust to a Unitholder, if not included in determining
taxable income for Federal income tax purposes, is also not included in
the adjusted tax base upon which the Single Business Tax is computed, of
either the Michigan Trust or the Unitholders. If the Michigan Trust or
the Unitholders have a taxable event for Federal income tax purposes when
the Michigan Trust disposes of a Bond (whether by sale, exchange,
redemption or payment at maturity) or the Unitholder redeems or sells his
Unit, an amount equal to any gain realized from such taxable event which
was included in the computation of taxable income for Federal income tax
purposes (plus an amount equal to any capital gain of an individual
realized in connection with such event but excluded in computing that
individual's Federal taxable income) will be included in the tax base
against which, after allocation, apportionment and other adjustments, the
Single Business Tax is computed. The tax base will be reduced by an
amount equal to any capital loss realized from such a taxable event,
whether or not the capital loss was deducted in computing Federal taxable
income in the year the loss occurred. Unitholders should consult their
tax advisor as to their status under Michigan law.
Any proceeds paid under an insurance policy issued to the Trustee of
the Trust, or paid under individual policies obtained by issuers of
Bonds, which, when received by the Unitholders, represent maturing
interest on defaulted obligations held by the Trustee, will be excludable
from the Michigan income tax laws and the Single Business Tax if, and to
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the same extent as, such interest would have been so excludable if paid
by the issuer of the defaulted obligations. While treatment under the
Michigan Intangibles Tax is not premised upon the characterization of
such proceeds under the Internal Revenue Code, the Michigan Department of
Treasury should adopt the same approach as under the Michigan income tax
laws and the Single Business Tax.
As the Tax Reform Act of 1986 eliminates the capital gain deduction
for tax years beginning after December 31, 1986, the federal adjusted
gross income, the computation base for the Michigan Income Tax, of a
Unitholder will be increased accordingly to the extent such capital gains
are realized when the Michigan Trust disposes of a Bond or when the
Unitholder redeems or sells a Unit, to the extent such transaction
constitutes a taxable event for Federal income tax purposes.
Minnesota Trusts. In the early 1980s, the State of
Minnesota experienced financial difficulties due to a downturn in the
State's economy resulting from the national recession. In response to
revenue shortfalls, the legislature broadened and increased the State
sales tax, increased income taxes (by increasing rates and eliminating
deductions) and reduced appropriations and deferred payment of State aid,
including appropriations for and aids to local governmental units. The
State's fiscal problems affected other governmental units within the
State, such as local government, school districts and state agencies,
which, in varying degrees, also faced cash flow difficulties. In certain
cases, revenues of local governmental units and agencies were reduced by
the recession.
Because of the State's fiscal problems, Standard & Poor's
Corporation reduced its rating on the State's outstanding general
obligation bonds from AAA to AA+ in August 1981 and to AA in March 1982.
Moody's Investors Service, Inc. lowered its rating on the State's
outstanding general obligation bonds from Aaa to Aa in April 1982. The
State's economy recovered in the July 1, 1983 to June 30, 1985 biennium,
and substantial reductions in the individual income tax were enacted in
1984 and 1985. Standard & Poor's raised its rating on the State's
outstanding general obligation bonds to AA+ in January 1985. In 1986,
1987, 1991, 1992, and 1993, legislation was required to eliminate
projected budget deficits by raising additional revenue, reducing
expenditures, including aids to political subdivisions and higher
education, reducing the State's budget reserve (cash flow account),
imposing a sales tax on purchases by local governmental units, and making
other budgetary adjustments.
State grants and aids represent a large percentage of the total
revenues of cities, towns, counties and school districts in Minnesota.
Even with respect to Bonds that are revenue obligations of the issuer and
not general obligations of the State, there can be no assurance that the
fiscal problems referred to above will not adversely affect the market
value or marketability of the Bonds or the ability of the respective
obligors to pay interest on and principal of the Bonds.
Minnesota's 1994-95 Fiscal Year ended with a general fund and local
government trust fund budgetary balance of $444.63 million. Total
resources available were $17.760 billion. Total expenditures and
transfers were $16.740 billion.
According to a July 1996 report from the Minnesota Department of
Finance, net general fund receipts, including revenues dedicated to the
local government trust fund are estimated to have totaled more than
$8.983 billion during the 1996 fiscal year, $255.3 (2.9%) more than
forecast. Minnesota's economy has been stronger than forecast in 1996.
Each of the four major taxes-individual, sales, corporate, and motor
vehicle-brought in an estimated $4,146.6 million, $2,905.1 million,
$704.8 million, and $372.1 million, respectively, a total of $226 million
more than forecast. More than $100 million of the additional revenue is
attributable to settlement of tax year 1995 individual income tax
liabilities, some of which may be one time in nature.
The uncommitted general fund balance at the close of the 1996-97
biennium is expected to be $64 million. This forecast reflects the
statutory allocations made in November 1995 to increase the budget
reserve to $220 million and reduce the school property tax recognition
percentage to zero by Fiscal Year 1997. Total general fund revenues for
the 1996-97 biennium are expected to be $18.453 billion. Total general
fund expenditures are expected to reach $18.839 billion.
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In recent years, Minnesota has ranked as one of the top five states
in production for dairy products, soy beans, hogs, corn, turkeys, sugar
beets, barley, hay, sweet corn, oats, green peas, and sunflowers. In
1994, Minnesota ranked first in the nation in cash receipts for sugar
beets. Total cash receipts in 1994 were $6.522 billion, with dairy
products and soy beans contributing 18.3% and 15.6%, respectively.
Minnesota's 1980-94 growth rate of 12.1% was the highest of the 12
Midwest states and nearly triple the overall growth rate for the Midwest.
Minnesota's population grew 4.4% from 1990-94, to 4,570,355.
Between 1985 and 1994, more than 435,000 jobs were added in
Minnesota, resulting in employment growth of 24.1% compared to the
national average of 16.9%. The four fastest growing industries in
Minnesota were: services; manufacturing; finance, insurance and real
estate (FIRE); and transportation, communications and public utilities
(TCPU). Manufacturing employment increased 10.5% while overall national
manufacturing employment declined nearly 5%. Minnesota continues to rely
on its competitive advantages to generate jobs in traditional and
emerging manufacturing and service industries. Mining continues to be
the weakest industry, although in 1993, Minnesota accounted for more than
three-quarters of the total U.S. iron ore production. In 1994, 2.244
million were employed in non-farm industries.
The annual unemployment rate in Minnesota was below the U.S. and
Midwest rates every year during the ten-year period 1985 to 1994. In
1994, the Minnesota unemployment rate was at a ten-year low of 3.9%,
compared to the 6.1% for the nation. The highest unemployment rate
Minnesota has experienced in the last ten years was 6.0% in 1985.
Minnesota's unadjusted unemployment rate increased slightly from
3.4% in July 1995 to 3.5% in July 1996. This compares with the U.S. rate
of 5.9% in July 1995 and 5.6% in July 1996. Between July 1995 and July
1996, Minnesota added 42,700 jobs, growing at a rate of 1.8% for total
nonfarm wage and salary employment. This brings the total number of
nonfarm jobs in the state to 2,431,800. In the last year, the services
division accounted for over 40% of the growth and trade made up another
30%. From July 1995 to July 1996, the services sector grew 2.7%, or
17,400 jobs. Manufacturing added 2,400 jobs, a .8% increase. FIRE
gained 3,900 jobs for a growth rate of 2.8%. This was the largest
percentage increase of any industry division in the state. TCPU
increased by 2.7%, or 3,200 jobs. Employment has grown at a 3.5% annual
rate in 1996, well above the national average.
The labor force participation rate in Minnesota was 75.6% in 1994,
almost 14% higher than the U.S. average of 66.6%. In 1994, there were
2.565 million in the labor force. As of July 1996, this number increased
to 2.637 million.
In 1994, per capita personal income in Minnesota was $22,257,
exceeding the national average by 2.5%. In 1995, Minnesota's per capita
personal income rose to $23,971, an increase of 4.5% from 1994, and
exceeding the national average by 3%. Minnesota's personal income is
estimated to increase 5.0% in 1996. The U.S. increase for 1996 is
predicted at 4.7%.
Minnesota's wage and salary income increased 4.2% in 1993, 6.6% in
1994 and 6.2% in 1995. In comparison, the United States annual increase
was 3.5%, 4.8%, and 5.5% for 1993, 1994, and 1995, respectively. For
1996, Minnesota's wage and salary income is expected to increase 4.5%
compared to the United States' 4.4% increase.
In May 1996, Moody's Investor Services upgraded Minnesota's general
obligation bond rating to Aaa. S&P's current rating is AA+, and Fitch's
rates Minnesota bonds at AAA.
At the time of the closing for each Minnesota Trust, Special Counsel
to each Minnesota Trust for Minnesota tax matters rendered an opinion
under then existing Minnesota income tax law applicable to taxpayers
whose income is subject to Minnesota income taxation substantially to the
effect that:
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We understand that the Minnesota Trust will only have income
consisting of (i) interest from bonds issued by the State of Minnesota
and its political and governmental subdivisions, municipalities and
governmental agencies and instrumentalities (the "Minnesota Bonds") and
bonds issued by possessions of the United States (the "Possession Bonds"
and, with the Minnesota Bonds the "Bonds") which would be exempt from
federal and Minnesota income taxation when paid directly to an
individual, trust or estate, (ii) gain on the disposition of such Bonds,
and (iii) proceeds paid under certain insurance policies issued to the
Trustee or to the issuers of the Bonds which represent maturing interest
or principal payments on defaulted Bonds held by the Trustee.
Neither the Sponsor not its counsel have independently examined the
Bonds to be deposited in and held in the Trust. However, although no
opinion is expressed herein regarding such matters, it is assumed that:
(i) the Bonds were validly issued, (ii) the interest thereon is
excludable from gross income for federal income tax purposes and (iii)
the interest thereon is exempt from income tax imposed by Minnesota that
is applicable to individuals, trusts and estates (the "Minnesota Income
Tax"). It should be noted that interest on the Minnesota Bonds is
subject to tax in the case of corporations subject to the Minnesota
Corporate Franchise Tax or the Corporate Alternative Minimum Tax and is a
factor in the computation of the Minimum Fee applicable to financial
institutions; no opinion is expressed with respect to the treatment of
interest on the Possession Bonds for purposes of such taxes. The opinion
set forth below does not address the taxation of persons other than full
time residents of Minnesota.
Although Minnesota state law provides that interest on Minnesota
bonds is exempt from Minnesota state income taxation, the Minnesota state
legislature has enacted a statement of intent that interest on Minnesota
bonds should be subject to Minnesota state income taxation if it is
judicially determined that the exemption discriminates against interstate
commerce, effective for the calendar year in which such a decision
becomes final. It cannot be predicted whether a court would render such
a decision or whether, as a result thereof, interest on Minnesota bonds
and therefore distributions by the Minnesota Trust would become subject
to Minnesota state income taxation.
In the opinion of Counsel to the Sponsor, under existing Minnesota
income tax law as of the date of this prospectus and based upon the
assumptions above:
(1) The Minnesota Trust is not an association taxable as a
corporation and each Unitholder of the Minnesota Trust will be
treated as the owner of a pro rata portion of the Minnesota Trust,
and the income of such portion of the Minnesota Trust will therefore
be treated as the income of the Unitholder for Minnesota Income Tax
purposes;
(2) Income on the Bonds excludable from Minnesota taxable
income for purposes of the Minnesota Income Tax when received by the
Minnesota Trust and which would be excludable from Minnesota taxable
income for purposes of the Minnesota Income Tax if received directly
by a Unitholder, will be excludable from Minnesota taxable income
for purposes of the Minnesota Income Tax when received by the
Minnesota Trust and distributed to such Unitholder;
(3) To the extent that interest on certain Bonds, if any,
which is includible in the computation of "alternative minimum
taxable income" for federal income tax purposes, such interest will
also be includible in the computation of "alternative minimum
taxable income" for purposes of the Minnesota Alternative Minimum
Tax imposed on individuals, estates and trusts;
(4) Each Unitholder of the Minnesota Trust will recognize gain
or loss for Minnesota Income Tax purposes if the Trustee disposes of
a Bond (whether by redemption, sale or otherwise) or if the
Unitholder redeems or sells Units of the Minnesota Trust to the
extent that such a transaction results in a recognized gain or loss
to such Unitholder for federal income tax purposes;
(5) Tax basis reduction requirements relating to amortization
of bond premium may, under some circumstances, result in Unitholders
realizing taxable gain for Minnesota Income Tax purposes when their
Units are sold or redeemed for an amount equal to or less than their
original cost;
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(6) Proceeds, if any, paid under individual insurance policies
obtained by issuers of Bonds or the Trustee which represent maturing
interest on defaulted obligations held by the Trustee will be
excludable from Minnesota net income if, and to the same extent as,
such interest would have been so excludable from Minnesota net
income if paid in the normal course by the issuer of the defaulted
obligation provided that, at the time such policies are purchased,
the amounts paid for such policies are reasonable, customary and
consistent with the reasonable expectation that the issuer of the
bonds, rather than the insurer, will pay debt service on the bonds;
and
(7) To the extent that interest derived from the Minnesota
Trust by a Unitholder with respect to any Possession Bonds is
excludable from gross income for federal income tax purposes, such
interest will not be subject to the Minnesota Income Tax. As noted
above, we have expressed no opinion as to the treatment of interest
on the Possession Bonds for purposes of the Minnesota Corporate
Franchise Tax or the Alternative Minimum Tax or whether it is a
factor in the computation of the Minimum Fee applicable to financial
institutions. Although a federal statute currently provides that
bonds issued by the Government of Puerto Rico, or by its authority,
are exempt from all state and local taxation, the Supreme Court of
Minnesota has held that interest earned on bonds issued by the
Government of Puerto Rico may be included in taxable net income for
purposes of computing the Minnesota bank excise tax. The State of
Minnesota could apply the same reasoning in determining whether
interest on the Possession Bonds is subject to the taxes listed
above on which we express no opinion.
We have not examined any of the Bonds to be deposited and held in
the Minnesota Trust or the proceedings for the issuance thereof or the
opinions of bond counsel with respect thereto, and therefore express no
opinions to the exemption from State income taxes of interest on the
Bonds if received directly by a Unitholder.
Counsel to the Sponsor has expressed no opinion with respect to
taxation under any other provision of Minnesota law. Ownership of the
Units may result in collateral Minnesota tax consequences to certain
taxpayers. Prospective investors should consult their tax advisors as to
the applicability of any such collateral consequences.
Missouri Trusts. The following discussion regarding
constitutional limitations and the economy of the State of Missouri is
included for the purpose of providing general information that may or may
not affect issuers of the Bonds in Missouri.
Missouri's population was 5,117,000 according to the 1990 census of
the United States Bureau of the Census, which represented an increase of
200,000 or 4.1% from the 1980 census of 4,917,000 inhabitants. Based on
the 1990 population, Missouri was the 15th largest state in the nation
and the third most populous state west of the Mississippi River, ranking
behind California and Texas. In 1994, the State's population was
estimated to be 5,278,000 by the United States Bureau of the Census.
Agriculture is a significant component of Missouri's economy.
According to data of the United States Department of Agriculture,
Missouri ranked 16th in the nation in 1993 in the value of cash receipts
from farm marketing, with over $4.1 billion. Missouri is one of the
nation's leading purebred livestock producers. In 1993, sales of
livestock and livestock products constituted nearly 56% of the State's
total agricultural receipts.
Missouri is one of the leading mineral producers in the Midwest, and
ranked 15th nationally in 1993 in the production of nonfuel minerals.
Total preliminary value of mineral production in 1993 was approximately
$832 million. The State continues to rank first in the nation in the
production of lead. Lead production in 1993 was valued at over $193
million. Missouri also ranks first in the production of refractory clay,
third in barite, fourth in production of zinc and is a leading producer
of lime, cement and stone.
According to data obtained by the Missouri Division of Employment
Security, in 1996, over 2.5 million workers had nonagricultural jobs in
Missouri. Over 27% of these workers were employed in services,
approximately 24% were employed in wholesale and retail trade, and 16.7%
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were employed in manufacturing. By October 1996, Missouri had added the
most new jobs in non-farm employment of all the mountain-plains states,
with employment growth of 16,400. In the last ten years, Missouri has
experienced a significant increase in employment in the service sector
and in wholesale and retail trade. Missouri led the ten mountain-plains
states in adding the most service jobs between October 1995 and October
1996, at 23,400.
In 1995, per capita personal income in Missouri was $21,819, a 5.7%
increase over the 1994 figure of $20,644. For the United States as a
whole, per capita income in 1995 was $23,208, a 5.3% increase over the
1994 per capita income of $22,047. In 1995, Missouri had the largest pay
gain for the mountain-plains region, at 4.2%, outpacing the percentage
gain for the nation.
For fiscal year 1994, the majority of revenues for the State of
Missouri will be obtained from individual income taxes (53.1%), sales and
use taxes (30.0%), corporate income taxes (5.9%), and county foreign
insurance taxes (3.0%). Major expenditures for fiscal year 1994 include
elementary and secondary education (30.6%), human services (25.4%),
higher education (14.8%) and desegregation (8.9%).
The fiscal year 1994 budget balances resources and obligations based
on the consensus revenue and refund estimate and an opening balance
resulting from continued withholdings and delayed spending for
desegregation capital projects. The total general revenue operating
budget for fiscal year 1994 exclusive of desegregation is $3,844.6
million.
As of December 31, 1994, the state had spent $2.2 billion on the
desegregation cases in St. Louis and Kansas City. At the end of fiscal
year 1995, that total will rise to an estimated $2.6 billion. The
revised estimate for fiscal year 1995 is $358.9 million and the
projection for fiscal year 1996 is $344.4 million. This expected decline
is due to the completion of many of the court-ordered capital
improvements projections. The state's obligation for desegregation
capital improvements was paid for with one-time revenue sources. After
deducting the one-time capital improvements costs, the ongoing increase
required from general revenue growth is $42.3 million. The increase is
due to significant increases required by new St. Louis magnet schools,
general salary increases ordered by the federal district court in Kansas
City and the costs of voluntary interdistrict transfers in both cases.
These estimates are subject to variables including actions of the school
districts and participating students, future court orders and the
expenditure rates of the school districts.
According to the United States Bureau of Labor Statistics, the 1995
unemployment rate in Missouri was 4.8% and the 1996 rate was 4.1%. This
compares favorably with a nationwide unemployment rate of 5.6% for 1995
and 5.4% for 1996.
Currently, Moody's Investors Service, Inc. rates Missouri general
obligation bonds "Aaa" and Standard & Poor's rates Missouri general
obligation bonds "AAA." Although these ratings indicate that the State
of Missouri is in relatively good economic health, there can be, of
course, no assurance that this will continue or that particular bond
issues may not be adversely affected by changes in the State or local
economic or political conditions.
The foregoing information constitutes only a brief summary of some
of the general factors which may impact certain issuers of Bonds and does
not purport to be a complete or exhaustive description of all adverse
conditions to which the issuers of Bonds held by the Missouri Trust are
subject. Additionally, many factors including national economic, social
and environmental policies and conditions, which are not within the
control of the issuers of the Bonds, could affect or could have an
adverse impact on the financial condition of the issuers. The Sponsor is
unable to predict whether or to what extent such factors or other factors
may affect the issuers of the Bonds, the market value or marketability of
the Bonds or the ability of the respective issuers of the Bonds acquired
by the Missouri Trust to pay interest on or principal of the Bonds.
At the time of the closing for each Missouri Trust, Special Counsel
to the Fund for Missouri tax matters rendered an opinion under then
existing Missouri income tax law applicable to taxpayers whose income is
subject to Missouri income taxation substantially to the effect that:
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(1) The Missouri Trust is not an association taxable as a
corporation for Missouri income tax purposes, and each Unitholder of
the Missouri Trust will be treated as the owner of a pro rata
portion of the Missouri Trust and the income of such portion of the
Missouri Trust will be treated as the income of the Unitholder for
Missouri State Income Tax purposes.
(2) Interest paid and original issue discount, if any, on the
Bonds which would be exempt from the Missouri State Income Tax if
received directly by a Unitholder will be exempt from the Missouri
State Income Tax when received by the Missouri Trust and distributed
to such Unitholder; however, no opinion is expressed herein
regarding taxation of interest paid and original issue discount, if
any, on the Bonds received by the Missouri Trust and distributed to
Unitholders under any other tax imposed pursuant to Missouri law,
including but not limited to the franchise tax imposed on financial
institutions pursuant to Chapter 148 of the Missouri Statutes.
(3) Each Unitholder of the Missouri Trust will recognize gain
or loss for Missouri State Income Tax purposes if the Trustee
disposes of a bond (whether by redemption, sale, or otherwise) or if
the Unitholder redeems or sells Units of the Missouri Trust to the
extent that such a transaction results in a recognized gain or loss
to such Unitholder for Federal income tax purposes. Due to the
amortization of bond premium and other basis adjustments required by
the Internal Revenue Code, a Unitholder, under some circumstances,
may realize taxable gain when his or her Units are sold or redeemed
for an amount less than or equal to their original cost.
(4) Any insurance proceeds paid under policies which represent
maturing interest on defaulted obligations which are excludable from
gross income for Federal income tax purposes will be excludable from
Missouri State Income Tax to the same extent as such interest would
have been so excludable if paid by the issuer of such Bonds held by
the Missouri Trust; however, no opinion is expressed herein
regarding taxation of interest paid and original issue discount, if
any, on the Bonds received by the Missouri Trust and distributed to
Unitholders under any other tax imposed pursuant to Missouri law,
including but not limited to the franchise tax imposed on financial
institutions pursuant to Chapter 148 of the Missouri Statutes.
(5) The Missouri State Income Tax does not permit a deduction
of interest paid or incurred on indebtedness incurred or continued
to purchase or carry Units in the Trust, the interest on which is
exempt from such Tax.
(6) The Missouri Trust will not be subject to the Kansas City,
Missouri Earnings and Profits Tax and each Unitholder's share of
income of the Bonds held by the Missouri Trust will not generally be
subject to the Kansas City, Missouri Earnings and Profits Tax or the
City of St. Louis Earnings Tax (except that no opinion is expressed
in the case of certain Unitholders, including corporations,
otherwise subject to the St. Louis City Earnings Tax).
Counsel to the Sponsor has expressed no opinion with respect to
taxation under any other provision of Missouri law. Ownership of the
Units may result in collateral Missouri tax consequences to certain
taxpayers. Prospective investors should consult their tax advisors as to
the applicability of any such collateral consequences.
New Jersey Trusts. The New Jersey Trust consists
of a portfolio of Bonds. The Trust is therefore susceptible to
political, economic or regulatory factors affecting issuers of the Bonds.
The following information provides only a brief summary of some of the
complex factors affecting the financial situation in New Jersey (the
"State") and is derived from sources that are generally available to
investors and is believed to be accurate. It is based in part on
information obtained from various State and local agencies in New Jersey.
No independent verification has been made of any of the following
information.
New Jersey is the ninth largest state in population and the fifth
smallest in land area. With an average of 1,062 people per square mile,
it is the most densely populated of all the states. The state's economic
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base is diversified, consisting of a variety of manufacturing,
construction and service industries, supplemented by rural areas with
selective commercial agriculture. Historically, New Jersey's average per
capita income has been well above the national average, and in 1994, the
State ranked second among states in per capita personal income ($27,742).
In 1995, New Jersey's per capita personal income increased 5.1% to
$29,848, maintaining its rank as second in the nation.
The New Jersey Economic Policy Council, a statutory arm of the New
Jersey Department of Commerce and Economic Development, has reported in
New Jersey Economic Indicators, a monthly publication of the New Jersey
Department of Labor, Division of Labor Market and Demographic Research,
that in 1988 and 1989 employment in New Jersey's manufacturing sector
failed to benefit from the export boom experienced by many Midwest states
and the State's service sectors, which had fueled the State's prosperity
since 1982, lost momentum. In the meantime, the prolonged fast growth in
the State in the mid 1980s resulted in a tight labor market situation,
which has led to relatively high wages and housing prices. This means
that, while the incomes of New Jersey residents are relatively high, the
State's business sector has become more vulnerable to competitive
pressures.
The onset of the national recession (which officially began in July
1990 according to the National Bureau of Economic Research) caused an
acceleration of New Jersey's job losses in construction and
manufacturing. In addition, the national recession caused an employment
downturn in such previously growing sectors as wholesale trade, retail
trade, finance, utilities and trucking and warehousing. Reflecting the
downturn, the rate of unemployment in the State rose from a low of 3.6%
during the first quarter of 1989 to an estimated 6.2% in September 1996,
which is higher than the national average of 5.2% in September 1996.
Economic recovery is likely to be slow and uneven in New Jersey, with
unemployment receding at a correspondingly slow pace, due to the fact
that some sectors may lag due to continued excess capacity. In addition,
employers even in rebounding sectors can be expected to remain cautious
about hiring until they become convinced that improved business will be
sustained. Also, certain firms will continue to merge or downsize to
increase profitability.
Debt Service. The primary method for State financing of capital
projects is through the sale of the general obligation bonds of the
State. These bonds are backed by the full faith and credit of the State
tax revenues and certain other fees are pledged to meet the principal and
interest payments and if provided, redemption premium payments, if any,
required to repay the bonds. As of June 30, 1995, there was a total
authorized bond indebtedness of approximately $9.48 billion, of which
$3.65 billion was issued and outstanding, $4.0 billion was retired
(including bonds for which provision for payment has been made through
the sale and issuance of refunding bonds) and $1.83 billion was unissued.
The appropriation for the debt service obligation on such outstanding
indebtedness was $466.3 million for fiscal year 1996.
New Jersey's Budget and Appropriation System. The State operates
on a fiscal year beginning July 1 and ending June 30. At the end of
fiscal year 1989, there was a surplus in the State's general fund (the
fund into which all State revenues not otherwise restricted by statute
are deposited and from which appropriations are made) of $411.2 million.
At the end of fiscal year 1990, there was a surplus in the general fund
of $1 million. At the end of fiscal year 1991, there was a surplus in
the general fund of $1.4 million. New Jersey closed its fiscal year 1992
with a surplus of $760.8 million and fiscal year 1993 with a surplus of
$937.4 million. It is estimated that New Jersey closed its fiscal year
1994 with a surplus of $926.0 million and fiscal year 1995 with a surplus
of $569 million.
In order to provide additional revenues to balance future budgets,
to redistribute school aid and to contain real property taxes, on June
27, 1990, and July 12, 1990, Governor Florio signed into law legislation
which was estimated to raise approximately $2.8 billion in additional
taxes (consisting of $1.5 billion in sales and use taxes and $1.3 billion
in income taxes), the biggest tax hike in New Jersey history. There can
be no assurance that receipts and collections of such taxes will meet
such estimates.
The first part of the tax hike took effect on July 1, 1990, with the
increase in the State's sales and use tax rate from 6% to 7% and the
elimination of exemptions for certain products and services not
previously subject to the tax, such as telephone calls, paper products
(which has since been reinstated), soaps and detergents, janitorial
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services, alcoholic beverages and cigarettes. At the time of enactment,
it was projected that these taxes would raise approximately $1.5 billion
in additional revenue. Projections and estimates of receipts from sales
and use taxes, however, have been subject to variance in recent fiscal
years.
The second part of the tax hike took effect on January 1, 1991, in
the form of an increased state income tax on individuals. At the time of
enactment, it was projected that this increase would raise approximately
$1.3 billion in additional income taxes to fund a new school aid formula,
a new homestead rebate program and state assumption of welfare and social
services costs. Projections and estimates of receipts from income taxes,
however, have also been subject to variance in recent fiscal years.
Under the legislation, income tax rates increased from their previous
range of 2% to 3.5% to a new range of 2% to 7%, with the higher rates
applying to married couples with incomes exceeding $70,000 who file joint
returns, and to individuals filing single returns with incomes of more
than $35,000.
The Florio administration had contended that the income tax package
will help reduce local property tax increases by providing more state aid
to municipalities. Under the income tax legislation, the State will
assume approximately $289 million in social services costs that
previously were paid by counties and municipalities and funded by
property taxes. In addition, under the new formula for funding school
aid, an extra $1.1 billion was proposed to be sent by the State to school
districts beginning in 1991, thus reducing the need for property tax
increases to support education programs.
Effective July 1, 1992, the State's sales and use tax rate decreased
from 7% to 6%. Effective January 1, 1994, an across-the-board 5%
reduction in the income tax rates was enacted and effective January 1,
1995, further reductions ranging from 1% up to 10% in income tax rates
took effect. Governor Whitman recently signed into law further
reductions up to 15% for some taxpayers effective January 1, 1996,
completing her campaign promise to reduce income taxes by up to 30% for
most taxpayers within three years.
On June 28, 1996, Governor Whitman signed the New Jersey
Legislature's $16.5 billion budget for Fiscal Year 1997. The balanced
budget, which includes $550 million in surplus, is slightly less than the
1996 budget. Whether the State can achieve a balanced budget depends on
its ability to enact and implement expenditure reductions and to collect
the estimated tax revenues.
Litigation. The State is a party in numerous legal proceedings
pertaining to matters incidental to the performance of routine
governmental operations. Such litigation includes, but is not limited
to, claims asserted against the State arising from alleged torts, alleged
breaches of contracts, condemnation proceedings and other alleged
violations of State and Federal laws. Included in the State's
outstanding litigation are cases challenging the following: the funding
of teachers' pension funds, the adequacy of medicaid reimbursement for
hospital services, the hospital assessment authorized by the Health Care
Reform Act of 1992, various provisions, and the constitutionality of the
Fair Automobile Insurance Reform Act of 1990, the State's role in a
consent order concerning the construction of a resource facility in
Passaic County, actions taken by the New Jersey Bureau of Securities
against an individual, the State's actions regarding alleged chromium
contamination of State-owned property in Hudson County, the issuance of
emergency redirection orders and a draft permit by the Department of
Environmental Protection and Energy, refusal of the State to share with
Camden County federal funding the State recently received for
disproportionate share hospital payments made to county psychiatric
facilities, and the constitutionality of annual A-901 hazardous and solid
waste licensure renewal fees collected by the Department of Environmental
Protection and Energy. Adverse judgments in these and other matters
could have the potential for either a significant loss of revenue or a
significant unanticipated expenditure by the State.
At any given time, there are various numbers of claims and cases
pending against the State, State agencies and employees seeking recovery
of monetary damages that are primarily paid out of the fund created
pursuant to the New Jersey Tort Claims Act. In addition, at any given
time, there are various numbers of contract claims against the State and
State agencies seeking recovery of monetary damages. The State is unable
to estimate its exposure for these claims.
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Debt Ratings. For many years, both Moody's Investors Service, Inc.
and Standard and Poor's Corporation rated New Jersey general obligation
bonds "Aaa" and "AAA," respectively. On July 3, 1991, however, Standard
and Poor's Corporation downgraded New Jersey general obligation bonds to
"AA+." On June 4, 1992, Standard and Poor's Corporation placed New
Jersey general obligation bonds on CreditWatch with negative
implications, citing as its principal reason for its caution the
unexpected denial by the federal government of New Jersey's request for
$450 million in retroactive Medicaid payments for psychiatric hospitals.
These funds were critical to closing a $1 billion gap in the State's $15
billion budget for fiscal year 1992 which ended on June 30, 1992. Under
New Jersey state law, the gap in the budget was required to be closed
before the new budget year began on July 1, 1992. Standard and Poor's
suggested the State could close fiscal 1992's budget gap and help fill
fiscal 1993's hole by a reversion of $700 million of pension
contributions to its general fund under a proposal to change the way the
State calculates its pension liability.
On July 6, 1992, Standard and Poor's Corporation reaffirmed its
"AA+" rating for New Jersey general obligation bonds and removed the debt
from its CreditWatch list, although it stated that New Jersey's long-term
financial outlook was negative. Standard and Poor's Corporation was
concerned that the State was entering fiscal 1993 with only a $26 million
surplus and remained concerned about whether the State economy would
recover quickly enough to meet lawmakers' revenue projections. It also
remained concerned about the recent federal ruling leaving in doubt how
much the State was due in retroactive Medicaid reimbursements and a
ruling by a federal judge, now on appeal, of the State's method for
paying for uninsured hospital patients. However, on July 27, 1994,
Standard and Poor's announced that it was changing the State's outlook
from negative to stable due to a brightening of the State's prospects as
a result of Governor Whitman's effort to trim spending and cut taxes,
coupled with an improving economy. Standard and Poor's reaffirmed its
"AA+" rating at the same time.
On August 24, 1992, Moody's Investors Service, Inc. downgraded New
Jersey general obligation bonds to "Aa1," stating that the reduction
reflected a developing pattern of reliance on nonrecurring measures to
achieve budgetary balance, four years of financial operations marked by
revenue shortfalls and operating deficits, and the likelihood that
serious financial pressures will persist. On August 5, 1994, Moody's
reaffirmed its "Aa1" rating, citing on the positive side New Jersey's
broad-based economy, high income levels, history of maintaining a
positive financial position and moderate (albeit rising) debt ratios, and
on the negative side, a continued reliance on one-time revenue and a
dependence on pension-related savings to achieve budgetary balance.
At the time of the closing for each New Jersey Trust Special Counsel
to each New Jersey Trust for New Jersey tax matters rendered an opinion
under then existing New Jersey income tax law applicable to taxpayers
whose income is subject to New Jersey income taxation substantially to
the effect that:
(1) The New Jersey Trust will be recognized as a trust and not
an association taxable as a corporation. The New Jersey Trust will
not be subject to the New Jersey Corporation Business Tax or the New
Jersey Corporation Income Tax.
(2) With respect to the non-corporate Unitholders who are
residents of New Jersey, the income of the New Jersey Trust which is
allocable to each such Unitholder will be treated as the income of
such Unitholder under the New Jersey Gross Income Tax. Interest on
the underlying Bonds which would be exempt from New Jersey Gross
Income Tax if directly received by such Unitholder will retain its
status as tax-exempt interest when received by the New Jersey Trust
and distributed to such Unitholder. Any proceeds paid under the
insurance policy issued to the Trustee of the New Jersey Trust with
respect to the Bonds or under individual policies obtained by
issuers of Bonds which represent maturing interest on defaulted
obligations held by the Trustee will be exempt from New Jersey Gross
Income Tax if, and to the same extent as, such interest would have
been so exempt if paid by the issuer of the defaulted obligations.
(3) A non-corporate Unitholder will not be subject to the New
Jersey Gross Income Tax on any gain realized either when the New
Jersey Trust disposes of a Bond (whether by sale, exchange,
redemption, or payment at maturity), when the Unitholder redeems or
sells his Units or upon payment of any proceeds under the insurance
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policy issued to the Trustee of the New Jersey Trust with respect to
the Bonds or under individual policies obtained by issuers of Bonds
which represent maturing principal on defaulted obligations held by
the Trustee. Any loss realized on such disposition may not be
utilized to offset gains realized by such Unitholder on the
disposition of assets the gain on which is subject to the New Jersey
Gross Income Tax.
(4) Units of the New Jersey Trust may be taxable on the death
of a Unitholder under the New Jersey Transfer Inheritance Tax Law or
the New Jersey Estate Tax Law.
(5) If a Unitholder is a corporation subject to the New Jersey
Corporation Business Tax or New Jersey Corporation Income Tax,
interest from the Bonds in the New Jersey Trust which is allocable
to such corporation will be includable in its entire net income for
purposes of the New Jersey Corporation Business Tax or New Jersey
Corporation Income Tax, less any interest expense incurred to carry
such investment to the extent such interest expense has not been
deducted in computing Federal taxable income. Net gains derived by
such corporation on the disposition of the Bonds by the New Jersey
Trust or on the disposition of its Units will be included in its
entire net income for purposes of the New Jersey Corporation
Business Tax or New Jersey Corporation Income Tax. Any proceeds
paid under the insurance policy issued to the Trustee of the New
Jersey Trust with respect to the Bonds or under individual policies
obtained by issuers of Bonds which represent maturing interest or
maturing principal on defaulted obligations held by the Trustee will
be included in its entire net income for purposes of the New Jersey
Corporation Business Tax or New Jersey Corporation Income Tax if,
and to the same extent as, such interest or proceeds would have been
so included if paid by the issuer of the defaulted obligations.
New York Trusts. The New York Trust includes
obligations issued by New York State (the "State"), by its various public
bodies (the "Agencies"), and/or by other entities located within the
State, including the City of New York (the "City").
Some of the more significant events and conditions relating to the
financial situation in New York are summarized below. This section
provides only a brief summary of the complex factors affecting the
financial situation in New York and is derived from sources that are
generally available to investors and is believed to be accurate. It is
based in part on Official Statements and prospectuses issued by, and on
other information reported by the State, the City, and the Agencies in
connection with the issuance of their respective securities.
There can be no assurance that current or future statewide or
regional economic difficulties, and the resulting impact on State or
local government finances generally, will not adversely affect the market
value of New York Municipal Obligations held in the portfolio of the
Trust or the ability of particular obligors to make timely payments of
debt service on (or relating to) those obligations.
The State has historically been one of the wealthiest states in the
nation. For decades, however, the State economy has grown more slowly
than that of the nation as a whole, gradually eroding the State's
relative economic affluence. Statewide, urban centers have experienced
significant changes involving migration of the more affluent to the
suburbs and an influx of generally less affluent residents. Regionally,
the older Northeast cities have suffered because of the relative success
that the South and the West have had in attracting people and business.
The City has also had to face greater competition as other major cities
have developed financial and business capabilities which make them less
dependent on the specialized services traditionally available almost
exclusively in the City.
The State has for many years had a very high State and local tax
burden relative to other states. The burden of State and local taxation,
in combination with the many other causes of regional economic
dislocation, has contributed to the decisions of some businesses and
individuals to relocate outside, or not locate within, the State.
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A national recession commenced in mid-1990. The downturn continued
throughout the State's 1990-91 fiscal year and was followed by a period
of weak economic growth during the 1991 calendar year. For calendar year
1992, the national economy continued to recover, although at a rate below
all post-war recoveries. For calendar year 1993, the economy is expected
to grow faster than in 1992, but still at a very moderate rate as
compared to other recoveries.
Moderate economic growth continued in calendar year 1994. The State
has projected the rate of economic growth to slow within New York during
1995, as the expansion of the national economy moderates. Economic
recovery started considerably later in the State than in the nation as a
whole due in part to the significant retrenchment in the banking and
financial services industries, downsizing by several major corporations,
cutbacks in defense spending, and an oversupply of office buildings.
Many uncertainties exist in forecasts of both the national and State
economies and there can be no assurance that the State economy will
perform at a level sufficient to meet the State's projections of receipts
and disbursements.
1995-96 Fiscal Year. The Governor issued a proposed Executive
Budget for the 1995-96 fiscal year (the "Proposed Budget") on February 1,
1995, which projected a balanced general fund and receipts and
disbursements of $32.5 billion and $32.4 billion, respectively. As of
May 29, 1995, the State legislature had not yet enacted nor had the
Governor and the legislature reached an agreement on, the budget for the
1995-96 fiscal year which commenced on April 1, 1995. The delay in the
enactment of the budget may negatively affect certain proposed actions
and reduce projected savings.
The Proposed Budget and the 1995-96 Financial Plan provide for the
closing of a projected $4.7 billion budget gap in the 1995-96 fiscal year
by cost-containment savings in social welfare programs, savings from
State agency restructurings, freezing the level of some categories of
local aid and new revenue measures.
The State's proposed budget and the 1995-96 Plan may be impacted
negatively by uncertainties relating to the economy and tax collections,
although recent signs of improvement in the national economy could lead
to short-term increases in State receipts.
1994-1995 Fiscal Year. The State Legislature enacted the State's
1994-95 fiscal year budget on June 7, 1994, more than two months after
the start of that fiscal year. As of February 1, 1995, the updated
1994-95 State Financial Plan (the "Plan") projected total general fund
receipts and disbursements of $33.3 billion and $33.5 billion,
respectively, representing reductions in receipts and disbursements of $1
billion and $743 million, respectively, from the amount set forth in the
1994-95 budget. The Plan projected for a General Fund balance of
approximately $157 million at the close of the 1994-95 fiscal year.
1993-94 Fiscal Year. The State ended the 1993-94 fiscal year with
an operating surplus of approximately $1.0 billion.
There can be no assurance that the State will not face substantial
potential budget gaps in the future resulting from a significant
disparity between tax revenues projected from a lower recurring receipts
base and the spending required to maintain State programs at current
levels. To address any potential budgetary imbalance, the State may need
to take significant actions to align recurring receipts and
disbursements.
Indebtedness. As of March 31, 1994, the total amount of long-term
State general obligation debt authorized but unissued stood at $2.0
billion. As of the same date, the State had approximately $5.4 billion
in general obligation bonds including $224 million of Bond Anticipation
Notes outstanding.
The State originally projected that its borrowings for capital
purposes during the State's 1994-95 fiscal year would consist of $374
million in general obligation bonds and bond anticipation notes and $140
million in general obligation commercial paper. The Legislature has
authorized the issuance of up to $69 million in certificates of
participation in pools of leases for equipment and real property to be
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utilized by State agencies. Through March 15, 1995, the State had issued
in excess of $590 million of its general obligation bonds (including $430
million of refunding bonds). The projection of the State regarding its
borrowings for any fiscal year may change if actual receipts fall short
of State projections or if other circumstances require.
In June, 1990, legislation was enacted creating the "New York Local
Government Assistance Corporation" ("LGAC"), a public benefit corporation
empowered to issue long-term obligations to fund certain payments to
local governments traditionally funded through the State's annual
seasonal borrowing. As of March 31, 1994, LGAC has issued its bonds to
provide net proceeds of $4.5 billion. LGAC was authorized to issue
additional bonds to provide net proceeds of $315 million during the
State's 1994-95 fiscal year. The LGAC issued $347 million of bonds on
March 1, 1995 providing the authorized net proceeds.
The Legislature passed a proposed constitutional amendment which
would permit the State subject to certain restrictions to issue revenue
bonds without voter referendum. Among the restrictions proposed is that
such bonds would not be backed by the full faith and credit of the State.
The Governor intends to submit changes to the proposed amendment, which
before becoming effective must be passed again by the next
separately-elected Legislature and approved by voter referendum at a
general election. The earliest such an amendment could take effect would
be in November 1995.
Ratings. The $850 million in tax and revenue anticipation notes
("TRANS") issued by the State in April 1993 were rated SP-1-Plus by S&P
and MIG-1 by Moody's, which represents the highest ratings given by such
agencies and the first time the State's TRANS have received these ratings
since its May 1989 TRANS issuance. Both agencies cited the State's
improved fiscal position as a significant factor in the upgrading of the
April 1993 TRANS.
Moody's rating of the State's general obligation bonds stood at A on
February 28, 1994, and S&P's rating stood at A- with a positive outlook
on February 28, 1994, an improvement from S&P's stable outlook from April
1993 through February 1994 and negative outlook prior to April 1993.
Previously, Moody's lowered its rating to A on June 6, 1990, its rating
having been A1 since May 27, 1986. S&P lowered its rating from A to A-
on January 13, 1992. S&P's previous ratings were A from March 1990 to
January 1992, AA- from August 1987 to March 1990 and A+ from November
1982 to August 1987.
Moody's maintained its A rating and S&P continued its A- rating in
connection with the State's issuance of $537 million of its general
obligation bonds in March 1995.
The City accounts for approximately 40% of the State's population
and personal income, and the City's financial health affects the State in
numerous ways.
In response to the City's fiscal crisis in 1975, the State took a
number of steps to assist the City in returning to fiscal stability.
Among other actions, the State Legislature (i) created MAC to assist with
long-term financing for the City's short-term debt and other cash
requirements and (ii) created the State Financial Control Board (the
"Control Board") to review and approve the City's budgets and City four-
year financial plans (the financial plans also apply to certain City-
related public agencies (the "Covered Organizations")).
In recent years, the rate of economic growth in the City slowed
substantially as the City's economy entered a recession. While by some
measures the City's economy may have begun to recover, a number of
factors, including poor performance by the City's financial services
companies, may prevent a significant improvement in the City's economy
and may in fact negatively impact upon the City's finances by reducing
tax receipts. The City Comptroller has issued reports concluding that
the recession of the City's economy may be ending, but there is little
prospect of any significant improvement in the near term.
Fiscal Year 1996 and the 1995-1998 Financial Plan. On February 14,
1995, the Mayor released his preliminary $30.5 billion budget for fiscal
year 1996, which included $2.7 billion of deficit reduction measures.
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The Mayor is seeking a $1.2 billion reduction in mandated welfare and
Medicaid expenditures from the State, a $569 million reduction in
expenditures by city agencies and the Board of Education budget, $600
million in personnel related savings partly through the elimination of
15,000 jobs within 18 months, and other measures.
The 1995-1998 Financial Plan (the "Plan"), which was submitted to
the Control Board on February 23, 1995, projected budget gaps of $3.2
billion and $3.8 billion for fiscal years 1997 and 1998, respectively.
The City Comptroller warned on March 7, 1995 that the budget gap for
fiscal year 1996 could increase by $500 million to as much as $3.2
billion. The Control Board reported on March 17, 1995 that the proposed
budget for fiscal year 1996 relies heavily on risky assumptions such as
$600 million in savings to be negotiated with City unions and $1.4
billion in savings dependent on State legislative approval.
The City successfully negotiated concessions with a number of unions
in order to ensure that the fiscal year 1995 budget remained in balance.
The Mayor has indicated that to avoid additional lay-offs, higher than
the number referred to above, reductions will be necessary in the benefit
plans of City employees to close the budget gaps for fiscal years 1996
and thereafter. Union leadership has publicly opposed such "givebacks".
With respect to fiscal year 1995, the City was also successful in
obtaining additional funds and relief from certain mandated expenditures
from the State for various programs, including Medicaid. However, the
amount of gap closing measures requiring State action set forth in the
Plan is well in excess of proposed assistance to the City outlined in the
Governor's Proposed Budget.
The Mayor has directed City agencies to identify an additional $300
million in cuts for fiscal year 1996 because of anticipated shortfalls of
as such as $500 million in State aid and budgetary actions. An extended
delay by the State in adopting its 1995-96 fiscal year budget would
negatively impact upon the City's financial condition and ability to
close budget gaps for fiscal years 1996 and thereafter.
Given the foregoing factors, there can be no assurance that the City
will continue to maintain a balanced budget, or that it can maintain a
balanced budget without additional tax or other revenue increases or
reductions in City services, which could adversely affect the City's
economic base.
Pursuant to State law, the City prepares a four-year annual
financial plan, which is reviewed and revised on a quarterly basis and
which includes the City's capital, revenue and expense projections. The
City is required to submit its financial plans to review bodies,
including the Control Board. If the City were to experience certain
adverse financial circumstances, including the occurrence or the
substantial likelihood and imminence of the occurrence of an annual
operating deficit of more than $100 million or the loss of access to the
public credit markets to satisfy the City's capital and seasonal
financial requirements, the Control Board would be required by State law
to exercise certain powers, including prior approval of City financial
plans, proposed borrowings and certain contracts.
The City depends on the State for State aid both to enable the City
to balance its budget and to meet its cash requirements. If the State
experiences revenue shortfalls or spending increases beyond its
projections during its 1995-96 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 the
1996-97 or future fiscal years will be adopted by the April 1 statutory
deadline and that there will not be adverse effects on the City's cash
flow and additional City expenditures as a result of such delays.
The City's projections set forth in its financial plan are based on
various assumptions and contingencies which are uncertain and which may
not materialize. Changes in major assumptions could significantly affect
the City's ability to balance its budget as required by State law and to
meet its annual cash flow and financing requirements. Such assumptions
and contingencies include the timing of any regional and local economic
recovery, the absence of wage increases in excess of the increases
assumed in its financial plan, employment growth, provision of State and
Federal aid and mandate relief, State legislative approval of future
State budgets, levels of education expenditures as may be required by
State law, adoption of future City budgets by the New York City Council,
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and approval by the Governor or the State Legislature and the cooperation
of MAC with respect to various other actions proposed in such financial
plan.
The City's ability to maintain a balanced operating budget is
dependent on whether it can implement necessary service and personnel
reduction programs successfully. As discussed above, the City must
identify additional expenditure reductions and revenue sources to achieve
balanced operating budgets for fiscal years 1996 and thereafter. Any
such proposed expenditure reductions will be difficult to implement
because of their size and the substantial expenditure reductions already
imposed on City operations in the past two years.
Attaining a balanced budget is also dependent upon the City's
ability to market its securities successfully in the public credit
markets. The City's financing program for fiscal years 1995 through 1998
contemplates capital spending of $16.4 billion, which will be financed
through issuance of $10.7 billion of general obligation bonds and the
balance through Water Authority Revenue Bonds and Covered Organization
obligations, and will be utilized primarily to reconstruct and
rehabilitate the City's infrastructure and physical assets and to make
capital investments. A significant portion of such bond financing is
used to reimburse the City's general fund for capital expenditures
already incurred. In addition, the City issues revenue and tax
anticipation notes to finance its seasonal working capital requirements.
The terms and success of projected public sales of City general
obligation bonds and notes will be subject to prevailing market
conditions at the time of the sale, and no assurance can be given that
the credit markets will absorb the projected amounts of public bond and
note sales. In addition, future developments concerning the City and
public discussion of such developments, the City's future financial needs
and other issues may affect the market for outstanding City general
obligation bonds and notes. If the City were unable to sell its general
obligation bonds and notes, it would be prevented from meeting its
planned operating and capital expenditures.
The City Comptroller, the staff of the Control Board, the Office of
the State Deputy Comptroller for the City of New York (the "OSDC") and
other agencies and public officials have issued reports and made public
statements which, among other things, state that projected revenues may
be less and future expenditures may be greater than those forecast in the
financial plan. In addition, the Control Board and other agencies have
questioned whether the City has the capacity to generate sufficient
revenues in the future to meet the costs of its expenditure increases and
to provide necessary services. It is reasonable to expect that such
reports and statements will continue to be issued and to engender public
comment.
Fiscal Year 1995. New York City adopted its fiscal year 1995 budget
on June 21, 1994, which provided for spending of $31.6 billion and closed
a budget gap of $2.3 billion. However, following adoption of the fiscal
year 1995 budget, additional unexpected budget gaps totaling
approximately $2.0 billion were identified. The widening of the budget
gap for fiscal year 1995 resulted from shortfalls in tax revenues and
State and federal aid. The Mayor and the City Council were unable to
reach agreement on additional cuts proposed by the Mayor in October 1994.
The City Council passed its own budget cut proposal in November 1994.
The Mayor vetoed the City Council version, the City Council overrode his
veto and the Mayor implemented his original plan. A state court held in
December 1994 that neither budget cut proposal could be implemented. The
Mayor then elected not to spend certain funds in order to keep the budget
in balance.
Fiscal Years 1990 through 1994. The City achieved balanced
operating results as reported in accordance with GAAP for its fiscal
years 1990 through 1994. The City was required to close substantial
budget gaps in these fiscal years to maintain balanced operating results.
The City is a defendant in a significant number of lawsuits. Such
litigation includes, but is not limited to, actions commenced and claims
asserted against the City arising out of alleged constitutional
violations, torts, breaches of contracts, and other violations of law and
condemnation proceedings. While the ultimate outcome and fiscal impact,
if any, on the proceedings and claims are not currently predictable,
adverse determinations in certain of them might have a material adverse
effect upon the City's ability to carry out its financial plan. As of
June 30, 1994, the City estimated its potential future liability to be
$2.6 billion.
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On January 30, 1995, Robert L. Schulz and other defendants commenced
a federal district court action seeking among other matters to cancel the
issuance on January 31, 1995 of $659 million of City bonds. While the
federal courts have rejected requests for temporary restraining orders
and expedited appeals, the case is still pending. The City has indicated
that it believes the action to be without merit as it relates to the
City, but there can be no assurance as to the outcome of the litigation
and an adverse ruling or the granting of a permanent injunction would
have a negative impact on the City's financial condition and its ability
to fund its operations.
As of March 1996, Moody's rating of the City's general obligation
bonds stood at Baa1 and S&P's rating stood at A-. On February 11, 1991,
Moody's had lowered its rating from A. S&P's lowered its rating from A-
on July 10, 1995 after placing the City on "negative credit watch" in
January 1995.
On March 13, 1995, Moody's confirmed its Baa1 rating in connection
with a scheduled March 1995 sale of $795 million of the City's general
obligation bonds.
In dropping the City's rating in July 1995, S&P's cited the
"sluggish" economy and the poor outlook for job growth, as well as the
continued use of "one-time measures" to close budget gaps. The lowered
rating could increase the City's borrowing costs by forcing it to offer
higher interest rates on its bonds thereby adding further pressures to
the City's budget problems. In addition, the lowered rating may prevent
certain institutional investors from purchasing the City's bonds reducing
demand for future offerings, which could also force the City to increase
interest rates on its bonds.
On October 12, 1993, Moody's increased its rating of the City's
issuance of $650 million of Tax Anticipation Notes ("TANs") to MIG-1 from
MIG-2. Prior to that date, on May 9, 1990, Moody's revised downward its
rating on outstanding City revenue anticipation notes from MIG-1 to MIG-2
and rated the $900 million Notes than being sold MIG-2. S&P's rating of
the October 1993 TANS issue increased to SP-1 from SP-2. Prior to that
date, on April 29, 1991, S&P revised downward its rating on City revenue
anticipation notes from SP-1 and SP-2.
As of December 31, 1994, the City and MAC had, respectively, $22.5
billion and $4.1 billion of outstanding net long-term indebtedness.
Certain Agencies of the State have faced substantial financial
difficulties which could adversely affect the ability of such Agencies to
make payments of interest on, and principal amounts of, their respective
bonds. The difficulties have in certain instances caused the State
(under so-called "moral obligation" provisions which are non-binding
statutory provisions for State appropriations to maintain various debt
service reserve funds) to appropriate funds on behalf of the Agencies.
Moreover, it is expected that the problems faced by these Agencies will
continue and will require increasing amounts of State assistance in
future years. Failure of the State to appropriate necessary amounts or
to take other action to permit those Agencies having financial
difficulties to meet their obligations could result in a default by one
or more of the Agencies. Such default, if it were to occur, would be
likely to have a significant adverse effect on investor confidence in,
and therefore the market price of, obligations of the defaulting
Agencies. In addition, any default in payment on any general obligation
of any Agency whose bonds contain a moral obligation provision could
constitute a failure of certain conditions that must be satisfied in
connection with Federal guarantees of City and MAC obligations and could
thus jeopardize the City's long-term financing plans.
As of September 30, 1993, the State reported that there were
eighteen Agencies that each had outstanding debt of $100 million or more.
These eighteen Agencies had an aggregate of $63.5 billion of outstanding
debt, including refunding bonds, of which $7.7 billion was moral
obligation debt of the State and $19.3 billion was financed under lease-
purchase or contractual obligation financing arrangements.
The State is a defendant in numerous legal proceedings pertaining to
matters incidental to the performance of routine governmental operations.
Such litigation includes, but is not limited to, claims asserted against
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the State arising from alleged torts, alleged breaches of contracts,
condemnation proceedings and other alleged violations of State and
Federal laws. Included in the State's outstanding litigation are a
number of cases challenging the constitutionality or the adequacy and
effectiveness of a variety of significant social welfare programs
primarily involving the State's mental hygiene programs. Adverse
judgments in these matters generally could result in injunctive relief
coupled with prospective changes in patient care which could require
substantial increased financing of the litigated programs in the future.
The State is also engaged in a variety of claims wherein significant
monetary damages are sought. Actions commenced by several Indian nations
claim that significant amounts of land were unconstitutionally taken from
the Indians in violation of various treaties and agreements during the
eighteenth and nineteenth centuries. The claimants seek recovery of
approximately six million acres of land as well as compensatory and
punitive damages.
The State has entered into a settlement agreement with Delaware,
Massachusetts and all other parties with respect to State of Delaware v.
State of New York, an action by Delaware and other states to recover
unclaimed property from New York-based brokers, which has escheated to
the State pursuant to its Abandoned Property Law. Annual payments under
this settlement will be made through the State's 2002-03 fiscal year in
amounts not exceeding $48.4 million in any fiscal year subsequent to the
State's 1994-95 fiscal year.
In Schulz v. State of New York, commenced May 24, 1993 ("Schulz
1993"), petitioners have challenged the constitutionality of mass
transportation bonding programs of the New York State Thruway Authority
and the Metropolitan Transportation Authority. On May 24, 1993, the
Supreme Court, Albany County, temporarily enjoined the State from
implementing those bonding programs.
Petitioners in Schulz 1993 asserted that issuance of bonds by the
two Authorities is subject to approval by statewide referendum. By
decision dated October 21, 1993, the Appellate Division, Third
Department, affirmed the order of the Supreme Court, Albany County,
granting the State's motion for summary judgment, dismissing the
complaint and vacating the temporary restraining order. On June 30,
1994, the Court of Appeals, the State's highest court, upheld the
decisions of the Supreme Court and Appellate Division in Schulz,
Plaintiffs' motion for reargument was denied by the Court of Appeals on
September 1, 1994 and their writ of certiorari to the U.S. Supreme Court
was denied on January 23, 1995.
Adverse developments in the foregoing proceedings or new proceedings
could adversely affect the financial condition of the State in the
future.
Certain localities in addition to New York City could have financial
problems leading to requests for additional State assistance. The
potential impact on the State of such actions by localities is not
included in projections of State receipts and expenditures in the State's
1994-95 fiscal years.
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 1992, the total indebtedness of
all localities in the State was approximately $35.2 billion, of which
$19.5 billion was debt of New York City (excluding $5.9 billion in MAC
debt). State law requires the Comptroller to review and make
recommendations concerning the budgets of those local government units
other than New York City authorized by State law to issue debt to finance
deficits during the period that such deficit financing is outstanding.
Seventeen localities had outstanding indebtedness for state financing at
the close of their fiscal year ending in 1992.
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Certain proposed Federal expenditure reductions could reduce, or in
some cases eliminate, Federal funding of some local programs and
accordingly might impose substantial increased expenditure requirements
on affected localities. If the State, New York City or any of the
Agencies were to suffer serious financial difficulties jeopardizing their
respective access to the public credit markets, the marketability of
notes and bonds issued by localities within the State, including notes or
bonds in the New York Trust, could be adversely affected. Localities
also face anticipated and potential problems resulting from certain
pending litigation, judicial decisions, and long-range economic trends.
The longer-range potential problems of declining urban population,
increasing expenditures, and other economic trends could adversely affect
localities and require increasing State assistance in the future.
There are a number of other agencies, instrumentalities and
political subdivisions of the State that issue Municipal Obligations,
some of which may be conduit revenue obligations payable from payments
from private borrowers. These entities are subject to various economic
risks and uncertainties, and the credit quality of the securities issued
by them may vary considerably from the credit quality of obligations
backed by the full faith and credit of the State.
At the time of the closing for each New York Trust, Special Counsel
to each New York Trust for New York tax matters rendered an opinion under
then existing New York income tax law applicable to taxpayers whose
income is subject to New York income taxation substantially to the effect
that:
The New York Trust is not an association taxable as a corporation
and the income of the New York Trust will be treated as the income of the
Unitholders under the existing income tax laws of the State and City of
New York, in the same manner as for Federal income tax purposes (subject
to differences in accounting for discount and premium to the extent the
State and/or City of New York do not conform to current Federal law).
Individuals holding Units of the New York Trust who reside in New
York State or City will not be subject to State and City personal income
tax on interest income which is excludable from Federal gross income
under section 103 of the Internal Revenue Code of 1986 and derived from
any obligation of New York State or a political subdivision thereof,
although they will be subject to New York State and City personal income
tax with respect to any gains realized when such obligations are sold,
redeemed or paid at maturity or when any such Units are sold or redeemed;
and
For individuals holding Units of the New York Trust who reside in
New York State or City, any proceeds paid to the Trustee under the
applicable insurance policies which represent maturing interest on
defaulted obligations held by the Trustee will not be subject to New York
State or City personal income tax if, and to the same extent as, such
interest would not have been subject to New York State or City personal
income tax if paid by the issuer of the defaulted obligations.
North Carolina TrustsNorth Carolina Trusts. General obligations of
a city, town or county in North Carolina are payable from the general
revenues of the entity, including ad valorem tax revenues on property
within the jurisdiction. Revenue bonds issued by North Carolina
political subdivisions include (1) revenue bonds payable exclusively from
revenue-producing governmental enterprises and (2) industrial revenue
bonds, college and hospital revenue bonds and other "private activity
bonds" which are essentially non-governmental debt issues and which are
payable exclusively by private entities such as non-profit organizations
and business concerns of all sizes. State and local governments have no
obligation to provide for payment of such private activity bonds and in
many cases would be legally prohibited from doing so. The value of such
private activity bonds may be affected by a wide variety of factors
relevant to particular localities or industries, including economic
developments outside of North Carolina.
Section 23-48 of the North Carolina General Statutes appears to
permit any city, town, school district, county or other taxing district
to avail itself of the provisions of Chapter 9 of the United States
Bankruptcy Code, but only with the consent of the Local Government
Commission of the State and of the holders of such percentage or
percentages of the indebtedness of the issuer as may be required by the
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Bankruptcy Code (if any such consent is required). Thus, although
limitations apply, in certain circumstances political subdivisions might
be able to seek the protection of the Bankruptcy Code.
State Budget and Revenues. The North Carolina State Constitution
requires that the total expenditures of the State for the fiscal period
covered by each budget not exceed the total of receipts during the fiscal
period and the surplus remaining in the State Treasury at the beginning
of the period. The State's fiscal year runs from July 1st through June
30th.
Since 1994, the State has had a budget surplus, in part as a result
of new taxes and fees and spending reductions put into place in the early
1990s. In addition, the State, like the nation, has experienced economic
recovery during the 1990s. The General Fund balance at the end of the
1995-96 fiscal year was reported at approximately $406 million. As of
November 1996, the amount of uncommitted funds of the State was $586
million.
In the 1996-97 Budget prepared by the Office of State Budget and
Management, it is projected that General Fund net revenues, adjusted for
all revenue law changes, will increase 3% over 1995-96. This increase is
expected to result primarily from growth in the North Carolina economy.
The State budget is based upon estimated revenues and a multitude of
existing and assumed State and non-State factors, including State and
national economic conditions, international activity and federal
government policies and legislation. The Congress of the United States
is considering a number of matters affecting the federal government's
relationship with state governments that, if enacted into law, could
affect fiscal and economic policies of the states, including North
Carolina.
In 1995, the North Carolina General Assembly repealed, effective for
taxable years beginning January 1, 1995, the tax levied on various forms
of intangible personal property. The legislature provided from specific
appropriations to counties and municipalities to replace the revenues
previously received for the intangibles tax. In addition, in the 1996
session, the legislature reduced the corporate income tax rate from 7.75%
to 6.9% (phased in over four years) and reduced the food tax from 4% to
3%. As noted below in the discussion of tax litigation, a recent bill
passed to give certain federal retirees relief from income tax on
pensions that was unlawfully imposed but for which the taxpayers could
not claim refunds has raised concern that taxpayers who paid unlawful
intangibles taxes would seek similar legislative relief, in the range of
$400 million, which would put pressure on the State's fiscal condition.
Whether such claims will be asserted and the response of the legislature
to them remain to be seen.
It is unclear what effect these developments at the State level may
have on the value of the Bonds in the North Carolina Trust.
Litigation. Litigation against the State includes the following.
Francisco Case - In August, 1994, a class action lawsuit was filed
in state court against the Superintendent of Public Instruction and the
State Board of Education on behalf of a class of parents and their
children who are characterized as limited English proficient. The
complaint alleges that the State has failed to provide funding for the
education of these students and has failed to supervise local school
systems in administering programs for them. The complaint does not
allege an amount in controversy, but asks the Court to order the
defendants to fund a comprehensive program to ensure equal educational
opportunities for children with limited English proficiency. The North
Carolina Attorney General's Office believes that sound legal arguments
support the State's position, and no significant financial impact is
expected to result from the ultimate resolution of this case, even if
adverse to the State.
Faulkenbury v. Teachers' and State Employees' Retirement System;
Peele v. Teachers' and State Employees' Retirement System; Woodward v.
Local Governmental Employees' Retirement System - Plaintiffs are
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disability retirees who brought class actions in state court challenging
changes in the formula for payment of disability retirement benefits and
claiming impairment of contract rights, breach of fiduciary duty,
violation of other federal constitutional rights, and violation of state
constitutional and statutory rights. The State estimates that the cost
in damages and higher prospective benefit payments to class members would
probably amount to $50 million or more in Faulkenbury, $50 million or
more in Peele, and $15 million or more in Woodward, all ultimately
payable, at least initially, from the State retirement systems funds.
Upon review in Faulkenbury, the North Carolina Court of Appeals and
Supreme Court have held that claims made in Faulkenbury substantially
similar to those in Peele and Woodward - for breach of fiduciary duty and
violation of federal constitutional rights brought under the federal
Civil Rights Act - either do not state a cause of action or are barred by
the statute of limitations. In 1994, plaintiffs took voluntary
dismissals of their claims for impairment of contract rights in violation
of the United States Constitution and filed new actions in federal court
asserting the same claims, along with claims for violation of
constitutional rights in the taxation of retirement benefits. The
federal court actions have been stayed pending the trial in State court.
The cases have been consolidated and discretionary review by the State
Supreme Court has been allowed. The North Carolina Attorney General's
Office believes that sound legal arguments support the State's position.
Fulton Corporation v. Justus, Secretary of Revenue - The State's
intangible personal property tax levied on certain shares of stock
(repealed as of the tax year beginning January 1, 1995) was challenged by
the plaintiff on grounds that it violates the Commerce Clause of the
United States Constitution by discriminating against stock issued by
corporations that do all or part of their business outside the State.
The plaintiff, a North Carolina corporation, paid the intangibles tax on
stock it owns in other corporations. The plaintiff sought to invalidate
the tax in its entirety and to recover the intangibles taxes it paid for
the 1990 tax year.
The North Carolina Court of Appeals invalidated the taxable
percentage deduction and excised it from the statute beginning with the
1994 tax year. The effect of this ruling was to increase collections by
rendering all stock taxable on 100% of its value. The North Carolina
Supreme Court reversed the Court of Appeals and held that the tax is
valid and constitutional. The plaintiff appealed to the U.S. Supreme
Court which agreed with plaintiff that the tax was unconstitutionally
discriminatory. The U.S. Supreme Court remanded the case for the State
Supreme Court to decide whether to issue refunds or to levy a similar tax
retroactively on holdings in North Carolina firms.
In response, the State's Revenue Secretary has proposed that
taxpayers who paid the tax under protest in compliance with State law be
issued refunds. The estimated $123 million in refunds would be paid from
a State reserve fund. The proposal is currently being considered by the
State Supreme Court as a possible remedy, and the State legislature also
is considering a financial remedy.
Other Tax Cases: In Davis v. Michigan (1989), the United States
Supreme Court ruled that a Michigan income tax statute which taxed
federal retirement benefits while exempting those paid by state and local
governments violated the constitutional doctrine of intergovernmental tax
immunity. At the time of the Davis decision, North Carolina law
contained similar exemptions in favor of state and local retirees. Those
exemptions were repealed prospectively, beginning with the 1989 tax year.
All public pension and retirement benefits are now entitled to a $4,000
annual exclusion.
The Swanson Cases - Following Davis, federal retirees filed a class
action suit in federal court in 1989 seeking damages equal to the North
Carolina income tax paid on federal retirement income by the class
members. A companion suit was filed in state court in 1990. The
complaints alleged that the amount in controversy exceeded $140 million.
The North Carolina Department of Revenue estimated refunds and interest
liability of $280.89 million as of June 30, 1994.
The North Carolina Supreme Court ultimately held in favor of the
State in the case brought in State court, and the United States Supreme
Court denied the plaintiffs' request for review of that decision, thereby
concluding the State litigation. Plaintiffs also were unsuccessful in
the federal court action. The federal retirees sought relief through
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State legislation and in 1996 the legislature passed a special refund and
tax credit bill that will permit the retirees to recover, through credits
or, in some cases, refunds, the net tax previously paid that could not be
recovered through usual claims. The expected cost to the State is
approximately $140 million.
Patton v. State - In connection with the legislature's repeal of the
tax exemption for state retirees in 1989, certain adjustments were
adopted that reduced the state retirees' tax burden. In May 1995,
federal retirees filed a lawsuit in State court for tax refunds for the
years 1989 through 1994 alleging that these adjustments also constitute
unlawful discrimination against federal retirees. The amount of the
claim has not been set forth. This case is still pending in superior
court.
The Bailey Cases - State and local government retirees filed a class
action suit in 1990 as a result of the repeal of the income tax
exemptions for state and local government retirement benefits. The
original suit was dismissed after the North Carolina Supreme court ruled
in 1991 that the plaintiffs had failed to comply with state law
requirements for challenging unconstitutional taxes and the United States
Supreme Court denied review.
In 1992, many of the same plaintiffs filed a new lawsuit alleging
essentially the same claims, including breach of contract,
unconstitutional impairment of contract rights by the State in taxing
benefits that were allegedly promised to be tax-exempt, and violation of
several state constitutional provisions. Although the Superior Court
ruled largely in the plaintiffs' favor, appeals have been taken from both
sides and the North Carolina Supreme Court has allowed discretionary
review before hearing by the Court of Appeals. Additional suits have
been filed to recover taxes subsequently paid. The North Carolina
Attorney General's office estimates that the amount in controversy is
approximately $40-45 million annually for the tax years 1989 through
1992. The North Carolina Attorney General's office believes that sound
legal arguments support the State's position.
General. The population of the State has increased 13% from 1980,
from 5,880,095 to 6,657,106 as reported by the 1990 federal census and
the State rose from twelfth to tenth in population. The State's estimate
of population as of July, 1996 is 7,322,317. Notwithstanding its rank in
population size, North Carolina is primarily a rural state, having only
five municipalities with populations in excess of 100,000.
The labor force has undergone significant change during recent years
as the State has moved from an agricultural to a service and goods
producing economy. Those persons displaced by farm mechanization and
farm consolidations have, in large measure, sought and found employment
in other pursuits. Due to the wide dispersion of non-agricultural
employment, the people have been able to maintain, to a large extent,
their rural habitation practices. During the period 1980 to 1996, the
State labor force grew about 30% (from 2,855,200 to 3,718,000). Per
capita income during the period 1985 to 1995 grew from $11,870 to
$21,103, an increase of 77.8%.
The current economic profile of the State consists of a combination
of industry, agriculture and tourism. As of November 1994, the State was
reported to rank ninth among the states in non-agricultural employment
and eighth in manufacturing employment. Employment indicators have
varied somewhat in the annual periods since June of 1990, but have
demonstrated an upward trend since 1991. During 1995, North Carolina's
textile employment remained in first place nationally with an average of
197,900 jobs, 29.7% of the nation's textile employment and 41.3% of the
Southeast region's textile workforce.
The annual unemployment rate in 1995 and 1996 remained stable at
4.3%, while the national unemployment rate for 1995 was 5.6% and for
1996, it was 5.4%.
As of 1994, the State was ninth in the nation in gross agricultural
income of which nearly the entire amount (approximately $5.5 billion) was
from commodities. According to the State Commissioner of Agriculture, in
1995, the State ranked first in the nation in the production of flue-
cured tobacco, total tobacco, turkeys and sweet potatoes; second in hog
production, trout, the production of cucumbers for pickles; third in the
value of poultry and egg products, and greenhouse and nursery income;
fourth in commercial broilers, peanuts, blueberries and strawberries; and
sixth in burley tobacco.
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The diversity of agriculture in North Carolina and a continuing push
in marketing efforts have protected farm income from some of the wide
variations that have been experienced in other states where most of the
agricultural economy is dependent on a small number of agricultural
commodities. North Carolina is the third most diversified agricultural
state in the nation.
Tobacco production, which had been the leading source of
agricultural income in the State, declined in 1995. For 1995, commercial
broiler production and pork production surpassed tobacco among sources of
agricultural income, providing 16.6% and 18.2%, respectively, of gross
agricultural income compared to 15% for tobacco. Tobacco farming in
North Carolina has been and is expected to continue to be affected by
major Federal legislation and regulatory measures regarding tobacco
production and marketing and by international competition. Measures
adverse to tobacco farming could have negative effects on farm income and
the North Carolina economy generally.
The number of farms has been decreasing; in 1995 there were
approximately 58,000 farms in the State, down from approximately 72,000
in 1987 (a decrease of about 19% in eight years). However, a strong
agribusiness sector supports farmers with farm inputs (fertilizer,
insecticide, pesticide and farm machinery) and processing of commodities
produced by farmers (vegetable canning and cigarette manufacturing).
North Carolina's agriculture industry, including food, fiber and forest
products, contributes over $42 billion annually to the State's economy.
The State Department of Commerce, Travel and Tourism Division
reports that in 1995 more than $9 billion was spent on tourism in the
State. The Department estimates that two-thirds of total expenditures
came from out-of-state travelers, and that approximately 161,000 people
were employed in tourism-related jobs.
Bond Ratings. Currently, Moody's rates North Carolina general
obligation bonds as Aaa and Standard & Poor's rates such bonds as AAA.
Standard & Poor's also reaffirmed its stable outlook for the State in
June 1995.
Standard & Poor's reports that North Carolina's rating reflects the
State's strong economic characteristics, sound financial performance, and
low debt levels.
The Sponsor believes the information summarized above describes some
of the more significant events relating to the North Carolina Trust. The
sources of this information are the official statements of issuers
located in North Carolina, State agencies, publicly available documents,
publications of rating agencies and statements by, or news reports of
statements by State officials and employees and by rating agencies. The
Sponsor and its counsel have not independently verified any of the
information contained in the official statements and other sources and
counsel have not expressed any opinion regarding the completeness or
materiality of any matters contained in this Prospectus other than the
tax opinions set forth below under North Carolina Taxes.
At the time of the closing for each North Carolina Trust, Special
Counsel to the fund for North Carolina tax matters rendered an opinion
under then existing North Carolina income tax law applicable to taxpayers
whose income is subject to North Carolina income taxation substantially
to the effect that:
Upon the establishing of the North Carolina Trust and the Units
thereunder:
(1) The North Carolina Trust is not an "association" taxable
as a corporation under North Carolina law with the result that
income of the North Carolina Trust will be deemed to be income of
the Unitholders.
(2) Interest on the Bonds that is exempt from North Carolina
income tax when received by the North Carolina Trust will retain its
tax-exempt status when received by the Unitholders.
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(3) Unitholders will realize a taxable event when the North
Carolina Trust disposes of a Bond (whether by sale, exchange,
redemption or payment at maturity) or when a Unitholder redeems or
sells his Units (or any of them), and taxable gains for Federal
income tax purposes may result in gain taxable as ordinary income
for North Carolina income tax purposes. However, when a Bond has
been issued under an act of the North Carolina General Assembly that
provides that all income from such Bond, including any profit made
from the sale thereof, shall be free from all taxation by the State
of North Carolina, any such profit received by the North Carolina
Trust will retain its tax-exempt status in the hands of the
Unitholders.
(4) Unitholders must amortize their proportionate shares of
any premium on a Bond. Amortization for each taxable year is
accomplished by lowering the Unitholder's basis (as adjusted) in his
Units with no deduction against gross income for the year.
(5) The Units are exempt from the North Carolina tax on
intangible personal property so long as the corpus of the North
Carolina Trust remains composed entirely of Bonds or, pending
distribution, amounts received on the sale, redemption or maturity
of the Bonds and the Trustee periodically supplies to the North
Carolina Department of Revenue at such times as required by the
Department of Revenue a complete description of the North Carolina
Trust and also the name, description and value of the obligations
held in the corpus of the North Carolina Trust.
Ohio Trusts. The Ohio Trust will invest most of its net
assets in securities issued by or on behalf of (or in certificates of
participation in lease-purchase obligations of) the State of Ohio,
political subdivisions of the State, or agencies or instrumentalities of
the State, or its political subdivisions ("Ohio Obligations"). The Ohio
Trust is therefore susceptible to general or particular economic,
political or regulatory factors that may affect issuers of Ohio
Obligations. The following information constitutes only a brief summary
of some of the many complex factors that may have an effect. The
information does not apply to "conduit" obligations on which the public
issuer itself has no financial responsibility. This information is
derived from official statements of certain Ohio issuers published in
connection with their issuance of securities and from other publicly
available information, and is believed to be accurate. No independent
verification has been made of any of the following information.
Generally, the creditworthiness of Ohio Obligations of local issuers
is unrelated to that of obligations of the State itself, and the State
has no responsibility to make payments on those local obligations.
There may be specific factors that at particular times apply in
connection with investment in particular Ohio Obligations or in those
obligations of particular Ohio issuers. It is possible that the
investment may be in particular Ohio Obligations, or in those of
particular issuers, as to which those factors apply. However, the
information below is intended only as a general summary, and is not
intended as a discussion of any specific factors that may affect any
particular obligation or issuer.
The timely payment of principal of and interest on Ohio Obligations
has been guaranteed by bond insurance purchased by the issuers, the Ohio
Trust or other parties. Those Ohio Obligations may not be subject to the
factors referred to in this section of the Prospectus.
Ohio is the seventh most populous state. The 1990 Census count of
10,847,000 indicated a 0.5% population increase from 1980. The Census
estimate for 1994 is 11,102,000.
While diversifying more into the service and other non-manufacturing
areas, the Ohio economy continues to rely in part on durable goods
manufacturing largely concentrated in motor vehicles and equipment,
steel, rubber products and household appliances. As a result, general
economic activity, as in many other industrially-developed states, tends
to be more cyclical than in some other states and in the nation as a
whole. Agriculture is an important segment of the economy, with over
half the State's area devoted to farming and approximately 16% of total
employment in agribusiness.
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In prior years, the State's overall unemployment rate was commonly
somewhat higher than the national figure. For example, the reported 1990
average monthly State rate was 5.7%, compared to the 5.5% national
figure. However, for the last five years, the State rates were below the
national rates (4.8% versus 5.6% in 1995). The unemployment rate and its
effects vary among geographic areas of the State.
There can be no assurance that future national, regional or state-
wide economic difficulties, and the resulting impact on State or local
government finances generally, will not adversely affect the market value
of Ohio Obligations held in the Ohio Trust or the ability of particular
obligors to make timely payments of debt service on (or lease payments
relating to) those Obligations.
The State operates on the basis of a fiscal biennium for its
appropriations and expenditures, and is precluded by law from ending its
July 1 to June 30 fiscal year ("FY") or fiscal biennium in a deficit
position. Most State operations are financed through the General Revenue
Fund ("GRF"), for which the personal income and sales-use taxes are the
major sources. Growth and depletion of GRF ending fund balances show a
consistent pattern related to national economic conditions, with the
ending FY balance reduced during less favorable and increased during more
favorable economic periods. The State has well-established procedures
for, and has timely taken, necessary actions to ensure
resource/expenditure balances during less favorable economic periods.
Those procedures included general and selected reductions in
appropriations spending.
Key biennium-ending fund balances at June 30, 1989 were $475.1
million in the GRF and $353 million in the Budget Stabilization Fund
(BSF, a cash and budgetary management fund). June 30, 1991 ending fund
balances were $135.3 million (GRF) and $300 million (BSF).
The next biennium, 1992-93, presented significant challenges to
State finances, which were successfully addressed. To allow time to
resolve certain budget differences, an interim appropriations act was
enacted effective July 1, 1991; it included GRF debt service and lease
rental appropriations for the entire biennium, while continuing most
other appropriations for a month. Pursuant to the general appropriations
act for the entire biennium, passed on July 11, 1991, $200 million was
transferred from the BSF to the GRF in FY 1992.
Based on updated results and forecasts in the course of that FY,
both in light of a continuing uncertain nationwide economic situation,
there was projected and then timely addressed an FY 1992 imbalance in GRF
resources and expenditures. In response, the Governor ordered most State
agencies to reduce GRF spending in the last six months of FY 1992 by a
total of approximately $184 million; the $100.4 million BSF balance and
additional amounts from certain other funds were transferred late in the
FY to the GRF; and adjustments were made in the timing of certain tax
payments.
A significant GRF shortfall (approximately $520 million) was then
projected for FY 1993. It was addressed by appropriate legislative and
administrative actions, including the Governor's ordering $300 million in
selected GRF spending reductions and subsequent executive and legislative
action (a combination of tax revisions and additional spending
reductions). The June 30, 1993 ending GRF fund balance was approximately
$111 million, of which, as a first step to BSF replenishment, $21 million
was deposited in the BSF.
None of the spending reductions were applied to appropriations
needed for debt service or lease rentals relating to any State
obligations.
The 1994-95 biennium presented a more affirmative financial picture.
Based on June 30, 1994 balances, an additional $260 million was deposited
in the BSF. The biennium ended June 30, 1995 with a GRF ending fund
balance of $928 million, of which $535.2 million was transferred into the
BSF (which had an October 7, 1996 balance of over $828 million).
The GRF appropriations act for the 1995-96 biennium was passed on
June 28, 1995 and promptly signed (after selective vetoes) by the
Governor. All necessary GRF appropriations for State debt service and
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lease rental payments then projected for the biennium were included in
that act. In accordance with the appropriations act, the significant
June 30, 1995 GRF fund balance, after leaving in the GRF an unreserved
and undesignated balance of $70 million, was transferred to the BSF and
other funds including school assistance funds and, in anticipation of
possible federal program changes, a human services stabilization fund.
The State's incurrence or assumption of debt without a vote of the
people is, with limited exceptions, prohibited by current State
constitutional provisions. The State may incur debt, limited in amount
to $750,000, to cover casual deficits or failures in revenues or to meet
expenses not otherwise provided for. The Constitution expressly
precludes the State from assuming the debts of any local government or
corporation. (An exception is made in both cases for any debt incurred to
repel invasion, suppress insurrection or defend the State in war.)
By 14 constitutional amendments, the last adopted in 1995, Ohio
voters have authorized the incurrence of State debt and the pledge of
taxes or excises to its payment. At October 7, 1996, $854 million
(excluding certain highway bonds payable primarily from highway use
receipts) of this debt was outstanding. The only such State debt at that
date still authorized to be incurred were portions of the highway bonds,
and the following: (a) up to $100 million of obligations for coal
research and development may be outstanding at any one time ($34.9
million outstanding); (b) $240 million of obligations previously
authorized for local infrastructure improvements, no more than $120
million of which may be issued in any calendar year ($774.7 million
outstanding); and (c) up to $200 million in general obligation bonds for
parks, recreation and natural resources purposes which may be outstanding
at any one time ($44.2 million outstanding, with no more than $50 million
to be issued in any one year).
The electors approved, in November 1995, a constitutional amendment
that extends the local infrastructure bond program (authorizing an
additional $1.2 billion of State full faith and credit obligations to be
issued over 10 years for that purpose), and authorizes additional highway
bonds (expected to be payable primarily from highway use receipts). The
latter supersedes the prior $500 million highway obligation
authorization, and authorizes not more than $1.2 billion to be
outstanding at any time and not more than $220 million to be issued in a
fiscal year.
The Constitution also authorizes the issuance of State obligations
for certain purposes, the owners of which do not have the right to have
excises or taxes levied to pay debt service. Those special obligations
include obligations issued by the Ohio Public Facilities Commission and
the Ohio Building Authority, and certain obligations issued by the State
Treasurer, over $4.8 billion of which were outstanding or sold and
awaiting delivery at October 7, 1996.
A 1990 constitutional amendment authorizes greater State and
political subdivision participation (including financing) in the
provision of housing. The General Assembly may for that purpose
authorize the issuance of State obligations secured by a pledge of all or
such portion as it authorizes of State revenues or receipts (but not by a
pledge of the State's full faith and credit).
A 1994 constitutional amendment pledges the full faith and credit
and taxing power of the State to meeting certain guarantees under the
State's tuition credit program which provides for purchases of tuition
credits, for the benefit of State residents, guaranteed to cover a
specified amount when applied to the cost of higher education tuition.
(A 1965 constitutional provision that authorized student loan guarantees
payable from available State moneys has never been implemented, apart
from a "guarantee fund" approach funded especially from program
revenues.)
State and local agencies issue obligations that are payable from
revenues from or relating to certain facilities (but not from taxes). By
judicial interpretation, these obligations are not "debt" within
constitutional provisions. In general, payment obligations under lease-
purchase agreements of Ohio public agencies (in which certificates of
participation may be issued) are limited in duration to the agency's
fiscal period, and are renewable only upon appropriations being made
available for the subsequent fiscal period.
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Local school districts in Ohio receive a major portion (state-wide
aggregate approximately 44% in recent years) of their operating moneys
from State subsidies, but are dependent on local property taxes, and in
approximately 120 districts from voter-authorized income taxes, for
significant portions of their budgets. Litigation, similar to that in
other states, is pending questioning the constitutionality of Ohio's
system of school funding. The trial court concluded that aspects of the
system (including basic operating assistance) are unconstitutional, and
ordered the State to provide for and fund a system complying with the
Ohio Constitution. The State appealed and a court of appeals reversed
the trial court's findings for plaintiff districts. The case is now
pending on appeal in the Ohio Supreme Court. A small number of the
State's 612 local school districts have in any year required special
assistance to avoid year-end deficits. A current program provides for
school district cash need borrowing directly from commercial lenders,
with diversion of State subsidy distributions to repayment if needed.
Recent borrowings under this program totalled $94.5 million for 27
districts (including $75 million for one district) in FY 1993, $41.1
million for 28 districts in FY 1994, $71.1 million for 29 districts in FY
1995 (including $29.5 million for one), and $87.2 million for 20
districts in FY 1996 (including $42.1 million for one).
Ohio's 943 incorporated cities and villages rely primarily on
property and municipal income taxes for their operations. With other
subdivisions, they also receive local government support and property tax
relief moneys distributed by the State.
For those few municipalities and school districts that on occasion
have faced significant financial problems, there are statutory procedures
for a joint State/local commission to monitor the fiscal affairs and for
development of a financial plan to eliminate deficits and cure any
defaults. Since inception for municipalities in 1979, these procedures
have been applied to 23 cities and villages; for 19 of them the fiscal
situation was resolved and the procedures terminated. The 1996 school
district provision has been applied to two districts.
At present, the State itself does not levy ad valorem taxes on real
or tangible personal property. Those taxes are levied by political
subdivisions and other local taxing districts. The Constitution has
since 1934 limited to 1% of true value in money the amount of the
aggregate levy (including a levy for unvoted general obligations) of
property taxes by all overlapping subdivisions, without a vote of the
electors or a municipal charter provision, and statutes limit the amount
of that aggregate levy to 10 mills per $1 of assessed valuation (commonly
referred to as the "ten-mill limitation"). Voted general obligations of
subdivisions are payable from property taxes that are unlimited as to
amount or rate.
At the time of the closing for each Ohio Trust, Special Counsel to
each Ohio Trust for Ohio tax matters rendered an opinion under then
existing Ohio income tax law applicable to taxpayers whose income is
subject to Ohio income taxation substantially to the effect that:
The Ohio Trust is not taxable as a corporation or otherwise for
purposes of the Ohio personal income tax, Ohio school district
income taxes, the Ohio corporation franchise tax, or the Ohio
dealers in intangibles tax.
Distributions with respect to Units of the Ohio Trust
("Distributions") will be treated as the income of the Unitholders
for purposes of the Ohio personal income tax, and school district
and municipal income taxes in Ohio and the Ohio corporation
franchise tax in proportion to the respective interest therein of
each Unitholder.
Distributions properly attributable to interest on obligations
issued by or on behalf of the State of Ohio, political subdivisions
thereof, or agencies or instrumentalities thereof ("Ohio
Obligations"), or by the governments of Puerto Rico, the Virgin
Islands or Guam ("Territorial Obligations") held by the Trust are
exempt from the Ohio personal income tax, school district and
municipal income taxes, and are excluded from the net income base of
the Ohio corporation franchise tax when distributed or deemed
distributed to Unitholders.
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Distributions properly attributable to proceeds of insurance
paid to the Ohio Trust that represent maturing or matured interest
on defaulted obligations held by the Ohio Trust and that are
excluded from gross income for federal income tax purposes will be
exempt from Ohio personal income tax, and school district and
municipal income taxes in Ohio and the net income base of the Ohio
corporation franchise tax.
Distributions of profit made on the sale, exchange or other
disposition by the Ohio Trust of Ohio Obligations including
distributions of "capital gain dividends" as defined in
Section 852(b)(3)(C) of the Code, properly attributable to the sale,
exchange or other disposition of Ohio Obligations are exempt from
Ohio personal income tax, and school district and municipal income
taxes in Ohio, and are excluded from the net income base of the Ohio
corporation franchise tax.
Pennsylvania Trusts. Investors should be aware
of certain factors that might affect the financial conditions of the
Commonwealth of Pennsylvania. Pennsylvania historically has been
identified as a heavy industry state although that reputation has changed
recently as the industrial composition of the Commonwealth diversified
when the coal, steel and railroad industries began to decline. The major
sources of growth in Pennsylvania are in the service sector, including
trade, medical and the health services, education and financial
institutions. Pennsylvania's agricultural industries are also an
important component of the Commonwealth's economic structure, accounting
for more than $3.6 billion in crop and livestock products annually, while
agribusiness and food-related industries support $39 billion in economic
activity annually.
Non-manufacturing employment has increased steadily since 1980 to
its 1995 level of 82.1 percent of total Commonwealth employment.
Manufacturing, contributing 17.9 percent of 1995 non-agricultural
employment, has fallen behind both the services sector and the trade
sector as the largest single source of employment within the
Commonwealth. In 1995, the services sector accounted for 30.4 percent of
all non-agricultural employment while the trade sector accounted for 22.8
percent.
The Commonwealth recently experienced a slowdown in its economy.
Moreover, economic strengths and weaknesses vary in different parts of
the Commonwealth. In general, heavy industry and manufacturing have been
facing increasing competition from foreign producers. During 1995, the
annual average unemployment rate in the Commonwealth was 5.9% compared to
5.6% for the United States. For September 1996, the unadjusted
unemployment rate was 4.8% in the Commonwealth and 5.0% in the United
States, while the seasonally adjusted unemployment rate for the
Commonwealth was 5.0% and for the United States was 5.2%.
State Budget. The Commonwealth operates under an annual budget that
is formulated and submitted for legislative approval by the Governor each
February. The Pennsylvania Constitution requires that the Governor's
budget proposal consist of three parts: (i) a balanced operating budget
setting forth proposed expenditures and estimated revenues from all
sources and, if estimated revenues and available surplus are less than
proposed expenditures, recommending specific additional sources of
revenue sufficient to pay the deficiency; (ii) a capital budget setting
forth proposed expenditures to be financed from the proceeds of
obligations of the Commonwealth or its agencies or from operating funds;
and (iii) a financial plan for not less than the succeeding five fiscal
years, that includes for each year projected operating expenditures and
estimated revenues and projected expenditures for capital projects. The
General Assembly may add, change or delete any items in the budget
prepared by the Governor, but the Governor retains veto power over the
individual appropriations passed by the legislature. The Commonwealth's
fiscal year begins on July 1 and ends on June 30.
All funds received by the Commonwealth are subject to appropriation
in specific amounts by the General Assembly or by executive authorization
by the Governor. Total appropriations enacted by the General Assembly
may not exceed the ensuing year's estimated revenues, plus (less) the
unappropriated fund balance (deficit) of the preceding year, except for
constitutionally authorized debt service payments. Appropriations from
the principal operating funds of the Commonwealth (the General Fund, the
Motor License Fund and the State Lottery Fund) are generally made for one
fiscal year and are returned to the unappropriated surplus of the fund if
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not spent or encumbered by the end of the fiscal year. The Constitution
specifies that a surplus of operating funds at the end of a fiscal year
must be appropriated for the ensuing year.
Financial information for the principal operating funds of the
Commonwealth is maintained on a budgetary basis of accounting. A
budgetary basis of accounting is used for the purpose of ensuring
compliance with the enacted operating budget and is governed by
applicable statutes of the Commonwealth and by administrative procedures.
The Commonwealth also prepares annual financial statements in accordance
with generally accepted accounting principles ("GAAP"). The budgetary
basis financial information maintained by the Commonwealth to monitor and
enforce budgetary control is adjusted at fiscal year-end to reflect
appropriate accruals for financial reporting in conformity with GAAP.
Recent Financial Conditions. From fiscal 1984, when the
Commonwealth first prepared its financial statements on a GAAP basis,
through fiscal 1989, the Commonwealth reported a positive unreserved-
undesignated fund balance for its governmental fund types at each fiscal
year end. Slowing economic growth during 1990, leading to a national
economic recession beginning in fiscal 1991, reduced revenue growth and
increased costs of certain governmental programs and contributed to
negative unreserved-undesignated fund balances at the end of the 1990 and
1991 fiscal years. The negative unreserved-undesignated fund balance was
due largely to operating deficits in the General Fund and the State
Lottery Fund during those fiscal years. Actions taken during fiscal 1992
to bring the General Fund budget back into balance, including tax
increases and expenditure restraints, resulted in a $1.1 billion
reduction to the unreserved-undesignated fund deficit for combined
governmental fund types and a return to a positive fund balance.
Financial performance continued to improve during the 1993 and 1994
fiscal years. The fund balance for the governmental fund types increased
from $1,692.8 million on June 30, 1993, as restated, to $1,982.0 million
on June 30, 1994, an increase of $289.2 million. An unreserved-
undesignated fund balance of $334.7 million was recorded for fiscal 1994
year end. At June 30, 1995, the fund balance totaled $1,927.6 million,
including an unreserved-undesignated fund balance of $104.8 million.
Financial Results for Recent Fiscal Years. For the five-year period
from fiscal 1991 through fiscal 1995, total revenues and other sources
rose at a 9.1% average annual rate while total expenditures and other
uses grew by 7.4% annually. Over two-thirds of the increase in total
revenues and other sources during this period occurred during fiscal 1992
when a $2.7 billion tax increase was enacted to address a fiscal 1991
budget deficit and to fund increased expenditures for fiscal 1992. For
the four-year period from fiscal 1992 through fiscal 1995, total revenues
and other sources increased at an annual average of 3.3%, less than one-
half the rate of increase for the five-year period beginning with fiscal
1991. This slower rate of growth was due, in part, to tax rate
reductions and other tax law revisions that restrained the growth of tax
receipts for fiscal years 1993, 1994 and 1995.
Expenditures and other uses followed a pattern similar to that for
revenues, although with smaller growth rates, during the fiscal 1991
through fiscal 1995 period. Program areas having the largest increase in
costs for the fiscal 1991 to fiscal 1995 period related to protection of
persons and property, an expansion of state prisons, and public health
and welfare. Recently, efforts to restrain the rapid expansion of public
health and welfare program costs have resulted in expenditure increases
at or below the total rate of increase for total expenditures in each
fiscal year.
Fiscal 1995 Financial Results. Commonwealth revenues for the 1995
fiscal year were above estimate and exceeded fiscal year expenditures and
encumbrances. Fiscal 1995 was the fourth consecutive fiscal year the
Commonwealth reported an increase in the fiscal year-end unappropriated
balance. Prior to reserves for transfer to the Tax Stabilization Reserve
Fund, the fiscal 1995 closing unappropriated surplus was $540.0 million,
an increase of $204.2 million over the fiscal 1994 closing unappropriated
surplus prior to transfers.
Commonwealth revenues during the 1995 fiscal year were $459.4
million, 2.9% above the estimate of revenues used at the time the 1995
fiscal year budget was enacted. Corporation taxes contributed $329.4
million of the additional receipts largely due to higher receipts from
the corporate net income tax. Fiscal 1995 revenues from the corporate
net income tax were 22.6% over collections in fiscal 1994 and include the
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effects of the reduction of the tax rate from 12.25% to 11.99% that
became effective with tax years beginning on and after January 1, 1994.
The sales and use tax and miscellaneous revenues also showed strong year-
over-year growth that produced above-estimate revenue collections. Sales
and use tax revenues were $5,526.9 million, $128.8 million above the
enacted budget estimate and 7.9% over fiscal 1994 collections. Tax
receipts from motor vehicle and non-motor vehicle sales contributed to
the higher collections. Miscellaneous revenue collections for fiscal
1995 were $183.5 million, $44.9 million above estimate and were largely
due to additional investment earnings, escheat revenues and other
miscellaneous revenues.
Fiscal 1996 Budget. Commonwealth revenues (prior to tax refunds)
for the 1996 fiscal year increased by $113.9 million over the prior
fiscal year to $16,338.5 million representing a growth rate of 0.7%. Tax
rate reductions and other tax law changes substantially reduced the
amount and rate of revenue growth for the fiscal year. The Commonwealth
has estimated that tax changes enacted for the 1996 fiscal year reduced
Commonwealth revenues by $283.4 million, representing 1.7 percentage
points of fiscal 1996 growth in Commonwealth revenues. The most
significant tax changes enacted for the 1996 fiscal year were (i) the
reduction of the corporate net income tax rate to 9.99%; (ii) double
weighing of the sales factor of the corporate net income apportionment
calculation; (iii) an increase in the maximum annual allowance for a net
operating loss deduction from $0.5 million to $1.0 million; (iv) an
increase in the basic exemption amount for the capital stock and
franchise tax; (v) the repeal of the tax on annuities; and (vi) the
elimination of inheritance tax on transfers of certain property to
surviving spouses.
Among the major sources of Commonwealth revenues for the 1996 fiscal
year, corporate tax receipts declined $338.4 million from receipts in the
prior fiscal year, largely due to the various tax changes enacted for
these taxes. Corporate tax changes were enacted to reduce the cost of
doing business in Pennsylvania for the purpose of encouraging business to
remain in Pennsylvania and to expand employment opportunities within the
state. Sales and use tax receipts for the fiscal year increased $155.5
million, or 2.8%, over receipts during fiscal 1995. All of the increase
was produced by the non-motor vehicle portion of the tax as receipts from
the sale of motor vehicles declined slightly for fiscal 1996. Personal
income tax receipts for the fiscal year increased $291.1 million, or
5.7%, over receipts during fiscal 1995. Personal income tax receipts
were aided by a 10.2% increase in nonwithholding tax payments which
generally are comprised of quarterly estimated and annual final return
tax payments. Non-tax receipts for the fiscal year increased $23.7
million for the fiscal year. Included in that increase was $67 million
in net receipts from a tax amnesty program that was available for a
portion of the 1996 fiscal year. Some portion of the tax amnesty
receipts represent normal collections of delinquent taxes. The tax
amnesty program is not expected to be repeated.
The unappropriated surplus (prior to transfers to Tax Stabilization
Reserve Fund) at the close of the fiscal year for the General Fund was
$183.8 million, $65.5 million above estimate. Transfers to the Tax
Stabilization Reserve Fund from fiscal 1996 operations will be $27.6
million. This amount represents the fifteen percent of the fiscal year
ending unappropriated surplus transfer provided under current law. With
the addition of this transfer and anticipated interest earnings, the Tax
Stabilization Reserve Fund balance will be $211 million.
Fiscal 1997 Budget. The enacted fiscal 1997 budget provides for
expenditures from Commonwealth revenues of $16,375.8 million, an increase
of 0.6% over appropriated amounts from Commonwealth revenues for fiscal
1996. The fiscal 1997 budget is based on anticipated Commonwealth
revenues before refunds of $16,744.5 million, an increase over actual
fiscal 1996 revenues of 2.5 percent.
Increased authorized spending for fiscal 1997 is driven largely by
increased costs of the corrections and the probation and parole programs.
Continuation of the trend of rapidly rising inmate populations increases
operating costs for correctional facilities and requires the opening of
new facilities. The fiscal 1997 budget contains an appropriation
increase in excess of $110 million for these programs. The approved
budget also contains some departmental restructurings. The Department of
Community Affairs was eliminated with certain of its programs transferred
to the Department of Commerce that has been renamed the Department of
Community and Economic Development. In addition to assuming some of the
community programs, a significant restructuring of the economic
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development programs was completed with the establishment of the new
Department of Community and Economic Development. Although the
departmental restructurings are estimated to save approximately $8
million, a $25 million increase in funds was committed to economic and
community development programs for fiscal 1997.
Providing funding for these program increases in a fiscal year
budget where appropriations increased by only $96.7 million, or 0.6%,
required reductions and savings in other programs funded from the General
Fund. A major reform of the current welfare system was enacted in May
1996 to encourage recipients toward self-sufficiency through work
requirements, to provide temporary support for families showing personal
responsibility and to maintain safeguards for those who cannot help
themselves. Net savings to the fiscal 1997 budget of $176.5 million is
anticipated. Many of these savings are redirected in the fiscal 1997
budget toward providing additional support services to those working and
seeking work. Of the net savings, $21 million is committed to job
training opportunities and an additional $69 million towards making day
care services available to welfare recipients for work opportunities.
The fiscal 1997 budget also provides additional funding without requiring
additional appropriations. An actuarial reduction of 112 basis points in
the employer contribution rate is estimated to save school districts
approximately $21 million for the fiscal year. Additional savings can be
expected to be realized by school districts from legislated changes to
teacher sabbatical leaves and worker's compensation insurance.
Debt Limits and Outstanding Debt. The Pennsylvania Constitution
permits the issuance of the following types of debt: (i) debt to suppress
insurrection or rehabilitate areas affected by disaster; (ii) electorate
approved debt; (iii) debt for capital projects subject to an aggregate
outstanding debt limit of 1.75 times the annual average tax revenues of
the preceding five fiscal years; and (iv) tax anticipation notes payable
in the fiscal year of issuance.
Under the Pennsylvania Fiscal Code, the Auditor General is required
to certify to the Governor and the General Assembly certain information
regarding the Commonwealth's indebtedness. According to the February 29,
1996 Auditor General certificate, the average annual tax revenues
deposited in all funds in the five fiscal years ended June 30, 1995 was
approximately $17.7 billion, and, therefore, the net debt limitation for
the 1996 fiscal year is $30.9 billion. Outstanding net debt totaled $3.9
billion at June 30, 1995, approximately equal to the net debt at June 30,
1994. At February 29, 1996, the amount of debt authorized by law to be
issued, but not yet incurred, was $16.5 billion.
Outstanding general obligation debt totaled $5,045.4 million at June
30, 1995, a decrease of $30.4 million from June 30, 1994. Over the ten-
year period ending June 30, 1995, total outstanding general obligation
debt increased at an annual rate of 1.1%. Within the most recent five-
year period, outstanding general obligation debt has grown at an annual
rate of 1.7%.
Debt Ratings. All outstanding general obligation bonds of the
Commonwealth are rated AA- by S&P and A1 by Moody's.
Any explanation concerning the significance of such ratings must be
obtained from the rating agencies. There is no assurance that any
ratings will continue for any period of time or that they will not be
revised or withdrawn.
The City of Philadelphia ("Philadelphia") is the largest city in the
Commonwealth, with an estimated population of 1,585,577 according to the
1990 Census. Philadelphia functions both as a city of the first-class
and a county for the purpose of administering various governmental
programs.
For the fiscal year ending June 30, 1991, Philadelphia experienced a
cumulative General Fund balance deficit of $153.5 million. In its 1992
Comprehensive Annual Financial Report, Philadelphia reported a cumulative
general fund deficit of $71.4 million for fiscal year 1992.
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Legislation providing for the establishment of the Pennsylvania
Intergovernmental Cooperation Authority ("PICA") to assist first class
cities in remedying fiscal emergencies was enacted by the General
Assembly and approved by the Governor in June, 1991. PICA is designed to
provide assistance through the issuance of funding debt to liquidate
budget deficits and to make factual findings and recommendations to the
assisted city concerning its budgetary and fiscal affairs. An
intergovernmental cooperation agreement between Philadelphia and PICA was
approved by City Council on January 3, 1992, and approved by the PICA
Board and signed by the Mayor on January 8, 1992. At this time,
Philadelphia is operating under a five year fiscal plan approved by PICA
on April 30, 1996 in which Philadelphia projects a balanced budget in
each of the five years (fiscal years 1997 through 2001) covered by the
plan.
In June 1992, PICA issued $474,555,000 of its Special Tax Revenue
Bonds (the "1992 Bonds") to provide financial assistance to Philadelphia
and to liquidate the cumulative General Fund balance deficit. PICA
issued $643,430,000 in July 1993 and $178,675,000 in August 1993 of
Special Tax Revenue Bonds to refund certain general obligation bonds of
the city and to fund additional capital projects. In May 1996, PICA
issued $343,030,000 of Special Tax Revenue Refunding Bonds to (i) advance
refund the 1992 Bonds and the 1994 Bonds; (ii) pay the premium for a
surety bond to satisfy the Debt Service Reserve Fund Requirement for the
1996 Bonds; and, (iii) pay the costs of issuing the 1996 Bonds. As of
September 19, 1996, PICA has issued approximately $1,761.7 million of its
Special Tax Revenue Bonds.
No further PICA bonds are to be issued by PICA for the purpose of
financing a capital project or deficit as the authority for such bond
sales expired on December 31, 1994. PICA's authority to issue debt for
the purpose of financing a cash flow deficit expired on December 31,
1996. Its ability to refund existing outstanding debt is unrestricted.
PICA had $1,146.2 million in Special Tax Revenue Bonds outstanding as of
June 30, 1996.
The audited General Fund balance of the City as of June 30, 1993,
1994 and 1995 showed a surplus of approximately $3 million, $15.4 million
and $80.5 million, respectively.
As of the date hereof, the ratings on the City's long-term
obligations supported by payments from the City's General Fund are rated
Baa by Moody's and BBB- by S&P. Any explanation concerning the
significance of such ratings must be obtained from the rating agencies.
There is no assurance that any ratings will continue for any period of
time or that they will not be revised or withdrawn.
The foregoing information constitutes only a brief summary of some
of the financial difficulties which may impact certain issuers of bonds
and does not purport to be a complete or exhaustive description of all
adverse conditions to which the issuers of the Bonds in the Pennsylvania
Trust are subject. Additionally, many factors including national
economic, social and environmental policies and conditions, which are not
within the control of the issuers of Bonds, could have an adverse impact
on the financial condition of the State and various agencies and
political subdivisions located in the State. The Sponsor is unable to
predict whether or to what extent such factors or other factors may
affect the issuers of Bonds, the market value or marketability of the
Bonds or the ability of the respective issuers of the Bonds acquired by
the Pennsylvania Trust to pay interest on or principal of the Bonds.
At the time of the closing for each Pennsylvania Trust, Special
Counsel to each Pennsylvania Trust for Pennsylvania tax matters rendered
an opinion under then existing Pennsylvania income tax law applicable to
taxpayers whose income is subject to Pennsylvania income taxation
substantially to the effect that:
(1) Units evidencing fractional undivided interests in the
Pennsylvania Trust, which are represented by obligations issued by
the Commonwealth of Pennsylvania, any public authority, commission,
board or other agency created by the Commonwealth of Pennsylvania,
any political subdivision of the Commonwealth of Pennsylvania or any
public authority created by any such political subdivision, are not
taxable under any of the personal property taxes presently in effect
in Pennsylvania;
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(2) Distributions of interest income to Unitholders that would
not be taxable if received directly by a Pennsylvania resident are
not subject to personal income tax under the Pennsylvania Tax Reform
Code of 1971; nor will such interest be taxable under the
Philadelphia School District Investment Income Tax imposed on
Philadelphia resident individuals;
(3) A Unitholder will have a taxable event under the
Pennsylvania state and local income taxes referred to in the
preceding paragraph upon the redemption or sale of his Units. Units
will be taxable under the Pennsylvania inheritance and estate taxes;
(4) A Unitholder which is a corporation will have a taxable
event under the Pennsylvania Corporate Net Income Tax upon the
redemption or sale of its Units. Interest income distributed to
Unitholders which are corporations is not subject to Pennsylvania
Corporate Net Income Tax or Mutual Thrift Institutions Tax.
However, banks, title insurance companies and trust companies may be
required to take the value of Units into account in determining the
taxable value of their shares subject to Shares Tax;
(5) Under Act No. 68 of December 3, 1993, gains derived by the
Pennsylvania Trust from the sale, exchange or other disposition of
Bonds may be subject to Pennsylvania personal or corporate income
taxes. Those gains which are distributed by the Pennsylvania Trust
to Unitholders who are individuals may be subject to Pennsylvania
Personal Income Tax. For Unitholders which are corporations, the
distributed gains may be subject to Corporate Net Income Tax or
Mutual Thrift Institutions Tax. Gains which are not distributed by
the Pennsylvania Trust may nevertheless be taxable to Unitholders if
derived by the Pennsylvania Trust from the sale, exchange or other
disposition of Bonds issued on or after February 1, 1994. Gains
which are not distributed by the Pennsylvania Trust will remain
nontaxable to Unitholders if derived by the Pennsylvania Trust from
the sale, exchange or other disposition of Bond issued prior to
February 1, 1994;
(6) Any proceeds paid under insurance policies issued to the
Trustee or obtained by issuers of the Bonds, with respect to the
Bonds which represent maturing interest on defaulted obligations
held by the Trustee will be excludable from Pennsylvania gross
income if, and to the same extent as, such interest would have been
so excludable if paid by the issuer of the defaulted obligations;
(7) The Pennsylvania Trust is not taxable as a corporation
under Pennsylvania tax laws applicable to corporations; and
(8) On December 3, 1993, changes to Pennsylvania laws
affecting taxation of income and gains from the sale of Pennsylvania
and local obligations were enacted. Among these changes was the
repeal of the exemption from tax of gains realized upon the sale or
other disposition of such obligations. The Pennsylvania Department
of Revenue has issued proposed regulations concerning these changes.
The opinions expressed above are based on Special Counsel's analysis
of the law and proposed regulations, but are subject to modification
upon review of final regulations or other guidance that may be
issued by the Department of Revenue or future court decisions.
In rendering its opinion, Special Counsel has not, for timing
reasons, made an independent review of proceedings related to the
issuance of the Bonds. It has relied on the Sponsor for assurance that
the Bonds have been issued by the Commonwealth of Pennsylvania or by or
on behalf of municipalities or other governmental agencies within the
Commonwealth.
Texas Trusts. This summary is derived from sources that
are generally available to investors and is believed to be accurate. It
is based in part on information obtained from various State and local
agencies in Texas, including information provided in official statements
of recent Texas State issues. Historical data on economic conditions in
Texas is presented for background information only, and should not be
relied on to suggest future economic conditions in the State.
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Historically, the primary sources of the State's revenues have been
sales taxes, mineral severance taxes and federal grants. Due to the
collapse of oil and gas prices in 1986 and a resulting enactment by
recent legislatures of new tax measures, including those increasing the
rates of existing taxes and expanding the tax base for certain taxes,
there has been a reordering in the relative importance of the State's
taxes in terms of their contribution to the State's revenue in any year.
Due to the State's expansion in Medicaid spending and other Health and
Human Services programs requiring federal matching revenues, federal
receipts was the State's number one source of income in fiscal 1995.
Sales tax, which had been the main source of revenue for the previous 12
years prior to fiscal 1993, was second, accounting for 26.5% of total
revenues in fiscal 1995. Licenses, fees and permits is the third largest
revenue source, contributing 9.7% of total revenues in fiscal 1995. The
motor fuels tax is the State's fourth largest revenue source and second
largest tax, accounting for approximately 5.8% of total revenue in fiscal
year 1995. Motor vehicle sales/rental taxes, the State's fifth largest
revenue source, accounted for 4.6% of the total revenue in fiscal year
1995. The remainder of the State's revenues are derived primarily from
interest and investment income and other excise taxes. The State
currently has no personal or corporate income tax. The State does,
however, impose a corporate franchise tax based in certain circumstances
in part on a corporation's profits.
Heavy reliance on the energy and agricultural sectors for jobs and
income resulted in a general downturn in the Texas economy beginning in
1982 as those industries suffered significantly. The effects of this
downturn continue to adversely affect the State's real estate industry
and its financial institutions for several years. As a result of these
problems, the general revenue fund had a $231 million cash deficit at the
beginning of the 1987 fiscal year and ended the 1987 fiscal year with a
$745 million cash deficit. In 1987, the Texas economy began to move
toward a period of recovery. The expansion continued in 1988 and 1989.
In fiscal year 1995, the State ended the year with a general revenue fund
cash surplus of $2.110 billion. This was the eighth consecutive year
that Texas ended a fiscal year with a positive balance.
The 73rd Legislature meeting in 1993 passed the 1994-1995 biennial
all funds budget of $70.1 billion without increasing state taxes. This
was accomplished by cutting spending in certain areas and increasing
federal funding. The State Comptroller has estimated that total State
revenues from all sources would total $74.1 billion for the 1994-1995
biennium. Actual total net revenue for fiscal year 1995 was $38.68
billion, compared to $36.7 billion for fiscal year 1994. Total
expenditures for fiscal year 1995 were $39.34 billion, compared to $35.64
billion for fiscal year 1994. At the end of fiscal year 1995, the
General Revenue Fund had a balance of $2.11 billion.
The 74th Legislature, which convened in 1995, passed the 1996-97
biennial budget, totaling $79.9 billion, also without raising additional
taxes. The 74th Legislature relied, in part, on the State Comptroller's
1996-97 biennal estimate of a $3.0 billion balance from the 1994-95
biennium. The Comptroller has estimated that total revenues for fiscal
1996 and 1997 will be $39.2 billion and $40.6 billion, respectively. The
revenue estimate for the 1996-97 biennium is based on an assumption that
the Texas economy will show a steady growth.
Cuirrently, the service-producing sectors (i.e., transportation and
public utilities, insurance and real estate, government, trade) are the
major sources of job growth in Texas, accounting for 80% of total
non-farm employment and over 90% of employment growth since 1990. Also,
the number of manufacturing jobs has increased 7% since 1992. This job
growth is expected to be significant to future growth in Texas. Texas's
unemployment rate in 1995 of 6.0% was its lowest rate in ten years. The
unemployment rate for the United States in 1995 was 5.6%.
The Texas Constitution prohibits the State from levying ad valorem
taxes on property for general revenue purposes and limits the rate of
such taxes for other purposes to $.35 per $100 of valuation. The
Constitution also permits counties to levy, in addition to all other
ad valorem taxes permitted by the Constitution, ad valorem taxes on
property within the county for flood control and road purposes in an
amount not to exceed $.30 per $100 of valuation. The Constitution
prohibits counties, cities and towns from levying a tax rate exceeding
$.80 per $100 of valuation for general fund and other specified purposes.
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With certain specific exceptions, the Texas Constitution generally
prohibits the creation of debt by or on behalf of the State unless the
voters of the State, by constitutional amendment, authorize the issuance
of debt (including general obligation indebtedness backed by the State's
taxing power and full faith and credit). In excess of $9.0 billion of
general obligation bonds have been authorized in Texas and almost $5.4
billion of such bonds, including revenue bonds, are currently
outstanding. Many of these were issued by the Veterans' Land Board and
the Texas Public Finance Authority.
Though the full faith and credit of the State are pledged for the
payment of all general obligations issued by the State, much of that
indebtedness is designed to be eventually self-supporting from fees,
payments, and other sources of revenues; in some instances, the receipt
of such revenues by certain issuing agencies has been in sufficient
amounts to pay the principal of and interest on the issuer's outstanding
bonds without requiring the use of appropriated funds.
Pursuant to Article 717k-2, Texas Revised Civil Statutes, as
presently amended, the net effective interest rate for any issue or
series of Bonds in the Texas Trust is limited to 15%.
From the time Standard & Poor's began rating Texas general
obligation bonds in 1956 until early 1986, that firm gave such bonds its
highest rating, "AAA." In April 1986, in response to the State economic
problems, Standard & Poor's downgraded its rating of Texas general
obligation bonds to "AA+." Such rating was further downgraded in July
1987 to "AA." Moody's Investors Service, Inc. has rated Texas bonds
since prior to the Great Depression. Moody's upgraded its rating of
Texas general obligation bonds in 1962 from "Aa" to "Aaa," its highest
rating, following the imposition of a statewide sales tax by the
Legislature. Moody's downgraded such rating to "Aa" in March 1987. No
prediction can be made concerning future changes in ratings by national
rating agencies of Texas general obligation bonds or concerning the
effect of such ratings changes on the market for such issues.
The same economic and other factors affecting the State of Texas and
its agencies also have affected cities, counties, school districts and
other issuers of bonds located throughout the State. Declining revenues
caused by the downturn in the Texas economy in the mid-1980s forced these
various other issuers to raise taxes and cut services to achieve the
balanced budget mandated by their respective charters or applicable State
law requirements. Standard & Poor's and Moody's Investors Service, Inc.
assign separate ratings to each issue of bonds sold by these other
issuers. Such ratings may be significantly lower than the ratings
assigned by such rating agencies to Texas general obligation bonds.
In March, 1993, the Legislature passed a proposed constitutional
amendment which would allow a limited amount of money to be "recaptured"
from wealthy school districts and redistributed to property-poor school
districts. However, the amendment was rejected by the voters on May 1,
1993, requiring the Legislature to develop a new school finance plan. At
the end of May, 1993, the Legislature passed a new school finance bill
that provides school districts with certain choices to achieve funding
equalization. The Texas Supreme Court upheld this school finance law in
January, 1995.
A wide variety of Texas laws, rules and regulations affect,
directly, or indirectly, the payment of interest on, or the repayment of
the principal of, Bonds in the Texas Trust. The impact of such laws and
regulations on particular Bonds may vary depending upon numerous factors
including, among others, the particular type of Bonds involved, the
public purpose funded by the Bonds and the nature and extent of insurance
or other security for payment of principal and interest on the Bonds.
For example, Bonds in the Texas Trust which are payable only from the
revenues derived from a particular facility may be adversely affected by
Texas laws or regulations which make it more difficult for the particular
facility to generate revenues sufficient to pay such interest and
principal, including, among others, laws and regulations which limit the
amount of fees, rates or other charges which may be imposed for use of
the facility or which increase competition among facilities of that type
or which limit or otherwise have the effect of reducing the use of such
facilities generally, thereby reducing the revenues generated by the
particular facility. Bonds in the Texas Trust, the payment of interest
and principal on which is payable from annual appropriations, may be
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adversely affected by local laws or regulations that restrict the
availability of monies with which to make such appropriations.
Similarly, Bonds in the Texas Trust, the payment of interest and
principal on which is secured, in whole or in part, by an interest in
real property may be adversely affected by declines in real estate values
and by Texas laws that limit the availability of remedies or the scope of
remedies available in the event of a default on such Bonds. Because of
the diverse nature of such laws and regulations and the impossibility of
predicting the nature or extent of future changes in existing laws or
regulations or the future enactment or adoption of additional laws or
regulations, it is not presently possible to determine the impact of such
laws and regulations on the Bonds in the Texas Trust and, therefore, on
the Units.
The foregoing information constitutes only a brief summary of some
of the general factors which may impact certain issuers of Bonds and does
not purport to be a complete or exhaustive description of all adverse
conditions to which the issuers of Bonds held by the Texas Trust are
subject. Additionally, many factors including national economic, social
and environmental policies and conditions, which are not within the
control of the issuers of the Bonds, could affect or could have an
adverse impact on the financial condition of the issuers. The Sponsor is
unable to predict whether or to what extent such factors or other factors
may affect the issuers of the Bonds, the market value or marketability of
the Bonds or the ability of the respective issuers of the Bonds acquired
by the Texas Trust to pay interest on or principal of the Bonds.
At the time of the closing for the Texas Trust, Special Counsel to
the Fund for Texas tax matters rendered an opinion under then existing
Texas income tax law applicable to taxpayers whose income is subject to
Texas income taxation substantially to the effect that:
(1) Neither the State nor any political subdivision of the
State currently imposes an income tax on individuals. Therefore, no
portion of any distribution received by an individual Unitholder of
the Trust in respect of his Units, including a distribution of the
proceeds of insurance in respect of such Units, is subject to income
taxation by the State or any political subdivision of the State;
(2) Except in the case of certain transportation businesses,
savings and loan associations and insurance companies, no Unit of
the Trust is taxable under any property tax levied in the State;
(3) The "inheritance tax" of the State, imposed upon certain
transfers of property of a deceased resident individual Unitholder,
may be measured in part upon the value of Units of the Trust
included in the estate of such Unitholder; and
(4) With respect to any Unitholder which is subject to the
State corporate franchise tax, Units in the Trust held by such
Unitholder, and distributions received thereon, will be taken into
account in computing the "taxable capital" of the Unitholder
allocated to the State, one of the bases by which such franchise tax
is currently measured (the other being a corporation's "net capital
earned surplus," which is, generally, its net corporate income plus
officers and directors income).
The opinion set forth in clause (2), above, is limited to the extent
that Units of the Trust may be subject to property taxes levied in the
State if held on the relevant date: (i) by a transportation business
described in V.T.C.A., Tax Code, Subchapter A, Chapter 24; (ii) by a
savings and loan association formed under the laws of the State (but only
to the extent described in section 11.09 of the Texas Savings and Loan
Act, Vernon's Ann. Civ. St. art. 852a); or (iii) by an insurance company
incorporated under the laws of the State (but only to the extent
described in V.A.T.S., Insurance Code, Art. 4.01). Each Unitholder
described in the preceding sentence should consult its own tax advisor
with respect to such matters.
Corporations subject to the State franchise tax should be aware that
in its first called 1991 session, the Texas Legislature adopted, and the
Governor has signed into law, certain substantial amendments to the State
corporate franchise tax, the effect of which may be subject to taxation
all or a portion of any gains realized by such a corporate Unitholder
upon the sale, exchange or other disposition of a Unit. The amendments
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are applicable to taxable periods commencing January 1991, and to each
taxable period thereafter. Because no authoritative judicial,
legislative or administrative interpretation of these amendments has
issued, and there remain many unresolved questions regarding its
potential effect on corporate franchise taxpayers, each corporation which
is subject to the State franchise tax and which is considering the
purchase of Units should consult its tax advisor regarding the effect of
these amendments.
PUBLIC OFFERING OF UNITS
Public Offering Price. Units of each State
Trust are offered at the Public Offering Price thereof. The Public
Offering Price per Unit is equal to the aggregate bid side evaluation of
the Municipal Bonds in the State Trust's portfolio (as determined
pursuant to the terms of a contract with the Evaluator, by a non-
affiliated firm regularly engaged in the business of evaluating, quoting
or appraising comparable securities), plus or minus cash, if any, in the
Principal Account, held or owned by the State Trust, plus accrued
interest to the settlement date divided by the number of outstanding
Units of the State Trust, plus the sales charge applicable to a Unit of
such State Trust. The sales charge is based upon the dollar weighted
average maturity of the State Trust and is determined in accordance with
the table set forth below. For purposes of this computation, Municipal
Bonds will be deemed to mature on their expressed maturity dates unless:
(a) the Municipal Bonds have been called for redemption or funds or
securities have been placed in escrow to redeem them on an earlier call
date, in which case such call date will be deemed to be the date upon
which they mature; or (b) such Municipal Bonds are subject to a
"mandatory tender," in which case such mandatory tender will be deemed to
be the date upon which they mature. The effect of this method of sales
charge computation will be that different sales charge rates will be
applied to the State Trust based upon the dollar weighted average
maturity of such State Trust's portfolio, in accordance with the
following schedule:
<TABLE>
<CAPTION>
PERCENT OF
DOLLAR PUBLIC PERCENT OF
WEIGHTED AVERAGE OFFERING NET AMOUNT
YEARS TO MATURITY PRICE INVESTED
----------------- ------------- --------------
<S> <C> <C>
0 to .99 years 0.00% 0.00%
1 to 3.99 years 2.00 2.041
4 to 7.99 years 3.50 3.627
8 to 14.99 years 4.50 4.712
15 or more years 5.50 5.820
</TABLE>
The sales charge per Unit will be reduced as set forth below:
<TABLE>
<CAPTION>
DOLLAR WEIGHTED AVERAGE
YEARS TO MATURITY*
4 TO 7.99 8 TO 14.99 15 OR MORE
--------- ---------- ----------
AMOUNT OF INVESTMENT SALES CHARGE (% OF PUBLIC OFFERING PRICE)
-------------------- -----------------------------------------
<S> <C> <C> <C>
$1 to $99,999 3.50% 4.50% 5.50%
$100,000 to $499,999 3.25 4.25 5.00
$500,000 to $999,999 3.00 4.00 4.50
$1,000,000 or more 2.75 3.75 4.00
</TABLE>
-----------------
* If the dollar weighted average maturity of a State Trust is from 1 to
3.99 years, the sales charge is 2% and 1.5% of the Public Offering
Price for purchases of $1 to $249,999 and $250,000 or more,
respectively.
The reduced sales charges as shown on the preceding charts will
apply to all purchases of Units on any one day by the same person from
the same Underwriter or dealer and for this purpose, purchases of Units
of a State Trust will be aggregated with concurrent purchases of Units as
any other unit investment trust that may be offered by the Sponsor.
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Additionally, Units purchased in the name of a spouse or child (under 21)
of such purchaser will be deemed to be additional purchases by such
purchaser. The reduced sales charges will also be applicable to a trust
or other fiduciary purchasing for a single trust estate or single
fiduciary account.
The Sponsor intends to permit officers, directors and employees of
the Sponsor and Evaluator, and at the discretion of the Sponsor,
registered representatives of selling firms to purchase Units of the
Trust without a sales charge, although a transaction processing fee may
be imposed on such trades.
Units may be purchased at the Public Offering Price less the
concession the Sponsor typically allows to dealers and other selling
agents for purchases (see "Public Distribution of Units" within this
section) by investors who purchase Units through registered investment
advisers, certified financial planners or registered broker-dealers who
in each case either charge periodic fees for financial planning,
investment advisory or asset management services, or provide such
services in connection with the establishment of an investment account
for which a comprehensive "wrap fee" charge is imposed.
The Public Offering Price per Unit of a State Trust on the date
shown on the cover page of Part Two of the Prospectus or on any
subsequent date will vary from the amounts stated under "Essential
Information" in Part Two in accordance with fluctuations in the prices of
the underlying Municipal Bonds and the amount of accrued interest on the
Units. The aggregate bid side evaluation of the Municipal Bonds shall be
determined (a) on the basis of current bid prices of the Municipal Bonds,
(b) if bid prices are not available for any particular Municipal Bonds,
on the basis of current bid prices for comparable bonds, (c) by
determining the value of the Municipal Bonds on the bid side of the
market by appraisal, or (d) by any combination of the above. Except as
described in "Insurance on the Portfolios" above, the Evaluator will not
attribute any value to the insurance obtained by a State Trust. On the
other hand, the value of insurance obtained by an issuer of Municipal
Bonds is reflected and included in the market value of such Municipal
Bonds.
In any case, the Evaluator will consider the ability of an insurer
to meet its commitments under the Trust's insurance policy (if any). For
example, if a State Trust were to hold a municipality's Municipal Bonds
which had significantly deteriorated in credit quality, the Evaluator
would first consider in its evaluation the market price of the Municipal
Bonds at their lower credit rating. The Evaluator would also attribute a
value to the insurance feature of the Municipal Bonds which would be
equal to the difference between the market value of such Municipal Bonds
and the market value of bonds of a similar nature which were of
investment grade rating. It is the position of the Sponsor that this is
a fair method of valuing insured Municipal Bonds and reflects a proper
valuation method in accordance with the provisions of the Investment
Company Act of 1940. For a description of the circumstances under which
a full or partial suspension of the right of Unitholders to redeem their
Units may occur, see "Redemption" below.
The foregoing evaluations and computations shall be made as of the
Evaluation Time stated under "Essential Information" in Part Two, on each
business day effective for all sales made during the preceding 24-hour
period.
The interest on the Municipal Bonds in each State Trust, less the
related estimated fees and expenses, is estimated to accrue in the annual
amounts per Unit set forth under "Essential Information" in Part Two.
The amount of net interest income which accrues per Unit may change as
Municipal Bonds mature or are redeemed, exchanged or sold, or as the
expenses of a State Trust change or as the number of outstanding Units of
such State Trust changes.
Payment for Units must be made on or before the third business day
following the order for purchase (the "settlement date"). A purchaser
becomes the owner of Units on the settlement date. Cash, if any, made
available to the Sponsor prior to the date of settlement for the purchase
of Units may be used in the Sponsor's business and may be deemed to be a
benefit to the Sponsor, subject to the limitations of the Securities
Exchange Act of 1934. If a Unitholder desires to have certificates
representing Units purchased, such certificates will be delivered as soon
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as possible following a written request therefor, or shortly thereafter.
For information with respect to redemption of Units purchased, but as to
which certificates requested have not been received, see "Redemption"
below.
Accrued Interest-Kemper Tax-Exempt Insured Income Trust and Ohio Tax-
Exempt Bond Trust. In the case of series of Kemper Tax-Exempt Insured
Income Trust, Multi-State Series and Ohio Tax-Exempt Bond Trust
Series 11-22, accrued interest consists of two elements as described in
this section. The first element arises as a result of accrued interest
which is the accumulation of unpaid interest on a bond from the last day
on which interest thereon was paid. Interest on Bonds in the State
Trusts is actually paid either monthly or semi-annually to the State
Trust. However, interest on the bonds in the State Trusts is accounted
for daily on an accrual basis. Because of this, a State Trust always has
an amount of interest earned but not yet collected by the Trustee because
of coupons that are not yet due. For this reason, the Public Offering
Price of Units will have added to it the proportionate share of accrued
and undistributed interest to the date of settlement.
The Trustee advanced the amount of accrued interest as of the First
Settlement Date (which is three business days following the Date of
Deposit of the applicable State Trust) and the same was distributed to
the Sponsor. Such advance was repaid to the Trustee through the first
receipts of interest received on the Municipal Bonds. Consequently, the
amount of accrued interest added to the Public Offering Price of Units
included only accrued interest arising after the First Settlement Date of
a State Trust, less any distributions from the Interest Account
subsequent to this First Settlement Date. Since the First Settlement
Date was the date of settlement for anyone who ordered Units on the Date
of Deposit, no accrued interest was added to the Public Offering Price of
Units ordered on the Date of Deposit.
The second element of accrued interest arises because of the
structure of the Interest Account. The Trustee has no cash for
distribution to Unitholders until it receives interest payments on the
Bonds in a State Trust. The Trustee is obligated to provide its own
funds, at times, in order to advance interest distributions. The Trustee
will recover these advancements when such interest is received. Interest
Account balances are established so that it will not be necessary on a
regular basis for the Trustee to advance its own funds in connection with
such interest distributions. The Interest Account balances are also
structured so that there will generally be positive cash balances and
since the funds held by the Trustee will be used by it to earn interest
thereon, it benefits thereby (see "Expenses of the Trust").
Accrued interest is computed as of the initial Record Date of the
State Trusts. On the date of the first distribution of interest to
Unitholders after the First Settlement Date, the interest collected by
the Trustee will be sufficient to repay its advances, to allow for
accrued interest under the monthly, quarterly and semi-annual plans of
distribution and to generate enough cash to commence distributions to
Unitholders. If a Unitholder sells or redeems all or a portion of his
Units or if the Bonds in a State Trust are sold or otherwise removed or
if a State Trust is liquidated, he will receive at that time his
proportionate share of the accrued interest computed to the settlement
date in the case of sale or liquidation and to the date of tender in the
case of redemption in such State Trust.
Purchased and Daily Accrued Interest. In the case of a State Trust
in Series 1-18 of Kemper Defined Funds, accrued interest consists of two
elements as described in this section. The first element arises as a
result of accrued interest which is the accumulation of unpaid interest
on a bond from the later of the last day on which interest thereon was
paid or the date of original issuance of the bond. Interest on the
coupon Bonds in a State Trust is paid semi-annually to the State Trust.
A portion of the aggregate amount of such accrued interest on the Bonds
in the Trust to the First Settlement Date (which is three business days
following the Date of Deposit of the applicable State Trust) of the State
Trust is referred to herein as "Purchased Interest." Included in the
Public Offering Price of the State Trust Units is the Purchased Interest.
In an effort to reduce the amount of Purchased Interest which would
otherwise have to be paid by Unitholders, the Trustee may have advanced a
portion of the accrued interest to the Sponsor as the Unitholder of
record as of the First Settlement Date. The second element of accrued
interest arises because the estimated net interest on the Units in the
State Trust is accounted for daily on an accrual basis (herein referred
to as "Daily Accrued Interest"). Because of this, the Units always have
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an amount of interest earned but not yet paid or reserved for payment.
For this reason, the Public Offering Price of Units in any series of
Kemper Defined Funds will include the proportionate share of Daily
Accrued Interest to the date of settlement.
If a Unitholder in Series 1-18 of Kemper Defined Funds sells or
redeems all or a portion of his Units or if the bonds are sold or
otherwise removed or if the State Trust is liquidated, he will receive at
that time his proportionate share of the Purchased Interest and Daily
Accrued Interest computed to the settlement date in the case of sale or
liquidation and to the date of tender in the case of redemption in the
State Trust.
Accrued Interest-Kemper Defined Funds and EVEREN Unit Investment
Trusts. In the case of Kemper Defined Funds, Series 19 and subsequent
series and all series of EVEREN Unit Investment Trusts, accrued interest
is treated as described in this section. Accrued interest is the
accumulation of unpaid interest on a security from the last day on which
interest thereon was paid. Interest on Securities generally is paid semi-
annually (monthly in the case of Ginnie Maes, if any) although a Trust
accrues such interest daily. Because of this, a Trust always has an
amount of interest earned but not yet collected by the Trustee. For this
reason, with respect to sales settling subsequent to the First Settlement
Date, the Public Offering Price of Units will have added to it the
proportionate share of accrued interest to the date of settlement.
Unitholders will receive on the next distribution date of a Trust the
amount, if any, of accrued interest paid on their Units.
In an effort to reduce the amount of accrued interest which would
otherwise have to be paid in addition to the Public Offering Price in the
sale of Units to the public, the Trustee will advance the amount of
accrued interest as of the First Settlement Date and the same will be
distributed to the Sponsor as the Unitholder of record as of the First
Settlement Date. Consequently, the amount of accrued interest to be
added to the Public Offering Price of Units will include only accrued
interest from the First Settlement Date to the date of settlement, less
any distributions from the Interest Account subsequent to the First
Settlement Date.
Because of the varying interest payment dates of the Securities,
accrued interest at any point in time will be greater than the amount of
interest actually received by the Trusts and distributed to Unitholders.
Therefore, there will always remain an item of accrued interest that is
added to the value of the Units. If a Unitholder sells or redeems all or
a portion his Units, he will be entitled to receive his proportionate
share of the acrued interest from the purchaser of his Units. Since the
Trustee has the use of the funds held in the Interest Account for
distributions to Unitholders and since such Account is non-interest-
bearing to Unitholders, the Trustee benefits thereby.
Public Distribution of Units.
The Sponsor has qualified Units of each State Trust for sale in the State
for which such State Trust is named. Units will be sold through the
Underwriters, through dealers who are members of the National Association
of Securities Dealers, Inc. and through others. Sales may be made to or
through dealers at prices which represent discounts from the Public
Offering Price as set forth in the table below. Certain commercial banks
are making Units of the Trust available to their customers on an agency
basis. A portion of the sales charge paid by their customers is retained
by or remitted to the banks, in the amounts shown in the table below.
Under the Glass-Steagall Act, banks are prohibited from underwriting
Trust Units; however, the Glass-Steagall Act does permit certain agency
transactions and the banking regulators have indicated that these
particular agency transactions are permitted under such Act. In
addition, state securities laws on this issue may differ from the
interpretations of federal law expressed herein and banks and financial
institutions may be required to register as dealers pursuant to State
law.
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<TABLE>
<CAPTION>
DOLLAR WEIGHTED AVERAGE
YEARS TO MATURITY*
4 TO 7.99 8 TO 14.99 15 OR MORE
--------- ---------- ----------
AMOUNT OF INVESTMENT DISCOUNT PER UNIT (% OF PUBLIC OFFERING PRICE)
-------------------- ----------------------------------------------
<S> <C> <C> <C>
$1,000 to $99,999 2.00% 3.00% 4.00%
$100,000 to $499,999 1.75 2.75 3.50
$500,000 to $999,999 1.50 2.50 3.00
$1,000,000 or more 1.25 2.25 2.50
</TABLE>
---------------------
* If the dollar weighted average maturity of a Trust is from 1 to 3.99
years, the concession or agency commission is 1.00% of the Public
Offering Price.
In addition to such discounts, the Sponsor may, from time to time,
pay or allow an additional discount, in the form of cash or other
compensation, to dealers employing registered representatives who sell,
during a specified time period, a minimum dollar amount of Units of the
Trust and other unit investment trusts underwritten by the Sponsor. The
Sponsor reserves the right to change the levels of discounts at any time.
The difference between the discount allowed to firms and the sales charge
will be retained by the Sponsor. The Sponsor reserves the right to
reject, in whole or in part, any order for the purchase of Units.
Profits of Sponsor. The Sponsor will retain a
portion of the sales charge on each Unit sold representing the difference
between the Public Offering Price of the Units and the discounts allowed
to firms selling such Units. The Sponsor may realize additional profit
or loss as a result of the possible change in the daily evaluation of the
Municipal Bonds in the State Trusts, since the value of its inventory of
Units may increase or decrease.
MARKET FOR UNITS
While not obligated to do so, the Sponsor intends to, subject to
change at any time, maintain a market for Units of the State Trusts
offered hereby and to offer to purchase said Units at prices, as
determined by the Evaluator, based on the aggregate bid prices of the
underlying Municipal Bonds of such State Trusts, together with accrued
interest to the expected date of settlement. Accordingly, Unitholders
who wish to dispose of their Units should inquire of their broker or bank
as to current market prices of the Units in order to determine whether
there is in existence any price in excess of the redemption price and, if
so, the amount thereof prior to making a tender for redemption to the
Trustee.
The offering price of any Units resold by the Sponsor will be in
accord with that described in the currently effective Prospectus
describing such Units. Any profit or loss resulting from the resale of
such Units will belong to the Sponsor. The Sponsor may suspend or
discontinue purchase of Units of any State Trust if the supply of Units
exceeds demand, or for other business reasons.
REDEMPTION
A Unitholder who does not dispose of Units in the secondary market
described above may cause their Units to be redeemed by the Trustee by
making a written request to the Trustee, The Bank of New York, 101
Barclay Street, New York, New York 10286 and, in the case of Units
evidenced by a certificate, by tendering such certificate to the Trustee,
properly endorsed or accompanied by a written instrument or instruments
of transfer in a form satisfactory to the Trustee. Unitholders must sign
such written request, and such certificate or transfer instrument,
exactly as their names appear on the records of the Trustee and on any
certificate representing the Units to be redeemed. If the amount of the
redemption is $25,000 or less and the proceeds are payable to the
Unitholder(s) of record at the address of record, no signature guarantee
is necessary for redemptions by individual account owners (including
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joint owners). Additional documentation may be requested, and a
signature guarantee is always required, from corporations, executors,
administrators, trustees, guardians or associations. The signatures must
be guaranteed by a participant in the Securities Transfer Agents
Medallion Program ("STAMP") or such other guarantee program in addition
to, or in substitution for, STAMP, as may be acceptable to the Trustee.
A certificate should only be sent by registered or certified mail for the
protection of the Unitholder. Since tender of the certificate is
required for redemption when one has been issued, Units represented by a
certificate cannot be redeemed until the certificate representing the
Units has been received by the purchaser.
Redemption shall be made by the Trustee on the third business day
following the day on which a tender for redemption is received (the
"Redemption Date"), by payment of cash equivalent to the Redemption Price
for such State Trust, determined as set forth below under "Computation of
Redemption Price," as of the Evaluation Time stated under "Essential
Information" in Part Two, next following such tender, multiplied by the
number of Units being redeemed. The price received upon redemption might
be more or less than the amount paid by the Unitholder depending on the
value of the Municipal Bonds in the State Trust's portfolio at the time
of redemption. Any Units redeemed shall be cancelled and any undivided
fractional interest in the State Trust will be extinguished.
Under regulations issued by the Internal Revenue Service, the
Trustee is required to withhold a specified percentage of the principal
amount of a Unit redemption if the Trustee has not been furnishing the
redeeming Unitholder's tax identification number in the manner required
by such regulations. Any amount so withheld is transmitted to the
Internal Revenue Service and may be recovered by the Unitholder only when
filing a tax return. Under normal circumstances, the Trustee obtains the
Unitholder's tax identification number from the selling broker. However,
any time a Unitholder elects to tender Units for redemption, such
Unitholder should make sure that the Trustee has been provided a
certified tax identification number in order to avoid this possible "back-
up withholding." In the event the Trustee has not been previously
provided such number, one must be provided at the time redemption is
requested.
Any amounts paid on redemption representing interest shall be
withdrawn from the Interest Account of such State Trust to the extent
that funds are available for such purpose. All other amounts paid on
redemption shall be withdrawn from the Principal Account for such State
Trust. The Trustee is empowered to sell Municipal Bonds from the
portfolio of a State Trust in order to make funds available for the
redemption of Units of such State Trust. Such sale may be required when
Municipal Bonds would not otherwise be sold and might result in lower
prices than might otherwise be realized. To the extent Municipal Bonds
are sold, the size and diversity of such State Trust will be reduced.
The Trustee is irrevocably authorized in its discretion, if the
Sponsor does not elect to purchase any Units tendered for redemption, in
lieu of redeeming such Units, to sell such Units in over-the-counter
market for the account of tendering Unitholders at prices which will
return to such Unitholders amounts in cash, net after brokerage
commissions, transfer taxes and other charges, equal to or in excess of
the Redemption Price for such Units. In the event of any such sale, the
Trustee shall pay the net proceeds thereof to the Unitholders on the day
they would otherwise be entitled to receive payment of the Redemption
Price.
The right of redemption may be suspended and payment postponed
(1) for any period during which the New York Stock Exchange is closed,
other than customary weekend and holiday closings, or during which (as
determined by the Securities and Exchange Commission) trading on the New
York Stock Exchange is restricted; (2) for any period during which an
emergency exists as a result of which disposal by the Trustee of
Municipal Bonds is not reasonably practicable or it is not reasonably
practicable to fairly determine the value of the underlying Municipal
Bonds in accordance with the Agreement; or (3) for such other period as
the Securities and Exchange Commission may by order permit. The Trustee
is not liable to any person in any way for any loss or damage which may
result from any such suspension or postponement.
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Computation of Redemption Price.
The Redemption Price for Units of each State Trust is computed by the
Evaluator as of the Evaluation Time stated under "Essential Information"
on Part Two next occurring after the tendering of a Unit for redemption
and on any other business day desired by it, by:
A. adding (1) the principal cash on hand held or owed by the
State Trust; (2) the aggregate value of the Municipal Bonds held in
the State Trust, as determined by the Evaluator on the basis of bid
prices therefor; and (3) interest accrued and unpaid on the
Municipal Bonds in the State Trust as of the date of computation;
and
B. deducting therefrom (1) amounts representing any
applicable taxes or governmental charges payable out of the State
Trust and for which no deductions have been previously made for the
purpose of additions to the Reserve Account described under
"Expenses of the Trust"; (2) amounts representing estimated accrued
expenses of the State Trust including, but not limited to, unpaid
fees and expenses of the Trustee (including legal and auditing fees
and insurance costs), the Evaluator, the Sponsor and bond counsel,
if any; (3) cash held for distribution to Unitholders of record as
of the business day prior to the evaluation being made; and
(4) other liabilities incurred by the State Trust; and
C. finally, dividing the results of such computation by the
number of Units of the State Trust outstanding as of the date
thereof.
UNITHOLDERS
Ownership of Units. Ownership of Units of any
State Trust will not be evidenced by a certificate unless a Unitholder or
the Unitholder's registered broker/dealer or the clearing agent for such
broker/dealer makes a written request to the Trustee. Certificates, if
issued, will be so noted on the confirmation statement sent to the
Underwriter and broker. Non-receipt of such certificate(s) must be
reported to the Trustee within one year; otherwise, a 2% surety bond fee
will be required for replacement.
Units are transferable by making a written request to the Trustee
and, in the case of Units evidenced by a certificate, presenting and
surrendering such certificate to the Trustee properly endorsed or
accompanied by a written instrument or instruments of transfer.
Unitholders must sign such written request, and such certificate or
transfer instrument, exactly as their names appear on the records of the
Trustee and on any certificate representing the Units to be transferred.
Such signatures must be guaranteed by a participant in the Securities
Transfer Agents Medallion Program ("STAMP") or such other signature
guarantee program in addition to, or in substitution for, STAMP, as may
be acceptable to the Trustee.
Units may be purchased and certificates, if requested, will be
issued in denominations of one Unit or any multiple thereof subject to
any minimum investment requirement established by the Sponsor from time
to time. Any certificate issued will be numbered serially for
identification, issued in fully registered form and will be transferable
only on the books of the Trustee. The Trustee may require a Unitholder
to pay a fee for each certificate reissued or transferred, and to pay any
governmental charge that may be imposed in connection with each such
transfer or interchange. The Trustee at the present time does not intend
to charge for the normal transfer or interchange of certificates.
Destroyed, stolen, mutilated or lost certificates will be replaced upon
delivery to the Trustee of satisfactory indemnity (generally amounting to
not more than 3% of the market value of the Units), affidavit of loss,
evidence of ownership and payment of expenses incurred.
Distributions to Unitholders. Interest
Distributions: Interest received by each State Trust, including any
portion of the proceeds (including insurance proceeds) from a disposition
of Municipal Bonds which represents accrued interest, is credited by the
Trustee to the Interest Account for such State Trust. All other receipts
are credited by the Trustee to a separate Principal Account for the State
Trust. The Trustee normally has no cash for distribution to Unitholders
until it receives interest payments on the Bonds in the State Trust.
Since municipal interest usually is paid semi-annually, during the
initial months of the Trust, the Interest Account of each State Trust,
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consisting of accrued but uncollected interest and collected interest
(cash), will be predominantly the uncollected accrued interest that is
not available for distribution. On the dates set forth under "Essential
Information" for each State Trust in Part Two, the Trustee will commence
distributions, in part from funds advanced by the Trustee.
Thereafter, assuming the State Trust retains its original size and
composition, after deduction of the fees and expenses of the Trustee, the
Sponsor and Evaluator and reimbursements (without interest) to the
Trustee for any amount advanced to a State Trust, the Trustee will
normally distribute on each Interest Distribution Date (the fifteenth of
the month) or shortly thereafter to Unitholders of record of such State
Trust on the preceding Record Date. Unitholders of the State Trusts will
receive an amount substantially equal to one-twelfth, one-fourth or one-
half (depending on the distribution option selected except in series of
Kemper Defined Funds in which case only monthly distributions are
available) of such Unitholders' pro rata share of the estimated net
annual interest income to the Interest Account of such State Trust.
However, interest earned at any point in time will be greater than the
amount actually received by the Trustee and distributed to the
Unitholders. Therefore, there will always remain an item of accrued
interest that is added to the daily value of the Units. If Unitholders
of a State Trust sell or redeem all or a portion of their Units, they
will be paid their proportionate share of the accrued interest of such
State Trust to, but not including, the fifth business day after the date
of a sale or to the date of tender in the case of a redemption.
In order to equalize distributions and keep the undistributed
interest income of the Trusts at a low level, all Unitholders of record
on the first Record Date in such State Trust received an interest
distribution on the first Interest Distribution Date. Because the period
of time between the first Interest Distribution Date and the regular
distribution dates may not have been a full period, the first regular
distributions may have been partial distributions.
Persons who purchase Units between a Record Date and a Distribution
Date will receive their first distribution on the second Distribution
Date following their purchase of Units. Since interest on Municipal
Bonds in the State Trusts is payable at varying intervals, usually in
semi-annual installments, and distributions of income are made to
Unitholders at different intervals from receipt of interest, the interest
accruing to a State Trust may not be equal to the amount of money
received and available for distribution from the Interest Account.
Therefore, on each Distribution Date the amount of interest actually
deposited in the Interest Account of a State Trust and available for
distribution may be slightly more or less than the interest distribution
made. In order to eliminate fluctuations in interest distributions
resulting from variances, the Trustee is authorized by the Trust
Agreements to advance such amounts as may be necessary to provide
interest distributions of approximately equal amounts. The Trustee will
be reimbursed, without interest, for any such advances from funds
available in the Interest Account for such State Trust.
Unitholders of any series of Kemper Tax-Exempt Income Trust, Multi-
State Series or Ohio Tax-Exempt Bond Trust, Series 11-22 who desire to
receive distributions on a quarterly or semi-annual basis may elect to do
so, however, only monthly distributions are available for other Trusts.
Record Dates for monthly distributions will be the first day of each
month; Record Dates for quarterly distributions will be the first day of
January, April, July and October; and Record Dates for semi-annual
distributions will be the first day of January and July. The
distribution option selected by a Unitholder of any series of Kemper Tax-
Exempt Income Trust, Multi-State Series or Ohio Tax-Exempt Bond Trust,
Series 1-10 will remain in effect until changed by written notice to the
Trustee.
Unitholders of any series of Kemper Tax-Exempt Insured Income Trust,
Multi-State Series or Ohio Tax-Exempt Bond Trust, Series 11-22 purchasing
Units of the State Trusts in the secondary market will initially receive
distributions in accordance with the election of the prior owner.
Unitholders of such Trusts desiring to change their distribution option
may do so by sending written notice to the Trustee, together with their
certificate (if one was issued). Certificates should only be sent by
registered or certified mail to minimize the possibility of loss. If
written notice and any certificate are received by the Trustee not later
than January 1 or July 1 of a year, the change will become effective for
distributions commencing with February 15 or August 15, respectively, of
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that year. If notice is not received by the Trustee, the Unitholder will
be deemed to have elected to continue with the same option.
Principal Distributions. The Trustee will
distribute on each semi-annual Distribution Date (or, in the case of
certain Trusts, on each Distribution Date) or shortly thereafter, to each
Unitholder of record of the State Trust of the preceding Record Date, an
amount substantially equal to such Unitholder's pro rata share of the
cash balance, if any, in the Principal Account of such State Trust
computed as of the close of business on the preceding Record Date.
However, no distribution will be required if the balance in the Principal
Account is less than $1.00 per Unit (or $.001 per Unit for certain
Series). Except for Series of certain Trusts, if such balance is between
$5.00 and $10.00 per Unit, distributions will be made on each quarterly
Distribution Date; and if such balance exceeds $10.00 per Unit, such
amounts will be distributed on the next monthly Distribution Date.
Statements to Unitholders. With each
distribution, the Trustee will furnish each Unitholder a statement of the
amount of interest and the amount of other receipts, if any, which are
being distributed, expressed in each case as a dollar amount per Unit.
The accounts of each State Trust are required to be audited annually
by independent certified public accountants designated by the Sponsor,
unless the Trustee determines that such an audit would not be in the best
interest of the Unitholders of such State Trust. The accountants' report
will be furnished by the Trustee to any Unitholder of such State Trust
upon written request.
Within a reasonable period of time after the end of each calendar
year, the Trustee shall furnish to each person who at any time during the
calendar year was a Unitholder of a State Trust a statement covering the
calendar year, setting forth: A. As to the Interest Account: 1. The
amount of interest received on the Municipal Bonds in such State Trust,
and the percentage of such amount by states and territories in which the
issuers of such Municipal Bonds are located; 2. The amount paid from the
Interest Account of such State Trust representing accrued interest of any
Units redeemed; 3. The deductions from the Interest Account of such State
Trust for applicable taxes, if any, fees and expenses (including
insurance costs and auditing fees) of the Trustee, the Evaluator, the
Sponsor and of bond counsel, if any; 4. Any amounts credited by the
Trustee to a Reserve Account for such State Trust described under
"Expenses of the Trust"; and 5. The net amount remaining after such
payments and deductions, expressed both as a total dollar amount and a
dollar amount per Unit outstanding on the last business day of such
calendar year; B. As to the Principal Account: 1. The dates of the
maturity, liquidation or redemption of any of the Municipal Bonds in such
State Trust and the net proceeds received therefrom excluding any portion
credited to the Interest Account; 2. The amount paid from the Principal
Account of such Series representing the principal of any Units redeemed;
3. The deductions from the Principal Account of such Series for payment
of applicable taxes, if any, fees and expenses (including insurance costs
and auditing expenses) of the Trustee, the Evaluator, the Sponsor and of
bond counsel, if any; 4. Any amounts credited by the Trustee to a Reserve
Account for such Series described under "Expenses of the Trust"; and
5. The net amount remaining after distributions of principal and
deductions, expressed both as a dollar amount and as a dollar amount per
Unit outstanding on the last business day of such calendar year; C. The
following information: 1. A list of the Municipal Bonds in such State
Trust as of the last business day of such calendar year; 2. The number of
Units of such State Trust outstanding on the last business day of such
calendar year; 3. The Redemption Price of such State Trust based on the
last Trust Fund Evaluation made during such calendar year; and 4. The
amount actually distributed during such calendar year from the Interest
and Principal Accounts of such State Trust separately stated, expressed
both as total dollar amounts and as dollar amounts per Unit of such State
Trust outstanding on the Record Date for each such distribution.
Rights of UnitholdersRights of Unitholders. A Unitholder may at any
time tender Units to the Trustee for redemption. No Unitholder of a
State Trust shall have the right to control the operation and management
of the Trust or such State Trust in any manner, except to vote with
respect to amendment of the Agreement or termination of the Trust or such
State Trust. The death or incapacity of any Unitholder will not operate
to terminate the Trust or any State Trust nor entitle legal
representatives or heirs to claim an accounting or to bring any action or
proceeding in any court for partition or winding up of the Trust or any
State Trust.
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INVESTMENT SUPERVISION
The Sponsor may not alter the portfolio of the State Trusts by the
purchase, sale or substitution of Municipal Bonds, except in the special
circumstances noted below. Thus, with the exception of the redemption or
maturity of Municipal Bonds in accordance with their terms, and/or the
sale of Municipal Bonds to meet redemption requests, the assets of the
State Trusts will remain unchanged under normal circumstances.
The Sponsor may direct the Trustee to dispose of Municipal Bonds the
value of which has been affected by certain adverse events, including
institution of certain legal proceedings, a decline in their price or the
occurrence of other market factors, including advance refunding, so that
in the opinion of the Sponsor, the retention of such Municipal Bonds in a
State Trust would be detrimental to the interest of its Unitholders. The
proceeds from any such sales, exclusive of any portion which represents
accrued interest, will be credited to the Principal Account of such Trust
Fund for distribution to its Unitholders.
The Trustee is permitted to utilize the option to obtain Permanent
Insurance only in circumstances where the value added to the Municipal
Bonds exceeds the costs of acquiring such Permanent Insurance. Unless
such Permanent Insurance may be obtained at an acceptable price, the
Sponsor will not direct the Trustee to dispose of Municipal Bonds which
are in default or imminent danger of default but to retain such Municipal
Bonds in the portfolio so that the Trust may realize the benefits of the
insurance on the portfolio.
The Sponsor is required to instruct the Trustee to reject any offer
made by an issuer of the Municipal Bonds to issue new obligations in
exchange or substitution for any of such Municipal Bonds pursuant to a
refunding financing plan except that the Sponsor may instruct the Trustee
to accept or reject such an offer or to take any other action with
respect thereto as the Sponsor may deem proper if (1) the issuer is in
default with respect to such Bonds or (2) in the written opinion of the
Sponsor, the issuer will probably default with respect to such Bonds in
the reasonably foreseeable future. Any obligation so received in
exchange or substitution will be held by the Trustee subject to the terms
and conditions of the Trust Agreement to the same extent as Bonds
originally deposited thereunder. Within five days after the deposit of
obligations in exchange or substitution for underlying Bonds, the Trustee
is required to give notice thereof to each Unitholder, identifying the
Bonds eliminated and the Bonds substituted therefor.
The Trustee may sell Municipal Bonds, designated by the Sponsor,
from a State Trust for the purpose of redeeming Units of such State Trust
tendered for redemption and the payment of expenses. To the extent that
Municipal Bonds are sold which are current in payment of principal and
interest by one of the Insured Trust Funds in order to meet redemption
requests and defaulted Municipal Bonds are retained in the portfolio of
an Insured Trust Fund in order to preserve the related insurance
protection applicable to said Municipal Bonds, the overall quality of the
Municipal Bonds remaining in such Insured Trust Fund's portfolio will
tend to diminish. Because of such restrictions on the Trustee, under
certain circumstances, the Sponsor may seek a full or partial suspension
of the right of Unitholders to redeem their Units. See "Redemption."
ADMINISTRATION OF THE TRUST
The Trustee. The Trustee is The Bank of New York, a
trust company organized under the laws of New York. The Bank of New York
has its offices at 101 Barclay Street, New York, New York 10286,
telephone 1 (800) 701-8178. The Bank of New York is the successor
trustee to Investors Fiduciary Trust Company for certain State Trusts
under their respective Trust Agreements. The Bank of New York is subject
to supervision and examination by the Superintendent of Banks of the
State of New York and the Board of Governors of the Federal Reserve
System, and its deposits are insured by the Federal Deposit Insurance
Corporation to the extent permitted by law.
The Trustee, whose duties are ministerial in nature, has not
participated in selecting the portfolio of any Trust Fund. For
information relating to the responsibilities of the Trustee under the
Agreements, reference is made to the material set forth under
"Unitholders."
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In accordance with the Agreements, the Trustee shall keep proper
books of record and account of all transactions at its office. Such
records shall include the name and address of, and the number of Units
held by, every Unitholder of each Trust Fund. Such books and records
shall be open to inspection by any Unitholder of such Trust Fund at all
reasonable times during usual business hours. The Trustee shall make
such annual or other reports as may from time to time be required under
any applicable State or Federal statute, rule or regulation. The Trustee
shall keep a certified copy or duplicate original of the Agreement on
file in its office available for inspection at all reasonable times
during usual business hours by any Unitholder, together with a current
list of the Municipal Bonds held in the State Trust. Pursuant to the
Agreement, the Trustee may employ one or more agents for the purpose of
custody and safeguarding of Municipal Bonds comprising the portfolios.
Under the Agreement, the Trustee or any successor trustee may resign
and be discharged of the trust created by the Agreement by executing an
instrument in writing and filing the same with the Sponsor.
The Trustee or successor trustee must mail a copy of the notice of
resignation to all Unitholders then of record, not less than sixty days
before the date specified in such notice when such resignation is to take
effect. The Sponsor upon receiving notice of such resignation is
obligated to appoint a successor trustee promptly. If, upon such
resignation, no successor trustee has been appointed and has accepted the
appointment within thirty days after notification, the retiring Trustee
may apply to a court of competent jurisdiction for the appointment of a
successor. The Sponsor may at any time remove the Trustee with or
without cause and appoint a successor trustee as provided in the
Agreement. Notice of such removal and appointment shall be mailed to
each Unitholder by the Sponsor. Upon execution of a written acceptance
of such appointment by a successor trustee, all the rights, powers,
duties and obligations of the original Trustee shall vest in the
successor.
The Trustee shall be a corporation organized under the laws of the
United States or any state thereof, which is authorized under such laws
to exercise trust powers. The Trustee shall have at all times an
aggregate capital, surplus and undivided profits of not less than
$5,000,000.
The Evaluator. Ranson & Associates, Inc., the Sponsor,
also serves as Evaluator. The Evaluator may resign or be removed by the
Trustee, which is to use its best efforts to appoint a satisfactory
successor. Such resignation or removal shall become effective upon
acceptance of appointment by the successor evaluator. If, upon
resignation of the Evaluator, no successor has accepted appointment
within thirty days after notice of resignation, the Evaluator may apply
to a court of competent jurisdiction for the appointment of a successor.
Notice of such resignation or removal and appointment shall be mailed by
the Trustee to each Unitholder. At the present time, pursuant to a
contract with the Evaluator, Muller Data Corporation, a non-affiliated
firm regularly engaged in the business of evaluating, quoting or
appraising comparable securities, provides portfolio evaluations of the
Municipal Bonds in the State Trusts which are then reviewed by the
Evaluator. In the event the Sponsor is unable to obtain current
evaluations from Muller Data Corporation, it may make its own evaluations
or it may utilize the services of any other non-affiliated evaluator or
evaluators it deems appropriate.
Amendment and Termination. The Agreement
may be amended by the Trustee and the Sponsor without the consent of any
of the Unitholders: (1) to cure any ambiguity or to correct or
supplement any provision which may be defective or inconsistent; (2) to
change any provision thereof as may be required by the Securities and
Exchange Commission or any successor governmental agency; or (3) to make
such provisions as shall not adversely affect the interests of the
Unitholders. The Agreement with respect to any State Trust may also be
amended in any respect by the Sponsor and the Trustee, or any of the
provisions thereof may be waived, with the written consent of the holders
of Units representing 66-2/3% of the Units then outstanding of such State
Trust, provided that no such amendment or waiver will reduce the interest
in the State Trust of any Unitholder thereof without the consent of such
Unitholder or reduce the percentage of Units required to consent to any
such amendment or waiver without the consent of all Unitholders of such
State Trust. In no event shall the Agreement be amended to increase the
number of Units of a State Trust issuable thereunder or to permit, except
in accordance with the provisions of the Agreement, the acquisition of
any Municipal Bonds in addition to or in substitution for those in a
State Trust. The Trustee shall promptly notify Unitholders of the
substance of any such amendment.
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The Agreement provides that each State Trust shall terminate upon
the maturity, redemption or other disposition, as the case may be, of the
last of the Municipal Bonds held in such State Trust. If the value of
the State Trust shall be less than the applicable minimum value stated
under "Essential Information" in Part Two, the Trustee may, in its
discretion, and shall, when so directed by the Sponsor, terminate the
State Trust. A State Trust may be terminated at any time by the holders
of Units representing 66-2/3% of the Units thereof then outstanding.
Notwithstanding the foregoing, in no event shall any State Trust continue
beyond the mandatory termination date shown in Part Two under "Essential
Information." In the event of termination of a State Trust, written
notice thereof will be sent by the Trustee to all Unitholders of such
State Trust. Within a reasonable period after termination, the Trust
will sell any Municipal Bonds remaining in the State Trust and, after
paying all expenses and charges incurred by the State Trust, will
distribute to Unitholders thereof (upon surrender for cancellation of
certificates for Units, if issued) their pro rata share of the balances
remaining in the Interest and Principal Accounts of such State Trust.
Limitations on Liability. The Sponsor: The
Sponsor is liable for the performance of its obligations arising from its
responsibilities under the Agreement, but will be under no liability to
the Unitholders for taking any action or refraining from any action in
good faith pursuant to the Agreement or for errors in judgment, except in
cases of its own gross negligence, bad faith or willful misconduct. The
Sponsor shall not be liable or responsible in any way for depreciation or
loss incurred by reason of the sale of any Municipal Bonds.
The Trustee: The Agreement provides that the Trustee shall be under
no liability for any action taken in good faith in reliance upon prima
facie properly executed documents or for the disposition of monies,
Municipal Bonds, or Certificates except by reason of its own negligence,
bad faith or willful misconduct, nor shall the Trustee be liable or
responsible in any way for depreciation or loss incurred by reason of the
sale by the Trustee of any Municipal Bonds. In the event that the
Sponsor shall fail to act, the Trustee may act and shall not be liable
for any such action taken by it in good faith. The Trustee shall not be
personally liable for any taxes or other governmental charges imposed
upon or in respect of the Municipal Bonds or upon the interest thereon.
In addition, the Agreement contains other customary provisions limiting
the liability of the Trustee. The Trustee, whose duties are ministerial,
did not participate in the selection of Municipal Bonds for the State
Trusts.
The Evaluator: The Trustee and Unitholders may rely on any
evaluation furnished by the Evaluator and shall have no responsibility
for the accuracy thereof. The Agreement provides that the determinations
made by the Evaluator shall be made in good faith upon the basis of the
best information available to it; provided, however, that the Evaluator
shall be under no liability to the Trustee or Unitholders for errors in
judgment, but shall be liable only for its gross negligence, lack of good
faith or willful misconduct.
EXPENSES OF THE TRUST
Except with respect to those series indicated in the next sentence,
the Sponsor will not charge the Trust an advisory fee and will receive no
fee from the Trust for services performed as Sponsor. The Sponsor will
charge Kemper Tax-Exempt Income Trust, Multi-State Series 45 and
subsequent series an annual surveillance fee for services performed for
such Trust Funds in an amount not to exceed the amount shown under
"Essential Information" in Part Two, but in no event will such
compensation when combined with all compensation received from other unit
investment trusts for which the Sponsor acts as sponsor and provides
portfolio surveillance, exceed the aggregate cost to the Sponsor for
providing such services. Such fee shall be based on the total number of
Units of such State Trust Fund outstanding as of the January Record Date
for any annual period. The Sponsor and other Underwriters paid all the
expenses of creating and establishing the Trust, including the cost of
the initial preparation, printing and execution of the Prospectus,
Agreement and the certificates, legal and accounting expenses,
advertising and selling expenses, payment of closing fees, expenses of
the Trustee, initial evaluation fees during the initial public offering
and other out-of-pocket expenses.
The Trustee receives for its services a fee calculated on the basis
of the annual rate set forth under "Essential Information" in Part Two
per $1,000 principal amount of Municipal Bonds in each State Trust, based
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on the largest aggregate principal amount of Municipal Bonds in the State
Trust at any time during the monthly, quarterly or semi-annual period, as
appropriate. In no event shall the Trustee receive less than $2000
annual compensation in any single year for any Trust. The Trustee also
receives indirect benefits to the extent that it holds funds on deposit
in the various non-interest bearing accounts created pursuant to the
Agreement; however, the Trustee is also authorized by the Agreement to
make from time to time certain non-interest bearing advances to the State
Trusts. See "Unitholders-Distributions to Unitholders."
For evaluation of Municipal Bonds in the State Trusts, the Evaluator
receives a fee, calculated on an annual rate as set forth under
"Essential Information" in Part Two, based upon the largest aggregate
principal amount of Municipal Bonds in such State Trust at any time
during such monthly period.
The Trustee's, Sponsor's (if any) and Evaluator's fees for the State
Trusts are payable monthly on or before each Distribution Date by
deductions from the Interest Accounts thereof to the extent funds are
available and then from the Principal Accounts. Such fees may be
increased without approval of the Unitholders by amounts not exceeding a
proportionate increase in the Consumer Price Index entitled "All Services
Less Rent of Shelter," published by the United States Department of
Labor, or any equivalent index substituted therefor.
The following additional charges are or may be incurred by a State
Trust: (a) fees for the Trustee's extraordinary services; (b) expenses
of the Trustee (including legal and auditing expenses and insurance
costs, but not including any fees and expenses charged by any agent for
custody and safeguarding of Municipal Bonds) and of bond counsel, if any;
(c) various governmental charges; (d) expenses and costs of any action
taken by the Trustee to protect the Trust or such State Trust, or the
rights and interest of the Unitholders; (e) indemnification of the
Trustee for any loss, liability or expense incurred by it in the
administration of the Trust or such State Trust without negligence, bad
faith or willful misconduct on its part; (f) indemnification of the
Sponsor for any loss, liability or expense incurred in acting as Sponsor
of the State Trust without gross negligence, bad faith or willful
misconduct; and (g) expenditures incurred in contacting Unitholders upon
termination of the State Trust. The fees and expenses set forth herein
are payable out of the appropriate State Trust and, when owed to the
Trustee, are secured by a lien on such State Trust.
Fees and expenses of a State Trust shall be deducted from the
Interest Account thereof, or, to the extent funds are not available in
such Account, from the Principal Account. The Trustee may withdraw from
the Principal Account or the Interest Account of any State Trust such
amounts, if any, as it deems necessary to establish a reserve for any
taxes or other governmental charges or other extraordinary expenses
payable out of the State Trust. Amounts so withdrawn shall be credited
to a separate account maintained for the State Trust known as the Reserve
Account and shall not be considered a part of the State Trust when
determining the value of the Units until such time as the Trustee shall
return all or any part of such amounts to the appropriate account.
THE SPONSOR
Ranson & Associates, Inc., the Sponsor of the Trusts, is an
investment banking firm created in 1995 by a number of former owners and
employees of Ranson Capital Corporation. On November 26, 1996, Ranson &
Associates, Inc. purchased all existing unit investment trusts sponsored
by EVEREN Securities, Inc. Accordingly, Ranson & Associates is the
successor sponsor to unit investment trusts formerly sponsored by EVEREN
Unit Investment Trusts, a service of EVEREN Securities, Inc. Ranson &
Associates, Inc. is also the sponsor and successor sponsor of Series of
The Kansas Tax-Exempt Trust and Multi-State Series of The Ranson
Municipal Trust. Ranson & Associates, Inc. is the successor to a series
of companies, the first of which was originally organized in Kansas in
1935. During its history, Ranson & Associates, Inc. and its predecessors
have been active in public and corporate finance and have sold bonds and
unit investment trusts and maintained secondary market activities
relating thereto. At present, Ranson & Associates, Inc., which is a
member of the National Association of Securities Dealers, Inc., is the
sponsor to each of the above-named unit investment trusts and serves as
the financial advisor and as an underwriter for issuers in the Midwest
and Southwest, especially in Kansas, Missouri and Texas. The Company's
offices are located at 250 North Rock Road, Suite 150, Wichita, Kansas
67206-2241.
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If at any time the Sponsor shall fail to perform any of its duties
under the Agreement or shall become incapable of acting or shall be
adjudged a bankrupt or insolvent or its affairs are taken over by public
authorities, then the Trustee may (a) appoint a successor sponsor at
rates of compensation deemed by the Trustee to be reasonable and not
exceeding such reasonable amounts as may be prescribed by the Securities
and Exchange Commission, or (b) terminate the Agreement and liquidate the
Trust or any State Trust as provided therein or (c) continue to act as
Trustee without terminating the Agreement.
The foregoing financial information with regard to the Sponsor
relates to the Sponsor only and not to this Trust or any State Trust.
Such information is included in this Prospectus only for the purpose of
informing investors as to the financial responsibility of the Sponsor and
its ability to carry out its contractual obligations with respect to the
State Trusts. More comprehensive financial information can be obtained
upon request from the Sponsor.
LEGAL OPINIONS
The legality of the Units offered hereby and certain matters
relating to federal tax law were originally passed upon by Chapman and
Cutler, 111 West Monroe Street, Chicago, Illinois 60603, as counsel for
the Sponsor.
AUDITORS
The statement of net assets, including the Schedule of Investments,
appearing in Part Two of this Prospectus and Registration Statement, with
information pertaining to the specific Series of the Trust to which such
statement relates, has been audited by Ernst & Young LLP, independent
auditors, as set forth in their report appearing in Part Two and is
included in reliance upon such report given upon the authority of such
firm as experts in accounting and auditing.
DESCRIPTION OF SECURITIES RATINGS
Standard & Poor's, a division of The McGraw-Hill Companies; - A
brief description of the applicable Standard & Poor's rating symbols and
their meanings as described by Standard & Poor's follows:
A Standard & Poor's corporate or municipal bond rating is a current
assessment of the creditworthiness of an obligor with respect to a
specific debt obligation. This assessment may take into consideration
obligors such as guarantors, insurers, or lessees.
The bond rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or
suitability for a particular investor.
The ratings are based on current information furnished by the issuer
and obtained by Standard & Poor's from other sources it considers
reliable. Standard & Poor's does not perform an audit in connection with
any rating and may, on occasion, rely on unaudited financial information.
The ratings may be changed, suspended, or withdrawn as a result of
changes in, or unavailability of, such information, or for other
circumstances.
The ratings are based, in varying degrees, on the following
considerations:
I. Likelihood of default - capacity and willingness of the
obligor as to the timely payment of interest and repayment of
principal in accordance with the terms of the obligation;
II. Nature of and provisions of the obligation; and
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III. Protection afforded by, and relative position of, the
obligation in the event of bankruptcy, reorganization or other
arrangement, under the laws of bankruptcy and other laws affecting
creditors' rights.
AAA - Bonds rated AAA have the highest rating assigned by Standard &
Poor's to a debt obligation. Capacity to pay interest and repay
principal is extremely strong.
AA - Bonds rated AA have a very strong capacity to pay interest and
repay principal and differ from the highest rated issues only in small
degree.
A - Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than bonds in
higher rated categories.
BBB - Bonds rated BBB are regarded as having an adequate capacity to
pay interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for bonds in this category than for bonds in
higher rated categories.
Plus (+) or Minus (-): The ratings from "AA" to "A" may be modified
by the addition of a plus or minus sign to show relative standing within
the major rating categories.
Provisional Ratings: The letter "p" indicates the rating is
provisional. A provisional rating assumes the successful completion of
the project being financed by the bonds being rated and indicates that
payment of debt service requirements is largely or entirely dependent
upon the successful and timely completion of the project. This rating,
however, while addressing credit quality subsequent to completion of the
project, makes no comment on the likelihood of, or the risk of default
upon failure of, such completion. The investor should exercise his own
judgment with respect to such likelihood and risk.
Moody's Investors Service, Inc. - A brief description of the
applicable Moody's rating symbols and their meanings as described by
Moody's follows:
Aaa - Bonds which are rated Aaa are judged to be the best quality.
They carry the smallest degree of investment risk and are generally
referred to as "gilt edge." Interest payments are protected by a large
or by an exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues. Their safety is so absolute that with the occasional
exception of oversupply in a few specific instances, characteristically,
their market value is affected solely by money market fluctuations.
Aa - Bonds which are rated Aa are judged to be the high quality by
all standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than the best
bonds because margins of protection may not be as large as in Aaa
securities or fluctuations of protective elements may be of greater
amplitude or there may be other elements present which make the long term
risks appear somewhat larger than in Aaa securities. Their market value
is virtually immune to all but money market influences, with the
occasional exception of oversupply in a few specific instances.
A - Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations.
Factors giving security to principal and interest are considered
adequate, but elements may be present which suggest a susceptibility to
impairment sometime in the future. The market value of A-rated bonds may
be influenced to some degree by economic performance during a sustained
period of depressed business conditions, but, during periods of normalcy,
A-rated bonds frequently move in parallel with Aaa and Aa obligations,
with the occasional exception of oversupply in a few specific instances.
-98-
<PAGE>
A1 - Bonds which are rated A1 offer the maximum in security within
their quality group, can be bought for possible upgrading in quality, and
additionally, afford the investor an opportunity to gauge more precisely
the relative attractiveness of offerings in the marketplace.
Baa - Bonds which are rated Baa are considered as lower medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present
but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds
lack outstanding investment characteristics and, in fact, have
speculative characteristics as well. The market value of Baa-rated bonds
is more sensitive to changes in economic circumstances and, aside from
occasional speculative factors applying to some bonds of this class, Baa
market valuations move in parallel with Aaa, Aa and A obligations during
periods of economic normalcy, expect in instances of oversupply.
Conditional Ratings: Bonds rated "Con(-)" are ones for which the
security depends upon the completion of some act or the fulfillment of
some condition. These are bonds secured by (a) earnings of projects
under construction, (b) earnings of projects unseasoned in operation
experience, (c) rentals which begin when facilities are completed, or
(d) payments to which some other limiting condition attaches.
Parenthetical ratings denote probable credit stature upon completion of
construction or elimination of basis of condition.
Note: Moody's applies numerical modifiers, 1, 2, and 3 in each
generic rating classification from Aa through B in certain areas of its
bond rating system. The modifier 1 indicates that the security ranks in
the higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the issue ranks in
the lower end of its generic rating category.
-99-
<PAGE>
Kemper Tax-Exempt Insured Income Trust
Multi-State Series 54
Michigan Trust
Part Two
Dated December 28, 2000
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
NOTE: Part Two of this Prospectus May Not Be Distributed Unless Accompanied by
Part One.
<PAGE>
Kemper Tax-Exempt Insured Income Trust
Multi-State Series 54
Michigan Trust
Essential Information
As of August 31, 2000
Sponsor and Evaluator: Ranson & Associates, Inc.
Trustee: The Bank of New York Co.
<TABLE>
<CAPTION>
General Information
<S> <C>
Principal Amount of Municipal Bonds $2,735,000
Number of Units 2,765
Fractional Undivided Interest in the Trust per Unit 1/2,765
Principal Amount of Municipal Bonds per Unit $989.150
Public Offering Price:
Aggregate Bid Price of Municipal Bonds in the Portfolio $2,776,094
Aggregate Bid Price of Municipal Bonds per Unit $1,004.012
Cash per Unit (1) $(15.880)
Sales Charge of 4.712% (4.50% of Public Offering Price) $46.561
Public Offering Price per Unit (exclusive of
accrued interest) (2) $1,034.693
Redemption Price per Unit (exclusive of accrued interest) $988.132
Excess of Public Offering Price per Unit Over Redemption
Price per Unit $46.561
Minimum Value of the Trust under which Trust Agreement
may be terminated $715,000
</TABLE>
Date of Trust September 16, 1992
Mandatory Termination Date December 31, 2042
Evaluations for purpose of sale, purchase or redemption of Units are made as of
the close of business of the Sponsor next following receipt of an order for a
sale or purchase of Units or receipt by The Bank of New York Co. of Units
tendered for redemption.
[FN]
1. This amount, if any, represents principal cash or overdraft which is an
asset or liability of the Trust and is included in the Public Offering Price.
2. Units are offered at the Public Offering Price plus accrued interest to the
date of settlement (three business days after purchase). On August 31, 2000,
there was added to the Public Offering Price of $1,034.69, accrued interest to
the settlement date of September 6, 2000 of $7.15, $13.74 and $16.27 for a total
price of $1,041.84, $1,048.43 and $1,050.96 for the monthly, quarterly and
semiannual distribution options, respectively.
<PAGE>
Kemper Tax-Exempt Insured Income Trust
Multi-State Series 54
Michigan Trust
Essential Information (continued)
As of August 31, 2000
Sponsor and Evaluator: Ranson & Associates, Inc.
Trustee: The Bank of New York Co.
<TABLE>
<CAPTION>
Special Information Based on Various Distribution Options
Monthly Quarterly Semiannual
<S> <C> <C> <C>
--------- --------- ---------
Calculation of Estimated Net Annual
Interest Income per Unit:
Estimated Annual Interest Income $60.245479 $60.245479 $60.245479
Less: Estimated Annual Expense 2.643368 2.393658 2.139437
--------- --------- ---------
Estimated Net Annual Interest Income $57.602111 $57.851821 $58.106042
========= ========= =========
Calculation of Interest Distribution
per Unit:
Estimated Net Annual Interest Income $57.602111 $57.851821 $58.106042
Divided by 12, 4 and 2, respectively $4.800176 $14.462955 $29.053021
Estimated Daily Rate of Net Interest
Accrual per Unit $.160006 $.160700 $.161406
Estimated Current Return Based on Public
Offering Price (3) 5.57% 5.59% 5.62%
Estimated Long-Term Return (3) 3.49% 3.52% 3.54%
Trustee's Annual Fees per $1,000
Principal Amount $1.020900 $.819000 $.572100
Evaluation Fees per $1,000 Principal Amount $.300000 $.300000 $.300000
Trustee's Miscellaneous Expenses per Unit $.882912 $.832912 $.822912
Surveillance Fees per Unit $.200000 $.200000 $.200000
</TABLE>
Record and Computation Dates: First day of the month, as follows: monthly - each
month; quarterly - January, April, July and October; semiannual - January and
July.
Distribution Dates: Fifteenth day of the month, as follows: monthly - each
month; quarterly - January, April, July and October; semiannual - January and
July.
[FN]
3. The Estimated Long-Term Return and Estimated Current Return will vary. For
detailed explanation, see Part One of this prospectus.
<PAGE>
Report of Independent Auditors
Unitholders
Kemper Tax-Exempt Insured Income Trust
Multi-State Series 54
Michigan Trust
We have audited the accompanying statement of assets and liabilities of Kemper
Tax-Exempt Insured Income Trust Multi-State Series 54 Michigan Trust, including
the schedule of investments, as of August 31, 2000, and the related statements
of operations and changes in net assets for each of the three years in the
period then ended. These financial statements are the responsibility of the
Trust's sponsor. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
Our procedures included confirmation of investments owned as of August 31, 2000,
by correspondence with the custodial bank. An audit also includes assessing the
accounting principles used and significant estimates made by the sponsor, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Kemper Tax-Exempt Insured
Income Trust Multi-State Series 54 Michigan Trust at August 31, 2000, and the
results of its operations and changes in its net assets for the periods
indicated above in conformity with accounting principles generally accepted in
the United States.
Ernst & Young LLP
Kansas City, Missouri
December 14, 2000
<PAGE>
Kemper Tax-Exempt Insured Income Trust
Multi-State Series 54
Michigan Trust
Statement of Assets and Liabilities
August 31, 2000
<TABLE>
<CAPTION>
<S> <C> <C>
Assets
Municipal Bonds, at value (cost $2,683,650) $2,776,094
Interest receivable 38,011
---------
Total assets 2,814,105
Liabilities and net assets
Cash overdraft 35,799
Accrued liabilities 1,894
Redemptions payable 10,039
---------
47,732
Net assets, applicable to 2,765 Units outstanding:
Cost of Trust assets, exclusive of interest $2,683,650
Unrealized appreciation 92,444
Distributable funds (9,721)
--------- ---------
Net assets $2,766,373
=========
</TABLE>
[FN]
See accompanying notes to financial statements.
<PAGE>
Kemper Tax-Exempt Insured Income Trust
Multi-State Series 54
Michigan Trust
Statements of Operations
<TABLE>
<CAPTION>
Year ended August 31
2000 1999 1998
<S> <C> <C> <C>
--------- --------- ---------
Investment income - interest $178,273 $194,621 $203,828
Expenses:
Trustee's fees and related expenses 5,082 5,957 4,875
Evaluator's and portfolio
surveillance fees 1,479 1,604 1,680
--------- --------- ---------
Total expenses 6,561 7,561 6,555
--------- --------- ---------
Net investment income 171,712 187,060 197,273
Realized and unrealized gain (loss)
on investments:
Realized gain on investments 2,259 4,060 9,787
Unrealized appreciation (depreciation)
during the year (38,128) (102,114) 68,016
--------- --------- ---------
Net gain (loss) on investments (35,869) (98,054) 77,803
--------- --------- ---------
Net increase in net assets resulting
from operations $135,843 $89,006 $275,076
========= ========= =========
</TABLE>
[FN]
See accompanying notes to financial statements.
<PAGE>
Kemper Tax-Exempt Insured Income Trust
Multi-State Series 54
Michigan Trust
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Year ended August 31
2000 1999 1998
<S> <C> <C> <C>
--------- --------- ---------
Operations:
Net investment income $171,712 $187,060 $197,273
Realized gain on investments 2,259 4,060 9,787
Unrealized appreciation (depreciation)
on investments during the year (38,128) (102,114) 68,016
--------- --------- ---------
Net increase in net assets resulting
from operations 135,843 89,006 275,076
Distributions to Unitholders:
Net investment income (177,411) (188,952) (199,468)
Capital transactions:
Redemption of Units (424,693) (114,073) (194,053)
--------- --------- ---------
Total decrease in net assets (466,261) (214,019) (118,445)
Net assets:
At the beginning of the year 3,232,634 3,446,653 3,565,098
--------- --------- ---------
At the end of the year (including
distributable funds applicable to
Trust Units of $(9,721), $35,455
and $40,354 at August 31, 2000,
1999 and 1998, respectively) $2,766,373 $3,232,634 $3,446,653
========= ========= =========
Trust Units outstanding at the end of
the year 2,765 3,196 3,308
========= ========= =========
Net asset value per Unit at the end of
the year:
Monthly $999.07 $1,010.01 $1,040.41
========= ========= =========
Quarterly $1,000.90 $1,011.83 $1,042.22
========= ========= =========
Semiannual $1,003.43 $1,014.37 $1,044.82
========= ========= =========
</TABLE>
[FN]
See accompanying notes to financial statements.
<PAGE>
<TABLE>
Kemper Tax-Exempt Insured Income Trust
Multi-State Series 54
Michigan Trust
Schedule of Investments
August 31, 2000
<CAPTION>
Coupon Maturity Redemption Principal
Name of Issuer and Title of Bond (4) (6) Rate Date Provisions(2) Rating(1) Amount Value(3)
<S> <C> <C> <C> <C> <C> <C>
--------------------- --- --- ----- --- --------- ---
+City of Detroit, Michigan, Sewage Disposal 6.625% 7/01/2021 2001 @ 102 AAA $375,000 $389,370
System Revenue Bonds, Series 1991. Insured by FGIC.
+County of Grand Traverse Hospital Finance 6.250 7/01/2022 2002 @ 102 AAA 330,000 347,068
Authority, Hospital Revenue Refunding Bonds
(Munson Healthcare Obligated Group), Series
1992A. Insured by AMBAC.
#County of Grand Traverse Hospital Finance 6.250 7/01/2022 2013 @ 100 S.F. AAA 170,000 173,795
Authority, Hospital Revenue Refunding Bonds 2002 @ 102
(Munson Healthcare Obligated Group), Series 1992A.
Insured by AMBAC.
Kalkaska Public Schools, County of Kalkaska, 0.000 5/01/2014 Non-Callable AAA 85,000 40,851
State of Michigan, 1991 School Building and
Site Bonds (General Obligation-Unlimited Tax).
Insured by AMBAC. (5)
Michigan State Hospital Finance Authority, 6.250 2/15/2022 2004 @ 100 S.F. AAA 250,000 255,090
Hospital Revenue and Refunding Bonds (Sisters 2002 @ 102
of Mercy Health Corp. Obligated Group),
Series 1992. Insured by FSA.
+Romulus Community Schools, County of Wayne, 6.400 5/01/2017 2002 @ 102 AAA 390,000 410,003
State of Michigan, 1992 School Building and Site
and Refunding Bonds, Series II. Insured by FGIC.
City of Saginaw Hospital Finance Authority 6.000 7/01/2021 2018 @ 100 S.F. AAA 265,000 265,853
(St Luke's Hospital), Hospital Revenue Refunding 2001 @ 100
Bonds, Series 1991C. Insured by MBIA.
Board of Trustees of Western Michigan University, 6.500 7/15/2021 2012 @ 100 S.F. AAA 75,000 77,282
General Revenue Bonds, Series 1991B. 2001 @ 102
Insured by AMBAC.
</TABLE>
<PAGE>
<TABLE>
Kemper Tax-Exempt Insured Income Trust
Multi-State Series 54
Michigan Trust
Schedule of Investments (continued)
August 31, 2000
<CAPTION>
Coupon Maturity Redemption Principal
Name of Issuer and Title of Bond (4) (6) Rate Date Provisions(2) Rating(1) Amount Value(3)
<S> <C> <C> <C> <C> <C> <C>
--------------------- --- --- ----- --- --------- ---
Breitung Township School District, County of 6.300% 5/01/2015 2013 @ 100 S.F. AAA $375,000 $390,435
Dickinson, Michigan, 1992 Refunding Bonds, 2002 @ 102
General Obligation - Unlimited Tax. Insured by MBIA.
School District of the City of Holland, Counties 6.375 5/01/2010 2008 @ 100 S.F. AAA 400,000 417,328
of Ottawa and Allegan, State of Michigan, 1992 2002 @ 102
General Obligation-Unlimited Tax. Insured by AMBAC.
Reeths-Puffer Schools, County of Muskegon, State 0.000 5/01/2015 Non-Callable AAA 20,000 9,019
of Michigan, 1992 Refunding Capital Appreciation
Bonds, General Obligation-Unlimited Tax.
Insured by FGIC. (5)
--------- ---------
$2,735,000 $2,776,094
========= =========
</TABLE>
[FN]
See accompanying notes to Schedule of Investments.
<PAGE>
Kemper Tax-Exempt Insured Income Trust
Multi-State Series 54
Michigan Trust
Notes to Schedule of Investments
1. All ratings are by Standard & Poor's Corporation, unless marked with the
symbol "*", in which case the rating is by Moody's Investors Service, Inc. The
symbol "NR" indicates Bonds for which no rating is available.
2. There is shown under this heading the year in which each issue of Bonds is
initially redeemable and the redemption price for that year or, if currently
redeemable, the redemption price currently in effect; unless otherwise
indicated, each issue continues to be redeemable at declining prices thereafter,
but not below par value. In addition, certain Bonds in the Portfolio may be
redeemed in whole or in part other than by operation of the stated redemption or
sinking fund provisions under certain unusual or extraordinary circumstances
specified in the instruments setting forth the terms and provisions of such
Bonds. "S.F." indicates a sinking fund is established with respect to an issue
of Bonds. Redemption pursuant to call provisions generally will, and redemption
pursuant to sinking fund provisions may, occur at times when the redeemed Bonds
have a valuation which represents a premium over the call price or par.
To the extent that the Bonds were deposited in the Trust at a price higher
than the price at which they are redeemed, this will represent a loss of capital
when compared with the original Public Offering Price of the Units. To the
extent that the Bonds were acquired at a price lower than the redemption price,
this may represent an increase in capital when compared with the original Public
Offering Price of the Units. Distributions of net income will generally be
reduced by the amount of the income which would otherwise have been paid with
respect to redeemed Bonds and, unless utilized to pay for Units tendered for
redemption, there will be distributed to Unitholders the principal amount and
any premium received on such redemption. In this event the estimated current
return and estimated long-term return may be affected by such redemptions.
3. See Note 1 to the accompanying financial statements for a description of the
method of determining cost and value.
4. Insurance on the Bonds in the Trust was obtained by the issuers of such
Bonds.
5. These Bonds have been purchased at a discount from the par value because
there is no stated interest income thereon. Such Bonds are normally described
as "zero coupon" Bonds. Over the life of the Bonds the values increase, so that
upon maturity, the holders of the Bonds will receive 100% of the principal
amount thereof.
6. The securities preceded by (+) are secured by, and payable from, escrowed
U.S. Government securities.
7. The security preceded by (#) is of the same issue as another Bond in the
Trust.
See accompanying notes to financial statements.
<PAGE>
Kemper Tax-Exempt Insured Income Trust
Multi-State Series 54
Michigan Trust
Notes to Financial Statements
1. Significant Accounting Policies
Trust Sponsor and Evaluator
Ranson & Associates, Inc. serves as the Trust's sponsor and evaluator.
Valuation of Municipal Bonds
Municipal Bonds (Bonds) are stated at bid prices as determined by Ranson &
Associates, Inc., the "Evaluator" of the Trust. The aggregate bid prices of the
Bonds are determined by the Evaluator based on (a) current bid prices of the
Bonds, (b) current bid prices for comparable bonds, (c) appraisal, (d)
insurance, or (e) any combination of the above (See Note 4 - Insurance).
Cost of Municipal Bonds
Cost of the Trust's Bonds was based on the offering prices of the Bonds on
September 16, 1992 (Date of Deposit). The premium or discount (including any
original issue discount) existing at September 16, 1992, is not being
amortized. Realized gain (loss) from Bond transactions is reported on an
identified cost basis.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires the Trust's sponsor to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from such
estimates.
2. Unrealized Appreciation and Depreciation
Following is an analysis of net unrealized appreciation at August 31, 2000:
<TABLE>
<CAPTION>
<S> <C>
Gross unrealized appreciation $92,444
Gross unrealized depreciation -
----------
Net unrealized appreciation $92,444
=========
</TABLE>
3. Federal Income Taxes
The Trust is not an association taxable as a corporation for federal income tax
purposes. Each Unitholder is considered to be the owner of a pro rata portion
of the Trust under Subpart E, Subchapter J of Chapter 1 of the Internal Revenue
Code of 1986, as amended. Accordingly, no provision has been made for federal
income taxes.
<PAGE>
Kemper Tax-Exempt Insured Income Trust
Multi-State Series 54
Michigan Trust
Notes to Financial Statements (continued)
4. Other Information
Cost to Investors
The cost to original investors of Units of the Trust was based on the aggregate
offering price of the Bonds on the date of an investor's purchase, plus a sales
charge of 3.90% of the Public Offering Price (equivalent to 4.058% of the net
amount invested). The Public Offering Price for secondary market transactions
is based on the aggregate bid price of the Bonds plus or minus a pro rata share
of cash or overdraft in the Principal Account, if any, and daily accrued
interest on the date of an investor's purchase, plus a sales charge of 4.50% of
the Public Offering Price (equivalent to 4.712% of the net amount invested).
Insurance
Insurance guaranteeing the payment of all principal and interest on the Bonds in
the portfolio has been obtained from independent companies by the respective
issuers of such Bonds. Insurance obtained by a Bond issuer is effective as long
as such Bonds are outstanding. As a result of such insurance, the Units of the
Trust have received a rating of "AAA" by Standard & Poor's Corporation. No
representation is made as to any insurer's ability to meet its commitments.
Distributions
Distributions of net investment income to Unitholders are declared and paid in
accordance with the option (monthly, quarterly or semiannual) selected by the
investor. Income distributions, on a record date basis, are as follows:
<TABLE>
<CAPTION>
Year ended Year ended Year ended
Distribution August 31, 2000 August 31, 1999 August 31, 1998
Plan Per Unit Total Per Unit Total Per Unit Total
<S> <C> <C> <C> <C> <C> <C>
----- --------- ---------- --------- ---------- --------- ----------
Monthly $57.48 $101,427 $57.33 $109,355 $57.58 $114,214
Quarterly 57.70 24,293 57.55 24,946 57.96 26,921
Semiannual 57.97 47,411 57.89 52,972 58.24 55,442
---------- ---------- ----------
$173,131 $187,273 $196,577
========= ========= =========
</TABLE>
In addition, the Trust redeemed Units with proceeds from the sale of Bonds as
follows:
<TABLE>
<CAPTION>
Year ended August 31
2000 1999 1998
<S> <C> <C> <C>
---------- ---------- ----------
Principal portion $424,693 $114,073 $194,053
Net interest accrued 4,280 1,679 2,891
---------- ---------- ----------
$428,973 $115,752 $196,944
========= ========= =========
Units 431 112 189
========= ========= =========
</TABLE>
<PAGE>
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Independent Auditors"
and to the use of our report dated December 14, 2000, in this Post-Effective
Amendment to the Registration Statement (Form S-6) and related Prospectus of
Kemper Tax-Exempt Insured Income Trust Multi-State Series 54 Michigan Trust
dated December 28, 2000.
Ernst & Young LLP
Kansas City, Missouri
December 28, 2000
<PAGE>
Kemper Tax-Exempt Insured Income Trust
Multi-State Series 54V
New York Trust
Part Two
Dated December 28, 2000
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
NOTE: Part Two of this Prospectus May Not Be Distributed Unless Accompanied by
Part One.
<PAGE>
Kemper Tax-Exempt Insured Income Trust
Multi-State Series 54V
New York Trust
Essential Information
As of August 31, 2000
Sponsor and Evaluator: Ranson & Associates, Inc.
Trustee: The Bank of New York Co.
<TABLE>
<CAPTION>
General Information
<S> <C>
Principal Amount of Municipal Bonds $3,280,000
Number of Units 3,394
Fractional Undivided Interest in the Trust per Unit 1/3,394
Principal Amount of Municipal Bonds per Unit $966.411
Public Offering Price:
Aggregate Bid Price of Municipal Bonds in the Portfolio $3,347,522
Aggregate Bid Price of Municipal Bonds per Unit $986.306
Cash per Unit (1) $(4.003)
Sales Charge of 2.041% (2.00% of Public Offering Price) $20.049
Public Offering Price per Unit (exclusive of accrued
interest) (2) $1,002.352
Redemption Price per Unit (exclusive of accrued interest) $982.303
Excess of Public Offering Price per Unit Over Redemption
Price per Unit $20.049
Minimum Value of the Trust under which Trust Agreement
may be terminated $955,000
</TABLE>
Date of Trust September 16, 1992
Mandatory Termination Date December 31, 2042
Evaluations for purpose of sale, purchase or redemption of Units are made as
of the close of business of the Sponsor next following receipt of an order for
a sale or purchase of Units or receipt by The Bank of New York Co. of Units
tendered for redemption.
[FN]
1. This amount, if any, represents principal cash or overdraft which is an
asset or liability of the Trust and is included in the Public Offering Price.
2. Units are offered at the Public Offering Price plus accrued interest to the
date of settlement (three business days after purchase). On August 31, 2000,
there was added to the Public Offering Price of $1,002.35, accrued interest to
the settlement date of September 6, 2000 of $6.13, $14.15 and $14.31 for a total
price of $1,008.48, $1,016.50 and $1,016.66 for the monthly, quarterly and
semiannual distribution options, respectively.
<PAGE>
Kemper Tax-Exempt Insured Income Trust
Multi-State Series 54V
New York Trust
Essential Information (continued)
As of August 31, 2000
Sponsor and Evaluator: Ranson & Associates, Inc.
Trustee: The Bank of New York Co.
<TABLE>
<CAPTION>
Special Information Based on Various Distribution Options
Monthly Quarterly Semiannual
<S> <C> <C> <C>
--------- --------- ---------
Calculation of Estimated Net Annual
Interest Income per Unit (3):
Estimated Annual Interest Income $51.859163 $51.859163 $51.859163
Less: Estimated Annual Expense 2.397859 2.272740 1.914133
--------- --------- ---------
Estimated Net Annual Interest Income $49.461304 $49.586423 $49.945030
========= ========= =========
Calculation of Interest Distribution
per Unit:
Estimated Net Annual Interest Income $49.461304 $49.586423 $49.945030
Divided by 12, 4 and 2, respectively $4.121775 $12.396606 $24.972515
Estimated Daily Rate of Net Interest
Accrual per Unit $.137393 $.137740 $.138736
Estimated Current Return Based on Public
Offering Price (3) 4.93% 4.95% 4.98%
Estimated Long-Term Return (3) 3.61% 3.62% 3.66%
Trustee's Annual Fees per
$1,000 Principal Amount $1.020900 $.819000 $.572100
Evaluation Fees per
$1,000 Principal Amount $.300000 $.300000 $.300000
Trustee's Miscellaneous Expenses per Unit $.715080 $.785080 $.665080
Surveillance Fees per Unit $.200000 $.200000 $.200000
</TABLE>
Record and Computation Dates: First day of the month, as follows: monthly - each
month; quarterly - January, April, July and October; semiannual - January and
July.
Distribution Dates: Fifteenth day of the month, as follows: monthly - each
month; quarterly - January, April, July and October; semiannual - January and
July.
[FN]
3. The Estimated Long-Term Return and Estimated Current Return will vary. For
detailed explanation, see Part One of this prospectus.
<PAGE>
Report of Independent Auditors
Unitholders
Kemper Tax-Exempt Insured Income Trust
Multi-State Series 54V
New York Trust
We have audited the accompanying statement of assets and liabilities of Kemper
Tax-Exempt Insured Income Trust Multi-State Series 54V New York Trust, including
the schedule of investments, as of August 31, 2000, and the related statements
of operations and changes in net assets for each of the three years in the
period then ended. These financial statements are the responsibility of the
Trust's sponsor. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
Our procedures included confirmation of investments owned as of August 31, 2000,
by correspondence with the custodial bank. An audit also includes assessing the
accounting principles used and significant estimates made by the sponsor, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Kemper Tax-Exempt Insured
Income Trust Multi-State Series 54V New York Trust at August 31, 2000, and the
results of its operations and changes in its net assets for the periods
indicated above in conformity with accounting principles generally accepted in
the United States.
Ernst & Young LLP
Kansas City, Missouri
December 14, 2000
<PAGE>
Kemper Tax-Exempt Insured Income Trust
Multi-State Series 54V
New York Trust
Statement of Assets and Liabilities
August 31, 2000
<TABLE>
<CAPTION>
<S> <C> <C>
Assets
Municipal Bonds, at value (cost $3,219,573) $3,347,522
Interest receivable 26,378
---------
Total assets 3,373,900
Liabilities and net assets
Cash overdraft 1,786
Accrued liabilities 1,991
---------
3,777
Net assets, applicable to 3,394 Units outstanding:
Cost of Trust assets, exclusive of interest $3,219,573
Unrealized appreciation 127,949
Distributable funds 22,601
--------- ---------
Net assets $3,370,123
=========
</TABLE>
[FN]
See accompanying notes to financial statements.
<PAGE>
Kemper Tax-Exempt Insured Income Trust
Multi-State Series 54V
New York Trust
Statements of Operations
<TABLE>
<CAPTION>
Year ended August 31
2000 1999 1998
<S> <C> <C> <C>
--------- --------- ---------
Investment income - interest $184,426 $199,485 $216,565
Expenses:
Trustee's fees and related expenses 5,578 6,228 5,281
Evaluator's and portfolio
surveillance fees 1,742 1,877 2,028
--------- --------- ---------
Total expenses 7,320 8,105 7,309
--------- --------- ---------
Net investment income 177,106 191,380 209,256
Realized and unrealized gain (loss) on
investments:
Realized gain on investments 102 9,258 11,312
Unrealized appreciation (depreciation)
during the year (38,516) (101,705) 130,988
--------- --------- ---------
Net gain (loss) on investments (38,414) (92,447) 142,300
--------- --------- ---------
Net increase in net assets resulting
from operations $138,692 $98,933 $351,556
========= ========= =========
</TABLE>
[FN]
See accompanying notes to financial statements.
<PAGE>
o
Kemper Tax-Exempt Insured Income Trust
Multi-State Series 54V
New York Trust
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Year ended August 31
2000 1999 1998
<S> <C> <C> <C>
--------- --------- ---------
Operations:
Net investment income $177,106 $191,380 $209,256
Realized gain on investments 102 9,258 11,312
Unrealized appreciation (depreciation)
on investments during the year (38,516) (101,705) 130,988
--------- --------- ---------
Net increase in net assets resulting
from operations 138,692 98,933 351,556
Distributions to Unitholders:
Net investment income (181,400) (196,329) (212,142)
Capital transactions:
Redemption of Units (265,524) (286,077) (297,062)
--------- --------- ---------
Total decrease in net assets (308,232) (383,473) (157,648)
Net assets:
At the beginning of the year 3,678,355 4,061,828 4,219,476
--------- --------- ---------
At the end of the year (including
distributable funds applicable to
Trust Units of $22,601, $28,802
and $40,233 at August 31, 2000, 1999
and 1998, respectively) $3,370,123 $3,678,355 $4,061,828
========= ========= =========
Trust Units outstanding at the end of
the year 3,394 3,666 3,949
========= ========= =========
Net asset value per Unit at the end of
the year:
Monthly $991.34 $1,001.67 $1,026.85
========= ========= =========
Quarterly $995.24 $1,005.66 $1,030.85
========= ========= =========
Semiannual $995.40 $1,005.75 $1,030.97
========= ========= =========
</TABLE>
[FN]
See accompanying notes to financial statements.
<PAGE>
<TABLE>
Kemper Tax-Exempt Insured Income Trust
Multi-State Series 54V
New York Trust
Schedule of Investments
August 31, 2000
<CAPTION>
Coupon Maturity Redemption Principal
Name of Issuer and Title of Bond (6) (7) Rate Date Provisions(2) Rating(1) Amount Value(3)
<S> <C> <C> <C> <C> <C> <C>
--------------------- --- --- ----- --- --------- ---
County of Erie, New York, General Obligation 6.000% 1/15/2005 2002 @ 102 AAA $350,000 $363,598
Serial Bonds (Public Improvement Serial Bonds),
1992. Insured by FGIC.
Hyde Park, New York Fire & Water District, 5.900 9/15/2004 2002 @ 102 AAA 200,000 209,172
Dutchess County, New York, Water Improvement
Serial Bonds, 1992. Insured by AMBAC.
Metropolitan Transportation Authority (New York), 5.900 7/01/2004 2002 @ 102 AAA 330,000 345,408
Commuter Facility Revenue Bonds, Series 1992B.
Insured by MBIA.
County of Nassau, New York, General Obligation 5.500 7/15/2005 2002 @ 101.5 AAA 335,000 345,331
Bonds (Serial General Improvement Bonds, Series K).
Insured by MBIA.
New York City Municipal Water Finance Authority, 0.000 6/15/2004 Non-Callable AAA 200,000 167,458
Water and Sewer System Revenue Bonds, Fiscal 1990
Series A. Insured by FGIC. (5)
#New York City Municipal Water Finance Authority, 0.000 6/15/2004 Non-Callable AAA 30,000 25,295
Water and Sewer System Revenue Bonds, Fiscal 1993
Series A. Insured by MBIA. (5)
#New York City Municipal Water Finance Authority, 5.800 6/15/2003 2002 @ 101.5 AAA 320,000 332,067
Water and Sewer System Revenue Bonds, Fiscal 1993
Series A. Insured by AMBAC.
Dormitory Authority of the State of New York, 5.600 7/01/2002 2001 @ 102 AAA 320,000 326,454
Teachers College, Insured Revenue Bonds,
Series 1992. Insured by MBIA.
</TABLE>
<PAGE>
<TABLE>
Kemper Tax-Exempt Insured Income Trust
Multi-State Series 54V
New York Trust
Schedule of Investments (continued)
August 31, 2000
<CAPTION>
Coupon Maturity Redemption Principal
Name of Issuer and Title of Bond (6) (7) Rate Date Provisions(2) Rating(1) Amount Value(3)
<S> <C> <C> <C> <C> <C> <C>
--------------------- --- --- ----- --- --------- ---
New York State Medical Care Facilities Finance 5.500% 2/15/2003 2002 @ 102 AAA $315,000 $321,395
Agency, Mental Health Services Facilities
Improvement Revenue Bonds, Series D. Insured by AMBAC.
The Port of New York and New Jersey Consolidated 5.500 8/01/2005 2002 @ 101 AAA 270,000 277,042
Bonds, Eighty-Second Series. Insured by MBIA.
The City of Rochester, New York, General Obligation 5.700 8/15/2005 Non-Callable AAA 340,000 357,309
Series Bonds-1992, Series A. Insured by AMBAC.
Triborough Bridge and Tunnel Authority, New York, 6.400 1/01/2003 2001 @ 102 AAA 270,000 276,993
Special Obligation Refunding Bonds, Series 1991A.
Insured by MBIA.
--------- ---------
$3,280,000 $3,347,522
========= =========
</TABLE>
[FN]
See accompanying notes to Schedule of Investments.
<PAGE>
Kemper Tax-Exempt Insured Income Trust
Multi-State Series 54V
New York Trust
Notes to Schedule of Investments
1. All ratings are by Standard & Poor's Corporation, unless marked with the
symbol "*", in which case the rating is by Moody's Investors Service, Inc. The
symbol "NR" indicates Bonds for which no rating is available.
2. There is shown under this heading the year in which each issue of Bonds is
initially redeemable and the redemption price for that year or, if currently
redeemable, the redemption price currently in effect; unless otherwise
indicated, each issue continues to be redeemable at declining prices thereafter,
but not below par value. In addition, certain Bonds in the Portfolio may be
redeemed in whole or in part other than by operation of the stated redemption or
sinking fund provisions under certain unusual or extraordinary circumstances
specified in the instruments setting forth the terms and provisions of such
Bonds. "S.F." indicates a sinking fund is established with respect to an issue
of Bonds. Redemption pursuant to call provisions generally will, and redemption
pursuant to sinking fund provisions may, occur at times when the redeemed Bonds
have a valuation which represents a premium over the call price or par.
To the extent that the Bonds were deposited in the Trust at a price higher
than the price at which they are redeemed, this will represent a loss of capital
when compared with the original Public Offering Price of the Units. To the
extent that the Bonds were acquired at a price lower than the redemption price,
this may represent an increase in capital when compared with the original Public
Offering Price of the Units. Distributions of net income will generally be
reduced by the amount of the income which would otherwise have been paid with
respect to redeemed Bonds and, unless utilized to pay for Units tendered for
redemption, there will be distributed to Unitholders the principal amount and
any premium received on such redemption. In this event the estimated current
return and estimated long-term return may be affected by such redemptions.
3. See Note 1 to the accompanying financial statements for a description of the
method of determining cost and value.
4. Insurance on the Bonds in the Trust was obtained by the issuers of such
Bonds.
5. This Bond has been purchased at a discount from the par value because there
is no stated interest income thereon. Such Bond is normally described as a
"zero coupon" Bond. Over the life of the Bond the value increases, so that upon
maturity, the holders of the Bond will receive 100% of the principal amount
thereof.
6. The securities preceded by (#) are of the same issue as another Bond in the
Trust.
See accompanying notes to financial statements.
<PAGE>
Kemper Tax-Exempt Insured Income Trust
Multi-State Series 54V
New York Trust
Notes to Financial Statements
1. Significant Accounting Policies
Trust Sponsor and Evaluator
Ranson & Associates, Inc. serves as the Trust's sponsor and evaluator.
Valuation of Municipal Bonds
Municipal Bonds (Bonds) are stated at bid prices as determined by Ranson &
Associates, Inc., the "Evaluator" of the Trust. The aggregate bid prices of the
Bonds are determined by the Evaluator based on (a) current bid prices of the
Bonds, (b) current bid prices for comparable bonds, (c) appraisal, (d)
insurance, or (e) any combination of the above (See Note 4 - Insurance).
Cost of Municipal Bonds
Cost of the Trust's Bonds was based on the offering prices of the Bonds on
September 16, 1992 (Date of Deposit). The premium or discount (including any
original issue discount) existing at September 16, 1992, is not being
amortized. Realized gain (loss) from Bond transactions is reported on an
identified cost basis.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires the Trust's sponsor to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from such
estimates.
2. Unrealized Appreciation and Depreciation
Following is an analysis of net unrealized appreciation at August 31, 2000:
<TABLE>
<CAPTION>
<S> <C>
Gross unrealized appreciation $140,933
Gross unrealized depreciation (12,984)
----------
Net unrealized appreciation $127,949
=========
</TABLE>
3. Federal Income Taxes
The Trust is not an association taxable as a corporation for federal income tax
purposes. Each Unitholder is considered to be the owner of a pro rata portion
of the Trust under Subpart E, Subchapter J of Chapter 1 of the Internal Revenue
Code of 1986, as amended. Accordingly, no provision has been made for federal
income taxes.
<PAGE>
Kemper Tax-Exempt Insured Income Trust
Multi-State Series 54V
New York Trust
Notes to Financial Statements (continued)
4. Other Information
Cost to Investors
The cost to original investors of Units of the Trust was based on the aggregate
offering price of the Bonds on the date of an investor's purchase, plus a sales
charge of 3.75% of the Public Offering Price (equivalent to 3.896% of the net
amount invested). The Public Offering Price for secondary market transactions
is based on the aggregate bid price of the Bonds plus or minus a pro rata share
of cash or overdraft in the Principal Account, if any, and daily accrued
interest on the date of an investor's purchase, plus a sales charge of 2.00% of
the Public Offering Price (equivalent to 2.041% of the net amount invested).
Insurance
Insurance guaranteeing the payment of all principal and interest on the Bonds in
the portfolio has been obtained from independent companies by the respective
issuers of such Bonds. Insurance obtained by a Bond issuer is effective as long
as such Bonds are outstanding. As a result of such insurance, the Units of the
Trust have received a rating of "AAA" by Standard & Poor's Corporation. No
representation is made as to any insurer's ability to meet its commitments.
Distributions
Distributions of net investment income to Unitholders are declared and paid in
accordance with the option (monthly, quarterly or semiannual) selected by the
investor. Income distributions, on a record date basis, are as follows:
<TABLE>
<CAPTION>
Year ended Year ended Year ended
Distribution August 31, 2000 August 31, 1999 August 31, 1998
Plan Per Unit Total Per Unit Total Per Unit Total
<S> <C> <C> <C> <C> <C> <C>
----- ------------------- ------------------- -------------------
Monthly $49.99 $105,182 $50.33 $113,248 $50.38 $124,087
Quarterly 50.21 6,353 50.55 9,049 50.71 9,231
Semiannual 50.50 66,941 50.86 70,120 51.03 76,300
---------- ---------- ----------
$178,476 $192,417 $209,618
========= ========= =========
</TABLE>
In addition, the Trust redeemed Units with proceeds from the sale of Bonds as
follows:
<TABLE>
<CAPTION>
Year ended August 31
2000 1999 1998
<S> <C> <C> <C>
---------- ---------- ----------
Principal portion $265,524 $286,077 $297,062
Net interest accrued 2,924 3,912 2,524
---------- ---------- ----------
$268,448 $289,989 $299,586
========= ========= =========
Units 272 283 294
========= ========= =========
</TABLE>
In addition, distribution of principal related to the sale or call of securities
is $8.20 per Unit for the year ended August 31, 1998.
<PAGE>
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Independent Auditors"
and to the use of our report dated December 14, 2000, in this Post-Effective
Amendment to the Registration Statement (Form S-6) and related Prospectus of
Kemper Tax-Exempt Insured Income Trust Multi-State Series 54V New York Trust
dated December 28, 2000.
Ernst & Young LLP
Kansas City, Missouri
December 28, 2000
KEMPER TAX-EXEMPT INCOME TRUST
MULTI-STATE SERIES
OHIO TAX-EXEMPT BOND TRUST
SERIES 1-10
KEMPER DEFINED FUNDS
(TAX-EXEMPT PORTFOLIO)
PROSPECTUS
PART ONE
Each State Trust of the Kemper Tax-Exempt Income Trust, Multi-State
Series, Ohio Tax-Exempt Bond Trust, Series 1-10 and Kemper Defined Funds
(Tax-Exempt Portfolio) was formed for the purpose of gaining interest
income free from Federal, State and, where applicable, local income taxes
and/or property taxes while conserving capital and diversifying risks by
investing in fixed portfolios of Municipal Bonds consisting of
obligations issued primarily by or on behalf of the State for which such
Trust is named or counties, municipalities, authorities or political
subdivisions thereof.
Units of the Trusts are not deposits or obligations of, or
guaranteed by, any bank, and Units are not federally insured or otherwise
protected by the Federal Deposit Insurance Corporation and involve
investment risk including loss of principal.
This Prospectus is in two parts.
Read and retain both parts for future reference.
The date of this Part One is that date
which is set forth in Part Two
Of the Prospectus
------------------------------------------------------
SPONSOR: RANSON & ASSOCIATES, INC.
------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
TABLE OF CONTENTS
PAGE
SUMMARY 1
The Trust 1
Public Offering Price 1
Interest and Principal Distributions 1
Reinvestment 2
Estimated Current Return and
Estimated Long-Term Return 2
Market for Units 2
Risk Factors 2
THE TRUST 2
PORTFOLIOS 3
Risk Factors 4
DISTRIBUTION REINVESTMENT 9
INTEREST, ESTIMATED LONG-TERM RETURN
AND ESTIMATED CURRENT RETURN 9
FEDERAL TAX STATUS OF THE STATE TRUSTS 10
RISK FACTORS AND STATE TAX STATUS
OF THE STATE TRUSTS 13
Arizona Trusts 13
Arkansas Trusts 16
California Trusts 18
Colorado Trust 25
Kansas Trusts 29
Kentucky Trusts 32
Michigan Trusts 33
Minnesota Trusts 36
Missouri Trusts 39
New Jersey Trusts 42
New York Trusts 45
North Carolina Trusts 53
Ohio Trusts 57
South Carolina Trusts 61
Virginia Trusts 64
PUBLIC OFFERING OF UNITS 67
Public Offering Price 67
Accrued Interest 69
Purchased and Daily Accrued Interest 69
Public Distribution of Units 70
Profits of Sponsor 70
MARKET FOR UNITS 71
REDEMPTION 71
Computation of Redemption Price 72
UNITHOLDERS 72
Ownership of Units 72
Distributions to Unitholders 73
Statements to Unitholders 74
Rights of Unitholders 75
INVESTMENT SUPERVISION 75
ADMINISTRATION OF THE TRUST 76
The Trustee 76
The Evaluator 76
Amendment and Termination 77
EXPENSES OF THE TRUST 78
THE SPONSOR 79
LEGAL OPINIONS 79
INDEPENDENT AUDITORS 79
DESCRIPTION OF SECURITIES RATINGS 79
Essential Information*
Report of Independent Auditors*
Statement of Assets and Liabilities*
Statement of Operations*
Statement of Changes in Net Assets*
Schedule of Investments*
Notes to Schedule of Investments*
Notes to Financial Statements*
* INFORMATION ON THESE ITEMS
APPEARS IN PART TWO FOR THE
APPROPRIATE STATE TRUST
-i-
<PAGE>
SUMMARY
The Trust. Kemper Tax-Exempt Income Trust, Multi-State
Series, Ohio Tax-Exempt Bond Trust, Series 1-10 and Kemper Defined Funds
(Tax-Exempt Portfolio) (collectively, the "Trusts") are each a unit
investment trust consisting of a number of diversified portfolios
designated as the State Trusts. Each State Trust consists of obligations
("Municipal Bonds," "Securities" or "Bonds") issued primarily by or on
behalf of the State for which such State Trust is named or counties,
municipalities, authorities or political subdivisions thereof.
Each State Trust's investment objective is interest income which is
exempt from Federal, State and, where applicable, local income taxes
and/or property taxes, while conserving capital and diversifying risks by
investing in fixed portfolios of Municipal Bonds consisting of
obligations issued primarily by or on behalf of the State for which such
State Trust is named or counties, municipalities, authorities or
political subdivisions thereof. There is, of course, no guarantee that
the State Trusts' objectives will be achieved.
All of the Municipal Bonds in the State Trust portfolios were rated
in the category "BBB" or better by Standard & Poor's, a division of The
McGraw-Hill Companies ("Standard & Poor's") or "Baa" or better by Moody's
Investors Service, Inc. ("Moody's") on the Date of Deposit or were
unrated. However, if any Municipal Bonds were unrated on the Date of
Deposit, they must have had, in the opinion of the Sponsor, credit
characteristics equivalent to Bonds rated at least "BBB" or "Baa."
Municipal Bonds which are rated "BBB" or "Baa" are regarded as having an
adequate capacity to pay interest and repay principal but may lack
outstanding credit characteristics and, in fact, have speculative
characteristics as well. Ratings of the Municipal Bonds may have changed
since the Date of Deposit. See "DESCRIPTION OF SECURITIES RATINGS"
herein and the "SCHEDULE OF INVESTMENTS" in Part Two.
The Units, each of which represents a pro rata undivided fractional
interest in the principal amount of Municipal Bonds deposited in the
appropriate Trust, are issued and outstanding Units which have been
reacquired by the Sponsor either by purchase of Units tendered to the
Trustee for redemption or by purchase in the open market. No offering is
being made on behalf of a State Trust and any profit or loss realized on
the sale of Units will accrue to the Sponsor and/or the firm reselling
such Units. Offerees in the States of Illinois, Indiana, Virginia and
Washington may only purchase Units of an Illinois, Indiana, Virginia or
Washington Trust, respectively, if available.
Public Offering Price. The Public Offering
Price per Unit of each State Trust is equal to a pro rata share of the
aggregate bid prices of the Municipal Bonds in such State Trust plus or
minus a pro rata share of cash, if any, in the Principal Account, held or
owned by the State Trust plus, in the case of Kemper Defined Funds,
Purchased Interest, plus a sales charge shown under "PUBLIC OFFERING OF
UNITS." In addition, there will be added to each transaction in a State
Trust an amount equal to the accrued interest ("Daily Accrued Interest"
in the case of Kemper Defined Funds) from the last Record Date of such
State Trust to the date of settlement (three business days after order).
The sales charge is reduced on a graduated scale as indicated under
"PUBLIC OFFERING OF UNITS-Public Offering Price."
Interest and Principal Distributions. Distributions of the estimated
annual interest income to be received by each State Trust, after
deduction of estimated expenses, will be made monthly unless the
Unitholder elects to receive such distributions quarterly or semi-
annually. In the case of Kemper Defined Funds, distributions of the
estimated annual interest income to be received by each State Trust will
be made monthly. Distributions will be paid on the Distribution Dates to
Unitholders of record of such State Trust on the Record Dates set forth
for the applicable option. See "ESSENTIAL INFORMATION" in Part Two.
Only monthly distributions of estimated annual interest income will be
available of Kemper Defined Funds Unitholders. The distribution of
funds, if any, in the Principal Account of each State Trust, will be made
as provided in "UNITHOLDERS-Distributions to Unitholders."
<PAGE>
Reinvestment. Each Unitholder of a State Trust offered herein may
elect to have distributions of principal or interest or both
automatically invested without charge in shares of certain mutual funds
sponsored by Zurich Kemper Investments, Inc. See "DISTRIBUTION
REINVESTMENT."
Estimated Current Return and Estimated Long-Term Return. The
Estimated Current Return is calculated by dividing the estimated net
annual interest income per Unit by the Public Offering Price of such
State Trust. The estimated net annual interest income per Unit will vary
with changes in fees and expenses of such State Trust and with the
principal prepayment, redemption, maturity, exchange or sale of
Securities while the Public Offering Price will vary with changes in the
bid price of the underlying Securities and with changes in Purchased
Interest for Kemper Defined Funds; therefore, there is no assurance that
the present Estimated Current Returns will be realized in the future.
Estimated Long-Term Return is calculated using a formula which (1) takes
into consideration, and determines and factors in the relative weightings
of, the market values, yields (which takes into account the amortization
of premiums and the accretion of discounts) and estimated retirements of
all of the Securities in the State Trust and (2) takes into account the
expenses and sales charge associated with each State Trust Unit. Since
the market values and estimated retirements of the Securities and the
expenses of the State Trust will change, there is no assurance that the
present Estimated Long-Term Return will be realized in the future.
Estimated Current Return and Estimated Long-Term Return are expected to
differ because the calculation of Estimated Long-Term Return reflects the
estimated date and amount of principal returned while Estimated Current
Return calculations include only net annual interest income and Public
Offering Price.
Market for Units. While under no obligation to do
so, the Sponsor intends to and certain of the other Underwriters may,
subject to change at any time, maintain a market for the Units of each
State Trust and to continuously offer to repurchase such Units at prices
which are based on the aggregate bid side evaluation of the Municipal
Bonds in each State Trust plus accrued interest (which, in the case of
Kemper Defined Funds, consists of Purchased Interest and Daily Accrued
Interest). If such a market is not maintained and no other over-the-
counter market is available, Unitholders will still be able to dispose of
their Units through redemption by the Trustee at prices based upon the
aggregate bid price of the Municipal Bonds in such State Trust. See
"REDEMPTION."
Risk Factors. An investment in the Trusts should be
made with an understanding of the risks associated therewith, including,
among other factors, the inability of the issuer to pay the principal of
or interest on a bond when due, volatile interest rates, early call
provisions, and changes to the tax status of the Securities. See
"PORTFOLIOS-Risk Factors."
THE TRUST
Each State Trust is one of a series of unit investment trusts
created by the Sponsor under the name Ohio Tax-Exempt Bond Trust, Kemper
Tax-Exempt Income Trust, Multi-State Series or Kemper Defined Funds (Tax-
Exempt Portfolio), all of which are similar, and each of which was
created under the laws of the State of Missouri or the State of New York
pursuant to a Trust Agreement* (the "Agreement") (such "State Trusts"
being collectively referred to herein as the "Trust"). Ranson &
Associates, Inc. is the Sponsor and Evaluator of the Trusts and is
successor sponsor and evaluator of all unit investment trusts formerly
sponsored by EVEREN Unit Investment Trusts, a service of EVEREN
Securities, Inc. The Bank of New York is the Trustee of the Trusts as
successor to Investors Fiduciary Trust Company.
The State Trusts may be an appropriate investment vehicle for
investors who desire to participate in a portfolio of tax-exempt, fixed
income securities with greater diversification than they might be able to
acquire individually. In addition, Municipal Bonds of the type deposited
in the State Trusts are often not available in small amounts.
_______________________________
* Reference is hereby made to said Trust Agreement, and any statements
contained herein are qualified in their entirety by the provisions
of said Trust Agreement.
-2-
<PAGE>
Each State Trust's investment objective is interest income which is
exempt from Federal, State and, where applicable, local income and/or
property taxes, while conserving capital and diversifying risks by
investing in fixed portfolios of Municipal Bonds consisting of
obligations issued primarily by or on behalf of the State for which such
State Trust is named or counties, municipalities, authorities or
political subdivisions thereof. There is, of course, no guarantee that
the State Trusts' objective will be achieved.
All of the Municipal Bonds in the State Trust portfolios were rated
in the category "BBB" or better by either Standard & Poor's or "Baa" or
better by Moody's on the Date of Deposit or were unrated. However, if
any Municipal Bonds were unrated on the Date of Deposit, they must have
had, in the opinion of the Sponsor, credit characteristics equivalent to
Municipal Bonds rated at least "BBB" or "Baa." Municipal Bonds which are
rated "BBB" or "Baa" are regarded as having an adequate capacity to pay
interest and repay principal but may lack outstanding credit
characteristics and, in fact, have speculative characteristics as well.
Ratings of the Municipal Bonds may have changed since the Date of
Deposit. See "DESCRIPTION OF SECURITIES RATINGS" herein and the
"SCHEDULE OF INVESTMENTS" in Part Two.
Proceeds of the maturity, redemption or sale of the Municipal Bonds
in a State Trust, unless used to pay for Units tendered for redemption,
will be distributed to Unitholders thereof and will not be utilized to
purchase additional Municipal Bonds.
The Units, each of which represents a pro rata undivided fractional
interest in the principal amount of Municipal Bonds deposited in the
appropriate State Trust, are issued and outstanding Units which have been
reacquired by the Sponsor either by purchase of Units tendered to the
Trustee for redemption or by purchase in the open market. No offering is
being made on behalf of the State Trusts and any profit or loss realized
on the sale of Units will accrue to the Sponsor and/or the firm reselling
such Units. To the extent that Units of any State Trust are redeemed,
the principal amount of Municipal Bonds in such State Trust will be
reduced and the undivided fractional interest represented by each
outstanding Unit of such State Trust will increase. See "REDEMPTION."
PORTFOLIOS
The selection of Municipal Bonds for each State Trust was based
largely upon the experience and judgment of the Sponsor. In making such
selections, the Sponsor considered the following factors, among others,
to be of primary importance: (a) Standard & Poor's or Moody's ratings of
the Municipal Bonds; (b) the price of the Municipal Bonds relative to
other issues of similar quality and maturity; (c) the diversification of
the Municipal Bonds as to purpose of issue; (d) the income to the
Unitholders of the State Trust; and (e) the dates of maturity of the
Bonds. Subsequent to the Date of Deposit, a Municipal Bond may have
ceased to be rated or its rating may have been reduced below the minimum
required as of the Date of Deposit. Neither event requires the
elimination of such investment from a State Trust, but may be considered
in the Sponsor's determination to direct the Trustee to dispose of such
investment. See "INVESTMENT SUPERVISION" herein and the "SCHEDULE OF
INVESTMENTS" in Part Two.
The Sponsor may not alter the portfolio of a State Trust except that
certain of the Municipal Bonds may be sold upon the happening of certain
extraordinary circumstances described under "Investment Supervision."
Certain of the Municipal Bonds in the State Trusts are subject to
redemption prior to their stated maturity date, call or redemption
pursuant to sinking fund provisions, call provisions or extraordinary
optional or mandatory redemption provisions or otherwise. A sinking fund
is a reserve fund accumulated over a period of time for retirement of
debt. A callable debt obligation is one which is subject to redemption
or refunding prior to maturity at the option of the issuer. A refunding
is a method by which a debt obligation is redeemed, at or before
maturity, by the proceeds of a new debt obligation. In general, call
provisions are more likely to be exercised when the offering side
valuation is at a premium over par than when it is at a discount from
par. Accordingly, any such call, redemption, sale or maturity will
reduce the size and diversity of such Series, and the net annual interest
income of the Series and may reduce the Estimated Long-Term Return and/or
Estimated Current Return. See "INTEREST, ESTIMATED LONG-TERM RETURN AND
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ESTIMATED CURRENT RETURN." Each Trust portfolio contains a listing of
the sinking fund and call provisions, if any, with respect to each of the
debt obligations. Extraordinary optional redemptions and mandatory
redemptions result from the happening of certain events. Generally,
events that may permit the extraordinary optional redemption of Municipal
Bonds or may require the mandatory redemption of Municipal Bonds include,
among others: a final determination that the interest on the Municipal
Bonds is taxable; the substantial damage or destruction by fire or other
casualty of the project for which the proceeds of the Municipal Bonds
were used; an exercise by a local, State or Federal governmental unit of
its power of eminent domain to take all or substantially all of the
project for which the proceeds of the Municipal Bonds were used; changes
in the economic availability of raw materials, operating supplies or
facilities or technological or other changes which render the operation
of the project for which the proceeds of the Municipal Bonds were used
uneconomic; changes in law or an administrative or judicial decree which
renders the performance of the agreement under which the proceeds of the
Municipal Bonds were made available to finance the project impossible or
which creates unreasonable burdens or which imposes excessive
liabilities, such as taxes, not imposed on the date the Municipal Bonds
are issued on the issuer of the Municipal Bonds or the user of the
proceeds of the Municipal Bonds; an administrative or judicial decree
which requires the cessation of a substantial part of the operations of
the project financed with the proceeds of the Municipal Bonds; an
overestimate of the costs of the project to be financed with the proceeds
of the Municipal Bonds resulting in excess proceeds of the Municipal
Bonds which may be applied to redeem Municipal Bonds; or an underestimate
of a source of funds securing the Municipal Bonds resulting in excess
funds which may be applied to redeem Municipal Bonds. The Sponsor is
unable to predict all of the circumstances which may result in such
redemption of an issue of Municipal Bonds. The Sponsor and the Trustee
shall not be liable in any way for any default, failure or defect in any
Municipal Bond.
Risk Factors. An investment in Units of a Series of the
State Trusts should be made with an understanding of the risks which an
investment in fixed rate debt obligations may entail, including the risk
that the value of the portfolio and hence of the Units will decline with
increases in interest rates. The value of the underlying Municipal Bonds
will fluctuate inversely with changes in interest rates. The uncertain
economic conditions of recent years, together with the fiscal measures
adopted to attempt to deal with them, have resulted in wide fluctuations
in interest rates and, thus, in the value of fixed rate debt obligations
generally and long-term obligations in particular. The Sponsor cannot
predict whether such fluctuations will continue in the future.
Certain of the Municipal Bonds in the State Trusts may be general
obligations of a governmental entity that are backed by the taxing power
of such entity. All other Municipal Bonds in the State Trusts are
revenue bonds payable from the income of a specific project or authority
and are not supported by the issuer's power to levy taxes. General
obligation bonds are secured by the issuer's pledge of its faith, credit
and taxing power for the payment of principal and interest. Revenue
bonds, on the other hand, are payable only from the revenues derived from
a particular facility or class of facilities or, in some cases, from the
proceeds of a special excise or other specific revenue source. There
are, of course, variations in the security of the different Municipal
Bonds in the State Trusts, both within a particular classification and
between classifications, depending on numerous factors.
Certain Series of the State Trusts contain Municipal Bonds which are
obligations of issuers whose revenues are derived from services provided
by hospitals and other health care facilities, including nursing homes.
In view of this, an investment in such Series should be made with an
understanding of the characteristics of such issuers and the risks that
such an investment may entail. Ratings of bonds issued for health care
facilities are often based on feasibility studies that contain
projections of occupancy levels, revenues and expenses. A facility's
gross receipts and net income available for debt service will be affected
by future events and conditions including, among other things, demand for
services and the ability of the facility to provide the services
required, physicians' confidence in the facility, management
capabilities, economic developments in the service area, competition,
efforts by insurers and governmental agencies to limit rates, legislation
establishing state rate-setting agencies, expenses, the cost and possible
unavailability of malpractice insurance, the funding of Medicare,
Medicaid and other similar third party payor programs, and government
regulation. Federal legislation has been enacted which implemented a
system of prospective Medicare reimbursement which may restrict the flow
of revenues to hospitals and other facilities which are reimbursed for
services provided under the Medicare program. Future legislation or
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changes in the areas noted above, among other things, would affect all
hospitals to varying degrees and, accordingly, any adverse changes in
these areas may adversely affect the ability of such issuers to make
payment of principal and interest on Municipal Bonds held in such Series.
Such adverse changes also may adversely affect the ratings of the
Municipal Bonds held in such State Trusts. Hospitals and other health
care facilities are subject to claims and legal actions by patients and
others in the ordinary course of business. Although these claims are
generally covered by insurance, there can be no assurance that a claim
will not exceed the insurance coverage of a health care facility or that
insurance coverage will be available to a facility. In addition, a
substantial increase in the cost of insurance could adversely affect the
results of operations of a hospital or other health care facility.
Certain hospital bonds may provide for redemption at par at any time upon
the sale by the issuer of the hospital facilities to a non-affiliated
entity or in other circumstances. For example, certain hospitals may
have the right to call bonds at par if the hospital may legally be
required because of the bonds to perform procedures against specified
religious principles. Certain FHA-insured bonds may provide that all or
a portion of those bonds, otherwise callable at a premium, can be called
at par in certain circumstances. If a hospital defaults upon a bond
obligation, the realization of Medicare and Medicaid receivables may be
uncertain and, if the bond obligation is secured by the hospital
facilities, legal restrictions on the ability to foreclose upon the
facilities and the limited alternative uses to which a hospital can be
put may severely reduce its collateral value.
Certain of the Municipal Bonds in the State Trusts may be single
family mortgage revenue bonds, which are issued for the purpose of
acquiring from originating financial institutions notes secured by
mortgages on residences located within the issuer's boundaries and owned
by persons of low or moderate income. Mortgage loans are generally
partially or completely prepaid prior to their final maturities as a
result of events such as sale of the mortgaged premises, default,
condemnation or casualty loss. Because these Municipal Bonds are subject
to extraordinary mandatory redemption in whole or in part from such
prepayments of mortgage loans, a substantial portion of such Municipal
Bonds will probably be redeemed prior to their scheduled maturities or
even prior to their ordinary call dates. The redemption price of such
issues may be more or less than the offering price of such Municipal
Bonds. Extraordinary mandatory redemption without premium could also
result from the failure of the originating financial institutions to make
mortgage loans in sufficient amounts within a specified time period or,
in some cases, from the sale by the Municipal Bond issuer of the mortgage
loans. Failure of the originating financial institutions to make
mortgage loans would be due principally to the interest rates on mortgage
loans funded from other sources becoming competitive with the interest
rates on the mortgage loans funded with the proceeds of the single family
mortgage revenue bonds. Additionally, unusually high rates of default on
the underlying mortgage loans may reduce revenues available for the
payment of principal of or interest on such mortgage revenue bonds.
Single family mortgage revenue bonds issued after December 31, 1980 were
issued under Section 103A of the Internal Revenue Code, which Section
contains certain ongoing requirements relating to the use of the proceeds
of such Municipal Bonds in order for the interest on such Municipal Bonds
to retain its tax-exempt status. In each case, the issuer of the
Municipal Bonds has covenanted to comply with applicable ongoing
requirements and bond counsel to such issuer has issued an opinion that
the interest on the Municipal Bonds is exempt from Federal income tax
under existing laws and regulations. There can be no assurances that the
ongoing requirements will be met. The failure to meet these requirements
could cause the interest on the Municipal Bonds to become taxable,
possibly retroactively from the date of issuance.
Certain of the Municipal Bonds in the State Trusts may be
obligations of issuers whose revenues are primarily derived from mortgage
loans to housing projects for low to moderate income families. The
ability of such issuers to make debt service payments will be affected by
events and conditions affecting financed projects, including, among other
things, the achievement and maintenance of sufficient occupancy levels
and adequate rental income, increases in taxes, employment and income
conditions prevailing in local labor markets, utility costs and other
operating expenses, the managerial ability of project managers, changes
in laws and governmental regulations, the appropriation of subsidies and
social economic trends affecting the localities in which the projects are
located. The occupancy of housing projects may be adversely affected by
high rent levels and income limitations imposed under Federal and state
programs. Like single family mortgage revenue bonds, multi-family
mortgage revenue bonds are subject to redemption and call features,
including extraordinary mandatory redemption features, upon prepayment,
sale or non-origination of mortgage loans as well as upon the occurrence
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of other events. Certain issuers of single or multi-family housing bonds
have considered various ways to redeem bonds they have issued prior to
the stated first redemption dates for such bonds. In connection with the
housing Municipal Bonds held by the State Trusts, the Sponsor has not had
any direct communications with any of the issuers thereof, but at the
initial Date of Deposit it was not aware that any of the respective
issuers of such Municipal Bonds were actively considering the redemption
of such Municipal Bonds prior to their respective stated initial call
dates. However, there can be no assurance that an issuer of a Municipal
Bond in the State Trusts will not attempt to so redeem a Municipal Bond
in the State Trusts.
Certain of the Municipal Bonds in the State Trusts may be
obligations of issuers whose revenues are derived from the sale of water
and/or sewerage services. Water and sewerage bonds are generally payable
from user fees. Problems faced by such issuers include the ability to
obtain timely and adequate rate increases, a decline in population
resulting in decreased user fees, the difficulty of financing large
construction programs, the limitations on operations and increased costs
and delays attributable to environmental considerations, the increasing
difficulty of obtaining or discovering new supplies of fresh water, the
effect of conservation programs and the impact of "no-growth" zoning
ordinances. Issuers may have experienced these problems in varying
degrees. Because of the relatively short history of solid waste disposal
bond financing, there may be technological risks involved in the
satisfactory construction or operation of the projects exceeding those
associated with most municipal enterprise projects. Increasing
environmental regulation on the Federal, State and local level has a
significant impact on waste disposal facilities. While regulation
requires more waste producers to use waste disposal facilities, it also
imposes significant costs on the facilities. These costs include
compliance with frequently changing and complex regulatory requirements,
the cost of obtaining construction and operating permits, the cost of
conforming to prescribed and changing equipment standards and required
methods of operation and the cost of disposing of the waste residue that
remains after the disposal process in an environmentally safe manner. In
addition, waste disposal facilities frequently face substantial
opposition by environmental groups and officials to their location and
operation, to the possible adverse effects upon the public health and the
environment that may be caused by wastes disposed of at the facilities
and to alleged improper operating procedures. Waste disposal facilities
benefit from laws which require waste to be disposed of in a certain
manner but any relaxation of these laws could cause a decline in demand
for the facilities' services. Finally, waste disposal facilities are
concerned with many of the same issues facing utilities insofar as they
derive revenues from the sale of energy to local power utilities.
Certain of the Municipal Bonds in the State Trusts may be
obligations of issuers whose revenues are primarily derived from the sale
of electric energy or natural gas. Utilities are generally subject to
extensive regulation by state utility commissions which, among other
things, establish the rates which may be charged and the appropriate rate
of return on an approved asset base. The problems faced by such issuers
include the difficulty in obtaining approval for timely and adequate rate
increases from the governing public utility commission, the difficulty in
financing large construction programs, the limitations on operations and
increased costs and delays attributable to environmental considerations,
increased competition, recent reductions in estimates of future demand
for electricity in certain areas of the country, the difficulty of the
capital market in absorbing utility debt, the difficulty in obtaining
fuel at reasonable prices and the effect of energy conservation. Issuers
may have experienced these problems in varying degrees. In addition,
Federal, State and municipal governmental authorities may from time to
time review existing and impose additional regulations governing the
licensing, construction and operation of nuclear power plants, which may
adversely affect the ability of the issuers of such Municipal Bonds to
make payments of principal and/or interest on such Municipal Bonds. The
ability of State and local joint action power agencies to make payments
on bonds they have issued is dependent in large part on payments made to
them pursuant to power supply or similar agreements. Courts in
Washington and Idaho have held that certain agreements between the
Washington Public Power Supply System ("WPPSS") and the WPPSS
participants are unenforceable because the participants did not have the
authority to enter into the agreements. While these decisions are not
specifically applicable to agreements entered into by public entities in
other states, they may cause a reexamination of the legal structure and
economic viability of certain projects financed by joint action power
agencies, which might exacerbate some of the problems referred to above
and possibly lead to legal proceedings questioning the enforceability of
agreements upon which payment of these bonds may depend.
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Certain of the Municipal Bonds in the State Trusts may be industrial
revenue bonds ("IRBs"), including pollution control revenue bonds, which
are tax-exempt securities issued by states, municipalities, public
authorities or similar entities to finance the cost of acquiring,
constructing or improving various industrial projects. These projects
are usually operated by corporate entities. Issuers are obligated only
to pay amounts due on the IRBs to the extent that funds are available
from the unexpended proceeds of the IRBs or receipts or revenues of the
issuer under an arrangement between the issuer and the corporate operator
of a project. The arrangement may be in the form of a lease, installment
sale agreement, conditional sale agreement or loan agreement, but in each
case the payments to the issuer are designed to be sufficient to meet the
payments of amounts due on the IRBs. Regardless of the structure,
payment of IRBs is solely dependent upon the creditworthiness of the
corporate operator of the project or corporate guarantor. Corporate
operators or guarantors may be affected by many factors which may have an
adverse impact on the credit quality of the particular company or
industry. These include cyclicality of revenues and earnings, regulatory
and environmental restrictions, litigation resulting from accidents or
environmentally-caused illnesses, extensive competition and financial
deterioration resulting from leveraged buy-outs or takeovers. The IRBs
in the State Trusts may be subject to special or extraordinary redemption
provisions which may provide for redemption at par or, with respect to
original issue discount bonds, at issue price plus the amount of original
issue discount accreted to the redemption date plus, if applicable, a
premium. The Sponsor cannot predict the causes or likelihood of the
redemption of IRBs or other Municipal Bonds in the State Trusts prior to
the stated maturity of such Municipal Bonds.
Certain of the Municipal Bonds in the State Trusts may be
obligations which are payable from and secured by revenues derived from
the ownership and operation of facilities such as airports, bridges,
turnpikes, port authorities, convention centers and arenas. The major
portion of an airport's gross operating income is generally derived from
fees received from signatory airlines pursuant to use agreements which
consist of annual payments for leases, occupancy of certain terminal
space and service fees. Airport operating income may therefore be
affected by the ability of the airlines to meet their obligations under
the use agreements. The air transport industry is experiencing
significant variations in earnings and traffic, due to increased
competition, excess capacity, increased costs, deregulation, traffic
constraints and other factors, and several airlines are experiencing
severe financial difficulties. The Sponsor cannot predict what effect
these industry conditions may have on airport revenues which are
dependent for payment on the financial condition of the airlines and
their usage of the particular airport facility. Similarly, payment on
Municipal Bonds related to other facilities is dependent on revenues from
the projects, such as user fees from ports, tolls on turnpikes and
bridges and rents from buildings. Therefore, payment may be adversely
affected by reduction in revenues due to such factors as increased cost
of maintenance, decreased use of a facility, lower cost of alternative
modes of transportation, scarcity of fuel and reduction or loss of rents.
Certain of the Municipal Bonds in the State Trusts may be
obligations of issuers which are, or which govern the operation of,
schools, colleges and universities and whose revenues are derived mainly
from ad valorem taxes, or for higher education systems, from tuition,
dormitory revenues, grants and endowments. General problems relating to
school bonds include litigation contesting the state constitutionality of
financing public education in part from ad valorem taxes, thereby
creating a disparity in educational funds available to schools in wealthy
areas and schools in poor areas. Litigation or legislation on this issue
may affect the sources of funds available for the payment of school bonds
in the Trusts. General problems relating to college and university
obligations would include the prospect of a declining percentage of the
population consisting of "college" age individuals, possible inability to
raise tuition and fees sufficiently to cover increased operating costs,
the uncertainty of continued receipt of Federal grants and state funding
and new government legislation or regulations which may adversely affect
the revenues or costs of such issuers. All of such issuers have been
experiencing certain of these problems in varying degrees. In addition,
the ability of universities and colleges to meet their obligations is
dependent upon various factors, including the size and diversity of their
sources of revenues, enrollment, reputation, management expertise, the
availability and restrictions on the use of endowments and other funds,
the quality and maintenance costs of campus facilities, and, in the case
of public institutions, the financial condition of the relevant state or
other governmental entity and its policies with respect to education.
The institution's ability to maintain enrollment levels will depend on
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such factors as tuition costs, geographic location, geographic diversity
and quality of student body, quality of the faculty and the diversity of
program offerings.
Certain of the Municipal Bonds in the State Trusts may be Urban
Redevelopment Bonds ("URBs"). URBs have generally been issued under bond
resolutions pursuant to which the revenues and receipts payable under the
arrangements with the operator of a particular project have been assigned
and pledged to purchasers. In some cases, a mortgage on the underlying
project may have been granted as security for the URBs. Regardless of
the structure, payment of the URBs is solely dependent upon the
creditworthiness of the operator of the project.
Certain of the Municipal Bonds in the State Trusts may be lease
revenue bonds whose revenues are derived from lease payments made by a
municipality or other political subdivision which is leasing equipment or
property for use in its operation. The risks associated with owning
Municipal Bonds of this nature include the possibility that appropriation
of funds for a particular project or equipment may be discontinued. The
Sponsor cannot predict the likelihood of nonappropriation of funds for
these types of lease revenue Municipal Bonds. Lease revenue Municipal
Bonds may also be subject to the risk of abatement in many states -
rental obligations cease in the event that damage, destruction or
condemnation of the project prevents its use by the lessee. (In these
cases, insurance provisions designed to alleviate this risk become
important credit factors.) In the event of default by the lessee
government, there may be significant legal and/or practical difficulties
involved in the re-letting or sale of the project. Some of these issues,
particularly those for equipment purchase, contain the so-called
"substitution safeguard," which bars the lessee government, in the event
its defaults on its rental payments, from the purchase or use of similar
equipment for a certain period of time. This safeguard is designed to
insure that the lessee government will appropriate even though it is not
legally obligated to do so, but its legality remains untested in most, if
not all, states.
Certain of the Municipal Bonds in the State Trusts may be "zero
coupon" bonds, i.e., an original issue discount bond that does not
provide for the payment of current interest. Zero coupon bonds are
purchased at a deep discount because the buyer receives only the right to
receive a final payment at the maturity of the bond and does not receive
any periodic interest payments. The effect of owning deep discount bonds
which do not make current interest payments (such as the zero coupon
bonds) is that a fixed yield is earned not only on the original
investment but also, in effect, on all discount earned during the life of
such obligation. This implicit reinvestment of earning at the same rate
eliminates the risk of being unable to reinvest the income on such
obligation at a rate as high as the implicit yield on the discount
obligation, but at the same time eliminates the holder's ability to
reinvest at higher rates in the future. For this reason, zero coupon
bonds are subject to substantially greater price fluctuations during
periods of changing market interest rates than are securities of
comparable quality which pay interest currently. For the Federal tax
consequences of original issue discount bonds such as the zero coupon
bonds, see "FEDERAL TAX STATUS OF THE STATE TRUSTS."
Investors should be aware that many of the Municipal Bonds in the
State Trusts are subject to continuing requirements such as the actual
use of Municipal Bond proceeds or manner of operation of the project
financed from Municipal Bond proceeds that may affect the exemption of
interest on such Municipal Bonds from Federal income taxation. Although
at the time of issuance of each of the Municipal Bonds in the State
Trusts an opinion of bond counsel was rendered as to the exemption of
interest on such obligations from Federal income taxation, there can be
no assurance that the respective issuers or other obligors on such
obligations will fulfill the various continuing requirements established
upon issuance of the Municipal Bonds. A failure to comply with such
requirements may cause a determination that interest on such obligations
is subject to Federal income taxation, perhaps even retroactively from
the date of issuance of such Municipal Bonds, thereby reducing the value
of the Municipal Bonds and subjecting Unitholders to unanticipated tax
liabilities.
Federal bankruptcy statutes relating to the adjustment of debts of
political subdivisions and authorities of states of the United States
provide that, in certain circumstances, such subdivisions or authorities
may be authorized to initiate bankruptcy proceedings without prior notice
to or consent of creditors, which proceedings could result in material
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and adverse modification or alteration of the rights of holders of
obligations issued by such subdivision or authorities.
Certain issues of the Municipal Bonds in the State Trusts represent
"moral obligations" of a governmental entity. In the event that the
issuer of the Municipal Bond defaults in the repayment thereof, the
governmental entity lawfully may, but is not obligated to, discharge the
obligation of the issuer to repay such Municipal Bond. If an issuer of
moral obligation bonds is unable to meet its obligations, the repayment
of such Municipal Bonds becomes a moral commitment but not a legal
obligation of the State or municipality in question. Even though the
State may be called on to restore any deficits in capital reserve funds
of the agencies or authorities which issued the bonds, any restoration
generally requires appropriation by the State legislature and accordingly
does not constitute a legally enforceable obligation or debt of the
State. The agencies or authorities generally have no taxing power.
To the best of the Sponsor's knowledge, as of the date of this
Prospectus, there is no litigation pending with respect to any Municipal
Bond which might reasonably be expected to have a material adverse effect
on the Trust or any State Trust. Although the Sponsor is unable to
predict whether any other litigation may be instituted, or if instituted,
whether such litigation might have a material adverse effect on the
Trust, the Trust received copies of the opinions of bond counsel given to
the issuing authorities at the time of original delivery of each of the
Municipal Bonds to the effect that the Municipal Bonds had been validly
issued and that the interest thereon is exempt from Federal income taxes.
DISTRIBUTION REINVESTMENT
Each Unitholder of a Trust may elect to have distributions of
principal (including capital gains, if any) or interest or both
automatically invested without charge in shares of any mutual fund
underwritten or advised by Zurich Kemper Investments, Inc., (the "Kemper
Funds") which are registered in the Unitholder's state of residence,
other than those Kemper Funds sold with a contingent deferred sales
charge. Since the portfolio securities and investment objectives of such
Kemper Funds may differ significantly from that of the Trust, Unitholders
should carefully consider the consequences, including the fact that
distributions from such Kemper Funds may be taxable, before selecting
such Kemper Funds for reinvestment. Detailed information with respect to
the investment objectives and the management of the Kemper Funds is
contained in their respective prospectuses, which can be obtained from
the Sponsor upon request. An investor should read the appropriate
prospectus prior to making the election to reinvest.
Unitholders who are receiving distributions in cash may elect to
participate in distribution reinvestment by filing with the Program Agent
an election to have such distributions reinvested without charge. Such
election must be received by the Program Agent at least ten days prior to
the Record Date applicable to any distribution in order to be in effect
for such Record Date. Any such election shall remain in effect until a
subsequent notice is received by the Program Agent. See
"UNITHOLDERS-Distributions to Unitholders." The Program Agent is the
Trustee. All inquiries concerning participation in distribution
reinvestment should be directed to the Trustee at its unit investment
trust office.
INTEREST, ESTIMATED LONG-TERM RETURN AND ESTIMATED CURRENT RETURN
As of the opening of business on the date indicated therein, the
Estimated Current Returns and the Estimated Long-Term Returns for each
State Trust were as set forth under "ESSENTIAL INFORMATION" for the
applicable State Trust in Part Two of this Prospectus. Estimated Current
Returns are calculated by dividing the estimated net annual interest
income per Unit by the Public Offering Price. The estimated net annual
interest income per Unit will vary with changes in fees and expenses of
the Trustee, the Sponsor and the Evaluator and with the principal
prepayment, redemption, maturity, exchange or sale of Securities while
the Public Offering Price will vary with changes in the offering price of
the underlying Securities and with the changes in Purchased Interest in
the case of Kemper Defined Funds; therefore, there is no assurance that
the present Estimated Current Returns will be realized in the future.
Estimated Long-Term Returns are calculated using a formula which (1)
takes into consideration, and determines and factors in the relative
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weightings of, the market values, yields (which takes into account the
amortization of premiums and the accretion of discounts) and estimated
retirements of all of the Securities in the State Trust and (2) takes
into account the expenses and sales charge associated with each State
Trust Unit. Since the market values and estimated retirements of the
Securities and the expenses of the State Trust will change, there is no
assurance that the present Estimated Long-Term Returns will be realized
in the future. Estimated Current Returns and Estimated Long-Term Returns
are expected to differ because the calculation of Estimated Long-Term
Returns reflects the estimated date and amount of principal returned
while Estimated Current Returns calculations include only net annual
interest income and Public Offering Price.
FEDERAL TAX STATUS OF THE STATE TRUSTS
All Municipal Bonds deposited in a Trust were accompanied by copies
of opinions of bond counsel to the issuers thereof, given at the time of
original delivery of the Municipal Bonds, to the effect that the interest
thereon is excludable from gross income for Federal income tax purposes.
In connection with the offering of Units of a Trust, neither the Sponsor,
the Trustee, the auditors nor their respective counsel have made any
review of the proceedings relating to the issuance of the Municipal Bonds
or the basis for such opinions.
With respect to each Trust, counsel for the Sponsor rendered an
opinion as of the Date of Deposit that:
The Trust is not an association taxable as a corporation for
Federal income tax purposes and interest and accrued original issue
discount on Bonds which is excludable from gross income under the
Internal Revenue Code of 1986, as amended (the "Code") will retain
its status when distributed to Unitholders; however, such interest
may be taken into account in computing the alternative minimum tax,
an additional tax on branches of foreign corporations and the
environmental tax (the "Superfund Tax"), as noted below.
Each Unitholder is considered to be the owner of a pro rata
portion of each asset of the respective Trust in the proportion that
the number of Units of such Trust held by him bears to the total
number of Units outstanding of such Trust under subpart E,
subchapter J of chapter 1 of the Code and will have a taxable event
when such Trust disposes of a Bond, or when the Unitholder redeems
or sells his Units. Unitholders must reduce the tax basis of their
Units for their share of accrued interest received by a Trust, if
any, on Bonds delivered after the date the Unitholders pay for their
Units to the extent that such interest accrued on such Bonds during
the period from the Unitholder's settlement date to the date such
Bonds are delivered to a Trust and, consequently, such Unitholders
may have an increase in taxable gain or reduction in capital loss
upon the disposition of such Units. Gain or loss upon the sale or
redemption of Units is measured by comparing the proceeds of such
sale or redemption with the adjusted basis of the Units. If the
Trustee disposes of Bonds (whether by sale, payment on maturity,
redemption or otherwise), gain or loss is recognized to the
Unitholder (subject to various non-recognition provisions of the
Code). The amount of any such gain or loss is measured by comparing
the Unitholder's pro rata share of the total proceeds from such
disposition with the Unitholder's basis for his or her fractional
interest in the asset disposed of. In the case of a Unitholder who
purchases Units, such basis (before adjustment for earned original
issue discount and amortized bond premium, if any) is determined by
apportioning the cost of the Units among each of the Trust's assets
ratably according to their value as of the valuation date nearest
the date of acquisition of the Units. The tax basis reduction
requirements of the Code relating to amortization of bond premium
may, under some circumstances, result in the Unitholder realizing a
taxable gain when his Units are sold or redeemed for an amount equal
to or less than his original cost.
Any insurance proceeds paid under individual policies obtained
by issuers of Bonds which represent maturing interest on defaulted
obligations held by the Trustee will be excludable from Federal
gross income if, and to the same extent as, such interest would have
been so excludable if paid in the normal course by the issuer of the
defaulted obligations provided that, at the time such policies are
purchased, the amounts paid for such policies are reasonable,
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customary and consistent with the reasonable expectation that the
issuer of the obligations, rather than the insurer, will pay debt
service on the obligations.
Sections 1288 1272 of the Code provide a complex set of rules
governing the accrual of original issue discount. These rules provide
that original issue discount accrues either on the basis of a constant
compound interest rate or ratably over the term of the Municipal Bond,
depending on the date the Municipal Bond was issued. In addition,
special rules apply if the purchase price of a Municipal Bond exceeds the
original issue price plus the amount of original issue discount which
would have previously accrued based upon its issue price (its "adjusted
issue price") to prior owners. The application of these rules will also
vary depending on the value of the Municipal Bond on the date a
Unitholder acquires his Units, and the price the Unitholder pays for his
Units. Unitholders should consult with their tax advisers regarding
these rules and their application.
The Revenue Reconciliation Act of 1993 (the "Tax Act") subjects tax-
exempt bonds to the market discount rules of the Code effective for bonds
purchased after April 30, 1993. In general, market discount is the
amount (if any) by which the stated redemption price at maturity exceeds
an investor's purchase price (except to the extent that such difference,
if any, is attributable to original issue discount not yet accrued)
subject to a statutory de minimis rule. Market discount can arise based
on the price a Trust pays for Municipal Bonds or the price a Unitholder
pays for his or her Units. Under the Tax Act, accretion of market
discount is taxable as ordinary income; under prior law the accretion had
been treated as capital gain. Market discount that accretes while a
Trust holds a Municipal Bond would be recognized as ordinary income by
the Unitholders when principal payments are received on the Municipal
Bond, upon sale or at redemption (including early redemption), or upon
the sale or redemption of his or her Units, unless a Unitholder elects to
include market discount in taxable income as it accrues. The market
discount rules are complex and Unitholders should consult their tax
advisers regarding these rules and their application.
In the case of certain corporations, the alternative minimum tax and
the Superfund Tax for taxable years beginning after December 31, 1986
depends upon the corporation's alternative minimum taxable income, which
is the corporation's taxable income with certain adjustments. One of the
adjustment items used in computing the alternative minimum taxable income
and the Superfund Tax of a corporation (other than an S Corporation,
Regulated Investment Company, Real Estate Investment Trust, or REMIC) is
an amount equal to 75% of the excess of such corporation's "adjusted
current earnings" over an amount equal to its alternative minimum taxable
income (before such adjustment item and the alternative tax net operating
loss deduction). "Adjusted current earnings" includes all tax-exempt
interest, including interest on all of the Bonds in a Trust. Under the
provisions of Section 884 of the Code, a branch profits tax is levied on
the "effectively connected earnings and profits" of certain foreign
corporations which include tax-exempt interest such as interest on the
Bonds in the Trust. Under current Code provisions, the Superfund Tax
does not apply to tax years beginning on or after January 1, 1996.
However, the Superfund Tax could be extended retroactively. Unitholders
should consult their tax advisers with respect to the particular tax
consequences to them including the corporate alternative minimum tax, the
Superfund Tax and the branch profits tax imposed by Section 884 of the
Code.
Counsel for the Sponsor has also advised that under Section 265 of
the Code, interest on indebtedness incurred or continued to purchase or
carry Units of a Trust is not deductible for Federal income tax purposes.
The Internal Revenue Service has taken the position that such
indebtedness need not be directly traceable to the purchase or carrying
of Units (however, these rules generally do not apply to interest paid on
indebtedness incurred to purchase or improve a personal residence).
Also, under Section 265 of the Code, certain financial institutions that
acquire Units would generally not be able to deduct any of the interest
expense attributable to ownership of such Units. On December 7, 1995 the
U.S. Treasury Department released proposed legislation that, if enacted,
would generally extend the financial institution rules to all
corporations, effective for obligations acquired after the date of
announcement. Investors with questions regarding these issues should
consult with their tax advisers.
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In the case of certain Municipal Bonds in a Trust, the opinions of
bond counsel indicate that interest on such Municipal Bonds received by a
"substantial user" of the facilities being financed with the proceeds of
these Municipal Bonds or persons related thereto, for periods while such
Municipal Bonds are held by such a user or related person, will not be
excludable from Federal gross income, although interest on such Municipal
Bonds received by others would be excludable from Federal gross income.
"Substantial user" and "related person" are defined under the Code and
U.S. Treasury Regulations. Any person who believes that he or she may be
a "substantial user" or a "related person" as so defined should contact
his or her tax adviser.
In the case of corporations, the alternative tax rate applicable to
long-term capital gains is 35% effective for long-term capital gains
realized in taxable years beginning on or after January 1, 1993. For
taxpayers other than corporations, net capital gains are subject to a
maximum marginal stated tax rate of 28%. However, it should be noted
that legislative proposals are introduced from time to time that affect
tax rates and could affect relative differences at which ordinary income
and capital gains are taxed. Under the Code, taxpayers must disclose to
the Internal Revenue Service the amount of tax-exempt interest earned
during the year.
All statements of law in the Prospectus concerning exclusion from
gross income for Federal, State or other tax purposes are the opinions of
counsel and are to be so construed.
At the respective times of issuance of the Bonds, opinions relating
to the validity thereof and to the exclusion of interest thereon from
Federal gross income are rendered by bond counsel to the respective
issuing authorities. Neither the Sponsor nor its counsel has made any
special review for the Trust of the proceedings relating to the issuance
of the bonds or of the basis for such opinions.
Section 86 of the Code, in general, provides that fifty percent of
Social Security benefits are includible in gross income to the extent
that the sum of "modified adjusted gross income" plus fifty percent of
the Social Security benefits received exceeds a "base amount." The base
amount is $25,000 for unmarried taxpayers, $32,000 for married taxpayers
filing a joint return and zero for married taxpayers who do not live
apart at all times during the taxable year and who file separate returns.
Modified adjusted gross income is adjusted gross income determined
without regard to certain otherwise allowable deductions and exclusions
from gross income and by including tax-exempt interest. To the extent
that Social Security benefits are includible in gross income, they will
be treated as any other item of gross income.
In addition, under the Tax Act, for taxable years beginning after
December 31, 1993, up to 85 percent of Social Security benefits are
includible in gross income to the extent that the sum of "modified
adjusted gross income" plus fifty percent of Social Security benefits
received exceeds an "adjusted base amount." The adjusted based amount is
$34,000 for unmarried taxpayers, $44,000 for married taxpayers filing a
joint return and zero for married taxpayers who do not live apart at all
times during the taxable year and who file separate returns.
Although tax-exempt interest is included in modified adjusted gross
income solely for the purpose of determining what portion, if any, of
Social Security benefits will be included in gross income, no tax-exempt
interest, including that received from the Trust, will be subject to tax.
A taxpayer whose adjusted gross income already exceeds the base amount or
the adjusted base amount must include 50% or 85%, respectively, of his or
her Social Security benefits in gross income whether or not he or she
receives any tax-exempt interest. A taxpayer whose modified adjusted
gross income (after inclusion of tax-exempt interest) does not exceed the
base amount need not include any Social Security benefits in gross
income.
Ownership of the Units may result in collateral Federal income tax
consequences to certain taxpayers, including, without limitation,
corporations subject to either the environmental tax or the branch
profits tax, financial institutions, certain insurance companies, certain
S corporations, individual recipients of Social Security or Railroad
Retirement benefits and taxpayers who may be deemed to have incurred (or
continued) indebtedness to purchase or carry tax-exempt obligations.
Prospective investors should consult their tax advisors as to the
applicability of any collateral consequences.
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For a discussion of the State tax status of income earned on Units
of a State trust, see the discussion of tax status for the applicable
trust. Except as noted therein, the exemption of interest on State and
local obligations for Federal income tax purposes discussed above does
not necessarily result in exemption under the income or other tax laws of
any State or city. The laws of the several States vary with respect to
the taxation of such obligations.
RISK FACTORS AND STATE TAX STATUS OF THE STATE TRUSTS
Arizona Trusts. The following brief summary regarding
the economy of Arizona is based upon information drawn from publicly
available sources and is included for the purpose of providing the
information about general economic conditions that may or may not affect
issuers of the Arizona Bonds. The Sponsor has not independently verified
any of the information contained in such publicly available documents.
Arizona is the nation's sixth largest state in terms of area.
Arizona's main economic/employment sectors include services, tourism and
manufacturing. Mining and agriculture are also significant, although
they tend to be more capital than labor intensive. Services is the
single largest economic sector. Many of these jobs are directly related
to tourism.
The unemployment rate in Arizona as of October 1996 was 5.6%. This
is higher than the national rate in October 1996 of 4.9%. The annual
unemployment rate for the U.S. in 1996 was 5.4% (not seasonally
adjusted).
In 1986, the value of Arizona real estate began a steady decline,
reflecting a market which had been overbuilt in the previous decade with
a resulting surplus of completed inventory. This decline adversely
affected both the construction industry and those Arizona financial
institutions which had aggressively pursued many facets of real estate
lending. In the near future, Arizona's financial institutions are likely
to continue to experience problems until the excess inventories of
commercial and residential properties are absorbed. The problems of the
financial institutions have adversely affected employment and economic
activity. Longer-term prospects are brighter. Arizona has been, and is
projected to continue to be, one of the fastest growing areas in the
United States. Over the last several decades the State has outpaced most
other regions of the country in virtually every major category of growth,
including population, personal income, gross state product and job
creation.
Arizona's per capita personal income in 1994 and 1995 was $19,389
and $20,489, respectively, a 5.7% increase. The national increase for
the same period was 5.3%.
Budgetary Process. Arizona operates on a fiscal year beginning July
1 and ending June 30. Fiscal year 1995 refers to the year ending June
30, 1995.
Total General and Special Revenue Funds revenues of over $6.5
billion were expected during fiscal year 1994. Approximately 44.5% of
this budgeted revenue comes from sales and use taxes, 44.4% from income
taxes (both individual and corporate) and 4.4% from property taxes. All
taxes total approximately $4.0 billion, or 93% of General Fund revenues.
Non-tax revenue includes items such as income from the state lottery,
licenses, fees and permits, and interest.
For fiscal year 1994, the budget called for expenditures of
approximately $6.3 billion. These expenditures fell into the following
major categories: education (47.4%), health and welfare (26.3%),
protection and safety (4.0%), general government (15.5%) and inspection
and regulation, natural resources, transportation and other (6.8%). The
State's general fund revenues for fiscal year 1995 were budgeted at
approximately $4.7 billion.
Most or all of the Bonds of the Arizona Trust are not obligations of
the State of Arizona, and are not supported by the State's taxing powers.
The particular source of payment and security for each of the Bonds is
detailed in the instruments themselves and in related offering materials.
There can be no assurances, however, with respect to whether the market
value or marketability of any of the Bonds issued by an entity other than
the State of Arizona will be affected by the financial or other condition
of the State or of any entity located within the State. In addition, it
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should be noted that the State of Arizona, as well as counties,
municipalities, political subdivisions and other public authorities of
the state, are subject to limitations imposed by Arizona's constitution
with respect to ad valorem taxation, bonded indebtedness and other
matters. For example, the state legislature cannot appropriate revenues
in excess of 7% of the total personal income of the state in any fiscal
year. These limitations may affect the ability of the issuers to
generate revenues to satisfy their debt obligations.
Although most of the Bonds in the Arizona Trust are revenue
obligations of local governments or authorities in the State, there can
be no assurance that the fiscal and economic conditions referred to above
will not affect the market value or marketability of the Bonds or the
ability of the respective obligors to pay principal of and interest on
the Bonds when due.
On July 21, 1994, the Arizona Supreme Court rendered its opinion in
Roosevelt Elementary School District Number 66, et al. v.c. Dianne
Bishop, et al. (the "Roosevelt Opinion"). In this opinion, the Arizona
Supreme Court held that the present statutory financing scheme for public
education in the State of Arizona does not comply with the Arizona
constitution. Subsequently, the Arizona School Boards Association, with
the approval of the appellants and the appellees to the Roosevelt
Opinion, and certain Arizona school districts, filed with the Arizona
Supreme Court motions for clarification of the Roosevelt Opinion,
specifically with respect to seeking prospective application of the
Roosevelt Opinion. On July 29, 1994, the Arizona Supreme Court clarified
the Roosevelt Opinion to hold that such opinion will have prospective
effect only.
Certain other circumstances are relevant to the market value,
marketability and payment of any hospital and health care revenue bonds
in the Arizona Trust. The Arizona Legislature has in the past sought to
enact health care cost control legislation. Certain other health care
regulatory laws have expired. It is expected that the Arizona
legislature will at future sessions continue to attempt to adopt
legislation concerning health care cost control and related regulatory
matters. The effect of any such legislation or of the continued absence
of any legislation restricting hospital bed increases and limiting new
hospital construction on the ability of Arizona hospitals and other
health care providers to pay debt service on their revenue bonds cannot
be determined at this time.
Arizona does not participate in the federally administered Medicaid
program. Instead, the state administers an alternative program, Arizona
Health Care Cost Containment System ("AHCCCS"), which provides health
care to indigent persons meeting certain financial requirements, through
managed care programs. In fiscal year 1994, AHCCCS was financed
approximately 60% by federal funds, 29% by state funds, and 11% by county
funds.
Under state law, hospitals retain the authority to raise rates with
notification and review by, but not approval from, the Department of
Health Services. Hospitals in Arizona have experienced profitability
problems along with those in other states. At least two Phoenix-based
hospitals have defaulted on or reported difficulties in meeting their
bond obligations during the past three years.
Insofar as tax-exempt Arizona public utility pollution control
revenue bonds are concerned, the issuance of such bonds and the periodic
rate increases needed to cover operating costs and debt service are
subject to regulation by the Arizona Corporation Commission, the only
significant exception being the Salt River Project Agricultural
Improvement and Power District which, as a Federal instrumentality, is
exempt from rate regulation. On July 15, 1991, several creditors of
Tucson Electric Power Company ("Tucson Electric") filed involuntary
petitions under Chapter 11 of the U.S. Bankruptcy Code to force Tucson
Power to reorganize under the supervision of the bankruptcy court. On
December 31, 1991, the Bankruptcy Court approved the utility's motion to
dismiss the July petition after five months of negotiations between
Tucson Electric and its creditors to restructure the utility's debts and
other obligations. In December 1992, Tucson Electric announced that it
had completed its financial restructuring. In January 1993, Tucson
Electric asked the Arizona Corporation Commission for a 9.3% average rate
increase. Tucson Electric serves approximately 270,000 customers,
primarily in the Tucson area. Inability of any regulated public utility
to secure necessary rate increases could adversely affect, to an
indeterminable extent, its ability to pay debt service on its pollution
control revenue bonds.
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Based on a recent U.S. Supreme Court ruling, the State has
determined to refund $197 million, including statutory interest, in State
income taxes previously collected from Federal retirees on their
pensions. This payment will be made over a four-year period beginning
with approximately $14.6 million in tax refunds in fiscal year 1993-94.
A combination of tax refunds and tax credits will be used to satisfy this
liability.
The foregoing information constitutes only a brief summary of some
of the general factors which may impact certain issuers of Bonds and does
not purport to be a complete or exhaustive description of all adverse
conditions to which the issuers of Bonds held by the Arizona Trusts are
subject, Additionally, many factors including national economic, social
and environmental policies and conditions, which are not within the
control of the issuers of the Bonds, could affect or could have an
adverse impact on the financial condition of the issuers. The Sponsor is
unable to predict whether or to what extent such factors or other factors
may affect the issuers of the Bonds, the market value or marketability of
the Bonds or the ability of the respective issuers of the Bonds acquired
by the Arizona Trust to pay interest on or principal of the Bonds.
At the time of the closing for the Arizona Trust, Special Counsel to
the Fund for Arizona tax matters rendered an opinion under then existing
Arizona income tax law applicable to taxpayers whose income is subject to
Arizona income taxation substantially to the effect that:
For Arizona income tax purposes, each Unitholder will be treated as
the owner of a pro rata portion of the Arizona Trust, and the income of
the Trust therefore will be treated as the income of the Unitholder under
State law.
For Arizona income tax purposes, interest on the Bonds which is
excludable from Federal gross income and which is exempt from Arizona
income taxes when received by the Arizona Trust, and which would be
excludable from Federal gross income and exempt from Arizona income taxes
if received directly by a Unitholder, will retain its status as tax-
exempt interest when received by the Arizona Trust and distributed to the
Unitholders.
To the extent that interest derived from the Arizona Trust by a
Unitholder with respect to the Bonds is excludable from Federal gross
income, such interest will not be subject to Arizona income taxes;
Each Unitholder will receive taxable gain or loss for Arizona income
tax purposes when Bonds held in the Arizona Trust are sold, exchanged,
redeemed or paid at maturity, or when the Unitholder redeems or sells
Units, at a price that differs from original cost as adjusted for
accretion of any discount or amortization of any premium and other basis
adjustments, including any basis reduction that may be required to
reflect a Unitholder's share of interest, if any, accruing on Bonds
during the interval between the Unitholder's settlement date and the date
such Bonds are delivered to the Arizona Trust, if later.
Amounts paid by the Insurer under an insurance policy or policies
issued to the Trust, if any, with respect to the Bonds in the Trust which
represent maturing interest on defaulted obligations held by the Trustee
will be exempt from State income taxes if, and to the same extent as,
such interest would have been so exempt if paid by the issuer of the
defaulted obligations provided that, at the time such policies are
purchased, the amounts paid for such policies are reasonable, customary
and consistent with the reasonable expectation that the issuer of the
obligations, rather than the insurer, will pay debt service on the
obligations.
Arizona law does not permit a deduction for interest paid or
incurred on indebtedness incurred or continued to purchase or carry Units
in the Arizona Trust, the interest on which is exempt from Arizona income
taxes.
Neither the Bonds nor the Units will be subject to Arizona property
taxes, sales taxes or use taxes.
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Counsel to the Sponsor has expressed no opinion with respect to
taxation under any other provisions of Arizona law. Ownership of the
Units may result in collateral Arizona tax consequences to certain
taxpayers. Prospective investors should consult their tax advisors as to
the applicability of any such collateral consequences.
Arkansas Trusts. The Constitution of Arkansas
specifically prohibits the creation of any State general obligation debt
unless authorized in a Statewide general election. Although the State of
Arkansas defaulted on some of its general obligation debt during the
depression in the later 1930s, it has not failed to pay the principal and
interest on any of its general obligations when due since that time.
Act 496 of 1981, as amended, the "Arkansas Water Resources
Development Act of 1981" ("Act 496"), authorizes the issuance of State
Water Resources Development General Obligation Bonds by the State of
Arkansas, acting by and through the Arkansas Soil and Water Conservation
Commission. The issuance of bonds pursuant to Act 496 was approved by
the electors of the State at the general election on November 2, 1982.
The total principal amount of bonds issued during any fiscal biennium may
not exceed $15,000,000, and the total principal of all bonds issued under
Act 496 may not exceed $100,000,000. All bonds to be issued under Act
496 shall be direct general obligations of the State, the principal and
interest of which are payable from the general revenues of the State.
The State of Arkansas has outstanding two series of bonds in the
aggregate principal amount of $39,925,000 under Act 496 as of June 30,
1995.
Act 686 of 1987, the "Arkansas Waste Disposal and Pollution
Abatement Facilities Financing Act of 1987" ("Act 686"), authorizes the
issuance of Arkansas Waste Disposal and Pollution Abatement Facilities
General Obligation Bonds by the State of Arkansas, acting by and through
the Arkansas Soil and Water Conservation Commission. The issuance of
bonds pursuant to Act 686 was approved by the electors of the State at
the general election on November 8, 1988. The total principal amount of
bonds issued during any fiscal biennium may not exceed $50,000,000, and
the total principal of all bonds issued under Act 686 may not exceed
$250,000,000. All bonds to be issued under Act 686 shall be direct
general obligations of the State, the principal and interest of which are
payable from the general revenues of the State. The State of Arkansas
has outstanding two series of bonds in the aggregate principal amount of
$20,720,000 under Act 686 as of June 30, 1995.
Act 683 of 1989, the "Arkansas College Savings Bond Act of 1989"
("Act 683"), authorizes the issuance of Arkansas College Savings General
Obligation Bonds by the State of Arkansas, acting by and through the
Arkansas Development Finance Authority. The issuance of bonds pursuant
to Act 683 was approved by the electors of the State at the general
election on November 6, 1990. The total principal amount of bonds issued
during any fiscal biennium may not exceed $100,000,000, and the total
principal of all bonds issued under Act 683 may not exceed $300,000,000.
All bonds to be issued under Act 683 shall be direct general obligations
of the State, the principal and interest of which are payable from the
general revenues of the State. The State of Arkansas has outstanding
four series of bonds under Act 683 having a combined accreted value for
capital appreciation bonds and face value for coupon bonds of $86,084,000
as of June 30, 1995.
Deficit spending has been prohibited by statute in Arkansas since
1945. The Revenue Stabilization Law requires that before any State
spending can take place, there must be an appropriation by the General
Assembly and there must be funds available in the fund from which the
appropriation has been made. The State is prohibited from borrowing
money to put into any State fund from which appropriations can be paid.
Information regarding the financial condition of the State is
included for the purpose of providing information about general economic
conditions that may affect issuers of the Bonds in Arkansas. The
Arkansas economy represents approximately 2.0% of the total United
States' economy. Its small size causes the Arkansas economy to follow
the national economy. Fluctuations in the national economy are often
mirrored by coinciding or delayed fluctuations in the Arkansas economy.
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Arkansas had a population of 2,435,000 in 1994. This represents a
moderate growth in population since 1980. According to the 1990 federal
census, population is broken down between urban and rural areas as
follows: 53.5% urban and 46.5% rural.
Arkansas' economy is both agricultural and manufacturing based.
Thus, the State of Arkansas feels the full force of the business cycle
and also sees the growth swing from positive to negative as conditions in
agriculture change.
Agriculture is a significant and historical component of Arkansas'
economy. Over 40% of the land in Arkansas is devoted to agriculture.
Arkansas ranks first in the nation in rice production, first in
commercial broilers and fourth in cotton.
During the past two decades, Arkansas' economic base has shifted
from agriculture to light manufacturing. The State is now moving toward
a heavier manufacturing base involving more sophisticated processes and
products such as electrical machinery, transportation equipment,
fabricated metals and electronics. In fact, Arkansas now has a higher
percentage of workers involved in manufacturing than the national
average. The diversification of economic interests has lessened the
State's cyclical sensitivity to impact by any single sector.
Manufacturing continues to be a leading component of Arkansas'
economy. Manufacturing contributes over 25% of the total wage and salary
component of personal income. There is an almost equal division between
durable and nondurable goods. Non-manufacturing and non-agricultural
goods provide a balanced proportion of the overall economy and tend to
insulate any adverse economic conditions which affect manufacturing.
From 1992 to 1994, unemployment declined steadily. In 1994, the Arkansas
rate of unemployment was 5.3%, compared to 6.1% for the nation. Total
personal income had an average annual growth of 5.2% from 1991 to 1994
and a 6.7% increase from 1994 to 1995. This is higher than the national
increase of 6.2% from 1994-95. Per capita personal income increased from
$17,182 in 1994 to $18,101 in 1995, reflecting an average annual growth
of 5.3%.
Counties and municipalities may issue general obligation bonds
(pledging an ad valorem tax), special obligation bonds (pledging other
specific tax revenues) and revenue bonds (pledging only specific revenues
from sources other than tax revenues). School districts may issue
general obligation bonds (pledging ad valorem taxes). Revenue bonds may
also be issued by agencies and instrumentalities of counties,
municipalities and the State of Arkansas but, as in all cases of revenue
bonds, neither the full faith and credit nor the taxing power of the
State of Arkansas or any municipality or county thereof is pledged to the
repayment of those bonds. Revenue bonds can be issued only for public
purposes, including, but not limited to, industry, housing, health care
facilities, airports, port facilities and water and sewer projects.
The foregoing information constitutes only a brief summary of some
of the general factors which may impact certain issuers of Bonds and does
not purport to be a complete or exhaustive description of all adverse
conditions to which the issuers of Bonds held by the Arkansas Trust are
subject. Additionally, many factors including national economic, social
and environmental policies and conditions, which are not within the
control of the issuers of the Bonds, could affect or could have an
adverse impact on the financial condition of the issuers. The Sponsor is
unable to predict whether or to what extent such factors or other factors
may affect the issuers of the Bonds, the market value or marketability of
the Bonds or the ability of the respective issuers of the Bonds acquired
by the Arkansas Trust to pay interest on or principal of the Bonds.
At the time of the closing for each Arkansas Trust, Special Counsel
to the Arkansas Trust for Arkansas tax matters rendered an opinion under
then existing Arkansas income tax law applicable to taxpayers whose
income is subject to Arkansas income taxation substantially to the effect
that:
The Arkansas Trust is not an association taxable as a corporation or
otherwise for purposes of Arkansas income taxation;
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Each Arkansas Unitholder will be treated as the owner of a pro rata
portion of the Arkansas Trust for Arkansas income tax purposes, and will
have a taxable event when the Arkansas Trust disposes of a Bond or when
the Unitholder sells, exchanges, redeems or otherwise disposes of his
Units;
Any gains realized upon the sale, exchange, maturity, redemption or
other disposition of Bonds held by the Arkansas Trust resulting in the
distribution of income to Arkansas Unitholders will be subject to
Arkansas income taxation to the extent that such income would be subject
to Arkansas income taxation if the Bonds were held, sold, exchanged,
redeemed or otherwise disposed of by the Arkansas Unitholders; and
Interest on Bonds, issued by the State of Arkansas, or by or on
behalf of political subdivisions, thereof, that would be exempt from
Federal income taxation when paid directly to an Arkansas Unitholder will
be exempt from Arkansas income taxation when received by the Arkansas
Trust and attributed to such Arkansas Unitholder and when distributed to
such Arkansas Unitholder.
California Trusts. The Trust will invest
substantially all of its assets in California Municipal Obligations. The
Trust is therefore susceptible to political, economic or regulatory
factors affecting issuers of California Municipal Obligations. These
include the possible adverse effects of certain California constitutional
amendments, legislative measures, voter initiatives and other matters
that are described below. The following information provides only a
brief summary of the complex factors affecting the financial situation in
California (the "State") and is derived from sources that are generally
available to investors and are believed to be accurate. No independent
verification has been made of the accuracy or completeness of any of the
following information. It is based in part on information obtained from
various State and local agencies in California or contained in official
statements for various California Municipal Obligations.
There can be no assurance that future statewide or regional economic
difficulties, and the resulting impact on State or local governmental
finances generally, will not adversely affect the market value of
California Municipal Obligations held in the portfolio of the Trust or
the ability of particular obligors to make timely payments of debt
service on (or relating to) those obligations.
California's economy is the largest among the 50 states and one of
the largest in the world. The State's population of more than 32 million
represents over 12% of the total United States population and grew by 27%
in the 1980s. Total personal income in the State in 1995 of $760.4
billion accounts for almost 13% of all personal income in the nation.
Total employment is over 14 million, the majority of which is in the
service, trade, and manufacturing sectors.
From mid-1990 to late 1993, the State's economy suffered its worst
recession since the 1930s, with recovery starting later than for the
nation as a whole. The State has experienced the worst job losses of any
post-war recession. Prerecession job levels may not be realized until
near the end of the decade. The largest job losses have been in Southern
California, led by declines in the aerospace and construction industries.
Weakness statewide occurred in manufacturing, construction, services and
trade. Additional military base closures will have further adverse
effects on the State's economy later in the decade.
Since the start of 1994, the California economy has shown signs of
steady recovery and growth. The State Department of Finance reports net
job growth, particularly in construction and related manufacturing,
wholesale and retail trade, transportation, recreation and services.
This growth has offset the continuing but slowing job losses in the
aerospace industry and restructuring of the finance and utility sectors.
Unemployment in the State was down substantially in 1995 to 7.8% from its
10% peak in January, 1994, but remained higher than the national average
rate in 1995 of 5.6%. As of November 1996, the 11-month average
unemployment rate in California was 7.3%. This figure decreased from an
8.2% unemployment rate in January 1996 to 6.7% in November 1996. The
national unemployment rate in 1996 was 5.4%. Delay or slowdown in
recovery will adversely affect State revenues.
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Certain California Municipal Obligations may be obligations of
issuers which rely in whole or in part, directly or indirectly, on ad
valorem property taxes as a source of revenue. The taxing powers of
California local governments and districts are limited by Article XIIIA
of the California Constitution, enacted by the voters in 1978 and
commonly known as "Proposition 13." Briefly, Article XIIIA limits to 1%
of full cash value the rate of ad valorem property taxes on real property
and generally restricts the reassessment of property to 2% per year,
except upon new construction or change of ownership (subject to a number
of exemptions). Taxing entities may, however, raise ad valorem taxes
above the 1% limit to pay debt service on voter-approved bonded
indebtedness.
Under Article XIIIA, the basic 1% ad valorem tax levy is applied
against the assessed value of property as of the owner's date of
acquisition (or as of March 1, 1975, if acquired earlier), subject to
certain adjustments. This system has resulted in widely varying amounts
of tax on similarly situated properties. Several lawsuits have been
filed challenging the acquisition-based assessment system of Proposition
13, and on June 18, 1992, the U.S. Supreme Court announced a decision
upholding Proposition 13.
Article XIIIA prohibits local governments from raising revenues
through ad valorem property taxes above the 1% limit; it also requires
voters of any governmental unit to give two-thirds approval to levy any
"special tax." Court decisions, however, allowed non-voter approved levy
of "general taxes" which were not dedicated to a specific use. In
response to these decisions, the voters of the State in 1986 adopted an
initiative statute which imposed significant new limits on the ability of
local entities to raise or levy general taxes, except by receiving
majority local voter approval. Significant elements of this initiative,
"Proposition 62," have been overturned in recent court cases. An
initiative proposed to re-enact the provisions of Proposition 62 as a
constitutional amendment was defeated by the voters in November 1990, but
such a proposal may be renewed in the future.
California and its local governments are subject to an annual
"appropriations limit" imposed by Article XIIIB of the California
Constitution, enacted by the voters in 1979 and significantly amended by
Propositions 98 and 111 in 1988 and 1990, respectively. Article XIIIB
prohibits the State or any covered local government from spending
"appropriations subject to limitation" in excess of the appropriations
limit imposed. "Appropriations subject to limitation" are authorizations
to spend "proceeds of taxes," which consists of tax revenues and certain
other funds, including proceeds from regulatory licenses, user charges or
other fees, to the extent that such proceeds exceed the cost of providing
the product or service, but "proceeds of taxes" excludes most State
subventions to local governments. No limit is imposed on appropriations
of funds which are not "proceeds of taxes," such as reasonable user
charges or fees and certain other non-tax funds, including bond proceeds.
Among the expenditures not included in the Article XIIIB
appropriations limit are (1) the debt service cost of bonds issued or
authorized prior to January 1, 1979, or subsequently authorized by the
voters, (2) appropriations arising from certain emergencies declared by
the Governor, (3) appropriations for certain capital outlay projects,
(4) appropriations by the State of post-1989 increases in gasoline taxes
and vehicle weight fees, and (5) appropriations made in certain cases of
emergency.
The appropriations limit for each year is adjusted annually to
reflect changes in cost of living and population, and any transfers of
service responsibilities between government units. The definitions for
such adjustments were liberalized in 1990 by Proposition 111 to follow
more closely growth in California's economy.
"Excess" revenues are measured over a two-year cycle. With respect
to local governments, excess revenues must be returned by a revision of
tax rates or fee schedules within the two subsequent fiscal years. The
appropriations limit for a local government may be overridden by
referendum under certain conditions for up to four years at a time. With
respect to the State, 50% of any excess revenues is to be distributed to
K-12 school districts and community college districts (collectively,
"K-14 districts") and the other 50% is to be refunded to taxpayers. With
more liberal annual adjustment factors since 1988, and depressed revenues
since 1990 because of the recession, few governments, including the
State, are currently operating near their spending limits, but this
condition may change over time. Local governments may by voter approval
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exceed their spending limits for up to four years. During Fiscal Year
1986-87, State receipts from proceeds of taxes exceeded its
appropriations limit by $1.1 billion, which was returned to taxpayers.
Since that year, appropriations subject to limitations have been under
the State limit. State appropriations were $6.5 billion under the limit
for Fiscal Year 1995-96.
Because of the complex nature of Articles XIIIA and XIIIB of the
California Constitution, the ambiguities and possible inconsistencies in
their terms, and the impossibility of predicting future appropriations or
changes in population and cost of living, and the probability of
continuing legal challenges, it is not currently possible to determine
fully the impact of Article XIIIA or Article XIIIB on California
Municipal Obligations or on the ability of California or local
governments to pay debt service on such California Municipal Obligations.
It is not presently possible to predict the outcome of any pending
litigation with respect to the ultimate scope, impact or
constitutionality of either Article XIIIA or Article XIIIB, or the impact
of any such determinations upon State agencies or local governments, or
upon their ability to pay debt service on their obligations. Future
initiative or legislative changes in laws or the California Constitution
may also affect the ability of the State or local issuers to repay their
obligations.
Under the California Constitution, debt service on outstanding
general obligation bonds is the second charge to the General Fund after
support of the public school system and public institutions of higher
education. Total outstanding general obligation bond and lease purchase
debt of the State increased from $9.4 billion at June 30, 1987 to $23.8
billion at February 1, 1996. In FY 1994-95, debt service on general
obligation bonds and lease purchase debt was approximately 5.3% of
General Fund revenues.
The principal sources of General Fund revenues in 1994-95 were the
California personal income tax (43% of total revenues), the sales tax
(34%), bank and corporation taxes (13%), and the gross premium tax on
insurance (3%). California maintains a Special Fund for Economic
Uncertainties (the "Economic Uncertainties Fund"), derived from General
Fund revenues, as a reserve to meet cash needs of the General Fund, but
which is required to be replenished as soon as sufficient revenues are
available. Year-end balances in the Economic Uncertainties Fund are
included for financial reporting purposes in the General Fund balance.
In most recent years, the State has budgeted to maintain the Economic
Uncertainties Fund at around 3% of General Fund expenditures but
essentially no reserve was budgeted from 1992-93, to 1995-96 because
revenues had been reduced by the recession and an accumulated budget
deficit had to be repaid.
Throughout the 1980s, State spending increased rapidly as the State
population and economy also grew rapidly, including increased spending
for many assistance programs to local governments, which were constrained
by Proposition 13 and other laws. The largest State program is
assistance to local public school districts. In 1988, an initiative
(Proposition 98) was enacted which (subject to suspension by a two-thirds
vote of the Legislature and the Governor) guarantees local school
districts and community college districts a minimum share of State
General Fund revenues (currently about 35%).
Since the start of 1990-91 Fiscal Year, the State has faced adverse
economic, fiscal and budget conditions. The economic recession seriously
affected State tax revenues. It also caused increased expenditures for
health and welfare programs. The State is also facing a structural
imbalance in its budget with the largest programs supported by the
General Fund (education, health, welfare and corrections) growing at
rates significantly higher than the growth rates for the principal
revenue sources of the General Fund. These structural concerns will be
exacerbated in coming years by the expected need to substantially
increase capital and operating funds for corrections as a result of a
"Three Strikes" law enacted in 1994.
As a result of these factors, among others, from the late 1980's
until 1992-1993, the State had a period of nearly chronic budget
imbalance, with expenditures exceeding revenues in four out of six years,
and the State accumulated and sustained a budget deficit in the budget
reserve, the Special Fund for Economic Uncertainties ("SFEU") approaching
$2.8 billion at its peak at June 30, 1993. Starting in the 1990-91
Fiscal Year and for each year thereafter, each budget required
multibillion dollar actions to bring projected revenues and expenditures
into balance and to close large "budget gaps" which were identified. The
Legislature and Governor eventually agreed on a number of different steps
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to produce Budget Acts in the years 1991-92 to 1995-96, including:
significant cuts in health and welfare program expenditures; transfers of
program responsibilities and some funding sources from the State to local
governments, coupled with some reduction in mandates on local government;
transfer of about $3.6 billion in annual local property tax revenues from
cities, counties, redevelopment agencies and some other districts to
local school districts, thereby reducing State funding for schools;
reduction in growth of support for higher education programs, coupled
with increases in student fees; revenue increases (particularly in the
1992-93 Fiscal Year budget), most of which were for a short duration;
increased reliance on aid from the federal government to offset the costs
of incarcerating, educating and providing health and welfare services to
undocumented aliens (although these efforts have produced much less
federal aid than the State Administration had requested); and various one-
time adjustment and accounting changes.
Despite these budget actions, the effects of the recession led to
large, unanticipated deficits in the SFEU, as compared to projected
positive balances. By the start of the 1993-94 Fiscal Year, the
accumulated deficit was so large (almost $2.8 billion) that it was
impractical to budget to retire it in one year, so a two-year program was
implemented, using the issuance of revenue anticipation warrants to carry
a portion of the deficit over the end of the fiscal year. When the
economy failed to recover sufficiently in 1993-94, a second two-year plan
was implemented in 1994-95, to carry the final retirement of the deficit
into 1995-96.
The combination of stringent budget actions cutting State
expenditures, and the turnaround of the economy by late 1993, finally led
to the restoration of positive financial results. While General Fund
revenues and expenditures were essentially equal in FY 1992-93 (following
two years of excess expenditures over revenues), the General Fund had
positive operating results in FY 1993-94 and 1994-95, and 1995-96 which
have reduced the accumulated budget deficit to about $70 million as of
June 30, 1996.
A consequence of the accumulated budget deficits in the early
1990's, together with other factors such as disbursement of funds to
local school districts "borrowed" from future fiscal years and hence not
shown in the annual budget, was to significantly reduce the State's cash
resources available to pay its ongoing obligations. When the Legislature
and the Governor failed to adopt a budget for the 1992-93 Fiscal Year by
July 1, 1992, which would have allowed the State to carry out its normal
annual cash flow borrowing to replenish its cash reserves, the State
Controller was forced to issue approximately $3.8 billion of registered
warrants ("IOUs") over a 2-month period to pay a variety of obligations
representing prior years' or continuing appropriations, and mandates from
court orders.
The State's cash condition became so serious that from late spring
1992 until 1995, the State had to rely on issuance of short term notes
which matured in a subsequent Fiscal Year to finance its ongoing deficit,
and pay current obligations. With the repayment of the last of these
deficit notes in April, 1996, the State does not plan to rely further on
external borrowing across Fiscal Years, but will continue its normal cash
flow borrowings during a Fiscal Year.
For the first time in four years, the State entered the 1995-96
fiscal year with strengthening revenues based on an improving economy.
The major feature of the Governor's proposed Budget, a 15% phased tax
cut, was rejected by the Legislature.
The 1995-96 Budget Act was signed by the Governor on August 3, 1995,
34 days after the start of the fiscal year. The Budget Act projected
General Fund revenues and transfers of $44.1 billion, a 3.5% increase
from the prior years. Expenditures were budgeted at $43.4 billion, a 4%
increase. The principal features of the 1995-96 Budget Act are
additional cuts in health and welfare expenditures (some of which are
subject to approvals or waivers by the federal government); assumed
further federal aid for illegal immigrant costs; and an increase in per-
pupil funding for public schools and community colleges, the first such
significant increase in four years.
In its regular budget update in May, 1996, the Department of Finance
indicated that, with the strengthening economy, State General Fund
revenues for 1995-96 would be about $46.1 billion, some $2 billion higher
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than originally estimated. Because of mandated spending for public
schools, the failure to receive expected federal aid for illegal
immigrants, and the failure of Congress to enact welfare reform which the
Administration had expected would reduce State costs, expenditures for
1995-96 were also increased, to about $45.4 billion. As a result, the
Department estimated that the accumulated budget deficit would be reduced
to about $70 million as of June 30, 1996.
As a result of the improved revenues, that State's cash position has
substantially recovered. Only $2 billion of cash flow borrowing was
needed during 1995-96, and only about $3 billion is projected for
1996-97, with no external borrowing over the end of the Fiscal Year.
The Governor's proposed budget for 1996-97 projects $47.1 billion of
revenues and transfers, and $46.5 billion of expenditures, resulting in a
budget reserve at June 30, 1997 of about $500 million. A number of
issues related to the 1996-97 budget still have to be resolved, including
the Governor's tax reduction proposals, and his proposals for further
health and welfare cuts.
State general obligation bonds ratings were reduced in July, 1994 to
"A1" by Moody's and "A" by S&P. Both of these ratings were reduced from
"AAA" levels which the State held until late 1991. There can be no
assurance that such ratings will be maintained in the future. It should
be noted that the creditworthiness of obligations issued by local
California issuers may be unrelated to the creditworthiness of
obligations issued by the State of California, and that there is no
obligation on the part of the State to make payment on such local
obligations in the event of default.
The State is involved in certain legal proceedings (described in the
State's recent financial statements) that, if decided against the State,
may require the State to make significant future expenditures or may
substantially impair revenues. Trial courts have recently entered
tentative decisions or injunctions which would overturn several parts of
the State's recent budget compromises. The matters covered by these
lawsuits include a deferral of payments by the State to the Public
Employees Retirement System, reductions in welfare payments, and the use
of certain cigarette tax funds for health costs. All of these cases are
subject to further proceedings and appeals, and if the State eventually
loses, the final remedies may not have to be implemented in one year.
There are a number of State agencies, instrumentalities and
political subdivisions of the State that issue Municipal Obligations,
some of which may be conduit revenue obligations payable from payments
from private borrowers. These entities are subject to various economic
risks and uncertainties, and the credit quality of the securities issued
by them may vary considerably from the credit quality of the obligations
backed by the full faith and credit of the State.
Property tax revenues received by local governments declined more
than 50% following passage of Proposition 13. Subsequently, the
California Legislature enacted measures to provide for the redistribution
of the State's General Fund surplus to local agencies, the reallocation
of certain State revenues to local agencies and the assumption of certain
governmental functions by the State to assist municipal issuers to raise
revenues. Total local assistance from the State's General Fund was
budgeted at approximately 75% of General Fund expenditures in recent
years, including the effect of implementing reductions in certain aid
programs. To reduce State General Fund support for school districts, the
1992-93 and 1993-94 Budget Acts caused local governments to transfer $3.9
billion of property tax revenues to school districts, representing loss
of the post-Proposition 13 "bailout" aid. The largest share of these
transfers came from counties, and the balance from cities, special
districts and redevelopment agencies. In order to make up this
shortfall, the Legislature proposed and voters approved, in 1993,
dedicating 0.5% of the sales tax to counties and cities for public safety
purposes. In addition, the Legislature has changed laws to relieve local
governments of certain mandates, allowing them to reduce costs.
To the extent the State should be constrained by its Article XIIIB
appropriations limit, or its obligation to conform to Proposition 98, or
other fiscal considerations, the absolute level, or the rate of growth,
of State assistance to local governments may be further reduced. Any
such reductions in State aid could compound the serious fiscal
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constraints already experienced by many local governments, particularly
counties. At least one rural county (Butte) publicly announced that it
might enter bankruptcy proceedings in August 1990, although such plans
were put off after the Governor approved legislation to provide
additional funds for the county. Other counties have also indicated that
their budgetary condition is extremely grave. The Richmond Unified
School District (Contra Costa County) entered bankruptcy proceedings in
May, 1991, but the proceedings have been dismissed. Los Angeles County,
the largest in the State, has reported severe fiscal problems, leading to
a nominal $1.2 billion deficit in its 1995-96 budget, half of which was
in the County healthcare system. The gaps were closed only with
significant cuts in services and personnel, particularly in the health
care system, federal aid, and transfer of some funds from other local
governments to the County pursuant to special legislation. The County's
debt was downgraded by Moody's and S&P in the summer of 1995. Orange
County, just emerged from Federal Bankruptcy Court protection in June
1996, has significantly reduced county services and personnel, and faces
strict financial conditions following large investment fund losses in
1994 which resulted in bankruptcy.
California Municipal Obligations which are assessment bonds may be
adversely affected by a general decline in real estate values or a
slowdown in real estate sales activity. In many cases, such bonds are
secured by land which is undeveloped at the time of issuance but
anticipated to be developed within a few years after issuance. In the
event of such reduction or slowdown, such development may not occur or
may be delayed, thereby increasing the risk of a default on the bonds.
Because the special assessments or taxes securing these bonds are not the
personal liability of the owners of the property assessed, the lien on
the property is the only security for the bonds. Moreover, in most
cases, the issuer of these bonds is not required to make payments on the
bonds in the event of delinquency in the payment of assessments or taxes,
except from amounts, if any, in a reserve fund established for the bonds.
Certain California long-term lease obligations, though typically
payable from the general fund of the municipality, are subject to
"abatement" in the event the facility being leased is unavailable for
beneficial use and occupancy by the municipality during the term of the
lease. Abatement is not a default, and there may be no remedies
available to the holders of the certificates evidencing the lease
obligation in the event abatement occurs. The most common cases of
abatement are failure to complete construction of the facility before the
end of the period during which lease payments have been capitalized and
uninsured casualty losses to the facility (e.g., due to earthquake). In
the event abatement occurs with respect to a lease obligation, lease
payments may be interrupted (if all available insurance proceeds and
reserves are exhausted) and the certificates may not be paid when due.
Several years ago, the Richmond United School District (the
"District") entered into a lease transaction in which certain existing
properties of the District were sold and leased back in order to obtain
funds to cover operating deficits. Following a fiscal crisis in which
the District's finances were taken over by a State receiver (including a
brief period under bankruptcy court protection), the District failed to
make rental payments on this lease, resulting in a lawsuit by the Trustee
for the Certificate of Participation holders, in which the State was a
named defendant (on the grounds that it controlled the District's
finances). One of the defenses raised in answer to this lawsuit was the
invalidity of the original lease transaction. The trial court has upheld
the validity of the District's lease, and the case has been settled. Any
judgment in any future case against the position asserted by the Trustee
in the Richmond case may have adverse implications for lease transactions
of a similar nature by other California entities.
The repayment of industrial development securities secured by real
property may be affected by California laws limiting foreclosure rights
of creditors. Securities backed by healthcare and hospital revenues may
be affected by changes in State regulations governing cost reimbursements
to health care providers under Medi-Cal (the State's Medicaid program),
including risks related to the policy of awarding exclusive contracts to
certain hospitals.
Limitations on ad valorem property taxes may particularly affect
"tax allocation" bonds issued by California redevelopment agencies. Such
bonds are secured solely by the increase in assessed valuation of a
redevelopment project area after the start of redevelopment activity. In
the event that assessed values in the redevelopment project decline
(e.g., because of a major natural disaster such as an earthquake), the
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tax increment revenue may be insufficient to make principal and interest
payments on these bonds. Both Moody's and S&P suspended ratings on
California tax allocation bonds after the enactment of Articles XIIIA and
XIIIB, and only resumed such ratings on a selective basis.
Proposition 87, approved by California voters in 1988, requires that
all revenues produced by a tax rate increase go directly to the taxing
entity which increased such tax rate to repay that entity's general
obligation indebtedness. As a result, redevelopment agencies (which,
typically, are the issuers of tax allocation securities) no longer
receive an increase in tax increment when taxes on property in the
project area are increased to repay voter-approved bonded indebtedness.
The effect of these various constitutional and statutory changes
upon the ability of California municipal securities issuers to pay
interest and principal on their obligations remains unclear.
Furthermore. other measures affecting the taxing or spending authority of
California or its political subdivisions may be approved or enacted in
the future. Legislation has been or may be introduced which would modify
existing taxes or other revenue-raising measures or which either would
further limit or, alternatively, would increase the abilities of state
and local governments to impose new taxes or increase existing taxes. It
is not presently possible to determine the impact of any such legislation
on California Municipal Obligations in which the Fund may invest future
allocations of state revenues to local governments or the abilities of
state or local governments to pay the interest on, or repay the principal
of, such California Municipal Obligations.
Substantially all of California is within an active geologic region
subject to major seismic activity. Northern California in 1989 and
Southern California in 1994 experienced major earthquakes causing
billions of dollars in damages. The federal government provided more
than $13 billion in aid for both earthquakes, and neither event is
expected to have any long-term negative economic impact. Any California
Municipal Obligation in the Portfolio could be affected by an
interruption of revenues because of damaged facilities, or, consequently,
income tax deductions for casualty losses or property tax assessment
reductions. Compensatory financial assistance could be constrained by
the inability of (i) an issuer to have obtained earthquake insurance
coverage at reasonable rates; (ii) an insurer to perform on its contracts
of insurance in the event of widespread losses; or (iii) the Federal or
State government to appropriate sufficient funds within their respective
budget limitations.
At the time of the closing for each California Trust, Special
Counsel to the California Trust for California tax matters, rendered an
opinion under then existing California income and property tax law
applicable to taxpayers whose income is subject to California income
taxation substantially to the effect that:
(1) the California Trust is not an association taxable as a
corporation and the income of the California Trust will be treated
as the income of the Unitholders under the income tax laws of
California;
(2) amounts treated as interest on the underlying Securities
in the California Trust which are exempt from tax under California
personal income tax and property tax laws when received by the
California Trust will, under such laws, retain their status as tax-
exempt interest when distributed to Unitholders. However, interest
on the underlying Securities attributed to a Unitholder which is a
corporation subject to the California franchise tax laws may be
includable in its gross income for purposes of determining its
California franchise tax. Further, certain interest which is
attributable to a Unitholder subject to the California personal
income tax and which is treated as an item of tax preference for
purposes of the federal alternative minimum tax pursuant to Section
57(a)(5) of the Internal Revenue Code of 1986 may also be treated as
an item of tax preference that must be taken into account in
computing such Unitholder's alternative minimum taxable income for
purposes of the California alternative minimum tax enacted by 1987
California Statutes, chapter 1138. However, because of the
provisions of the California Constitution exempting the interest on
bonds issued by the State of California, or by local governments
within the state, from taxes levied on income, the application of
the new California alternative minimum tax to interest otherwise
exempt from the California personal income tax in some cases may be
unclear;
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(3) under California income tax law, each Unitholder in the
California Trust will have a taxable event when the California Trust
disposes of a Security (whether by sale, exchange, redemption, or
payment at maturity) or when the Unitholder redeems or sells Units.
Because of the requirement that tax cost basis be reduced to reflect
amortization of bond premium, under some circumstances a Unitholder
may realize taxable gains when Units are sold or redeemed for an
amount equal to, or less than, their original cost. The total cost
of each Unit in the California Trust to a Unitholder is allocated
among each of the Bond issues held in the California Trust (in
accordance with the proportion of the California Trust comprised by
each Bond issue) in order to determine his per Unit tax cost for
each Bond issue; and the tax cost reduction requirements relating to
amortization of bond premium will apply separately to the per Unit
tax cost of each Bond issue. Unitholders' bases in their units, and
the bases for their fractional interest in each Trust asset, may
have to be adjusted for their pro rata share of accrued interest
received, if any, on Securities delivered after the Unitholders'
respective settlement dates;
(4) under the California personal property tax laws, bonds
(including the Securities in the California Trust) or any interest
therein is exempt from such tax;
(5) any proceeds paid under the insurance policy issued to the
California Trust with respect to the Securities which represent
maturing interest on defaulted obligations held by the Trustee will
be exempt from California personal income tax if, and to the same
extent as, such interest would have been so exempt if paid by the
issuer of the defaulted obligations; and
(6) under Section 17280(b)(2) of the California Revenue and
Taxation Code, interest on indebtedness incurred or continued to
purchase or carry Units of the California Trust is not deductible
for the purposes of the California personal income tax. While there
presently is no California authority interpreting this provision,
Section 17280(b)(2) directs the California Franchise Tax Board to
prescribe regulations determining the proper allocation and
apportionment of interest costs for this purpose. The Franchise Tax
Board has not yet proposed or prescribed such regulations. In
interpreting the generally similar Federal provision, the Internal
Revenue Service has taken the position that such indebtedness need
not be directly traceable to the purchase or carrying of Units
(although the Service has not contended that a deduction for
interest on indebtedness incurred to purchase or improve a personal
residence or to purchase goods or services for personal consumption
will be disallowed). In the absence of conflicting regulations or
other California authority, the California Franchise Tax Board
generally has interpreted California statutory tax provisions in
accord with Internal Revenue Service interpretations of similar
Federal provisions.
At the respective times of issuance of the Securities, opinions
relating to the validity thereof and to the exemption of interest thereon
from Federal income tax and California personal income tax are rendered
by bond counsel to the respective issuing authorities. Except in certain
instances in which Special Counsel acted as bond counsel to issuers of
Securities, and as such made a review of proceedings relating to the
issuance of certain Securities at the time of their issuance, Special
Counsel has not made any special review for the California Trust of the
proceedings relating to the issuance of the Securities or of the basis
for such opinions.
Colorado Trust. Restrictions on Appropriations and
Revenues. The State Constitution requires that expenditures for any
fiscal year not exceed revenues for such fiscal year. By statute, the
amount of General Fund revenues available for appropriation is based upon
revenue estimates which, together with other available resources, must
exceed annual appropriations by the amount of the unappropriated reserve
(the "Unappropriated Reserve"). The Unappropriated Reserve requirement
for fiscal years 1991, 1992 and 1993 was set at 3% of total
appropriations from the General Fund. For fiscal years 1994 and
thereafter, the Unappropriated Reserve requirement is set at 4%. In
addition to the Unappropriated Reserve, a constitutional amendment
approved by Colorado voters in 1992 requires the State and each local
government to reserve a certain percentage of its fiscal year spending
(excluding bonded debt service) for emergency use (the "Emergency
Reserve"). The minimum Emergency Reserve was set at 2% for 1994 and 3%
for 1995 and later years. For fiscal year 1992 and thereafter, General
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Fund appropriations are also limited by statute to an amount equal to the
cost of performing certain required reappraisals of taxable property plus
an amount equal to the lesser of (i) five percent of Colorado personal
income or (ii) 106% of the total General Fund appropriations for the
previous fiscal year. This restriction does not apply to any General
Fund appropriations which are required as a result of a new federal law,
a final state or federal court order or moneys derived from the increase
in the rate or amount of any tax or fee approved by a majority of the
registered electors of the State voting at any general election. In
addition, the statutory limit on the level of General Fund appropriations
may be exceeded for a given fiscal year upon the declaration of a State
fiscal emergency by the State General Assembly.
The 1995 fiscal year ending General Fund balance was $486.7 million,
or $260.7 million over the Unappropriated Reserve and Emergency Reserve
requirement. The 1996 fiscal year ending General Fund balance was $368.5
million, or $211.8 million over the required Unappropriated Reserve and
Emergency Reserve. Based on December 20, 1996 estimates, the 1997 fiscal
year ending General Fund balance is expected to be $396.3 million, or
$230.2 million over the required Unappropriated Reserve and Emergency
Reserve.
On November 3, 1992, voters in Colorado approved a constitutional
amendment (the "Amendment") which, in general, became effective December
31, 1992, and could restrict the ability of the State and local
governments to increase revenues and impose taxes. The Amendment applies
to the State and all local governments, including home rule entities
("Districts"). Enterprises, defined as government-owned businesses
authorized to issue revenue bonds and receiving under 10% of annual
revenue in grants from all Colorado state and local governments combined,
are excluded from the provisions of the Amendment.
The provisions of the Amendment are unclear and will probably
require judicial interpretation. Among other provisions, beginning
November 4, 1992, the Amendment requires voter approval prior to tax
increases, creation of debt, or mill levy or valuation for assessment
ratio increases. The Amendment also limits increases in government
spending and property tax revenues to specified percentages. The
Amendment requires that District property tax revenues yield no more than
the prior year's revenues adjusted for inflation, voter approved changes
and (except with regard to school districts) local growth in property
values according to a formula set forth in the Amendment. School
districts are allowed to adjust tax levies for changes in student
enrollment. Pursuant to the Amendment, local government spending is to
be limited by the same formula as the limitation for property tax
revenues. The Amendment limits increases in expenditures from the State
General Fund and program revenues (cash funds) to the growth in inflation
plus the percentage change in State population in the prior calendar
year. The bases for initial spending and revenue limits are fiscal year
1992 spending and 1991 property taxes collected in 1992. The bases for
spending and revenue limits for fiscal year 1994 and later years will be
the prior fiscal year's spending and property taxes collected in the
prior calendar year. Debt service changes, reductions and voter-approved
revenue changes are excluded from the calculation bases. The Amendment
also prohibits new or increased real property transfer tax rates, new
State real property taxes and local District income taxes.
Litigation concerning several issues relating to the Amendment was
filed in the Colorado courts. The litigation dealt with three principal
issues: (i) whether Districts can increase mill levies to pay debt
service on general obligation bonds without obtaining voter approval;
(ii) whether a multi-year lease-purchase agreement subject to annual
appropriations is an obligation which requires voter approval prior to
execution of the agreement; and (iii) what constitutes an "enterprise"
which is excluded from the provisions of the Amendment. In September,
1994, the Colorado Supreme Court held that Districts can increase mill
levies to pay debt service on general obligation bonds issued after the
effective date of the Amendment; in June, 1995, the Colorado Supreme
Court validated mill levy increases to pay general obligation bonds
issued prior to the Amendment. In late 1994, the Colorado Court of
Appeals held that multi-year lease-purchase agreements subject to annual
appropriation do not require voter approval. The time to file an appeal
in that case has expired. Finally, in May, 1995, the Colorado Supreme
Court ruled that entities with the power to levy taxes may not themselves
be "enterprises" for purposes of the Amendment; however, the Court did
not address the issue of how valid enterprises may be created.
Litigation in the "enterprise" arena may be filed in the future to
clarify these issues.
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According to the Colorado Economic Perspective, Second Quarter, FY
1996-97, December 20, 1996 (the "Economic Report"), inflation for 1995
was 4.3% and population grew at the rate of 2.3% in Colorado.
Accordingly, under the Amendment, increases in State expenditures during
the 1997 fiscal year will be limited to 6.6% over expenditures during the
1996 fiscal year. The limitation for the 1998 fiscal year is projected
to be 5.9%, based on projected inflation of 3.9% for 1996 and projected
population growth of 2.0% during 1996. The 1996 fiscal year is the base
year for calculating the limitation for the 1997 fiscal year. For the
1996 fiscal year, General Fund revenues totalled $4,230.8 million and
program revenues (cash funds) totalled $1,893.5 million, resulting in
total estimated base revenues of $6,124.3 million. Expenditures for the
1997 fiscal year, therefore, cannot exceed $6,528.5 million. However,
the 1997 fiscal year General Fund and program revenues (cash funds) are
projected to be only $6,499.1 million, or $29.4 million less than
expenditures allowed under the spending limitation.
There is also a statutory restriction on the amount of annual
increases in taxes that the various taxing jurisdictions in Colorado can
levy without electoral approval. This restriction does not apply to
taxes levied to pay general obligation debt.
State Finances. As the State experienced revenue shortfalls in the
mid-1980s, it adopted various measures, including impoundment of funds by
the Governor, reduction of appropriations by the General Assembly, a
temporary increase in the sales tax, deferral of certain tax reductions
and inter-fund borrowings. On a GAAP basis, the State had unrestricted
General Fund balances at June 30 of approximately $133.3 million in
fiscal year 1992, $326.6 million in fiscal year 1993, $405.1 million in
fiscal year 1994 and $486.7 million in fiscal year 1995. The fiscal year
1996 unrestricted General Fund ending balance was $368.5 million with
projections for fiscal year 1997 at $396.3 million.
Revenues for the fiscal year ending June 30, 1996, showed Colorado's
general fund continuing to slow. Revenues grew by $272.3 million, to
$4,268.7 million, a 6.8% increase from 1995. However, this figure was
down from the fiscal year 1995 pace of 7.3%. General Fund expenditures
rose substantially and exceeded revenues by $142.5 million. Reasons for
this consist of a change in how the state manages its emergency reserve,
and a significant increase in the transfer of reserves to the Capital
Construction Fund, and the Police and Fire Pension Association (increases
of $29 million and $32 million, respectively).
For fiscal year 1996, the following tax categories generated the
following percentages of the State's $4,268.7 million total gross
receipts: individual income taxes represented 54.4% of gross fiscal year
1996 receipts; sales, use and other excise taxes represented 33.2% of
gross fiscal year 1996 receipts; and corporate income taxes represented
4.8% of gross fiscal year 1996 receipts. The final budget for fiscal
year 1997 projects General Fund revenues of approximately $4,565.0
million and appropriations (at the 6% expenditure limit) of approximately
$4,151.9 million. The percentages of General Fund revenue generated by
type of tax for fiscal year 1997 are not expected to be significantly
different from fiscal year 1996 percentages.
For fiscal year 1997, General Fund revenues are projected at
$4,565.0 million. Revenue growth is expected to increase 6.9% over
fiscal year 1996 actual revenues. Total general fund expenditures are
estimated at $4,422.2 million. The ending general fund balance, after
reserve set-asides, is $230.2 million.
State Debt. Under its constitution, the State of Colorado is not
permitted to issue general obligation bonds secured by the full faith and
credit of the State. However, certain agencies and instrumentalities of
the State are authorized to issue bonds secured by revenues from specific
projects and activities. The State enters into certain lease
transactions which are subject to annual renewal at the option of the
State. In addition, the State is authorized to issue short-term revenue
anticipation notes. Local governmental units in the State are also
authorized to incur indebtedness. The major source of financing for such
local government indebtedness is an ad valorem property tax. In
addition, in order to finance public projects, local governments in the
State can issue revenue bonds payable from the revenues of a utility or
enterprise or from the proceeds of an excise tax, or assessment bonds
payable from special assessments. Colorado local governments can also
finance public projects through leases which are subject to annual
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appropriation at the option of the local government. Local governments
in Colorado also issue tax anticipation notes. The Amendment requires
prior voter approval for the creation of any multiple fiscal year debt or
other financial obligation whatsoever, except for refundings at a lower
rate or obligations of an enterprise.
State Economy. Based on data published by the State of Colorado,
Office of State Planning and Budgeting as presented in the Economic
Report, Colorado gained 74,966 employees in 1995. The 1995 increase was
down about 10,000 from the 1994 gain, but mirrored the 1993 employment
increase. Services and retail trade were the number one and two largest
growing industries in Colorado in 1995, adding 28,766 (6.0% increase) and
20,905 (6.2% increase) employees, respectively. Transportation,
communications and public utilities reported the largest percentage gain
from 1994 to 1995, at 8.8%. Construction reported the fourth largest
employment gain over the year, at 5.2%, with increases about half of what
they had been in 1994 and 1993 due to the completion of the Denver
International airport. Mining continued to be the weakest industry
sector, with only a 0.5% increase.
The unemployment rate in Colorado remained stable at 4.2% during
both 1994 and 1995. In 1996, the Colorado unemployment rate dropped to
4.0% compared to the 5.4% rate for the nation. Colorado's job growth
rate increased 2.5% in 1996, a decrease from the 4.7% growth rate in
1995. In comparison, the job growth rate for the United States in 1995
and 1996 was 2.7% and 2.0%, respectively. The services sector comprised
28% of Colorado's 1995 employment and generated 38% of the State's
growth.
Personal income rose 8.0% in Colorado during 1995 as compared with
6.3% for the nation as a whole. In 1996, Colorado's personal income
dropped to 6.3%, while still higher than the nation's 1996 rate of 5.6%.
Economic conditions in the State may have continuing effects on
other governmental units within the State (including issuers of the
Colorado Bonds in the Colorado Trust), which, to varying degrees, have
also experienced reduced revenues as a result of recessionary conditions
and other factors.
The foregoing information constitutes only a brief summary of some
of the general factors which may impact certain issuers of Bonds and does
not purport to be a complete or exhaustive description of all adverse
conditions to which the issuers of Bonds held by the Colorado Trusts are
subject. Additionally, many factors including national economic, social
and environmental policies and conditions, which are not within the
control of the issuers of the Bonds, could affect or could have an
adverse impact on the financial condition of the issuers. The Sponsor is
unable to predict whether or to what extent such factors or other factors
may affect the issuers of the Bonds, the market value or marketability of
the Bonds or the ability of the respective issuers of the Bonds acquired
by the Colorado Trusts to pay interest on or principal of the Bonds.
At the time of the closing for each Colorado Trust, Special Counsel
to the Fund for Colorado tax matters rendered an opinion under then
existing Colorado income tax law applicable to taxpayers whose income is
subject to Colorado income taxation substantially to the effect that:
Because Colorado income tax law is based upon the Federal law, the
Colorado Trust is not an association taxable as a corporation for
purposes of Colorado income taxation.
With respect to Colorado Unitholders, in view of the relationship
between Federal and Colorado tax computations described above:
(1) Each Colorado Unitholder will be treated as owning a pro
rata share of each asset of the Colorado Trust for Colorado income
tax purposes in the proportion that the number of Units of such
Trust held by the Unitholder bears to the total number of
outstanding Units of the Colorado Trust, and the income of the
Colorado Trust will therefore be treated as the income of each
Colorado Unitholder under Colorado law in the proportion described
and an item of income of the Colorado Trust will have the same
character in the hands of a Colorado Unitholder as it would in the
hands of the Trustee;
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(2) Interest on Bonds that would not be includable in income
for Colorado income tax purposes when paid directly to a Colorado
Unitholder will be exempt from Colorado income taxation when
received by the Colorado Trust and attributed to such Colorado
Unitholder and when distributed to such Colorado Unitholder;
(3) Any proceeds paid under an insurance policy or policies,
if any, issued to the Colorado Trust with respect to the Bonds in
the Colorado Trust which represent maturing interest on defaulted
Bonds held by the Trustee will be excludable from Colorado adjusted
gross income if, and to the same extent as, such interest is so
excludable for federal income tax purposes if paid in the normal
course by the issuer notwithstanding that the source of payment is
from insurance proceeds provided that, at the time such policies are
purchased, the amounts paid for such policies are reasonable,
customary, and consistent with the reasonable expectation that the
issuer of the Bonds, rather than the insurer, will pay debt service
on the Bonds;
(4) Each Colorado Unitholder will realize taxable gain or loss
when the Colorado Trust disposes of a Bond (whether by sale,
exchange, redemption, or payment at maturity) or when the Colorado
Unitholder redeems or sells Units at a price that differs from
original cost as adjusted for amortization of bond discount or
premium and other basis adjustments (including any basis reduction
that may be required to reflect a Colorado Unitholder's share of
interest, if any, accruing on Bonds during the interval between the
Colorado Unitholder's settlement date and the date such Bonds are
delivered to the Colorado Trust, if later);
(5) Tax basis reduction requirements relating to amortization
of bond premium may, under some circumstances, result in Colorado
Unitholders realizing taxable gain when their Units are sold or
redeemed for an amount equal to or less than their original cost;
and
(6) If interest on indebtedness incurred or continued by a
Colorado Unitholder to purchase Units in the Colorado Trust is not
deductible for federal income tax purposes, it also will be non-
deductible for Colorado income tax purposes.
Unitholders should be aware that all tax-exempt interest, including
their share of interest on the Bonds paid to the Colorado Trust, is taken
into account for purposes of determining eligibility for the Colorado
Property Tax/Rent/Heat Rebate.
Counsel to the Sponsor has expressed no opinion with respect to
taxation under any other provision of Colorado law. Ownership of the
Units may result in collateral Colorado tax consequences to certain
taxpayers. Prospective investors should consult with tax advisors as to
the applicability of any such collateral consequences.
Kansas Trusts. Recovery from the adverse effects of
layoffs, business closures and widespread flooding that occurred in 1993
characterized the Kansas economy in 1994. The continued effects of
layoffs and restructuring slowed employment growth in Kansas during 1994
and employment growth lagged behind the national rate. The unemployment
rate rose from 5.0% in 1993 to a monthly average of 5.3% in 1994.
During 1995, the Kansas economy improved and in 1996, Kansas
employment reflected a strong economy. Labor force employment showed an
increase of 34,000 from November 1995 to November 1996. The 11-month
average (January 1996-November 1996) unemployment rate for the state was
4.0%, the lowest 11-month average since 1979. During 1995 and 1996, the
unemployment rate decreased from 4.4% to 3.9%, respectively. This
compares favorably with a national unemployment rate in 1995 and 1996 of
5.6% and 5.4%, respectively.
In 1993 and 1994, the slowdown in employment growth was concentrated
in the goods producing industries of manufacturing and mining.
Employment growth in Kansas trailed national employment growth in all
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major employment categories except manufacturing and government. The
situation improved in the following years.
In 1996, jobs across Kansas were up 2.3%, for a net increase of
27,100 new jobs. There was a 3.8% growth rate from October 1995 to
October 1996. National job growth for the same period was 2.1%. Total
non-farm employment as of October 1996 was 1,233,200. This was 19,000
higher than the previous year. Trade led growth with the addition of
8,700 new jobs. Manufacturing employment rose by 4,600 over the year,
primarily from increased production of aircraft and parts. More business
in special trade contracting and heavy construction added 3,600
construction jobs during the year. Services employment rose by 2,300,
with substantial increases in social, management, and business services.
Transportation-utilities added 2,100 jobs, primarily from growth in
communications firms. Gains in banking and insurance provided most of
the 1,500 new jobs in the finance division. Mining edged up only 100
over the year. Government had the only decrease, down 3,900 from October
1995.
Per capita personal income increased 4.7% from $20,851 in 1994 to
$21,841 in 1995 (higher than the 1993-94 increase of 4.4%). Kansas's per
capita personal income in 1995 was 94% of the national figure ($23,208)
and Kansas ranked 23rd among the states in per capita personal income.
Total personal income in Kansas in 1994 and 1995 was $53.25 million
and $56.03 million, respectively, an increase of 5.2% (same as in 1993-
94). During the first quarter of 1996, this number increased to $58.15
million. Personal income increased from $57,908 in the first quarter of
1996 to $58,661 in the second quarter of 1996, an increase of 1.3%.
Kansas personal income is estimated to increase 5.2% in 1996 and 5.0% in
1997.
To ensure appropriate balances, the 1990 Kansas legislature enacted
legislation that established minimum ending balances for the State
General Fund. The act established targeted year-end State General Fund
balances as a percentage of state expenditures for the forthcoming fiscal
year. This act phased in over several years and now requires an ending
balance of at least 7.5% of expenditures and demand transfers. The act
provides that the Governor's budget recommendations and legislative-
approved budget must adhere to the balance targets.
The Governor's recommendations for receipts and expenditures would
provide an ending balance of 7.5% of expenditures and demand transfers in
fiscal year 1996 and 7.6% in fiscal year 1997. Although not required by
law, the Governor adjusted the fiscal year 1996 budget to assure the
targeted ending balance requirement through the announced 1.5% rescission
and other budget savings. These actions were necessary given the
shortfall that occurred in fiscal year 1995 receipts, resulting in
reduced estimates for fiscal year 1996 receipts and supplemental
appropriations necessary in education and other areas. The effect of a
regulation change (Real Estate Settlement Procedures Act) alone required
an additional $30.0 million for schools based on changes the act made in
the timing of property tax payments.
For fiscal year 1997, the budget recommendations produce receipts in
excess of expenditures of $5.1 million, a marked change from the deficits
of $91.0 million and $106.6 million in the prior two fiscal years. Given
that the state is projected to reach the minimum ending balance in fiscal
year 1996, this "balancing" was necessary to continue to meet the
targeted ending balance requirements. The budget presented by the
Governor meets the targeted balance and corrects the spending imbalance
(that occurred during fiscal years 1987 to 1993) without a proposed tax
rate increase.
Adjusted estimated receipts to the State General Fund for fiscal
year 1996 are $3,368.0 million. The estimate is a 4.6%, or $149.2
million, increase over fiscal year 1995 revenues of $3,218.8 million.
Expenditures for fiscal years 1995 and 1996 were $3,309.8 million, and
$3,474.5 million, respectively.
The estimated receipts of $3,526.9 million for fiscal year 1997
represent a 4.7% increase above fiscal year 1996 receipts adjusted for
the Governor's recommendations. This is an increase of $159.0 million
above the adjusted fiscal year 1996 amount. Increases to the estimate of
$8.8 million are based on acceleration of the transfer of the State
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Gaming Revenues Fund of receipts over $50.0 million. The State General
Fund expenditures of $3,521.8 million are recommended by the Governor for
fiscal year 1997.
Total receipts to the state were $7.39 billion in fiscal year 1995.
Net receipts are projected to remain constant in fiscal year 1996 (at
$7.49 billion), and then grow by $189.2 million in fiscal year 1997, an
increase of 2.6%. The Governor recommends fiscal year 1997 expenditures
from all funding sources of $7.81 billion. Approximately 57.1% of that
total budget is recommended for aid to local governments (30.6%) or for
direct assistance payments for individuals (26.6%).
Balances in funds in the state budget are projected to experience a
net decline from $1.2 billion to $683.2 million during fiscal year 1996.
This reduction of $513.1 million is primarily attributable to the
reduction in balances of the State Highway Fund of $352.5 million and a
reduction of the balance in the State General Fund of $106.6 million, a
total between the two funds of $459.1 million.
In fiscal year 1997, the reduction in the ending balance of $233.8
million is almost entirely the result of a decline of the State Highway
Fund balances of $212.8 million. Reduction in the State Highway Fund
balances are to be expected, because dollars reserved for the
Comprehensive Highway Program are being expended as major highway
construction projects to be completed in fiscal year 1996 and fiscal year
1997.
Individual income taxes account for the largest source of revenue,
totaling $1.410 billion in fiscal year 1996. The next largest category,
sales and use taxes, is projected to generate $1.392 billion for the
State General Fund in fiscal year 1997.
The foregoing information constitutes only a brief summary of some
of the general factors which may impact certain issuers of Bonds and does
not purport to be a complete or exhaustive description of all adverse
conditions to which the issuers of Bonds held by the Kansas Trust are
subject. Additionally, many factors including national economic, social
and environmental policies and conditions, which are not within the
control of the issuers of the Bonds, could affect or could have an
adverse impact on the financial condition of the issuers. The Sponsor is
unable to predict whether or to what extent such factors or other factors
may affect the issuers of the Bonds, the market value or marketability of
the Bonds or the ability of the respective issuers of the Bonds acquired
by the Kansas Trusts to pay interest on or principal of the Bonds.
At the time of the closing for the Kansas Trust, Special Counsel to
the Kansas Trust for Kansas tax matters rendered an opinion under then
existing Kansas income tax law applicable to taxpayers whose income is
subject to Kansas income taxation, assuming interest on the Bonds is
excludable from gross income under Section 103 of the Internal Revenue
Code of 1986, as amended, substantially to the effect that:
The Kansas Trust is not an association taxable as a corporation for
Kansas income tax purposes;
Each Unitholder of the Kansas Trust will be treated as the owner of
a pro rata portion of the Kansas Trust, and the income and deductions of
the Kansas Trust will therefore be treated as income of the Unitholder
under Kansas law;
Interest on Bonds issued after December 31, 1987 by the State of
Kansas or any of its political subdivisions will be exempt from income
taxation imposed on individuals, corporations and fiduciaries (other than
insurance companies, banks, trust companies or savings and loan
associations). However, interest on Bonds issued prior to January 1,
1988 by the State of Kansas or any of its political subdivisions will not
be exempt from income taxation imposed on individuals, corporations and
fiduciaries (other than insurance companies, banks, trust companies or
savings and loan associations) unless the laws of the State of Kansas
authorizing the issuance of such Bonds specifically exempt the interest
on the Bonds from income taxation by the State of Kansas;
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Interest on Bonds issued by the State of Kansas or any of its
political subdivisions will be subject to the tax imposed on banks, trust
companies and savings and loan associations under Article 11, Chapter 79
of the Kansas statutes;
Interest on Bonds issued by the State of Kansas or any of its
political subdivisions will be subject to the tax imposed on insurance
companies under Article 40, Chapter 28 of the Kansas statutes unless the
laws of the State of Kansas authorizing the issuance of such Bonds
specifically exempt the interest on the Bonds from income taxation by the
State of Kansas; interest on the Bonds which is exempt from Kansas income
taxation when received by the Kansas Trust will continue to be exempt
when distributed to a Unitholder (other than a bank, trust company or
savings and loan association);
Each Unitholder of the Kansas Trust will recognize gain or loss for
Kansas income tax purposes if the Trustee disposes of a Bond (whether by
sale, exchange, payment on maturity, retirement or otherwise) or if the
Unitholder redeems or sells Units of the Kansas Trust to the extent that
such transaction results in a recognized gain or loss for federal income
tax purposes;
Interest received by the Kansas Trust on the Bonds is exempt from
intangibles taxation imposed by any counties, cities and townships
pursuant to present Kansas law; and
No opinion is expressed regarding whether the gross earnings derived
from the Units is subject to intangibles taxation imposed by any
counties, cities and townships pursuant to present Kansas law.
Kentucky Trusts. Population. The 1990 population
census for the Commonwealth of Kentucky showed 3,685,296 persons residing
in the Commonwealth. Over one-fourth of the Commonwealth's residents
lived in Kentucky's twelve largest cities. In 1992, the population had
risen to 3,753,836.
Employment. Total nonagricultural employment in Kentucky averaged
1,643,200 during 1995. As of November 1996, the total number of those
employed in the non-agricultural industry was 1,700,200. In 1995,
manufacturing accounted for 19% of the state's nonagricultural jobs,
wholesale and retail trade 23.8%, services 23.8%, government 17.2%,
transportation and public utilities 5.5%, contract construction 4.5%, and
mining 1.6%. The state's unemployment rate in 1995 was 5.4% and in 1996
it was 5.1%.
Personal Income. Total personal income in Kentucky in 1994 and 1995
was $68.62 million and $72.76 million, respectively, an increase of 6.0%.
Per capita personal income in Kentucky increased 5.1% from $17,931 in
1994 to $18,849 in 1995. Kentucky's per capita personal income in 1995
was 81% of the national figure ($23,208).
Manufacturing. In 1991, Kentucky had more than 4,100 manufacturing
plants. Manufacturing firms added over $23 billion to the state's
economy in 1991. Principal manufacturing industries, by employment, in
1993 were apparel, industrial machinery, electric and electronic
equipment, transportation and food.
Natural Resources. The total value of Kentucky's mineral production
in 1992 was about $4.5 billion. Principal minerals produced in order of
value are coal, crushed stone, natural gas and petroleum. Other minerals
produced in Kentucky include sand and gravel, cement, ball clay, natural
gas liquids and lime.
Budget. According to the 1994-1996 Executive Budget of the
Commonwealth of Kentucky, for Fiscal Years 1995 and 1996, the
distribution of all funds appropriations is as follows: higher education
14.7%, other education 21.7%, human services 12.6%, Medicaid 18.4%,
transportation 10.2%, capital construction 4.3%, and all other 18.1%.
The 1994-1996 budget for the General Fund includes the following
resources (all of the following numbers are in millions of
dollars-rounded) beginning balance of $43.7, revenue estimate of
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$4,599.4, continued appropriations of $61.7, non-revenue receipts of
$114.4 for total resources of $4,819.2. The budget includes the
following appropriations: regular appropriations of $4,744.8, current
year appropriations of $67.1 and necessary governmental expenses of $4.0
for total appropriations of $4,815.9. Therefore, there is a balance of
$3.3 for additional necessary governmental expenses.
Prospective investors should study with care the portfolio of Bonds
in the Kentucky Trust and should consult with their investment advisors
as to the merits of particular issues in the portfolio.
At the time of the closing for each Kentucky Trust, Special Counsel
to each Kentucky Trust for Kentucky tax matters rendered an opinion under
then existing Kentucky income tax law applicable to taxpayers whose
income is subject to Kentucky income taxation substantially to the effect
that:
Each Kentucky Unitholder will be treated as the owner of a pro rata
portion of the Kentucky Trust for Kentucky income tax purposes, and the
income of the Kentucky Trust will therefore be treated as the income of
the Kentucky Unitholders under Kentucky law;
Interest on Bonds that would be exempt from Federal income taxation
when paid directly to a Kentucky Unitholder will be exempt from Kentucky
income taxation when: (i) received by the Kentucky Trust and attributed
to such Kentucky Unitholder; and (ii) distributed to such Kentucky
Unitholder;
Each Kentucky Unitholder will realize taxable gain or loss when the
Kentucky Trust disposes of a Bond (whether by sale, exchange, redemption
or payment of maturity) or when the Kentucky Unitholder redeems or sells
Units at a price that differs from original cost as adjusted for
amortization or accrual, as appropriate, of bond discount or premium and
other basis adjustments (including any basis reduction that may be
required to reflect a Kentucky Unitholder's share of interest, if any,
accruing on Bonds during the interval between the Kentucky Unitholder's
settlement date and the date such Bonds are delivered to the Kentucky
Trust, if later);
Tax cost reduction requirements relating to amortization of bond
premium may, under some circumstances, result in Kentucky Unitholders
realizing taxable gain when their Units are sold or redeemed for an
amount equal to or less than their original cost;
Units of the Kentucky Trust, to the extent the same represent an
ownership in obligations issued by or on behalf of the Commonwealth of
Kentucky or governmental units of the Commonwealth of Kentucky, the
interest on which is exempt from Federal and Kentucky income taxation
will not be subject to ad valorem taxation by the Commonwealth of
Kentucky or any political subdivision thereof; and
If interest on indebtedness incurred or continued by a Kentucky
Unitholder to purchase Units in the Kentucky Trust is not deductible for
Federal income tax purposes, it also will be nondeductible for Kentucky
income tax purposes.
Michigan Trusts. Investors should be aware that the
economy of the State of Michigan has, in the past, proven to be cyclical,
due primarily to the fact that the leading sector of the State's economy
is the manufacturing of durable goods. While the State's efforts to
diversify its economy have proven successful, as reflected by the fact
that the share of employment in the State in the durable goods sector has
fallen from 33.1 percent in 1960 to 17.9 percent in 1990, durable goods
manufacturing still represents a sizable portion of the State's economy.
As a result, any substantial national economic downturn is likely to have
an adverse effect on the economy of the State and on the revenues of the
State and some of its local governmental units.
In July 1995, Moody's Investors Service, Inc. raised the State's
general obligation bond rating to "Aa." In October 1989, Standard &
Poor's raised its rating on the State's general obligation bonds to "AA."
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The State's economy could continue to be affected by changes in the
auto industry, notably consolidation and plant closings resulting from
competitive pressures and over-capacity. Such actions could adversely
affect State revenues and the financial impact on the local units of
government in the areas in which plants are closed could be more severe.
In addition, as described in the State's comprehensive annual financial
report on file with the Nationally Recognized Municipal Securities
Information Repositories, the State is party to various legal
proceedings, some of which could, if unfavorably resolved from the point
of view of the State, substantially affect State programs or finances.
In recent years, the State has reported its financial results in
accordance with generally accepted accounting principles. For the fiscal
year ending September 30, 1991, the State reported a negative year-end
balance in the General Fund/School Aid Fund of $169.4 million. The State
ended each of the 1992, 1993, 1994 and 1995 fiscal years with its General
Fund/School Aid Fund in balance, after having made substantial transfers
to the Budget Stabilization Fund in 1993, 1994, and 1995. In the 1991
through 1993 fiscal years, the State experienced deteriorating cash
balances which necessitated short-term borrowing and the deferral of
certain scheduled cash payments. The State did not borrow for cash flow
purposes in 1994, but borrowed $500 million on March 9, 1995, which was
repaid on September 29, 1995 and $900 million on February 20, 1996, with
a maturity date of September 30, 1996. The State's Budget Stabilization
Fund received transfers of $283 million in 1993, $464 million in 1994 and
$320 million in 1995, bringing the balance in the Budget Stabilization
Fund, after making certain transfers out, to $988 million at
September 30, 1995.
The Michigan Constitution of 1963 limits the amount of total
revenues of the State raised from taxes and certain other sources to a
level for each fiscal year equal to a percentage of the State's personal
income for the prior calendar year. In the event that the State's total
revenues exceed the limit by 1 percent or more, the Michigan Constitution
of 1963 requires that the excess be refunded to taxpayers.
On March 15, 1994, Michigan voters approved a school finance reform
amendment to the State's Constitution which, among other things,
increased the State sales tax rate from 4% to 6% and placed a cap on
property assessment increases for all property taxes. Concurrent
legislation cut the State's income tax rate from 4.6% to 4.4%, reduced
some property taxes and altered local school funding sources to a
combination of property taxes and state revenues, some of which is
provided from other new or increased State taxes. The legislation also
contained other provisions that alter (and, in some cases, may reduce)
the revenues of local units of government, and tax increment bonds could
be particularly affected. While the ultimate impact of the
constitutional amendment and related legislation cannot yet be accurately
predicted, investors should be alert to the potential effect of such
measures upon the operations and revenues of Michigan local units of
government.
In addition, the State Legislature recently adopted a package of
State tax cuts, including a phase out of the intangibles tax, an increase
in exemption amounts for personal income tax, and reductions in the
single business tax.
Although all or most of the Bonds in the Michigan Trust are revenue
obligations or general obligations of local governments or authorities
rather than general obligations of the State of Michigan itself, there
can be no assurance that any financial difficulties the State may
experience will not adversely affect the market value or marketability of
the Bonds or the ability of the respective obligors to pay interest on or
principal of the Bonds, particularly in view of the dependency of local
governments and other authorities upon State aid and reimbursement
programs and, in the case of bonds issued by the State Building
Authority, the dependency of the State Building Authority on the receipt
of rental payments from the State to meet debt service requirements upon
such bonds. In the 1991 fiscal year, the State deferred certain
scheduled cash payments to municipalities, school districts, universities
and community colleges. While such deferrals were made up at specified
later dates, similar future deferrals could have an adverse impact on the
cash position of some local governmental units. Additionally, the State
reduced revenue sharing payments to municipalities below that level
provided under formulas by $10.9 million in the 1991 fiscal year, $34.4
million in the 1992 fiscal year, $45.5 million in the 1993 fiscal year,
$54.5 million in the 1994 fiscal year, and $67.0 million (budgeted) in
the 1995 fiscal year.
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The Michigan Trust may contain general obligation bonds of local
units of government pledging the full faith and credit of the local unit
which are payable from the levy of ad valorem taxes on taxable property
within the jurisdiction of the local unit. Such bonds issued prior to
December 22, 1978, or issued after December 22, 1978 with the approval of
the electors of the local unit, are payable from property taxes levied
without limitation as to rate or amount. With respect to bonds issued
after December 22, 1978, and which were not approved by the electors of
the local unit, the tax levy of the local unit for debt service purposes
is subject to constitutional, statutory and charter tax rate limitations.
In addition, several major industrial corporations have instituted
challenges of their ad valorem property tax assessments in a number of
local municipal units in the State. If successful, such challenges could
have an adverse impact on the ad valorem tax bases of such units which
could adversely affect their ability to raise funds for operation and
debt service requirements.
At the time of the closing for each Michigan Trust, Special Counsel
to each Michigan Trust for Michigan tax matters rendered an opinion under
then existing Michigan income tax law applicable to taxpayers whose
income is subject to Michigan income taxation substantially to the effect
that:
The Michigan Trust and the owners of Units will be treated for
purposes of the Michigan income tax laws and the Single Business Tax in
substantially the same manner as they are for purposes of the Federal
income tax laws, as currently enacted. Accordingly, we have relied upon
the opinion of Counsel to the Sponsor as to the applicability of Federal
income tax laws under the Internal Revenue Code of 1986, as currently
amended, to the Michigan Trust and the Unitholders.
Under the income tax laws of the State of Michigan, the Michigan
Trust is not an association taxable as a corporation; the income of the
Michigan Trust will be treated as the income of the Unitholders of the
Michigan Trust and be deemed to have been received by them when received
by the Michigan Trust. Interest on the Bonds in the Michigan Trust which
is exempt from tax under the Michigan income tax laws when received by
the Michigan Trust will retain its status as tax exempt interest to the
Unitholders of the Michigan Trust.
For purposes of the Michigan income tax laws, each Unitholder of the
Michigan Trust will be considered to have received his pro rata share of
interest on each Bond in the Michigan Trust when it is received by the
Michigan Trust, and each Unitholder will have a taxable event when the
Michigan Trust disposes of a Bond (whether by sale, exchange, redemption
or payment at maturity) or when the Unitholder redeems or sells his Unit,
to the extent the transaction constitutes a taxable event for Federal
income tax purposes. The tax cost of each Unit to a Unitholder will be
established and allocated for purposes of the Michigan income tax laws in
the same manner as such cost is established and allocated for Federal
income tax purposes;
Under the Michigan Intangibles Tax, the Michigan Trust is not
taxable and the pro rata ownership of the underlying Bonds, as well as
the interest thereon, will be exempt to the Unitholders to the extent the
Michigan Trust consists of obligations of the State of Michigan or its
political subdivisions or municipalities, or of obligations of the
possessions of the United States. The Intangibles Tax is being phased
out, with reductions of twenty-five percent (25%) in 1994 and 1995, fifty
percent (50%) in 1996, and seventy-five percent (75%) in 1997, with total
repeal effective January 1, 1998.
The Michigan Single Business Tax replaced the tax on corporate and
financial institution income under the Michigan Income Tax, and the
Intangible Tax with respect to those intangibles of persons subject to
the Single Business Tax the income from which would be considered in
computing the Single Business Tax. Persons are subject to the Single
Business Tax only if they are engaged in "business activity," as defined
in the Act. Under the Single Business Tax, both interest received by the
Michigan Trust on the underlying Bonds and any amount distributed from
the Michigan Trust to a Unitholder, if not included in determining
taxable income for Federal income tax purposes, is also not included in
the adjusted tax base upon which the Single Business Tax is computed, of
either the Michigan Trust or the Unitholders. If the Michigan Trust or
the Unitholders have a taxable event for Federal income tax purposes when
the Michigan Trust disposes of a Bond (whether by sale, exchange,
redemption or payment at maturity) or the Unitholder redeems or sells his
Unit, an amount equal to any gain realized from such taxable event which
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was included in the computation of taxable income for Federal income tax
purposes (plus an amount equal to any capital gain of an individual
realized in connection with such event but excluded in computing that
individual's Federal taxable income) will be included in the tax base
against which, after allocation, apportionment and other adjustments, the
Single Business Tax is computed. The tax base will be reduced by an
amount equal to any capital loss realized from such a taxable event,
whether or not the capital loss was deducted in computing Federal taxable
income in the year the loss occurred. Unitholders should consult their
tax advisor as to their status under Michigan law.
Any proceeds paid under an insurance policy issued to the Trustee of
the Trust, or paid under individual policies obtained by issuers of
Bonds, which, when received by the Unitholders, represent maturing
interest on defaulted obligations held by the Trustee, will be excludable
from the Michigan income tax laws and the Single Business Tax if, and to
the same extent as, such interest would have been so excludable if paid
by the issuer of the defaulted obligations. While treatment under the
Michigan Intangibles Tax is not premised upon the characterization of
such proceeds under the Internal Revenue Code, the Michigan Department of
Treasury should adopt the same approach as under the Michigan income tax
laws and the Single Business Tax.
As the Tax Reform Act of 1986 eliminates the capital gain deduction
for tax years beginning after December 31, 1986, the federal adjusted
gross income, the computation base for the Michigan Income Tax, of a
Unitholder will be increased accordingly to the extent such capital gains
are realized when the Michigan Trust disposes of a Bond or when the
Unitholder redeems or sells a Unit, to the extent such transaction
constitutes a taxable event for Federal income tax purposes.
Minnesota Trusts. In the early 1980s, the State of
Minnesota experienced financial difficulties due to a downturn in the
State's economy resulting from the national recession. In response to
revenue shortfalls, the legislature broadened and increased the State
sales tax, increased income taxes (by increasing rates and eliminating
deductions) and reduced appropriations and deferred payment of State aid,
including appropriations for and aids to local governmental units. The
State's fiscal problems affected other governmental units within the
State, such as local government, school districts and state agencies,
which, in varying degrees, also faced cash flow difficulties. In certain
cases, revenues of local governmental units and agencies were reduced by
the recession.
Because of the State's fiscal problems, Standard & Poor's
Corporation reduced its rating on the State's outstanding general
obligation bonds from AAA to AA+ in August 1981 and to AA in March 1982.
Moody's Investors Service, Inc. lowered its rating on the State's
outstanding general obligation bonds from Aaa to Aa in April 1982. The
State's economy recovered in the July 1, 1983 to June 30, 1985 biennium,
and substantial reductions in the individual income tax were enacted in
1984 and 1985. Standard & Poor's raised its rating on the State's
outstanding general obligation bonds to AA+ in January 1985. In 1986,
1987, 1991, 1992, and 1993, legislation was required to eliminate
projected budget deficits by raising additional revenue, reducing
expenditures, including aids to political subdivisions and higher
education, reducing the State's budget reserve (cash flow account),
imposing a sales tax on purchases by local governmental units, and making
other budgetary adjustments.
State grants and aids represent a large percentage of the total
revenues of cities, towns, counties and school districts in Minnesota.
Even with respect to Bonds that are revenue obligations of the issuer and
not general obligations of the State, there can be no assurance that the
fiscal problems referred to above will not adversely affect the market
value or marketability of the Bonds or the ability of the respective
obligors to pay interest on and principal of the Bonds.
Minnesota's 1994-95 Fiscal Year ended with a general fund and local
government trust fund budgetary balance of $444.63 million. Total
resources available were $17.760 billion. Total expenditures and
transfers were $16.740 billion.
According to a July 1996 report from the Minnesota Department of
Finance, net general fund receipts, including revenues dedicated to the
local government trust fund are estimated to have totaled more than
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$8.983 billion during the 1996 fiscal year, $255.3 (2.9%) more than
forecast. Minnesota's economy has been stronger than forecast in 1996.
Each of the four major taxes-individual, sales, corporate, and motor
vehicle-brought in an estimated $4,146.6 million, $2,905.1 million,
$704.8 million, and $372.1 million, respectively, a total of $226 million
more than forecast. More than $100 million of the additional revenue is
attributable to settlement of tax year 1995 individual income tax
liabilities, some of which may be one time in nature.
The uncommitted general fund balance at the close of the 1996-97
biennium is expected to be $64 million. This forecast reflects the
statutory allocations made in November 1995 to increase the budget
reserve to $220 million and reduce the school property tax recognition
percentage to zero by Fiscal Year 1997. Total general fund revenues for
the 1996-97 biennium are expected to be $18.453 billion. Total general
fund expenditures are expected to reach $18.839 billion.
In recent years, Minnesota has ranked as one of the top five states
in production for dairy products, soy beans, hogs, corn, turkeys, sugar
beets, barley, hay, sweet corn, oats, green peas, and sunflowers. In
1994, Minnesota ranked first in the nation in cash receipts for sugar
beets. Total cash receipts in 1994 were $6.522 billion, with dairy
products and soy beans contributing 18.3% and 15.6%, respectively.
Minnesota's 1980-94 growth rate of 12.1% was the highest of the 12
Midwest states and nearly triple the overall growth rate for the Midwest.
Minnesota's population grew 4.4% from 1990-94, to 4,570,355.
Between 1985 and 1994, more than 435,000 jobs were added in
Minnesota, resulting in employment growth of 24.1% compared to the
national average of 16.9%. The four fastest growing industries in
Minnesota were: services; manufacturing; finance, insurance and real
estate (FIRE); and transportation, communications and public utilities
(TCPU). Manufacturing employment increased 10.5% while overall national
manufacturing employment declined nearly 5%. Minnesota continues to rely
on its competitive advantages to generate jobs in traditional and
emerging manufacturing and service industries. Mining continues to be
the weakest industry, although in 1993, Minnesota accounted for more than
three-quarters of the total U.S. iron ore production. In 1994, 2.244
million were employed in non-farm industries.
The annual unemployment rate in Minnesota was below the U.S. and
Midwest rates every year during the ten-year period 1985 to 1994. In
1994, the Minnesota unemployment rate was at a ten-year low of 3.9%,
compared to the 6.1% for the nation. The highest unemployment rate
Minnesota has experienced in the last ten years was 6.0% in 1985.
Minnesota's unadjusted unemployment rate increased slightly from
3.4% in July 1995 to 3.5% in July 1996. This compares with the U.S. rate
of 5.9% in July 1995 and 5.6% in July 1996. Between July 1995 and July
1996, Minnesota added 42,700 jobs, growing at a rate of 1.8% for total
nonfarm wage and salary employment. This brings the total number of
nonfarm jobs in the state to 2,431,800. In the last year, the services
division accounted for over 40% of the growth and trade made up another
30%. From July 1995 to July 1996, the services sector grew 2.7%, or
17,400 jobs. Manufacturing added 2,400 jobs, a .8% increase. FIRE
gained 3,900 jobs for a growth rate of 2.8%. This was the largest
percentage increase of any industry division in the state. TCPU
increased by 2.7%, or 3,200 jobs. Employment has grown at a 3.5% annual
rate in 1996, well above the national average.
The labor force participation rate in Minnesota was 75.6% in 1994,
almost 14% higher than the U.S. average of 66.6%. In 1994, there were
2.565 million in the labor force. As of July 1996, this number increased
to 2.637 million.
In 1994, per capita personal income in Minnesota was $22,257,
exceeding the national average by 2.5%. In 1995, Minnesota's per capita
personal income rose to $23,971, an increase of 4.5% from 1994, and
exceeding the national average by 3%. Minnesota's personal income is
estimated to increase 5.0% in 1996. The U.S. increase for 1996 is
predicted at 4.7%.
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Minnesota's wage and salary income increased 4.2% in 1993, 6.6% in
1994 and 6.2% in 1995. In comparison, the United States annual increase
was 3.5%, 4.8%, and 5.5% for 1993, 1994, and 1995, respectively. For
1996, Minnesota's wage and salary income is expected to increase 4.5%
compared to the United States' 4.4% increase.
In May 1996, Moody's Investor Services upgraded Minnesota's general
obligation bond rating to Aaa. S&P's current rating is AA+, and Fitch's
rates Minnesota bonds at AAA.
At the time of the closing for each Minnesota Trust, Special Counsel
to each Minnesota Trust for Minnesota tax matters rendered an opinion
under then existing Minnesota income tax law applicable to taxpayers
whose income is subject to Minnesota income taxation substantially to the
effect that:
We understand that the Minnesota Trust will only have income
consisting of (i) interest from bonds issued by the State of Minnesota
and its political and governmental subdivisions, municipalities and
governmental agencies and instrumentalities (the "Minnesota Bonds") and
bonds issued by possessions of the United States (the "Possession Bonds"
and, with the Minnesota Bonds the "Bonds") which would be exempt from
federal and Minnesota income taxation when paid directly to an
individual, trust or estate, (ii) gain on the disposition of such Bonds,
and (iii) proceeds paid under certain insurance policies issued to the
Trustee or to the issuers of the Bonds which represent maturing interest
or principal payments on defaulted Bonds held by the Trustee.
Neither the Sponsor not its counsel have independently examined the
Bonds to be deposited in and held in the Trust. However, although no
opinion is expressed herein regarding such matters, it is assumed that:
(i) the Bonds were validly issued, (ii) the interest thereon is
excludable from gross income for federal income tax purposes and (iii)
the interest thereon is exempt from income tax imposed by Minnesota that
is applicable to individuals, trusts and estates (the "Minnesota Income
Tax"). It should be noted that interest on the Minnesota Bonds is
subject to tax in the case of corporations subject to the Minnesota
Corporate Franchise Tax or the Corporate Alternative Minimum Tax and is a
factor in the computation of the Minimum Fee applicable to financial
institutions; no opinion is expressed with respect to the treatment of
interest on the Possession Bonds for purposes of such taxes. The opinion
set forth below does not address the taxation of persons other than full
time residents of Minnesota.
Although Minnesota state law provides that interest on Minnesota
bonds is exempt from Minnesota state income taxation, the Minnesota state
legislature has enacted a statement of intent that interest on Minnesota
bonds should be subject to Minnesota state income taxation if it is
judicially determined that the exemption discriminates against interstate
commerce, effective for the calendar year in which such a decision
becomes final. It cannot be predicted whether a court would render such
a decision or whether, as a result thereof, interest on Minnesota bonds
and therefore distributions by the Minnesota Trust would become subject
to Minnesota state income taxation.
In the opinion of Counsel to the Sponsor, under existing Minnesota
income tax law as of the date of this prospectus and based upon the
assumptions above:
(1) The Minnesota Trust is not an association taxable as a
corporation and each Unitholder of the Minnesota Trust will be
treated as the owner of a pro rata portion of the Minnesota Trust,
and the income of such portion of the Minnesota Trust will therefore
be treated as the income of the Unitholder for Minnesota Income Tax
purposes;
(2) Income on the Bonds excludable from Minnesota taxable
income for purposes of the Minnesota Income Tax when received by the
Minnesota Trust and which would be excludable from Minnesota taxable
income for purposes of the Minnesota Income Tax if received directly
by a Unitholder, will be excludable from Minnesota taxable income
for purposes of the Minnesota Income Tax when received by the
Minnesota Trust and distributed to such Unitholder;
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(3) To the extent that interest on certain Bonds, if any,
which is includible in the computation of "alternative minimum
taxable income" for federal income tax purposes, such interest will
also be includible in the computation of "alternative minimum
taxable income" for purposes of the Minnesota Alternative Minimum
Tax imposed on individuals, estates and trusts;
(4) Each Unitholder of the Minnesota Trust will recognize gain
or loss for Minnesota Income Tax purposes if the Trustee disposes of
a Bond (whether by redemption, sale or otherwise) or if the
Unitholder redeems or sells Units of the Minnesota Trust to the
extent that such a transaction results in a recognized gain or loss
to such Unitholder for federal income tax purposes;
(5) Tax basis reduction requirements relating to amortization
of bond premium may, under some circumstances, result in Unitholders
realizing taxable gain for Minnesota Income Tax purposes when their
Units are sold or redeemed for an amount equal to or less than their
original cost;
(6) Proceeds, if any, paid under individual insurance policies
obtained by issuers of Bonds or the Trustee which represent maturing
interest on defaulted obligations held by the Trustee will be
excludable from Minnesota net income if, and to the same extent as,
such interest would have been so excludable from Minnesota net
income if paid in the normal course by the issuer of the defaulted
obligation provided that, at the time such policies are purchased,
the amounts paid for such policies are reasonable, customary and
consistent with the reasonable expectation that the issuer of the
bonds, rather than the insurer, will pay debt service on the bonds;
and
(7) To the extent that interest derived from the Minnesota
Trust by a Unitholder with respect to any Possession Bonds is
excludable from gross income for federal income tax purposes, such
interest will not be subject to the Minnesota Income Tax. As noted
above, we have expressed no opinion as to the treatment of interest
on the Possession Bonds for purposes of the Minnesota Corporate
Franchise Tax or the Alternative Minimum Tax or whether it is a
factor in the computation of the Minimum Fee applicable to financial
institutions. Although a federal statute currently provides that
bonds issued by the Government of Puerto Rico, or by its authority,
are exempt from all state and local taxation, the Supreme Court of
Minnesota has held that interest earned on bonds issued by the
Government of Puerto Rico may be included in taxable net income for
purposes of computing the Minnesota bank excise tax. The State of
Minnesota could apply the same reasoning in determining whether
interest on the Possession Bonds is subject to the taxes listed
above on which we express no opinion.
We have not examined any of the Bonds to be deposited and held in
the Minnesota Trust or the proceedings for the issuance thereof or the
opinions of bond counsel with respect thereto, and therefore express no
opinions to the exemption from State income taxes of interest on the
Bonds if received directly by a Unitholder.
Counsel to the Sponsor has expressed no opinion with respect to
taxation under any other provision of Minnesota law. Ownership of the
Units may result in collateral Minnesota tax consequences to certain
taxpayers. Prospective investors should consult their tax advisors as to
the applicability of any such collateral consequences.
Missouri Trusts. The following discussion regarding
constitutional limitations and the economy of the State of Missouri is
included for the purpose of providing general information that may or may
not affect issuers of the Bonds in Missouri.
Missouri's population was 5,117,000 according to the 1990 census of
the United States Bureau of the Census, which represented an increase of
200,000 or 4.1% from the 1980 census of 4,917,000 inhabitants. Based on
the 1990 population, Missouri was the 15th largest state in the nation
and the third most populous state west of the Mississippi River, ranking
behind California and Texas. In 1994, the State's population was
estimated to be 5,278,000 by the United States Bureau of the Census.
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Agriculture is a significant component of Missouri's economy.
According to data of the United States Department of Agriculture,
Missouri ranked 16th in the nation in 1993 in the value of cash receipts
from farm marketing, with over $4.1 billion. Missouri is one of the
nation's leading purebred livestock producers. In 1993, sales of
livestock and livestock products constituted nearly 56% of the State's
total agricultural receipts.
Missouri is one of the leading mineral producers in the Midwest, and
ranked 15th nationally in 1993 in the production of nonfuel minerals.
Total preliminary value of mineral production in 1993 was approximately
$832 million. The State continues to rank first in the nation in the
production of lead. Lead production in 1993 was valued at over $193
million. Missouri also ranks first in the production of refractory clay,
third in barite, fourth in production of zinc and is a leading producer
of lime, cement and stone.
According to data obtained by the Missouri Division of Employment
Security, in 1996, over 2.5 million workers had nonagricultural jobs in
Missouri. Over 27% of these workers were employed in services,
approximately 24% were employed in wholesale and retail trade, and 16.7%
were employed in manufacturing. By October 1996, Missouri had added the
most new jobs in non-farm employment of all the mountain-plains states,
with employment growth of 16,400. In the last ten years, Missouri has
experienced a significant increase in employment in the service sector
and in wholesale and retail trade. Missouri led the ten mountain-plains
states in adding the most service jobs between October 1995 and October
1996, at 23,400.
In 1995, per capita personal income in Missouri was $21,819, a 5.7%
increase over the 1994 figure of $20,644. For the United States as a
whole, per capita income in 1995 was $23,208, a 5.3% increase over the
1994 per capita income of $22,047. In 1995, Missouri had the largest pay
gain for the mountain-plains region, at 4.2%, outpacing the percentage
gain for the nation.
For fiscal year 1994, the majority of revenues for the State of
Missouri will be obtained from individual income taxes (53.1%), sales and
use taxes (30.0%), corporate income taxes (5.9%), and county foreign
insurance taxes (3.0%). Major expenditures for fiscal year 1994 include
elementary and secondary education (30.6%), human services (25.4%),
higher education (14.8%) and desegregation (8.9%).
The fiscal year 1994 budget balances resources and obligations based
on the consensus revenue and refund estimate and an opening balance
resulting from continued withholdings and delayed spending for
desegregation capital projects. The total general revenue operating
budget for fiscal year 1994 exclusive of desegregation is $3,844.6
million.
As of December 31, 1994, the state had spent $2.2 billion on the
desegregation cases in St. Louis and Kansas City. At the end of fiscal
year 1995, that total will rise to an estimated $2.6 billion. The
revised estimate for fiscal year 1995 is $358.9 million and the
projection for fiscal year 1996 is $344.4 million. This expected decline
is due to the completion of many of the court-ordered capital
improvements projections. The state's obligation for desegregation
capital improvements was paid for with one-time revenue sources. After
deducting the one-time capital improvements costs, the ongoing increase
required from general revenue growth is $42.3 million. The increase is
due to significant increases required by new St. Louis magnet schools,
general salary increases ordered by the federal district court in Kansas
City and the costs of voluntary interdistrict transfers in both cases.
These estimates are subject to variables including actions of the school
districts and participating students, future court orders and the
expenditure rates of the school districts.
According to the United States Bureau of Labor Statistics, the 1995
unemployment rate in Missouri was 4.8% and the 1996 rate was 4.1%. This
compares favorably with a nationwide unemployment rate of 5.6% for 1995
and 5.4% for 1996.
Currently, Moody's Investors Service, Inc. rates Missouri general
obligation bonds "Aaa" and Standard & Poor's rates Missouri general
obligation bonds "AAA." Although these ratings indicate that the State
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of Missouri is in relatively good economic health, there can be, of
course, no assurance that this will continue or that particular bond
issues may not be adversely affected by changes in the State or local
economic or political conditions.
The foregoing information constitutes only a brief summary of some
of the general factors which may impact certain issuers of Bonds and does
not purport to be a complete or exhaustive description of all adverse
conditions to which the issuers of Bonds held by the Missouri Trust are
subject. Additionally, many factors including national economic, social
and environmental policies and conditions, which are not within the
control of the issuers of the Bonds, could affect or could have an
adverse impact on the financial condition of the issuers. The Sponsor is
unable to predict whether or to what extent such factors or other factors
may affect the issuers of the Bonds, the market value or marketability of
the Bonds or the ability of the respective issuers of the Bonds acquired
by the Missouri Trust to pay interest on or principal of the Bonds.
At the time of the closing for each Missouri Trust, Special Counsel
to the Fund for Missouri tax matters rendered an opinion under then
existing Missouri income tax law applicable to taxpayers whose income is
subject to Missouri income taxation substantially to the effect that:
(1) The Missouri Trust is not an association taxable as a
corporation for Missouri income tax purposes, and each Unitholder of
the Missouri Trust will be treated as the owner of a pro rata
portion of the Missouri Trust and the income of such portion of the
Missouri Trust will be treated as the income of the Unitholder for
Missouri State Income Tax purposes.
(2) Interest paid and original issue discount, if any, on the
Bonds which would be exempt from the Missouri State Income Tax if
received directly by a Unitholder will be exempt from the Missouri
State Income Tax when received by the Missouri Trust and distributed
to such Unitholder; however, no opinion is expressed herein
regarding taxation of interest paid and original issue discount, if
any, on the Bonds received by the Missouri Trust and distributed to
Unitholders under any other tax imposed pursuant to Missouri law,
including but not limited to the franchise tax imposed on financial
institutions pursuant to Chapter 148 of the Missouri Statutes.
(3) Each Unitholder of the Missouri Trust will recognize gain
or loss for Missouri State Income Tax purposes if the Trustee
disposes of a bond (whether by redemption, sale, or otherwise) or if
the Unitholder redeems or sells Units of the Missouri Trust to the
extent that such a transaction results in a recognized gain or loss
to such Unitholder for Federal income tax purposes. Due to the
amortization of bond premium and other basis adjustments required by
the Internal Revenue Code, a Unitholder, under some circumstances,
may realize taxable gain when his or her Units are sold or redeemed
for an amount less than or equal to their original cost.
(4) Any insurance proceeds paid under policies which represent
maturing interest on defaulted obligations which are excludable from
gross income for Federal income tax purposes will be excludable from
Missouri State Income Tax to the same extent as such interest would
have been so excludable if paid by the issuer of such Bonds held by
the Missouri Trust; however, no opinion is expressed herein
regarding taxation of interest paid and original issue discount, if
any, on the Bonds received by the Missouri Trust and distributed to
Unitholders under any other tax imposed pursuant to Missouri law,
including but not limited to the franchise tax imposed on financial
institutions pursuant to Chapter 148 of the Missouri Statutes.
(5) The Missouri State Income Tax does not permit a deduction
of interest paid or incurred on indebtedness incurred or continued
to purchase or carry Units in the Trust, the interest on which is
exempt from such Tax.
(6) The Missouri Trust will not be subject to the Kansas City,
Missouri Earnings and Profits Tax and each Unitholder's share of
income of the Bonds held by the Missouri Trust will not generally be
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subject to the Kansas City, Missouri Earnings and Profits Tax or the
City of St. Louis Earnings Tax (except that no opinion is expressed
in the case of certain Unitholders, including corporations,
otherwise subject to the St. Louis City Earnings Tax).
Counsel to the Sponsor has expressed no opinion with respect to
taxation under any other provision of Missouri law. Ownership of the
Units may result in collateral Missouri tax consequences to certain
taxpayers. Prospective investors should consult their tax advisors as to
the applicability of any such collateral consequences.
New Jersey Trusts. The New Jersey Trust consists
of a portfolio of Bonds. The Trust is therefore susceptible to
political, economic or regulatory factors affecting issuers of the Bonds.
The following information provides only a brief summary of some of the
complex factors affecting the financial situation in New Jersey (the
"State") and is derived from sources that are generally available to
investors and is believed to be accurate. It is based in part on
information obtained from various State and local agencies in New Jersey.
No independent verification has been made of any of the following
information.
New Jersey is the ninth largest state in population and the fifth
smallest in land area. With an average of 1,062 people per square mile,
it is the most densely populated of all the states. The state's economic
base is diversified, consisting of a variety of manufacturing,
construction and service industries, supplemented by rural areas with
selective commercial agriculture. Historically, New Jersey's average per
capita income has been well above the national average, and in 1994, the
State ranked second among states in per capita personal income ($27,742).
In 1995, New Jersey's per capita personal income increased 5.1% to
$29,848, maintaining its rank as second in the nation.
The New Jersey Economic Policy Council, a statutory arm of the New
Jersey Department of Commerce and Economic Development, has reported in
New Jersey Economic Indicators, a monthly publication of the New Jersey
Department of Labor, Division of Labor Market and Demographic Research,
that in 1988 and 1989 employment in New Jersey's manufacturing sector
failed to benefit from the export boom experienced by many Midwest states
and the State's service sectors, which had fueled the State's prosperity
since 1982, lost momentum. In the meantime, the prolonged fast growth in
the State in the mid 1980s resulted in a tight labor market situation,
which has led to relatively high wages and housing prices. This means
that, while the incomes of New Jersey residents are relatively high, the
State's business sector has become more vulnerable to competitive
pressures.
The onset of the national recession (which officially began in July
1990 according to the National Bureau of Economic Research) caused an
acceleration of New Jersey's job losses in construction and
manufacturing. In addition, the national recession caused an employment
downturn in such previously growing sectors as wholesale trade, retail
trade, finance, utilities and trucking and warehousing. Reflecting the
downturn, the rate of unemployment in the State rose from a low of 3.6%
during the first quarter of 1989 to an estimated 6.2% in September 1996,
which is higher than the national average of 5.2% in September 1996.
Economic recovery is likely to be slow and uneven in New Jersey, with
unemployment receding at a correspondingly slow pace, due to the fact
that some sectors may lag due to continued excess capacity. In addition,
employers even in rebounding sectors can be expected to remain cautious
about hiring until they become convinced that improved business will be
sustained. Also, certain firms will continue to merge or downsize to
increase profitability.
Debt Service. The primary method for State financing of capital
projects is through the sale of the general obligation bonds of the
State. These bonds are backed by the full faith and credit of the State
tax revenues and certain other fees are pledged to meet the principal and
interest payments and if provided, redemption premium payments, if any,
required to repay the bonds. As of June 30, 1995, there was a total
authorized bond indebtedness of approximately $9.48 billion, of which
$3.65 billion was issued and outstanding, $4.0 billion was retired
(including bonds for which provision for payment has been made through
the sale and issuance of refunding bonds) and $1.83 billion was unissued.
The appropriation for the debt service obligation on such outstanding
indebtedness was $466.3 million for fiscal year 1996.
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New Jersey's Budget and Appropriation System. The State operates
on a fiscal year beginning July 1 and ending June 30. At the end of
fiscal year 1989, there was a surplus in the State's general fund (the
fund into which all State revenues not otherwise restricted by statute
are deposited and from which appropriations are made) of $411.2 million.
At the end of fiscal year 1990, there was a surplus in the general fund
of $1 million. At the end of fiscal year 1991, there was a surplus in
the general fund of $1.4 million. New Jersey closed its fiscal year 1992
with a surplus of $760.8 million and fiscal year 1993 with a surplus of
$937.4 million. It is estimated that New Jersey closed its fiscal year
1994 with a surplus of $926.0 million and fiscal year 1995 with a surplus
of $569 million.
In order to provide additional revenues to balance future budgets,
to redistribute school aid and to contain real property taxes, on June
27, 1990, and July 12, 1990, Governor Florio signed into law legislation
which was estimated to raise approximately $2.8 billion in additional
taxes (consisting of $1.5 billion in sales and use taxes and $1.3 billion
in income taxes), the biggest tax hike in New Jersey history. There can
be no assurance that receipts and collections of such taxes will meet
such estimates.
The first part of the tax hike took effect on July 1, 1990, with the
increase in the State's sales and use tax rate from 6% to 7% and the
elimination of exemptions for certain products and services not
previously subject to the tax, such as telephone calls, paper products
(which has since been reinstated), soaps and detergents, janitorial
services, alcoholic beverages and cigarettes. At the time of enactment,
it was projected that these taxes would raise approximately $1.5 billion
in additional revenue. Projections and estimates of receipts from sales
and use taxes, however, have been subject to variance in recent fiscal
years.
The second part of the tax hike took effect on January 1, 1991, in
the form of an increased state income tax on individuals. At the time of
enactment, it was projected that this increase would raise approximately
$1.3 billion in additional income taxes to fund a new school aid formula,
a new homestead rebate program and state assumption of welfare and social
services costs. Projections and estimates of receipts from income taxes,
however, have also been subject to variance in recent fiscal years.
Under the legislation, income tax rates increased from their previous
range of 2% to 3.5% to a new range of 2% to 7%, with the higher rates
applying to married couples with incomes exceeding $70,000 who file joint
returns, and to individuals filing single returns with incomes of more
than $35,000.
The Florio administration had contended that the income tax package
will help reduce local property tax increases by providing more state aid
to municipalities. Under the income tax legislation, the State will
assume approximately $289 million in social services costs that
previously were paid by counties and municipalities and funded by
property taxes. In addition, under the new formula for funding school
aid, an extra $1.1 billion was proposed to be sent by the State to school
districts beginning in 1991, thus reducing the need for property tax
increases to support education programs.
Effective July 1, 1992, the State's sales and use tax rate decreased
from 7% to 6%. Effective January 1, 1994, an across-the-board 5%
reduction in the income tax rates was enacted and effective January 1,
1995, further reductions ranging from 1% up to 10% in income tax rates
took effect. Governor Whitman recently signed into law further
reductions up to 15% for some taxpayers effective January 1, 1996,
completing her campaign promise to reduce income taxes by up to 30% for
most taxpayers within three years.
On June 28, 1996, Governor Whitman signed the New Jersey
Legislature's $16.5 billion budget for Fiscal Year 1997. The balanced
budget, which includes $550 million in surplus, is slightly less than the
1996 budget. Whether the State can achieve a balanced budget depends on
its ability to enact and implement expenditure reductions and to collect
the estimated tax revenues.
Litigation. The State is a party in numerous legal proceedings
pertaining to matters incidental to the performance of routine
governmental operations. Such litigation includes, but is not limited
to, claims asserted against the State arising from alleged torts, alleged
breaches of contracts, condemnation proceedings and other alleged
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violations of State and Federal laws. Included in the State's
outstanding litigation are cases challenging the following: the funding
of teachers' pension funds, the adequacy of medicaid reimbursement for
hospital services, the hospital assessment authorized by the Health Care
Reform Act of 1992, various provisions, and the constitutionality of the
Fair Automobile Insurance Reform Act of 1990, the State's role in a
consent order concerning the construction of a resource facility in
Passaic County, actions taken by the New Jersey Bureau of Securities
against an individual, the State's actions regarding alleged chromium
contamination of State-owned property in Hudson County, the issuance of
emergency redirection orders and a draft permit by the Department of
Environmental Protection and Energy, refusal of the State to share with
Camden County federal funding the State recently received for
disproportionate share hospital payments made to county psychiatric
facilities, and the constitutionality of annual A-901 hazardous and solid
waste licensure renewal fees collected by the Department of Environmental
Protection and Energy. Adverse judgments in these and other matters
could have the potential for either a significant loss of revenue or a
significant unanticipated expenditure by the State.
At any given time, there are various numbers of claims and cases
pending against the State, State agencies and employees seeking recovery
of monetary damages that are primarily paid out of the fund created
pursuant to the New Jersey Tort Claims Act. In addition, at any given
time, there are various numbers of contract claims against the State and
State agencies seeking recovery of monetary damages. The State is unable
to estimate its exposure for these claims.
Debt Ratings. For many years, both Moody's Investors Service, Inc.
and Standard and Poor's Corporation rated New Jersey general obligation
bonds "Aaa" and "AAA," respectively. On July 3, 1991, however, Standard
and Poor's Corporation downgraded New Jersey general obligation bonds to
"AA+." On June 4, 1992, Standard and Poor's Corporation placed New
Jersey general obligation bonds on CreditWatch with negative
implications, citing as its principal reason for its caution the
unexpected denial by the federal government of New Jersey's request for
$450 million in retroactive Medicaid payments for psychiatric hospitals.
These funds were critical to closing a $1 billion gap in the State's $15
billion budget for fiscal year 1992 which ended on June 30, 1992. Under
New Jersey state law, the gap in the budget was required to be closed
before the new budget year began on July 1, 1992. Standard and Poor's
suggested the State could close fiscal 1992's budget gap and help fill
fiscal 1993's hole by a reversion of $700 million of pension
contributions to its general fund under a proposal to change the way the
State calculates its pension liability.
On July 6, 1992, Standard and Poor's Corporation reaffirmed its
"AA+" rating for New Jersey general obligation bonds and removed the debt
from its CreditWatch list, although it stated that New Jersey's long-term
financial outlook was negative. Standard and Poor's Corporation was
concerned that the State was entering fiscal 1993 with only a $26 million
surplus and remained concerned about whether the State economy would
recover quickly enough to meet lawmakers' revenue projections. It also
remained concerned about the recent federal ruling leaving in doubt how
much the State was due in retroactive Medicaid reimbursements and a
ruling by a federal judge, now on appeal, of the State's method for
paying for uninsured hospital patients. However, on July 27, 1994,
Standard and Poor's announced that it was changing the State's outlook
from negative to stable due to a brightening of the State's prospects as
a result of Governor Whitman's effort to trim spending and cut taxes,
coupled with an improving economy. Standard and Poor's reaffirmed its
"AA+" rating at the same time.
On August 24, 1992, Moody's Investors Service, Inc. downgraded New
Jersey general obligation bonds to "Aa1," stating that the reduction
reflected a developing pattern of reliance on nonrecurring measures to
achieve budgetary balance, four years of financial operations marked by
revenue shortfalls and operating deficits, and the likelihood that
serious financial pressures will persist. On August 5, 1994, Moody's
reaffirmed its "Aa1" rating, citing on the positive side New Jersey's
broad-based economy, high income levels, history of maintaining a
positive financial position and moderate (albeit rising) debt ratios, and
on the negative side, a continued reliance on one-time revenue and a
dependence on pension-related savings to achieve budgetary balance.
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At the time of the closing for each New Jersey Trust Special Counsel
to each New Jersey Trust for New Jersey tax matters rendered an opinion
under then existing New Jersey income tax law applicable to taxpayers
whose income is subject to New Jersey income taxation substantially to
the effect that:
(1) The New Jersey Trust will be recognized as a trust and not
an association taxable as a corporation. The New Jersey Trust will
not be subject to the New Jersey Corporation Business Tax or the New
Jersey Corporation Income Tax.
(2) With respect to the non-corporate Unitholders who are
residents of New Jersey, the income of the New Jersey Trust which is
allocable to each such Unitholder will be treated as the income of
such Unitholder under the New Jersey Gross Income Tax. Interest on
the underlying Bonds which would be exempt from New Jersey Gross
Income Tax if directly received by such Unitholder will retain its
status as tax-exempt interest when received by the New Jersey Trust
and distributed to such Unitholder. Any proceeds paid under the
insurance policy issued to the Trustee of the New Jersey Trust with
respect to the Bonds or under individual policies obtained by
issuers of Bonds which represent maturing interest on defaulted
obligations held by the Trustee will be exempt from New Jersey Gross
Income Tax if, and to the same extent as, such interest would have
been so exempt if paid by the issuer of the defaulted obligations.
(3) A non-corporate Unitholder will not be subject to the New
Jersey Gross Income Tax on any gain realized either when the New
Jersey Trust disposes of a Bond (whether by sale, exchange,
redemption, or payment at maturity), when the Unitholder redeems or
sells his Units or upon payment of any proceeds under the insurance
policy issued to the Trustee of the New Jersey Trust with respect to
the Bonds or under individual policies obtained by issuers of Bonds
which represent maturing principal on defaulted obligations held by
the Trustee. Any loss realized on such disposition may not be
utilized to offset gains realized by such Unitholder on the
disposition of assets the gain on which is subject to the New Jersey
Gross Income Tax.
(4) Units of the New Jersey Trust may be taxable on the death
of a Unitholder under the New Jersey Transfer Inheritance Tax Law or
the New Jersey Estate Tax Law.
(5) If a Unitholder is a corporation subject to the New Jersey
Corporation Business Tax or New Jersey Corporation Income Tax,
interest from the Bonds in the New Jersey Trust which is allocable
to such corporation will be includable in its entire net income for
purposes of the New Jersey Corporation Business Tax or New Jersey
Corporation Income Tax, less any interest expense incurred to carry
such investment to the extent such interest expense has not been
deducted in computing Federal taxable income. Net gains derived by
such corporation on the disposition of the Bonds by the New Jersey
Trust or on the disposition of its Units will be included in its
entire net income for purposes of the New Jersey Corporation
Business Tax or New Jersey Corporation Income Tax. Any proceeds
paid under the insurance policy issued to the Trustee of the New
Jersey Trust with respect to the Bonds or under individual policies
obtained by issuers of Bonds which represent maturing interest or
maturing principal on defaulted obligations held by the Trustee will
be included in its entire net income for purposes of the New Jersey
Corporation Business Tax or New Jersey Corporation Income Tax if,
and to the same extent as, such interest or proceeds would have been
so included if paid by the issuer of the defaulted obligations.
New York Trusts. The New York Trust includes
obligations issued by New York State (the "State"), by its various public
bodies (the "Agencies"), and/or by other entities located within the
State, including the City of New York (the "City").
Some of the more significant events and conditions relating to the
financial situation in New York are summarized below. This section
provides only a brief summary of the complex factors affecting the
financial situation in New York and is derived from sources that are
generally available to investors and is believed to be accurate. It is
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based in part on Official Statements and prospectuses issued by, and on
other information reported by the State, the City, and the Agencies in
connection with the issuance of their respective securities.
There can be no assurance that current or future statewide or
regional economic difficulties, and the resulting impact on State or
local government finances generally, will not adversely affect the market
value of New York Municipal Obligations held in the portfolio of the
Trust or the ability of particular obligors to make timely payments of
debt service on (or relating to) those obligations.
The State has historically been one of the wealthiest states in the
nation. For decades, however, the State economy has grown more slowly
than that of the nation as a whole, gradually eroding the State's
relative economic affluence. Statewide, urban centers have experienced
significant changes involving migration of the more affluent to the
suburbs and an influx of generally less affluent residents. Regionally,
the older Northeast cities have suffered because of the relative success
that the South and the West have had in attracting people and business.
The City has also had to face greater competition as other major cities
have developed financial and business capabilities which make them less
dependent on the specialized services traditionally available almost
exclusively in the City.
The State has for many years had a very high State and local tax
burden relative to other states. The burden of State and local taxation,
in combination with the many other causes of regional economic
dislocation, has contributed to the decisions of some businesses and
individuals to relocate outside, or not locate within, the State.
A national recession commenced in mid-1990. The downturn continued
throughout the State's 1990-91 fiscal year and was followed by a period
of weak economic growth during the 1991 calendar year. For calendar year
1992, the national economy continued to recover, although at a rate below
all post-war recoveries. For calendar year 1993, the economy is expected
to grow faster than in 1992, but still at a very moderate rate as
compared to other recoveries.
Moderate economic growth continued in calendar year 1994. The State
has projected the rate of economic growth to slow within New York during
1995, as the expansion of the national economy moderates. Economic
recovery started considerably later in the State than in the nation as a
whole due in part to the significant retrenchment in the banking and
financial services industries, downsizing by several major corporations,
cutbacks in defense spending, and an oversupply of office buildings.
Many uncertainties exist in forecasts of both the national and State
economies and there can be no assurance that the State economy will
perform at a level sufficient to meet the State's projections of receipts
and disbursements.
1995-96 Fiscal Year. The Governor issued a proposed Executive
Budget for the 1995-96 fiscal year (the "Proposed Budget") on February 1,
1995, which projected a balanced general fund and receipts and
disbursements of $32.5 billion and $32.4 billion, respectively. As of
May 29, 1995, the State legislature had not yet enacted nor had the
Governor and the legislature reached an agreement on, the budget for the
1995-96 fiscal year which commenced on April 1, 1995. The delay in the
enactment of the budget may negatively affect certain proposed actions
and reduce projected savings.
The Proposed Budget and the 1995-96 Financial Plan provide for the
closing of a projected $4.7 billion budget gap in the 1995-96 fiscal year
by cost-containment savings in social welfare programs, savings from
State agency restructurings, freezing the level of some categories of
local aid and new revenue measures.
The State's proposed budget and the 1995-96 Plan may be impacted
negatively by uncertainties relating to the economy and tax collections,
although recent signs of improvement in the national economy could lead
to short-term increases in State receipts.
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1994-1995 Fiscal Year. The State Legislature enacted the State's
1994-95 fiscal year budget on June 7, 1994, more than two months after
the start of that fiscal year. As of February 1, 1995, the updated
1994-95 State Financial Plan (the "Plan") projected total general fund
receipts and disbursements of $33.3 billion and $33.5 billion,
respectively, representing reductions in receipts and disbursements of $1
billion and $743 million, respectively, from the amount set forth in the
1994-95 budget. The Plan projected for a General Fund balance of
approximately $157 million at the close of the 1994-95 fiscal year.
1993-94 Fiscal Year. The State ended the 1993-94 fiscal year with
an operating surplus of approximately $1.0 billion.
There can be no assurance that the State will not face substantial
potential budget gaps in the future resulting from a significant
disparity between tax revenues projected from a lower recurring receipts
base and the spending required to maintain State programs at current
levels. To address any potential budgetary imbalance, the State may need
to take significant actions to align recurring receipts and
disbursements.
Indebtedness. As of March 31, 1994, the total amount of long-term
State general obligation debt authorized but unissued stood at $2.0
billion. As of the same date, the State had approximately $5.4 billion
in general obligation bonds including $224 million of Bond Anticipation
Notes outstanding.
The State originally projected that its borrowings for capital
purposes during the State's 1994-95 fiscal year would consist of $374
million in general obligation bonds and bond anticipation notes and $140
million in general obligation commercial paper. The Legislature has
authorized the issuance of up to $69 million in certificates of
participation in pools of leases for equipment and real property to be
utilized by State agencies. Through March 15, 1995, the State had issued
in excess of $590 million of its general obligation bonds (including $430
million of refunding bonds). The projection of the State regarding its
borrowings for any fiscal year may change if actual receipts fall short
of State projections or if other circumstances require.
In June, 1990, legislation was enacted creating the "New York Local
Government Assistance Corporation" ("LGAC"), a public benefit corporation
empowered to issue long-term obligations to fund certain payments to
local governments traditionally funded through the State's annual
seasonal borrowing. As of March 31, 1994, LGAC has issued its bonds to
provide net proceeds of $4.5 billion. LGAC was authorized to issue
additional bonds to provide net proceeds of $315 million during the
State's 1994-95 fiscal year. The LGAC issued $347 million of bonds on
March 1, 1995 providing the authorized net proceeds.
The Legislature passed a proposed constitutional amendment which
would permit the State subject to certain restrictions to issue revenue
bonds without voter referendum. Among the restrictions proposed is that
such bonds would not be backed by the full faith and credit of the State.
The Governor intends to submit changes to the proposed amendment, which
before becoming effective must be passed again by the next
separately-elected Legislature and approved by voter referendum at a
general election. The earliest such an amendment could take effect would
be in November 1995.
Ratings. The $850 million in tax and revenue anticipation notes
("TRANS") issued by the State in April 1993 were rated SP-1-Plus by S&P
and MIG-1 by Moody's, which represents the highest ratings given by such
agencies and the first time the State's TRANS have received these ratings
since its May 1989 TRANS issuance. Both agencies cited the State's
improved fiscal position as a significant factor in the upgrading of the
April 1993 TRANS.
Moody's rating of the State's general obligation bonds stood at A on
February 28, 1994, and S&P's rating stood at A- with a positive outlook
on February 28, 1994, an improvement from S&P's stable outlook from April
1993 through February 1994 and negative outlook prior to April 1993.
Previously, Moody's lowered its rating to A on June 6, 1990, its rating
having been A1 since May 27, 1986. S&P lowered its rating from A to A-
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on January 13, 1992. S&P's previous ratings were A from March 1990 to
January 1992, AA- from August 1987 to March 1990 and A+ from November
1982 to August 1987.
Moody's maintained its A rating and S&P continued its A- rating in
connection with the State's issuance of $537 million of its general
obligation bonds in March 1995.
The City accounts for approximately 40% of the State's population
and personal income, and the City's financial health affects the State in
numerous ways.
In response to the City's fiscal crisis in 1975, the State took a
number of steps to assist the City in returning to fiscal stability.
Among other actions, the State Legislature (i) created MAC to assist with
long-term financing for the City's short-term debt and other cash
requirements and (ii) created the State Financial Control Board (the
"Control Board") to review and approve the City's budgets and City four-
year financial plans (the financial plans also apply to certain City-
related public agencies (the "Covered Organizations")).
In recent years, the rate of economic growth in the City slowed
substantially as the City's economy entered a recession. While by some
measures the City's economy may have begun to recover, a number of
factors, including poor performance by the City's financial services
companies, may prevent a significant improvement in the City's economy
and may in fact negatively impact upon the City's finances by reducing
tax receipts. The City Comptroller has issued reports concluding that
the recession of the City's economy may be ending, but there is little
prospect of any significant improvement in the near term.
Fiscal Year 1996 and the 1995-1998 Financial Plan. On February 14,
1995, the Mayor released his preliminary $30.5 billion budget for fiscal
year 1996, which included $2.7 billion of deficit reduction measures.
The Mayor is seeking a $1.2 billion reduction in mandated welfare and
Medicaid expenditures from the State, a $569 million reduction in
expenditures by city agencies and the Board of Education budget, $600
million in personnel related savings partly through the elimination of
15,000 jobs within 18 months, and other measures.
The 1995-1998 Financial Plan (the "Plan"), which was submitted to
the Control Board on February 23, 1995, projected budget gaps of $3.2
billion and $3.8 billion for fiscal years 1997 and 1998, respectively.
The City Comptroller warned on March 7, 1995 that the budget gap for
fiscal year 1996 could increase by $500 million to as much as $3.2
billion. The Control Board reported on March 17, 1995 that the proposed
budget for fiscal year 1996 relies heavily on risky assumptions such as
$600 million in savings to be negotiated with City unions and $1.4
billion in savings dependent on State legislative approval.
The City successfully negotiated concessions with a number of unions
in order to ensure that the fiscal year 1995 budget remained in balance.
The Mayor has indicated that to avoid additional lay-offs, higher than
the number referred to above, reductions will be necessary in the benefit
plans of City employees to close the budget gaps for fiscal years 1996
and thereafter. Union leadership has publicly opposed such "givebacks".
With respect to fiscal year 1995, the City was also successful in
obtaining additional funds and relief from certain mandated expenditures
from the State for various programs, including Medicaid. However, the
amount of gap closing measures requiring State action set forth in the
Plan is well in excess of proposed assistance to the City outlined in the
Governor's Proposed Budget.
The Mayor has directed City agencies to identify an additional $300
million in cuts for fiscal year 1996 because of anticipated shortfalls of
as such as $500 million in State aid and budgetary actions. An extended
delay by the State in adopting its 1995-96 fiscal year budget would
negatively impact upon the City's financial condition and ability to
close budget gaps for fiscal years 1996 and thereafter.
Given the foregoing factors, there can be no assurance that the City
will continue to maintain a balanced budget, or that it can maintain a
balanced budget without additional tax or other revenue increases or
reductions in City services, which could adversely affect the City's
economic base.
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Pursuant to State law, the City prepares a four-year annual
financial plan, which is reviewed and revised on a quarterly basis and
which includes the City's capital, revenue and expense projections. The
City is required to submit its financial plans to review bodies,
including the Control Board. If the City were to experience certain
adverse financial circumstances, including the occurrence or the
substantial likelihood and imminence of the occurrence of an annual
operating deficit of more than $100 million or the loss of access to the
public credit markets to satisfy the City's capital and seasonal
financial requirements, the Control Board would be required by State law
to exercise certain powers, including prior approval of City financial
plans, proposed borrowings and certain contracts.
The City depends on the State for State aid both to enable the City
to balance its budget and to meet its cash requirements. If the State
experiences revenue shortfalls or spending increases beyond its
projections during its 1995-96 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 the
1996-97 or future fiscal years will be adopted by the April 1 statutory
deadline and that there will not be adverse effects on the City's cash
flow and additional City expenditures as a result of such delays.
The City's projections set forth in its financial plan are based on
various assumptions and contingencies which are uncertain and which may
not materialize. Changes in major assumptions could significantly affect
the City's ability to balance its budget as required by State law and to
meet its annual cash flow and financing requirements. Such assumptions
and contingencies include the timing of any regional and local economic
recovery, the absence of wage increases in excess of the increases
assumed in its financial plan, employment growth, provision of State and
Federal aid and mandate relief, State legislative approval of future
State budgets, levels of education expenditures as may be required by
State law, adoption of future City budgets by the New York City Council,
and approval by the Governor or the State Legislature and the cooperation
of MAC with respect to various other actions proposed in such financial
plan.
The City's ability to maintain a balanced operating budget is
dependent on whether it can implement necessary service and personnel
reduction programs successfully. As discussed above, the City must
identify additional expenditure reductions and revenue sources to achieve
balanced operating budgets for fiscal years 1996 and thereafter. Any
such proposed expenditure reductions will be difficult to implement
because of their size and the substantial expenditure reductions already
imposed on City operations in the past two years.
Attaining a balanced budget is also dependent upon the City's
ability to market its securities successfully in the public credit
markets. The City's financing program for fiscal years 1995 through 1998
contemplates capital spending of $16.4 billion, which will be financed
through issuance of $10.7 billion of general obligation bonds and the
balance through Water Authority Revenue Bonds and Covered Organization
obligations, and will be utilized primarily to reconstruct and
rehabilitate the City's infrastructure and physical assets and to make
capital investments. A significant portion of such bond financing is
used to reimburse the City's general fund for capital expenditures
already incurred. In addition, the City issues revenue and tax
anticipation notes to finance its seasonal working capital requirements.
The terms and success of projected public sales of City general
obligation bonds and notes will be subject to prevailing market
conditions at the time of the sale, and no assurance can be given that
the credit markets will absorb the projected amounts of public bond and
note sales. In addition, future developments concerning the City and
public discussion of such developments, the City's future financial needs
and other issues may affect the market for outstanding City general
obligation bonds and notes. If the City were unable to sell its general
obligation bonds and notes, it would be prevented from meeting its
planned operating and capital expenditures.
The City Comptroller, the staff of the Control Board, the Office of
the State Deputy Comptroller for the City of New York (the "OSDC") and
other agencies and public officials have issued reports and made public
statements which, among other things, state that projected revenues may
be less and future expenditures may be greater than those forecast in the
financial plan. In addition, the Control Board and other agencies have
questioned whether the City has the capacity to generate sufficient
revenues in the future to meet the costs of its expenditure increases and
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to provide necessary services. It is reasonable to expect that such
reports and statements will continue to be issued and to engender public
comment.
Fiscal Year 1995. New York City adopted its fiscal year 1995 budget
on June 21, 1994, which provided for spending of $31.6 billion and closed
a budget gap of $2.3 billion. However, following adoption of the fiscal
year 1995 budget, additional unexpected budget gaps totaling
approximately $2.0 billion were identified. The widening of the budget
gap for fiscal year 1995 resulted from shortfalls in tax revenues and
State and federal aid. The Mayor and the City Council were unable to
reach agreement on additional cuts proposed by the Mayor in October 1994.
The City Council passed its own budget cut proposal in November 1994.
The Mayor vetoed the City Council version, the City Council overrode his
veto and the Mayor implemented his original plan. A state court held in
December 1994 that neither budget cut proposal could be implemented. The
Mayor then elected not to spend certain funds in order to keep the budget
in balance.
Fiscal Years 1990 through 1994. The City achieved balanced
operating results as reported in accordance with GAAP for its fiscal
years 1990 through 1994. The City was required to close substantial
budget gaps in these fiscal years to maintain balanced operating results.
The City is a defendant in a significant number of lawsuits. Such
litigation includes, but is not limited to, actions commenced and claims
asserted against the City arising out of alleged constitutional
violations, torts, breaches of contracts, and other violations of law and
condemnation proceedings. While the ultimate outcome and fiscal impact,
if any, on the proceedings and claims are not currently predictable,
adverse determinations in certain of them might have a material adverse
effect upon the City's ability to carry out its financial plan. As of
June 30, 1994, the City estimated its potential future liability to be
$2.6 billion.
On January 30, 1995, Robert L. Schulz and other defendants commenced
a federal district court action seeking among other matters to cancel the
issuance on January 31, 1995 of $659 million of City bonds. While the
federal courts have rejected requests for temporary restraining orders
and expedited appeals, the case is still pending. The City has indicated
that it believes the action to be without merit as it relates to the
City, but there can be no assurance as to the outcome of the litigation
and an adverse ruling or the granting of a permanent injunction would
have a negative impact on the City's financial condition and its ability
to fund its operations.
As of March 1996, Moody's rating of the City's general obligation
bonds stood at Baa1 and S&P's rating stood at A-. On February 11, 1991,
Moody's had lowered its rating from A. S&P's lowered its rating from A-
on July 10, 1995 after placing the City on "negative credit watch" in
January 1995.
On March 13, 1995, Moody's confirmed its Baa1 rating in connection
with a scheduled March 1995 sale of $795 million of the City's general
obligation bonds.
In dropping the City's rating in July 1995, S&P's cited the
"sluggish" economy and the poor outlook for job growth, as well as the
continued use of "one-time measures" to close budget gaps. The lowered
rating could increase the City's borrowing costs by forcing it to offer
higher interest rates on its bonds thereby adding further pressures to
the City's budget problems. In addition, the lowered rating may prevent
certain institutional investors from purchasing the City's bonds reducing
demand for future offerings, which could also force the City to increase
interest rates on its bonds.
On October 12, 1993, Moody's increased its rating of the City's
issuance of $650 million of Tax Anticipation Notes ("TANs") to MIG-1 from
MIG-2. Prior to that date, on May 9, 1990, Moody's revised downward its
rating on outstanding City revenue anticipation notes from MIG-1 to MIG-2
and rated the $900 million Notes than being sold MIG-2. S&P's rating of
the October 1993 TANS issue increased to SP-1 from SP-2. Prior to that
date, on April 29, 1991, S&P revised downward its rating on City revenue
anticipation notes from SP-1 and SP-2.
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As of December 31, 1994, the City and MAC had, respectively, $22.5
billion and $4.1 billion of outstanding net long-term indebtedness.
Certain Agencies of the State have faced substantial financial
difficulties which could adversely affect the ability of such Agencies to
make payments of interest on, and principal amounts of, their respective
bonds. The difficulties have in certain instances caused the State
(under so-called "moral obligation" provisions which are non-binding
statutory provisions for State appropriations to maintain various debt
service reserve funds) to appropriate funds on behalf of the Agencies.
Moreover, it is expected that the problems faced by these Agencies will
continue and will require increasing amounts of State assistance in
future years. Failure of the State to appropriate necessary amounts or
to take other action to permit those Agencies having financial
difficulties to meet their obligations could result in a default by one
or more of the Agencies. Such default, if it were to occur, would be
likely to have a significant adverse effect on investor confidence in,
and therefore the market price of, obligations of the defaulting
Agencies. In addition, any default in payment on any general obligation
of any Agency whose bonds contain a moral obligation provision could
constitute a failure of certain conditions that must be satisfied in
connection with Federal guarantees of City and MAC obligations and could
thus jeopardize the City's long-term financing plans.
As of September 30, 1993, the State reported that there were
eighteen Agencies that each had outstanding debt of $100 million or more.
These eighteen Agencies had an aggregate of $63.5 billion of outstanding
debt, including refunding bonds, of which $7.7 billion was moral
obligation debt of the State and $19.3 billion was financed under lease-
purchase or contractual obligation financing arrangements.
The State is a defendant in numerous legal proceedings pertaining to
matters incidental to the performance of routine governmental operations.
Such litigation includes, but is not limited to, claims asserted against
the State arising from alleged torts, alleged breaches of contracts,
condemnation proceedings and other alleged violations of State and
Federal laws. Included in the State's outstanding litigation are a
number of cases challenging the constitutionality or the adequacy and
effectiveness of a variety of significant social welfare programs
primarily involving the State's mental hygiene programs. Adverse
judgments in these matters generally could result in injunctive relief
coupled with prospective changes in patient care which could require
substantial increased financing of the litigated programs in the future.
The State is also engaged in a variety of claims wherein significant
monetary damages are sought. Actions commenced by several Indian nations
claim that significant amounts of land were unconstitutionally taken from
the Indians in violation of various treaties and agreements during the
eighteenth and nineteenth centuries. The claimants seek recovery of
approximately six million acres of land as well as compensatory and
punitive damages.
The State has entered into a settlement agreement with Delaware,
Massachusetts and all other parties with respect to State of Delaware v.
State of New York, an action by Delaware and other states to recover
unclaimed property from New York-based brokers, which has escheated to
the State pursuant to its Abandoned Property Law. Annual payments under
this settlement will be made through the State's 2002-03 fiscal year in
amounts not exceeding $48.4 million in any fiscal year subsequent to the
State's 1994-95 fiscal year.
In Schulz v. State of New York, commenced May 24, 1993 ("Schulz
1993"), petitioners have challenged the constitutionality of mass
transportation bonding programs of the New York State Thruway Authority
and the Metropolitan Transportation Authority. On May 24, 1993, the
Supreme Court, Albany County, temporarily enjoined the State from
implementing those bonding programs.
Petitioners in Schulz 1993 asserted that issuance of bonds by the
two Authorities is subject to approval by statewide referendum. By
decision dated October 21, 1993, the Appellate Division, Third
Department, affirmed the order of the Supreme Court, Albany County,
granting the State's motion for summary judgment, dismissing the
complaint and vacating the temporary restraining order. On June 30,
1994, the Court of Appeals, the State's highest court, upheld the
decisions of the Supreme Court and Appellate Division in Schulz,
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Plaintiffs' motion for reargument was denied by the Court of Appeals on
September 1, 1994 and their writ of certiorari to the U.S. Supreme Court
was denied on January 23, 1995.
Adverse developments in the foregoing proceedings or new proceedings
could adversely affect the financial condition of the State in the
future.
Certain localities in addition to New York City could have financial
problems leading to requests for additional State assistance. The
potential impact on the State of such actions by localities is not
included in projections of State receipts and expenditures in the State's
1994-95 fiscal years.
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 1992, the total indebtedness of
all localities in the State was approximately $35.2 billion, of which
$19.5 billion was debt of New York City (excluding $5.9 billion in MAC
debt). State law requires the Comptroller to review and make
recommendations concerning the budgets of those local government units
other than New York City authorized by State law to issue debt to finance
deficits during the period that such deficit financing is outstanding.
Seventeen localities had outstanding indebtedness for state financing at
the close of their fiscal year ending in 1992.
Certain proposed Federal expenditure reductions could reduce, or in
some cases eliminate, Federal funding of some local programs and
accordingly might impose substantial increased expenditure requirements
on affected localities. If the State, New York City or any of the
Agencies were to suffer serious financial difficulties jeopardizing their
respective access to the public credit markets, the marketability of
notes and bonds issued by localities within the State, including notes or
bonds in the New York Trust, could be adversely affected. Localities
also face anticipated and potential problems resulting from certain
pending litigation, judicial decisions, and long-range economic trends.
The longer-range potential problems of declining urban population,
increasing expenditures, and other economic trends could adversely affect
localities and require increasing State assistance in the future.
There are a number of other agencies, instrumentalities and
political subdivisions of the State that issue Municipal Obligations,
some of which may be conduit revenue obligations payable from payments
from private borrowers. These entities are subject to various economic
risks and uncertainties, and the credit quality of the securities issued
by them may vary considerably from the credit quality of obligations
backed by the full faith and credit of the State.
At the time of the closing for each New York Trust, Special Counsel
to each New York Trust for New York tax matters rendered an opinion under
then existing New York income tax law applicable to taxpayers whose
income is subject to New York income taxation substantially to the effect
that:
The New York Trust is not an association taxable as a corporation
and the income of the New York Trust will be treated as the income of the
Unitholders under the existing income tax laws of the State and City of
New York, in the same manner as for Federal income tax purposes (subject
to differences in accounting for discount and premium to the extent the
State and/or City of New York do not conform to current Federal law).
Individuals holding Units of the New York Trust who reside in New
York State or City will not be subject to State and City personal income
tax on interest income which is excludable from Federal gross income
under section 103 of the Internal Revenue Code of 1986 and derived from
any obligation of New York State or a political subdivision thereof,
although they will be subject to New York State and City personal income
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tax with respect to any gains realized when such obligations are sold,
redeemed or paid at maturity or when any such Units are sold or redeemed;
and
For individuals holding Units of the New York Trust who reside in
New York State or City, any proceeds paid to the Trustee under the
applicable insurance policies which represent maturing interest on
defaulted obligations held by the Trustee will not be subject to New York
State or City personal income tax if, and to the same extent as, such
interest would not have been subject to New York State or City personal
income tax if paid by the issuer of the defaulted obligations.
North Carolina Trusts. General obligations of
a city, town or county in North Carolina are payable from the general
revenues of the entity, including ad valorem tax revenues on property
within the jurisdiction. Revenue bonds issued by North Carolina
political subdivisions include (1) revenue bonds payable exclusively from
revenue-producing governmental enterprises and (2) industrial revenue
bonds, college and hospital revenue bonds and other "private activity
bonds" which are essentially non-governmental debt issues and which are
payable exclusively by private entities such as non-profit organizations
and business concerns of all sizes. State and local governments have no
obligation to provide for payment of such private activity bonds and in
many cases would be legally prohibited from doing so. The value of such
private activity bonds may be affected by a wide variety of factors
relevant to particular localities or industries, including economic
developments outside of North Carolina.
Section 23-48 of the North Carolina General Statutes appears to
permit any city, town, school district, county or other taxing district
to avail itself of the provisions of Chapter 9 of the United States
Bankruptcy Code, but only with the consent of the Local Government
Commission of the State and of the holders of such percentage or
percentages of the indebtedness of the issuer as may be required by the
Bankruptcy Code (if any such consent is required). Thus, although
limitations apply, in certain circumstances political subdivisions might
be able to seek the protection of the Bankruptcy Code.
State Budget and Revenues. The North Carolina State Constitution
requires that the total expenditures of the State for the fiscal period
covered by each budget not exceed the total of receipts during the fiscal
period and the surplus remaining in the State Treasury at the beginning
of the period. The State's fiscal year runs from July 1st through June
30th.
Since 1994, the State has had a budget surplus, in part as a result
of new taxes and fees and spending reductions put into place in the early
1990s. In addition, the State, like the nation, has experienced economic
recovery during the 1990s. The General Fund balance at the end of the
1995-96 fiscal year was reported at approximately $406 million. As of
November 1996, the amount of uncommitted funds of the State was $586
million.
In the 1996-97 Budget prepared by the Office of State Budget and
Management, it is projected that General Fund net revenues, adjusted for
all revenue law changes, will increase 3% over 1995-96. This increase is
expected to result primarily from growth in the North Carolina economy.
The State budget is based upon estimated revenues and a multitude of
existing and assumed State and non-State factors, including State and
national economic conditions, international activity and federal
government policies and legislation. The Congress of the United States
is considering a number of matters affecting the federal government's
relationship with state governments that, if enacted into law, could
affect fiscal and economic policies of the states, including North
Carolina.
In 1995, the North Carolina General Assembly repealed, effective for
taxable years beginning January 1, 1995, the tax levied on various forms
of intangible personal property. The legislature provided from specific
appropriations to counties and municipalities to replace the revenues
previously received for the intangibles tax. In addition, in the 1996
session, the legislature reduced the corporate income tax rate from 7.75%
to 6.9% (phased in over four years) and reduced the food tax from 4% to
3%. As noted below in the discussion of tax litigation, a recent bill
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passed to give certain federal retirees relief from income tax on
pensions that was unlawfully imposed but for which the taxpayers could
not claim refunds has raised concern that taxpayers who paid unlawful
intangibles taxes would seek similar legislative relief, in the range of
$400 million, which would put pressure on the State's fiscal condition.
Whether such claims will be asserted and the response of the legislature
to them remain to be seen.
It is unclear what effect these developments at the State level may
have on the value of the Bonds in the North Carolina Trust.
Litigation. Litigation against the State includes the following.
Francisco Case - In August, 1994, a class action lawsuit was filed
in state court against the Superintendent of Public Instruction and the
State Board of Education on behalf of a class of parents and their
children who are characterized as limited English proficient. The
complaint alleges that the State has failed to provide funding for the
education of these students and has failed to supervise local school
systems in administering programs for them. The complaint does not
allege an amount in controversy, but asks the Court to order the
defendants to fund a comprehensive program to ensure equal educational
opportunities for children with limited English proficiency. The North
Carolina Attorney General's Office believes that sound legal arguments
support the State's position, and no significant financial impact is
expected to result from the ultimate resolution of this case, even if
adverse to the State.
Faulkenbury v. Teachers' and State Employees' Retirement System;
Peele v. Teachers' and State Employees' Retirement System; Woodward v.
Local Governmental Employees' Retirement System - Plaintiffs are
disability retirees who brought class actions in state court challenging
changes in the formula for payment of disability retirement benefits and
claiming impairment of contract rights, breach of fiduciary duty,
violation of other federal constitutional rights, and violation of state
constitutional and statutory rights. The State estimates that the cost
in damages and higher prospective benefit payments to class members would
probably amount to $50 million or more in Faulkenbury, $50 million or
more in Peele, and $15 million or more in Woodward, all ultimately
payable, at least initially, from the State retirement systems funds.
Upon review in Faulkenbury, the North Carolina Court of Appeals and
Supreme Court have held that claims made in Faulkenbury substantially
similar to those in Peele and Woodward - for breach of fiduciary duty and
violation of federal constitutional rights brought under the federal
Civil Rights Act - either do not state a cause of action or are barred by
the statute of limitations. In 1994, plaintiffs took voluntary
dismissals of their claims for impairment of contract rights in violation
of the United States Constitution and filed new actions in federal court
asserting the same claims, along with claims for violation of
constitutional rights in the taxation of retirement benefits. The
federal court actions have been stayed pending the trial in State court.
The cases have been consolidated and discretionary review by the State
Supreme Court has been allowed. The North Carolina Attorney General's
Office believes that sound legal arguments support the State's position.
Fulton Corporation v. Justus, Secretary of Revenue - The State's
intangible personal property tax levied on certain shares of stock
(repealed as of the tax year beginning January 1, 1995) was challenged by
the plaintiff on grounds that it violates the Commerce Clause of the
United States Constitution by discriminating against stock issued by
corporations that do all or part of their business outside the State.
The plaintiff, a North Carolina corporation, paid the intangibles tax on
stock it owns in other corporations. The plaintiff sought to invalidate
the tax in its entirety and to recover the intangibles taxes it paid for
the 1990 tax year.
The North Carolina Court of Appeals invalidated the taxable
percentage deduction and excised it from the statute beginning with the
1994 tax year. The effect of this ruling was to increase collections by
rendering all stock taxable on 100% of its value. The North Carolina
Supreme Court reversed the Court of Appeals and held that the tax is
valid and constitutional. The plaintiff appealed to the U.S. Supreme
Court which agreed with plaintiff that the tax was unconstitutionally
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discriminatory. The U.S. Supreme Court remanded the case for the State
Supreme Court to decide whether to issue refunds or to levy a similar tax
retroactively on holdings in North Carolina firms.
In response, the State's Revenue Secretary has proposed that
taxpayers who paid the tax under protest in compliance with State law be
issued refunds. The estimated $123 million in refunds would be paid from
a State reserve fund. The proposal is currently being considered by the
State Supreme Court as a possible remedy, and the State legislature also
is considering a financial remedy.
Other Tax Cases: In Davis v. Michigan (1989), the United States
Supreme Court ruled that a Michigan income tax statute which taxed
federal retirement benefits while exempting those paid by state and local
governments violated the constitutional doctrine of intergovernmental tax
immunity. At the time of the Davis decision, North Carolina law
contained similar exemptions in favor of state and local retirees. Those
exemptions were repealed prospectively, beginning with the 1989 tax year.
All public pension and retirement benefits are now entitled to a $4,000
annual exclusion.
The Swanson Cases - Following Davis, federal retirees filed a class
action suit in federal court in 1989 seeking damages equal to the North
Carolina income tax paid on federal retirement income by the class
members. A companion suit was filed in state court in 1990. The
complaints alleged that the amount in controversy exceeded $140 million.
The North Carolina Department of Revenue estimated refunds and interest
liability of $280.89 million as of June 30, 1994.
The North Carolina Supreme Court ultimately held in favor of the
State in the case brought in State court, and the United States Supreme
Court denied the plaintiffs' request for review of that decision, thereby
concluding the State litigation. Plaintiffs also were unsuccessful in
the federal court action. The federal retirees sought relief through
State legislation and in 1996 the legislature passed a special refund and
tax credit bill that will permit the retirees to recover, through credits
or, in some cases, refunds, the net tax previously paid that could not be
recovered through usual claims. The expected cost to the State is
approximately $140 million.
Patton v. State - In connection with the legislature's repeal of the
tax exemption for state retirees in 1989, certain adjustments were
adopted that reduced the state retirees' tax burden. In May 1995,
federal retirees filed a lawsuit in State court for tax refunds for the
years 1989 through 1994 alleging that these adjustments also constitute
unlawful discrimination against federal retirees. The amount of the
claim has not been set forth. This case is still pending in superior
court.
The Bailey Cases - State and local government retirees filed a class
action suit in 1990 as a result of the repeal of the income tax
exemptions for state and local government retirement benefits. The
original suit was dismissed after the North Carolina Supreme court ruled
in 1991 that the plaintiffs had failed to comply with state law
requirements for challenging unconstitutional taxes and the United States
Supreme Court denied review.
In 1992, many of the same plaintiffs filed a new lawsuit alleging
essentially the same claims, including breach of contract,
unconstitutional impairment of contract rights by the State in taxing
benefits that were allegedly promised to be tax-exempt, and violation of
several state constitutional provisions. Although the Superior Court
ruled largely in the plaintiffs' favor, appeals have been taken from both
sides and the North Carolina Supreme Court has allowed discretionary
review before hearing by the Court of Appeals. Additional suits have
been filed to recover taxes subsequently paid. The North Carolina
Attorney General's office estimates that the amount in controversy is
approximately $40-45 million annually for the tax years 1989 through
1992. The North Carolina Attorney General's office believes that sound
legal arguments support the State's position.
General. The population of the State has increased 13% from 1980,
from 5,880,095 to 6,657,106 as reported by the 1990 federal census and
the State rose from twelfth to tenth in population. The State's estimate
of population as of July, 1996 is 7,322,317. Notwithstanding its rank in
population size, North Carolina is primarily a rural state, having only
five municipalities with populations in excess of 100,000.
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The labor force has undergone significant change during recent years
as the State has moved from an agricultural to a service and goods
producing economy. Those persons displaced by farm mechanization and
farm consolidations have, in large measure, sought and found employment
in other pursuits. Due to the wide dispersion of non-agricultural
employment, the people have been able to maintain, to a large extent,
their rural habitation practices. During the period 1980 to 1996, the
State labor force grew about 30% (from 2,855,200 to 3,718,000). Per
capita income during the period 1985 to 1995 grew from $11,870 to
$21,103, an increase of 77.8%.
The current economic profile of the State consists of a combination
of industry, agriculture and tourism. As of November 1994, the State was
reported to rank ninth among the states in non-agricultural employment
and eighth in manufacturing employment. Employment indicators have
varied somewhat in the annual periods since June of 1990, but have
demonstrated an upward trend since 1991. During 1995, North Carolina's
textile employment remained in first place nationally with an average of
197,900 jobs, 29.7% of the nation's textile employment and 41.3% of the
Southeast region's textile workforce.
The annual unemployment rate in 1995 and 1996 remained stable at
4.3%, while the national unemployment rate for 1995 was 5.6% and for
1996, it was 5.4%.
As of 1994, the State was ninth in the nation in gross agricultural
income of which nearly the entire amount (approximately $5.5 billion) was
from commodities. According to the State Commissioner of Agriculture, in
1995, the State ranked first in the nation in the production of flue-
cured tobacco, total tobacco, turkeys and sweet potatoes; second in hog
production, trout, the production of cucumbers for pickles; third in the
value of poultry and egg products, and greenhouse and nursery income;
fourth in commercial broilers, peanuts, blueberries and strawberries; and
sixth in burley tobacco.
The diversity of agriculture in North Carolina and a continuing push
in marketing efforts have protected farm income from some of the wide
variations that have been experienced in other states where most of the
agricultural economy is dependent on a small number of agricultural
commodities. North Carolina is the third most diversified agricultural
state in the nation.
Tobacco production, which had been the leading source of
agricultural income in the State, declined in 1995. For 1995, commercial
broiler production and pork production surpassed tobacco among sources of
agricultural income, providing 16.6% and 18.2%, respectively, of gross
agricultural income compared to 15% for tobacco. Tobacco farming in
North Carolina has been and is expected to continue to be affected by
major Federal legislation and regulatory measures regarding tobacco
production and marketing and by international competition. Measures
adverse to tobacco farming could have negative effects on farm income and
the North Carolina economy generally.
The number of farms has been decreasing; in 1995 there were
approximately 58,000 farms in the State, down from approximately 72,000
in 1987 (a decrease of about 19% in eight years). However, a strong
agribusiness sector supports farmers with farm inputs (fertilizer,
insecticide, pesticide and farm machinery) and processing of commodities
produced by farmers (vegetable canning and cigarette manufacturing).
North Carolina's agriculture industry, including food, fiber and forest
products, contributes over $42 billion annually to the State's economy.
The State Department of Commerce, Travel and Tourism Division
reports that in 1995 more than $9 billion was spent on tourism in the
State. The Department estimates that two-thirds of total expenditures
came from out-of-state travelers, and that approximately 161,000 people
were employed in tourism-related jobs.
Bond Ratings. Currently, Moody's rates North Carolina general
obligation bonds as Aaa and Standard & Poor's rates such bonds as AAA.
Standard & Poor's also reaffirmed its stable outlook for the State in
June 1995.
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Standard & Poor's reports that North Carolina's rating reflects the
State's strong economic characteristics, sound financial performance, and
low debt levels.
The Sponsor believes the information summarized above describes some
of the more significant events relating to the North Carolina Trust. The
sources of this information are the official statements of issuers
located in North Carolina, State agencies, publicly available documents,
publications of rating agencies and statements by, or news reports of
statements by State officials and employees and by rating agencies. The
Sponsor and its counsel have not independently verified any of the
information contained in the official statements and other sources and
counsel have not expressed any opinion regarding the completeness or
materiality of any matters contained in this Prospectus other than the
tax opinions set forth below under North Carolina Taxes.
At the time of the closing for each North Carolina Trust, Special
Counsel to the fund for North Carolina tax matters rendered an opinion
under then existing North Carolina income tax law applicable to taxpayers
whose income is subject to North Carolina income taxation substantially
to the effect that:
Upon the establishing of the North Carolina Trust and the Units
thereunder:
(1) The North Carolina Trust is not an "association" taxable
as a corporation under North Carolina law with the result that
income of the North Carolina Trust will be deemed to be income of
the Unitholders.
(2) Interest on the Bonds that is exempt from North Carolina
income tax when received by the North Carolina Trust will retain its
tax-exempt status when received by the Unitholders.
(3) Unitholders will realize a taxable event when the North
Carolina Trust disposes of a Bond (whether by sale, exchange,
redemption or payment at maturity) or when a Unitholder redeems or
sells his Units (or any of them), and taxable gains for Federal
income tax purposes may result in gain taxable as ordinary income
for North Carolina income tax purposes. However, when a Bond has
been issued under an act of the North Carolina General Assembly that
provides that all income from such Bond, including any profit made
from the sale thereof, shall be free from all taxation by the State
of North Carolina, any such profit received by the North Carolina
Trust will retain its tax-exempt status in the hands of the
Unitholders.
(4) Unitholders must amortize their proportionate shares of
any premium on a Bond. Amortization for each taxable year is
accomplished by lowering the Unitholder's basis (as adjusted) in his
Units with no deduction against gross income for the year.
(5) The Units are exempt from the North Carolina tax on
intangible personal property so long as the corpus of the North
Carolina Trust remains composed entirely of Bonds or, pending
distribution, amounts received on the sale, redemption or maturity
of the Bonds and the Trustee periodically supplies to the North
Carolina Department of Revenue at such times as required by the
Department of Revenue a complete description of the North Carolina
Trust and also the name, description and value of the obligations
held in the corpus of the North Carolina Trust.
Ohio Trusts. The Ohio Trust will invest most of its net
assets in securities issued by or on behalf of (or in certificates of
participation in lease-purchase obligations of) the State of Ohio,
political subdivisions of the State, or agencies or instrumentalities of
the State, or its political subdivisions ("Ohio Obligations"). The Ohio
Trust is therefore susceptible to general or particular economic,
political or regulatory factors that may affect issuers of Ohio
Obligations. The following information constitutes only a brief summary
of some of the many complex factors that may have an effect. The
information does not apply to "conduit" obligations on which the public
issuer itself has no financial responsibility. This information is
derived from official statements of certain Ohio issuers published in
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connection with their issuance of securities and from other publicly
available information, and is believed to be accurate. No independent
verification has been made of any of the following information.
Generally, the creditworthiness of Ohio Obligations of local issuers
is unrelated to that of obligations of the State itself, and the State
has no responsibility to make payments on those local obligations.
There may be specific factors that at particular times apply in
connection with investment in particular Ohio Obligations or in those
obligations of particular Ohio issuers. It is possible that the
investment may be in particular Ohio Obligations, or in those of
particular issuers, as to which those factors apply. However, the
information below is intended only as a general summary, and is not
intended as a discussion of any specific factors that may affect any
particular obligation or issuer.
The timely payment of principal of and interest on Ohio Obligations
has been guaranteed by bond insurance purchased by the issuers, the Ohio
Trust or other parties. Those Ohio Obligations may not be subject to the
factors referred to in this section of the Prospectus.
Ohio is the seventh most populous state. The 1990 Census count of
10,847,000 indicated a 0.5% population increase from 1980. The Census
estimate for 1994 is 11,102,000.
While diversifying more into the service and other non-manufacturing
areas, the Ohio economy continues to rely in part on durable goods
manufacturing largely concentrated in motor vehicles and equipment,
steel, rubber products and household appliances. As a result, general
economic activity, as in many other industrially-developed states, tends
to be more cyclical than in some other states and in the nation as a
whole. Agriculture is an important segment of the economy, with over
half the State's area devoted to farming and approximately 16% of total
employment in agribusiness.
In prior years, the State's overall unemployment rate was commonly
somewhat higher than the national figure. For example, the reported 1990
average monthly State rate was 5.7%, compared to the 5.5% national
figure. However, for the last five years, the State rates were below the
national rates (4.8% versus 5.6% in 1995). The unemployment rate and its
effects vary among geographic areas of the State.
There can be no assurance that future national, regional or state-
wide economic difficulties, and the resulting impact on State or local
government finances generally, will not adversely affect the market value
of Ohio Obligations held in the Ohio Trust or the ability of particular
obligors to make timely payments of debt service on (or lease payments
relating to) those Obligations.
The State operates on the basis of a fiscal biennium for its
appropriations and expenditures, and is precluded by law from ending its
July 1 to June 30 fiscal year ("FY") or fiscal biennium in a deficit
position. Most State operations are financed through the General Revenue
Fund ("GRF"), for which the personal income and sales-use taxes are the
major sources. Growth and depletion of GRF ending fund balances show a
consistent pattern related to national economic conditions, with the
ending FY balance reduced during less favorable and increased during more
favorable economic periods. The State has well-established procedures
for, and has timely taken, necessary actions to ensure
resource/expenditure balances during less favorable economic periods.
Those procedures included general and selected reductions in
appropriations spending.
Key biennium-ending fund balances at June 30, 1989 were $475.1
million in the GRF and $353 million in the Budget Stabilization Fund
(BSF, a cash and budgetary management fund). June 30, 1991 ending fund
balances were $135.3 million (GRF) and $300 million (BSF).
The next biennium, 1992-93, presented significant challenges to
State finances, which were successfully addressed. To allow time to
resolve certain budget differences, an interim appropriations act was
enacted effective July 1, 1991; it included GRF debt service and lease
rental appropriations for the entire biennium, while continuing most
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other appropriations for a month. Pursuant to the general appropriations
act for the entire biennium, passed on July 11, 1991, $200 million was
transferred from the BSF to the GRF in FY 1992.
Based on updated results and forecasts in the course of that FY,
both in light of a continuing uncertain nationwide economic situation,
there was projected and then timely addressed an FY 1992 imbalance in GRF
resources and expenditures. In response, the Governor ordered most State
agencies to reduce GRF spending in the last six months of FY 1992 by a
total of approximately $184 million; the $100.4 million BSF balance and
additional amounts from certain other funds were transferred late in the
FY to the GRF; and adjustments were made in the timing of certain tax
payments.
A significant GRF shortfall (approximately $520 million) was then
projected for FY 1993. It was addressed by appropriate legislative and
administrative actions, including the Governor's ordering $300 million in
selected GRF spending reductions and subsequent executive and legislative
action (a combination of tax revisions and additional spending
reductions). The June 30, 1993 ending GRF fund balance was approximately
$111 million, of which, as a first step to BSF replenishment, $21 million
was deposited in the BSF.
None of the spending reductions were applied to appropriations
needed for debt service or lease rentals relating to any State
obligations.
The 1994-95 biennium presented a more affirmative financial picture.
Based on June 30, 1994 balances, an additional $260 million was deposited
in the BSF. The biennium ended June 30, 1995 with a GRF ending fund
balance of $928 million, of which $535.2 million was transferred into the
BSF (which had an October 7, 1996 balance of over $828 million).
The GRF appropriations act for the 1995-96 biennium was passed on
June 28, 1995 and promptly signed (after selective vetoes) by the
Governor. All necessary GRF appropriations for State debt service and
lease rental payments then projected for the biennium were included in
that act. In accordance with the appropriations act, the significant
June 30, 1995 GRF fund balance, after leaving in the GRF an unreserved
and undesignated balance of $70 million, was transferred to the BSF and
other funds including school assistance funds and, in anticipation of
possible federal program changes, a human services stabilization fund.
The State's incurrence or assumption of debt without a vote of the
people is, with limited exceptions, prohibited by current State
constitutional provisions. The State may incur debt, limited in amount
to $750,000, to cover casual deficits or failures in revenues or to meet
expenses not otherwise provided for. The Constitution expressly
precludes the State from assuming the debts of any local government or
corporation. (An exception is made in both cases for any debt incurred to
repel invasion, suppress insurrection or defend the State in war.)
By 14 constitutional amendments, the last adopted in 1995, Ohio
voters have authorized the incurrence of State debt and the pledge of
taxes or excises to its payment. At October 7, 1996, $854 million
(excluding certain highway bonds payable primarily from highway use
receipts) of this debt was outstanding. The only such State debt at that
date still authorized to be incurred were portions of the highway bonds,
and the following: (a) up to $100 million of obligations for coal
research and development may be outstanding at any one time ($34.9
million outstanding); (b) $240 million of obligations previously
authorized for local infrastructure improvements, no more than $120
million of which may be issued in any calendar year ($774.7 million
outstanding); and (c) up to $200 million in general obligation bonds for
parks, recreation and natural resources purposes which may be outstanding
at any one time ($44.2 million outstanding, with no more than $50 million
to be issued in any one year).
The electors approved, in November 1995, a constitutional amendment
that extends the local infrastructure bond program (authorizing an
additional $1.2 billion of State full faith and credit obligations to be
issued over 10 years for that purpose), and authorizes additional highway
bonds (expected to be payable primarily from highway use receipts). The
latter supersedes the prior $500 million highway obligation
authorization, and authorizes not more than $1.2 billion to be
outstanding at any time and not more than $220 million to be issued in a
fiscal year.
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The Constitution also authorizes the issuance of State obligations
for certain purposes, the owners of which do not have the right to have
excises or taxes levied to pay debt service. Those special obligations
include obligations issued by the Ohio Public Facilities Commission and
the Ohio Building Authority, and certain obligations issued by the State
Treasurer, over $4.8 billion of which were outstanding or sold and
awaiting delivery at October 7, 1996.
A 1990 constitutional amendment authorizes greater State and
political subdivision participation (including financing) in the
provision of housing. The General Assembly may for that purpose
authorize the issuance of State obligations secured by a pledge of all or
such portion as it authorizes of State revenues or receipts (but not by a
pledge of the State's full faith and credit).
A 1994 constitutional amendment pledges the full faith and credit
and taxing power of the State to meeting certain guarantees under the
State's tuition credit program which provides for purchases of tuition
credits, for the benefit of State residents, guaranteed to cover a
specified amount when applied to the cost of higher education tuition.
(A 1965 constitutional provision that authorized student loan guarantees
payable from available State moneys has never been implemented, apart
from a "guarantee fund" approach funded especially from program
revenues.)
State and local agencies issue obligations that are payable from
revenues from or relating to certain facilities (but not from taxes). By
judicial interpretation, these obligations are not "debt" within
constitutional provisions. In general, payment obligations under lease-
purchase agreements of Ohio public agencies (in which certificates of
participation may be issued) are limited in duration to the agency's
fiscal period, and are renewable only upon appropriations being made
available for the subsequent fiscal period.
Local school districts in Ohio receive a major portion (state-wide
aggregate approximately 44% in recent years) of their operating moneys
from State subsidies, but are dependent on local property taxes, and in
approximately 120 districts from voter-authorized income taxes, for
significant portions of their budgets. Litigation, similar to that in
other states, is pending questioning the constitutionality of Ohio's
system of school funding. The trial court concluded that aspects of the
system (including basic operating assistance) are unconstitutional, and
ordered the State to provide for and fund a system complying with the
Ohio Constitution. The State appealed and a court of appeals reversed
the trial court's findings for plaintiff districts. The case is now
pending on appeal in the Ohio Supreme Court. A small number of the
State's 612 local school districts have in any year required special
assistance to avoid year-end deficits. A current program provides for
school district cash need borrowing directly from commercial lenders,
with diversion of State subsidy distributions to repayment if needed.
Recent borrowings under this program totalled $94.5 million for 27
districts (including $75 million for one district) in FY 1993, $41.1
million for 28 districts in FY 1994, $71.1 million for 29 districts in FY
1995 (including $29.5 million for one), and $87.2 million for 20
districts in FY 1996 (including $42.1 million for one).
Ohio's 943 incorporated cities and villages rely primarily on
property and municipal income taxes for their operations. With other
subdivisions, they also receive local government support and property tax
relief moneys distributed by the State.
For those few municipalities and school districts that on occasion
have faced significant financial problems, there are statutory procedures
for a joint State/local commission to monitor the fiscal affairs and for
development of a financial plan to eliminate deficits and cure any
defaults. Since inception for municipalities in 1979, these procedures
have been applied to 23 cities and villages; for 19 of them the fiscal
situation was resolved and the procedures terminated. The 1996 school
district provision has been applied to two districts.
At present, the State itself does not levy ad valorem taxes on real
or tangible personal property. Those taxes are levied by political
subdivisions and other local taxing districts. The Constitution has
since 1934 limited to 1% of true value in money the amount of the
aggregate levy (including a levy for unvoted general obligations) of
property taxes by all overlapping subdivisions, without a vote of the
electors or a municipal charter provision, and statutes limit the amount
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of that aggregate levy to 10 mills per $1 of assessed valuation (commonly
referred to as the "ten-mill limitation"). Voted general obligations of
subdivisions are payable from property taxes that are unlimited as to
amount or rate.
At the time of the closing for each Ohio Trust, Special Counsel to
each Ohio Trust for Ohio tax matters rendered an opinion under then
existing Ohio income tax law applicable to taxpayers whose income is
subject to Ohio income taxation substantially to the effect that:
The Ohio Trust is not taxable as a corporation or otherwise for
purposes of the Ohio personal income tax, Ohio school district
income taxes, the Ohio corporation franchise tax, or the Ohio
dealers in intangibles tax.
Distributions with respect to Units of the Ohio Trust
("Distributions") will be treated as the income of the Unitholders
for purposes of the Ohio personal income tax, and school district
and municipal income taxes in Ohio and the Ohio corporation
franchise tax in proportion to the respective interest therein of
each Unitholder.
Distributions properly attributable to interest on obligations
issued by or on behalf of the State of Ohio, political subdivisions
thereof, or agencies or instrumentalities thereof ("Ohio
Obligations"), or by the governments of Puerto Rico, the Virgin
Islands or Guam ("Territorial Obligations") held by the Trust are
exempt from the Ohio personal income tax, school district and
municipal income taxes, and are excluded from the net income base of
the Ohio corporation franchise tax when distributed or deemed
distributed to Unitholders.
Distributions properly attributable to proceeds of insurance
paid to the Ohio Trust that represent maturing or matured interest
on defaulted obligations held by the Ohio Trust and that are
excluded from gross income for federal income tax purposes will be
exempt from Ohio personal income tax, and school district and
municipal income taxes in Ohio and the net income base of the Ohio
corporation franchise tax.
Distributions of profit made on the sale, exchange or other
disposition by the Ohio Trust of Ohio Obligations including
distributions of "capital gain dividends" as defined in
Section 852(b)(3)(C) of the Code, properly attributable to the sale,
exchange or other disposition of Ohio Obligations are exempt from
Ohio personal income tax, and school district and municipal income
taxes in Ohio, and are excluded from the net income base of the Ohio
corporation franchise tax.
South Carolina Trusts. Although all of the
Bonds in the South Carolina Trust are revenue obligations or general
obligations of local governments or authorities rather than general
obligations of the State of South Carolina itself, there can be no
assurance that any financial difficulties the State may experience will
not adversely affect the market value or marketability of the Bonds or
the ability of the respective obligors to pay interest on or principal of
the Bonds. The information regarding the financial condition of the
State is included for the purpose of providing information about general
economic conditions that may affect issuers of the Bonds in South
Carolina.
South Carolina is primarily a manufacturing state. In 1994 and
1995, nearly one-quarter of all jobs in the State were in the
manufacturing industry, compared to fifteen percent nationally. However,
from 1995-96, the number of manufacturing jobs has slowly declined.
While the textile industry is still the major industrial employer in the
State, since 1950, the State's economy has undergone a gradual
transition. The economic base of the State has diversified as the trade
and service sectors developed, and with the added development of the
durable goods manufacturing industries, South Carolina's economy now more
closely resembles that of the United States.
Per capita personal income in South Carolina grew 4.9% during 1994
and 5.9% in 1995, compared to national income growth of 4.2% in 1994 and
5.3% in 1995. The Southeast region showed income growth during 1994 and
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1995 of 4.3% and 5.4%, respectively. In 1996, personal income in South
Carolina grew by .4% during the first quarter and then by 1.5% during the
second quarter. Corresponding national rates for the same periods were
1.2% and 1.7%, respectively. Over the five-year period 1988-1993,
personal income in South Carolina rose at a compounded annual rate of
6.3%, matching the annual income growth for the Southeast region, and
outpacing the 5.7% growth in the United States in the same period.
Through August 1996, the State's economy has added 25,700 jobs in
the non-agricultural sector compared to the same period in 1995. The
unemployment rate in South Carolina in 1994 and 1995 was 6.3% and 5.1%,
respectively, compared to the national unemployment rates of 6.1% and
5.6% for the same periods. Employment in the State was up by nearly
120,000 in August 1995 versus its level during the recession of 1991.
However, South Carolina had the largest unemployment rate increase (.9%)
in the nation from October 1995 to October 1996, an increase of 5.2% to
6.1%. The national unemployment rate decreased from 5.2% in October 1995
to 4.9% in October 1996. Yet, employment in South Carolina over the last
two decades has grown one-fifth faster than the United States as a whole.
Because of a slowing national economy, employment growth in South
Carolina is estimated at 1.5% for fiscal year 1995-96, a little less than
the 2.0% growth in fiscal year 1994-95.
The State Constitution requires the General Assembly to provide a
balanced budget and requires that if there be a deficit, such deficit
shall be provided for in the succeeding fiscal year. The State
Constitution also provides that the State Budget and Control Board may,
if a deficit appears likely, effect such reductions in appropriations as
may be necessary to prevent a deficit. At the November 6, 1984 general
election, there was approved a constitutional amendment providing that
annual increases in State appropriations may not exceed the average
growth rate of the economy of the State and that the annual increase in
the number of State employees may not exceed the average growth of
population of the State. The State Constitution also establishes a
General Reserve Fund to be maintained in an amount equal to 4% of General
Fund revenue for the latest fiscal year.
At the November 8, 1988 general election, there was approved a
constitutional amendment reducing from 4% to 3% the amount of General
Fund revenue which must be kept in the General Reserve Fund, and removing
the provisions requiring a special vote to adjust this percentage. The
amendment also created a Capital Reserve Fund equal to 2% of General Fund
revenue. Before March 1 of each year, the Capital Reserve Fund must be
used to offset mid-year budget reductions before mandating cuts in
operating appropriations, and after March 1, the Capital Reserve Fund may
be appropriated by a special vote in separate legislation by the General
Assembly to finance in cash previously authorized capital improvement
bond projects, retire bond principal or interest on bonds previously
issued, and for capital improvements or other nonrecurring purposes which
must be ranked in order of priority of expenditure. Monies in the
Capital Reserve Fund not appropriated or any appropriation for a
particular project or item which has been reduced due to application of
the monies to year-end deficit, must go back to the General Fund.
On August 22, 1992, the Budget and Control Board adopted a plan to
reduce appropriations under the 1992 Appropriations Act because of
revenue shortfall projections of approximately $200 million for the 1992-
93 fiscal year. These reductions were based on the rate of growth in
each agency's budget over the past year. On September 15, 1992, the
Supreme Court of South Carolina enjoined the Budget and Control Board
from implementing its proposed plan for budget reductions on the grounds
that the Board had authority to make budget reductions only across-the-
board based on total appropriations. In response to this decision, the
Board instituted a 4% across-the-board reduction. On November 10, 1992,
the Budget and Control Board permanently reduced the $88.1 million in
appropriations which were set aside on September 15, 1992. This action,
along with improved actual revenue collections, created a budgetary
surplus of approximately $101 million.
Responding to recurrent operating deficits of the early 1990s,
Standard & Poor's had placed the State's AAA-rated general obligation
debt on its CreditWatch, and on January 29, 1993, reduced this rating to
AA+. South Carolina's economy has improved dramatically since January of
1993, and on July 9, 1996, the State regained its AAA rating.
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In 1993, the General Assembly provided that beginning with
appropriations for fiscal year 1994-1995, appropriations in the annual
general appropriations act may not exceed the base revenue estimate. The
base revenue estimate is defined as the lesser of (i) the total of
recurring general fund revenues collected in the latest completed fiscal
year before the General Assembly first considers the annual general
appropriations bill plus an increase of seventy-five percent of the
difference between the general fund revenue estimate of the Board of
Economic Advisors for the upcoming fiscal year and the actual revenue
collections from the latest completed fiscal year; or (ii) the Board of
Economic Advisors general fund revenue estimate for the upcoming fiscal
year.
For the Fiscal Year ended June 30, 1994, the State had a budgetary
surplus of $273.48 million. Total surplus available at the end of fiscal
year 1995 was $90.584 million. General Fund revenue at the end of fiscal
years 1994, 1995, and 1996 was $4.024 billion, $4.234 billion, and $4.346
billion, respectively. The General Fund Revenue estimate for fiscal year
1997 is $4.419 billion. The Capital Reserve Fund had a balance at the
end of fiscal years 1994, 1995, and 1996 of $66.83 million, $73.45
million, and $80.49 million, respectively. The estimated amount in the
Capital Reserve Fund for fiscal year 1997 is $84.67 million. The General
Reserve Fund ending balance for fiscal years 1994, 1995, and 1996 was
$100.25 million, $110.18 million, and $120.73 million, respectively. The
projected General Reserve Fund for fiscal year 1997 is $127.0 million.
The South Carolina Budgetary General Fund ended its 1995-96 fiscal
year with a budgetary surplus of $316.7 million. During the fiscal year,
$9.6 million more came in (as revenues) than went out (as expenditures
and transfers). Actual General Fund revenue at the end of fiscal year
1996 of $4.346 billion was $101 million above the revenue estimate.
Total appropriations at the end of fiscal year 1996 were approximately
$4.744 billion. Of this amount, the State spent $4.269 billion, set
aside $80.5 million of Capital Reserve monies for expenditure in 1996-97,
and carried forward $391 million. The remaining balance of $3.5 million
represents net lapses of unspent appropriations.
The 1996 General Assembly's budget for fiscal year 1997 distributes
$4,687.4 million in recurring and non-recurring state funding, as well as
providing for up to $185 million should additional surplus money become
available. The General Appropriation Act provides for $4.4 billion in
General Fund revenue, which contains $270.6 million in "new" recurring
General Fund revenue with no general tax increases. Revenue actions
include shifting the one-cent tax from the General Fund to the Highway
Trust Fund over two years beginning June 1, 1997 (totaling $20.3
million). The statutorily and constitutionally-mandated General Reserve
Fund, Capital Reserve Fund, Debt Service, Local Government Fund, and
Homestead Exemption accounts were funded at the required levels, totaling
$64.6 million from recurring and non-recurring sources.
The fiscal year 1996-97 preliminary revenue forecast projects
general fund revenue to be $4.419 billion. This figure represents a
growth of 4.2% over the fiscal year 1996 General Fund revenue estimate.
Total General Fund revenue as of November 1996 was $1.722 billion.
Estimated fiscal year 1997 General Fund recurring revenue is $4.377
billion. This figure includes recurring revenue growth of $270.6
million, or 4.5% over the preceding fiscal year. Total new revenue
available for appropriation in fiscal year 1997 is approximately $350
million.
Prospective investors should study with care the portfolio of Bonds
in the South Carolina Trust and should consult with their investment
advisers as to the merits of particular issues in the portfolio.
At the time of the closing for each South Carolina Trust, Special
Counsel for each South Carolina Trust for South Carolina tax matters
rendered an opinion under then existing South Carolina income tax law
applicable to taxpayers whose income is subject to South Carolina income
taxation substantially to the effect that:
(1) By the provision of paragraph (j) of Section 3 of
Article 10 of the South Carolina Constitution (revised 1977)
intangible personal property is specifically exempted from any and
all ad valorem taxation.
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(2) Pursuant to the provisions of Section 12-1-60, the
interest of all bonds, notes or certificates of indebtedness issued
by or on behalf of the State of South Carolina and any authority,
agency, department or institution of the State and all counties,
school districts, municipalities, divisions and subdivisions of the
State and all agencies thereof are exempt from income taxes and that
the exemption so granted extends to all recipients of interest paid
thereon through the Trust. (This opinion does not extend to so-
called 63-20 obligations.)
(3) The income of the Trust would be treated as income to each
Unitholder of the Trust in the proportion that the number of Units
of the Trust held by the Unitholder bears to the total number of
Units of the Trust outstanding. For this reason, interest derived
by the Trust that would not be includable in income for South
Carolina income tax purposes when paid directly to a South Carolina
Unitholder will be exempt from South Carolina income taxation when
received by the Trust and attributed to such South Carolina
Unitholder.
(4) Each Unitholder will recognize gain or loss for South
Carolina state income tax purposes if the Trustee disposes of a Bond
(whether by sale, payment on maturity, retirement or otherwise) or
if the Unitholder redeems or sells his Unit.
(5) The Trust would be regarded, under South Carolina law, as
a common trust fund and therefore not subject to taxation under any
income tax law of South Carolina.
The above described opinion of Special Counsel has been concurred in
by an informal ruling of the South Carolina Tax Commission pursuant to
Section 12-3-170 of the South Carolina Code.
Virginia Trusts. Each Virginia Trust is susceptible
to political, economic or regulatory factors affecting issuers of
Virginia Bonds. Without intending to be complete, the following briefly
summarizes some of these matters, as well as some of the complex factors
affecting the financial situation in the Commonwealth of Virginia (the
"Commonwealth" or "Virginia"). This information is derived from sources
that are generally available to investors and is based in part on
information obtained from various agencies in Virginia. No independent
verification has been made of the accuracy or completeness of the
following information.
There can be no assurance that current or future statewide or
regional economic difficulties, and the resulting impact on State or
local governmental finances generally will not adversely affect the
market value of Virginia Bonds held in the portfolio of a Virginia Trust
or the ability of particular obligors to make timely payments of debt
service on (or relating to) those obligations.
The Commonwealth's financial condition is supported by a broad-based
economy, including manufacturing, tourism, agriculture, ports, mining and
fisheries. Manufacturing continues to be a major source of employment,
ranking behind only services, wholesale and retail trade, and government
(federal, state and local). Defense activity is an important component
of Virginia's economy. The Commonwealth accounted for 9.6% of all
military and civilian U.S. Department of Defense ("DOD") employees and
ranked first in per capita defense spending in federal fiscal year 1994,
while ranking second in total defense spending. Northern Virginia and
the Hampton Roads area accounted for 91.5% of DOD employment in Virginia
in 1994. However, for federal fiscal year 1994, total DOD employment in
Virginia decreased 2.2% from the previous year and can be expected to
continue to decline as previously announced base closures are implemented
and the military downsizes.
Economic growth continued in fiscal year 1995, mimicking neither the
boom of the late 1980's nor the 1990-1991 recession. Personal income
continued to rise in real terms during the first three quarters of the
fiscal year, but at only 1.1% in the first quarter of calendar year 1995.
Employment continued to give brighter news and unemployment dropped to
4.7% compared to the national rate of 5.7%. While recent decisions by
large private firms to locate or expand in Virginia provided
encouragement, additional company downsizings and defense cutbacks have
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now been joined by the prospect of major cuts in federal employment as
threats to the Commonwealth's economic health.
Personal income figures for Virginia have generally followed
national trends. Changes in the Commonwealth personal income were
generally higher than the U.S. figures in the 1980's. Since then, the
Commonwealth and the nation have grown at similar rates. Virginia's per
capita income of $22,501 for 1994 was 104% of the national figure, as in
the previous two years. In 1995, Virginia's per capita income was
$23,974, a 4.5% increase from 1994 and 103% of the national figure.
Virginia ranks highest in the Southeast region in per capita personal
income, and ranks 13th nationwide.
Virginia's nonagricultural employment figure has also reflected that
of the national economy. For fiscal year 1994, Virginia's
nonagricultural employment rose 2.3%, as did U.S. employment; however,
the rate of growth was less than the Commonwealth's 2.9% rate for the
previous year. Total nonagricultural employment for Virginia in June
1995 was a record high. During the 1980's, the Commonwealth growth rate
substantially outpaced the nation, but since then it has been close to
the national average. The South Atlantic region continued to outpace
Virginia in growth of nonagricultural employment and seemed to be
widening the gap.
The unemployment picture brightened in Virginia in fiscal year 1995.
For the first ten months of 1994, Virginia's unemployment rate of 5% was
21% below the national average of 6.3%. Virginia's unemployment rate has
typically been one of the lowest in the nation, largely as a result of
the balance found in Virginia's economy, and has remained consistently
below the national rate. Rates of unemployment in excess of 9% were
found in southwest Virginia where mining jobs have been lost and the
lowest unemployment rates were seen in the Northern Virginia,
Charlottesville and Richmond areas at under 4%.
Employment trends in Virginia are varied from sector to sector. The
growth patterns were similar to those in fiscal year 1994. Employment
grew in seven of ten sectors. This past fiscal year's growth was led by
a 6.3% employment jump in the construction sector and 5.4% in services.
Federal civilian employment slipped 2.3%, the result of continued defense
cutbacks and an effort to downsize. The drop in mining employment
accelerated to 9.8% from 7.7% in the previous year. Manufacturing has
lost 25,100 jobs during the five-year period beginning in 1991,
emphasizing dramatic evidence of the shift to a service economy from a
goods-producing one. Employment trends also varied among regions. All
of the Commonwealth's metropolitan statistical areas showed increased
employment from fiscal year 1994 to fiscal year 1995, ranging from .7% to
4.3%, with most employment increases being experienced in metropolitan
areas.
The Commonwealth of Virginia has historically operated on a fiscally
conservative basis and is required by its Constitution to have a balanced
biennial budget. At the end of the June 30, 1995 fiscal year, the
General Fund of the Commonwealth had an ending fund balance computed on a
budgetary cash basis of $350.7 million, of which $151.6 million was in
required reserves; $199.1 million of the General Fund balance was
designated for expenditure during the next fiscal year, leaving no
undesignated, unreserved fund balance. Computed on a modified accrual
basis in accordance with generally accepted accounting principles, the
General Fund balance at the end of the fiscal year ended June 30, 1995,
was negative $86.4 million, compared with a General Fund balance of
$185.3 million at the end of the fiscal year ended June 30, 1994. The
fiscal year 1995 deficit in the General Fund when measured on the GAAP
basis of accounting is the result of a settlement and subsequent ruling
by the Virginia Supreme Court in the case of Harper v. Department of
Taxation relating to the tax treatment of federal retirees' benefits.
As of June 30, 1995, total debt for the Commonwealth aggregated $9.3
billion. Of that amount, $2.7 billion was tax-supported. Outstanding
general obligation debt backed by the full faith and credit of the
Commonwealth was $963 million at June 30, 1995. Of that amount, $524
million was also secured by revenue producing capital projects.
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The Virginia Constitution contains limits on the amount of general
obligation bonds which the Commonwealth can issue. These limits are
substantially in excess of current levels of outstanding bonds, and at
June 30, 1995 would permit an additional total of approximately $6
billion of bonds secured by revenue-producing projects and approximately
$6.1 billion of unsecured general obligation bonds for capital projects,
with not more than approximately $1.0 billion of the latter to be issued
in any four-year period. Bonds which are not secured by revenue-
producing projects must be approved in a State-wide election.
The Commonwealth of Virginia maintains a "triple A" bond rating from
Standard & Poor's, Moody's Investors Service, Inc. and Fitch Investors
Service on its general obligation indebtedness, reflecting in part its
sound fiscal management, diversified economic base and low debt ratios.
There can be no assurances that these conditions will continue. Nor are
these same conditions necessarily applicable to securities which are not
general obligations of the Commonwealth. Securities issued by specific
municipalities, governmental authorities or similar issuers may be
subject to the economic risks or uncertainties peculiar to the issuers of
such securities or to the sources from which they are to be paid.
The foregoing information constitutes only a brief summary of some
of the general factors which may impact certain issuers of Bonds and does
not purport to be a complete or exhaustive description of all adverse
conditions to which the issuers of Bonds held by the Virginia Trust are
subject. Additionally, many factors, including national economic, social
and environmental policies and conditions, which are not within the
control of the issuers of the Bonds, could affect or could have an
adverse impact on the financial condition of the issuers. The Sponsor is
unable to predict whether or to what extent such factors or other factors
may affect the issuers of the Bonds, the market value or marketability of
the Bonds or the ability of the respective issuers of the Bonds acquired
by the Virginia Trust to pay interest on or principal of the Bonds.
At the time of the closing for each Virginia Trust, Special Counsel
to each Virginia Trust for Virginia tax matters rendered an opinion under
then existing Virginia income tax law applicable to taxpayers whose
income is subject to Virginia income taxation substantially to the effect
that:
(1) The Virginia Trust is not an association taxable as a
corporation for purposes of the Virginia Income Tax and each
Unitholder of the Virginia Trust will be treated as the owner of a
pro rata portion of the assets held by the Virginia Trust and the
income of such portion of the Virginia Trust will be treated as
income of the Unitholder for purposes of the Virginia Income Tax.
(2) Income on the Bonds which is exempt from Virginia Income
Tax when received by the Virginia Trust and which would be exempt
from Virginia Income Tax if received directly by a Unitholder, will
retain its status as exempt from such tax when received by the
Virginia Trust and distributed to such Unitholder.
(3) Each Unitholder will recognize gain or loss for purposes
of the Virginia Income Tax if the Trustee disposes of a bond
(whether by redemption, sale or otherwise) or if the Unitholder
redeems or sells Units of the Virginia Trust to the extent that such
a transaction results in a recognized gain or loss to such
Unitholder for Federal income tax purposes, except as described in
this paragraph. Virginia has by law provided that all income from
certain tax-exempt obligations issued under the laws of Virginia,
including any profits made from the sale of such Bonds, shall be
exempt from all taxation by Virginia. Although no opinion is
expressed herein, the Virginia Department of Taxation has indicated
that the gain on the sale of such tax-exempt obligations, recognized
for Federal income tax purposes, would not be subject to Virginia
income taxation. Accordingly, any such gain relating to the
disposition of any Bond that would not be subject to Virginia Income
tax if the Bond was held directly by a Unitholder will retain its
tax-exempt status for purposes of the Virginia Income Tax when the
Bond is disposed of by the Virginia Trust or when the Unitholder is
deemed to have disposed of his pro rata portion of such Bond upon
the disposition of his Unit, provided that such gain can be
determined with reasonable certainty and substantiated.
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(4) The Virginia Income Tax does not permit a deduction of
interest paid on indebtedness incurred or continued to purchase or
carry Units in the Virginia Trust to the extent that interest income
related to the ownership of Units is exempt from the Virginia Income
Tax.
In the case of Unitholders subject to the Virginia Bank Franchise
Tax, the income derived by such a Unitholder from his pro rata portion of
the Bonds held by the Virginia Trust may affect the determination of such
Unitholder's Bank Franchise Tax. Prospective investors subject to the
Virginia Bank Franchise Tax should consult their tax advisors. Counsel
to the Sponsor has expressed no opinion with respect to taxation under
any other provisions of Virginia law. Ownership of the Units may result
in collateral Virginia tax consequences to certain taxpayers.
Prospective investors should consult their tax advisors as to the
applicability of any such collateral consequences.
PUBLIC OFFERING OF UNITS
Public Offering Price. Units of each State
Trust are offered at the Public Offering Price thereof. The Public
Offering Price per Unit is equal to the aggregate bid side evaluation of
the Municipal Bonds in the State Trust's portfolio (as determined
pursuant to the terms of a contract with the Evaluator, by a non-
affiliated firm regularly engaged in the business of evaluating, quoting
or appraising comparable securities), plus or minus cash, if any, in the
Principal Account, held or owned by the State Trust, divided by the
number of outstanding Units of the State Trust plus accrued interest to
the date of settlement (which in the case of Kemper Defined Funds,
consists of Purchased Interest and Daily Accrued Interest), plus the
sales charge applicable to a Unit of such State Trust.
The sales charge is based upon the dollar weighted average maturity
of the State Trust and is determined in accordance with the table set
forth below. For purposes of this computation, Municipal Bonds will be
deemed to mature on their expressed maturity dates unless: (a) the
Municipal Bonds have been called for redemption or funds or securities
have been placed in escrow to redeem them on an earlier call date, in
which case such call date will be deemed to be the date upon which they
mature; or (b) such Municipal Bonds are subject to a "mandatory tender,"
in which case such mandatory tender will be deemed to be the date upon
which they mature. The effect of this method of sales charge computation
will be that different sales charge rates will be applied to the State
Trust based upon the dollar weighted average maturity of such State
Trust's portfolio, in accordance with the following schedule:
<TABLE>
<CAPTION>
PERCENT OF
DOLLAR PUBLIC PERCENT OF
WEIGHTED AVERAGE OFFERING NET AMOUNT
YEARS TO MATURITY PRICE INVESTED
----------------- ------------- --------------
<S> <C> <C>
0 to .99 years 0.00% 0.00%
1 to 3.99 years 2.00 2.041
4 to 7.99 years 3.50 3.627
8 to 14.99 years 4.50 4.712
15 or more years 5.50 5.820
</TABLE>
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<PAGE>
The sales charge per Unit will be reduced as set forth below:
<TABLE>
<CAPTION>
DOLLAR WEIGHTED AVERAGE
YEARS TO MATURITY*
4 TO 7.99 8 TO 14.99 15 OR MORE
--------- ---------- ----------
AMOUNT OF INVESTMENT SALES CHARGE (% OF PUBLIC OFFERING PRICE)
-------------------- -----------------------------------------
<S> <C> <C> <C>
$1 to $99,999 3.50% 4.50% 5.50%
$100,000 to $499,999 3.25 4.25 5.00
$500,000 to $999,999 3.00 4.00 4.50
$1,000,000 or more 2.75 3.75 4.00
</TABLE>
-----------------
* If the dollar weighted average maturity of a State Trust is from 1 to
3.99 years, the sales charge is 2% and 1.5% of the Public Offering
Price for purchases of $1 to $249,999 and $250,000 or more,
respectively.
The reduced sales charges as shown on the preceding charts will
apply to all purchases of Units on any one day by the same purchaser from
the same firm and for this purpose, purchases of Units of a Series of the
Trust will be aggregated with concurrent purchases of Units of any other
unit investment trust that may be offered by the Sponsor. Additionally,
Units purchased in the name of a spouse or child (under 21) of such
purchaser will be deemed to be additional purchases by such purchaser.
The reduced sales charges will also be applicable to a trust or other
fiduciary purchasing for a single trust estate or single fiduciary
account.
The Sponsor intends to permit officers, directors and employees of
the Sponsor and Evaluator and in the sole direction of the Sponsor,
registered representatives of selling firms to purchase Units of the
Trust without a sales charge, although a transaction processing fee may
be imposed on such trades.
Units may be purchased at the Public Offering Price less the
concession the Sponsor typically allows to dealers and other selling
agents for purchases (see "Public Distribution of Units" below) by
investors who purchase Units through registered investment advisers,
certified financial planners or registered broker-dealers who in each
case either charge periodic fees for financial planning, investment
advisory or asset management services, or provide such services in
connection with the establishment of an investment account for which a
comprehensive "wrap fee" charge is imposed.
The Public Offering Price per Unit of a State Trust on the date
shown on the cover page of Part Two of the Prospectus or on any
subsequent date will vary from the amounts stated under "ESSENTIAL
INFORMATION" in Part Two in accordance with fluctuations in the prices of
the underlying Municipal Bonds and the amount of accrued interest on the
Units. The aggregate bid side evaluation of the Municipal Bonds shall be
determined (a) on the basis of current bid prices of the Municipal Bonds,
(b) if bid prices are not available for any particular Municipal Bond, on
the basis of current bid prices for comparable bonds, (c) by determining
the value of the Municipal Bonds on the bid side of the market by
appraisal, or (d) by any combination of the above.
The foregoing evaluations and computations shall be made as of the
Evaluation Time stated under "ESSENTIAL INFORMATION" in Part Two, on each
business day effective for all sales made during the preceding 24-hour
period, and for purposes of resales and repurchases of Units.
The interest on the Municipal Bonds in each State Trust, less the
related estimated fees and expenses, is estimated to accrue in the annual
amounts per Unit set forth under "ESSENTIAL INFORMATION" in Part Two.
The amount of net interest income which accrues per Unit may change as
Municipal Bonds mature or are redeemed, exchanged or sold, or as the
expenses of a State Trust change or as the number of outstanding Units of
such State Trust changes.
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<PAGE>
Payment for Units must be made on or before the third business day
following the order for purchase (the "settlement date"). A purchaser
becomes the owner of Units on the settlement date. Cash, if any, made
available to the Sponsor prior to the date of settlement for the purchase
of Units may be used in the Sponsor's business and may be deemed to be a
benefit to the Sponsor, subject to the limitations of the Securities
Exchange Act of 1934. If a Unitholder desires to have certificates
representing Units purchased, such certificates will be delivered as soon
as possible following a written request therefor, or shortly thereafter.
For information with respect to redemption of Units purchased, but as to
which certificates requested have not been received, see "REDEMPTION"
below.
Accrued Interest. In the case of series of Kemper
Tax-Exempt Income Trust, Multi-State Series and Ohio Tax-Exempt Bond
Trust, Series 1-10, accrued interest consists of two elements as
described in this section. The first element arises as a result of
accrued interest which is the accumulation of unpaid interest on a bond
from the last day on which interest thereon was paid. Interest on Bonds
in the State Trusts is actually paid either monthly or semi-annually to
the State Trust. However, interest on the Bonds in the State Trusts is
accounted for daily on an accrual basis. Because of this, a State Trust
always has an amount of interest earned but not yet collected by the
Trustee because of coupons that are not yet due. For this reason, the
Public Offering Price of Units will have added to it the proportionate
share of accrued and undistributed interest to the date of settlement.
The Trustee advanced the amount of accrued interest as of the First
Settlement Date (which is three business days following the Date of
Deposit) and the same was distributed to the Sponsor. Such advance was
repaid to the Trustee through the first receipts of interest received on
the Municipal Bonds. Consequently, the amount of accrued interest added
to the Public Offering Price of Units included only accrued interest
arising after the First Settlement Date of a State Trust, less any
distributions from the Interest Account subsequent to this First
Settlement Date. Since the First Settlement Date was the date of
settlement for anyone who ordered Units on the Date of Deposit, no
accrued interest was added to the Public Offering Price of Units ordered
on the Date of Deposit.
The second element of accrued interest arises because of the
structure of the Interest Account. The Trustee has no cash for
distribution to Unitholders until it receives interest payments on the
Bonds in a State Trust. The Trustee is obligated to provide its own
funds, at times, in order to advance interest distributions. The Trustee
will recover these advancements when such interest is received. Interest
Account balances are established so that it will not be necessary on a
regular basis for the Trustee to advance its own funds in connection with
such interest distributions. The Interest Account balances are also
structured so that there will generally be positive cash balances and
since the funds held by the Trustee will be used by it to earn interest
thereon, it benefits thereby (see "EXPENSES OF THE TRUST").
Accrued interest is computed as of the initial Record Date of the
State Trusts. On the date of the first distribution of interest to
Unitholders after the First Settlement Date, the interest collected by
the Trustee will be sufficient to repay its advances, to allow for
accrued interest under the monthly, quarterly and semi-annual plans of
distribution and to generate enough cash to commence distributions to
Unitholders. If a Unitholder sells or redeems all or a portion of his
Units or if the Bonds in a State Trust are sold or otherwise removed or
if a State Trust is liquidated, he will receive at that time his
proportionate share of the accrued interest computed to the settlement
date in the case of sale or liquidation and to the date of tender in the
case of redemption in such State Trust.
Purchased and Daily Accrued Interest. In the case of series of
Kemper Defined Funds, accrued interest consists of two elements as
described in this section. The first element arises as a result of
accrued interest which is the accumulation of unpaid interest on a bond
from the later of the last day on which interest thereon was paid or the
date of original issuance of the bond. Interest on the coupon Bonds in
the State Trust is paid semi-annually to the Trust. In the case of
series of Kemper Defined Funds, a portion of the aggregate amount of such
accrued interest on the Bonds in the Trust to the First Settlement Date
of the Trust is referred to herein as "Purchased Interest." Included in
the Public Offering Price of the Trust Units in any series of Kemper
Defined Funds is the Purchased Interest. In an effort to reduce the
amount of Purchased Interest which would otherwise have to be paid by
Unitholders, the Trustee may advance a portion of the accrued interest to
the Sponsor as the Unitholder of
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<PAGE>
record as the First Settlement Date. The second element of accrued
interest arises because the estimated net interest on the Units in the
State Trust is accounted for daily on an accrual basis (herein referred
to as "Daily Accrued Interest" in connection with Kemper Defined Funds).
Because of this, the Units always have an amount of interest earned but
not yet paid or reserved for payment. For this reason, the Public
Offering Price of Units in any series of Kemper Defined Funds will
include the proportionate share of Daily Accrued Interest to the date of
settlement.
If a Unitholder in any series of Kemper Defined Funds sells or
redeems all or a portion of his Units or if the Bonds are sold or
otherwise removed or if the State Trust is liquidated, he will receive at
that time his proportionate share of the Purchased Interest and Daily
Accrued Interest computed to the settlement date in the case of sale or
liquidation and to the date of tender in the case of redemption in the
State Trust.
Public Distribution of Units. The
Sponsor has qualified Units of each State Trust for sale in the State for
which such State Trust is named. Units will be sold through dealers who
are members of the National Association of Securities Dealers, Inc. and
through others. Sales may be made to or through dealers at prices which
represent discounts from the Public Offering Price as set forth in the
table below. Certain commercial banks are making Units of the Trust
available to their customers on an agency basis. A portion of the sales
charge paid by their customers is retained by or remitted to the banks,
in the amounts in the table below. Under the Glass-Steagall Act, banks
are prohibited from underwriting Trust Units; however, the Glass-Steagall
Act does permit certain agency transactions and the banking regulators
have indicated that these particular agency transactions are permitted
under such Act. In addition, state securities laws on this issue may
differ from the interpretations of Federal law expressed herein and banks
and financial institutions may be required to register as dealers
pursuant to state law.
<TABLE>
<CAPTION>
DOLLAR WEIGHTED AVERAGE
YEARS TO MATURITY*
4 TO 7.99 8 TO 14.99 15 OR MORE
--------- ---------- ----------
AMOUNT OF INVESTMENT DISCOUNT PER UNIT (% OF PUBLIC OFFERING PRICE)
-------------------- ----------------------------------------------
<S> <C> <C> <C>
$1,000 to $99,999 2.00% 3.00% 4.00%
$100,000 to $499,999 1.75 2.75 3.50
$500,000 to $999,999 1.50 2.50 3.00
$1,000,000 or more 1.25 2.25 2.50
</TABLE>
---------------------
* If the dollar weighted average maturity of a Trust is from 1 to 3.99
years, the concession or agency commission is 1.00% of the Public
Offering Price.
In addition to such discounts, the Sponsor may, from time to time,
pay or allow an additional discount, in the form of cash or other
compensation, to dealers employing registered representatives who sell,
during a specified time period, a minimum dollar amount of Units of the
Trust and other unit investment trusts underwritten by the Sponsor. The
Sponsor reserves the right to change the levels of discounts at any time.
The difference between the discount allowed to firms and the sales charge
will be retained by the Sponsor. The Sponsor reserves the right to
reject, in whole or in part, any order for the purchase of Units.
Profits of Sponsor. The Sponsor will retain a
portion of the sales charge on each Unit sold from its inventory,
representing the difference between the Public Offering Price of the
Units, calculated as stated under "Public Offering Price," and the
discounts allowed to firms selling such Units. The Sponsor may realize
additional profit or loss as a result of the possible change in the daily
evaluation of the Municipal Bonds in the State Trusts from its inventory.
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<PAGE>
MARKET FOR UNITS
While not obligated to do so, the Sponsor intends to, subject to
change at any time, maintain a market for Units of the State Trust
offered hereby and to offer to purchase said Units at prices, as
determined by the Evaluator, based on the aggregate bid prices of the
underlying Municipal Bonds in such State Trusts, together with accrued
interest to the expected date of settlement (which, in the case of Kemper
Defined Funds, consists of Purchased Interest and Daily Accrued
Interest). Accordingly, Unitholders who wish to dispose of their Units
should inquire of their broker or bank as to the current market prices in
order to determine whether there is in existence any price in excess of
the Redemption Price and, if so, the amount thereof.
The offering price of any Units resold by the Sponsor will be in
accord with that described in the currently effective Prospectus
describing such Units. Any profits or loss resulting from the resale of
such Units will belong to the Sponsor. The Sponsor may suspend or
discontinue purchases of Units of any Trust Fund if the supply of Units
exceeds demand, or for other business reasons.
REDEMPTION
A Unitholder who does not dispose of Units in the secondary market
described above may cause their Units to be redeemed by the Trustee by
making a written request to the Trustee, The Bank of New York, 101
Barclay Street, New York, New York 10286, and, in the case of Units
evidenced by a certificate, by tendering such certificate to the Trustee,
properly endorsed or accompanied by a written instrument or instruments
of transfer in form satisfactory to the Trustee. Unitholders must sign
such written request, and such certificate or transfer instrument,
exactly as their names appear on the records of the Trustee and on any
certificate representing the Units to be redeemed. If the amount of the
redemption is $25,000 or less and the proceeds are payable to the
Unitholder of record at the address of record, no signature guarantee is
necessary for redemptions by individual account owners (including joint
owners). Additional documentation may be requested, and a signature
guarantee is always required, from corporations, executors,
administrators, trustees, guardians or associations. The signatures must
be guaranteed by a participant in the Securities Transfer Agents
Medallion Program ("STAMP") or such other signature guarantee program in
addition to, or in substitution for, STAMP, as may be accepted by the
Trustee. A certificate should only be sent by registered or certified
mail for the protection of the Unitholder. Since tender of the
certificate is required for redemption when one has been issued, Units
represented by a certificate cannot be redeemed until the certificate
representing such Units has been received by the purchasers.
Redemption shall be made by the Trustee on the seventh calendar day
following the day on which a tender for redemption is received, or if the
seventh calendar day is not a business day, on the first business day
prior thereto (the "Redemption Date"), by payment of cash equivalent to
the Redemption Price for such State Trust, determined as set forth below
under "Computation of Redemption Price," as of the Evaluation Time stated
under "ESSENTIAL INFORMATION" in Part Two, next following such tender,
multiplied by the number of Units being redeemed. The price received
upon redemption might be more or less than the amount paid by the
Unitholder depending on the value of the Municipal Bonds in the State
Trust's portfolio at the time of redemption. Any Units redeemed shall be
cancelled and any undivided fractional interest in the State Trust will
be extinguished.
Under regulations issued by the Internal Revenue Service, the
Trustee is required to withhold a specified percentage of the principal
amount of a Unit redemption if the Trustee has not been furnished the
redeeming Unitholder's tax identification number in the manner required
by such regulations. Any amount so withheld is transmitted to the
Internal Revenue Service and may be recovered by the Unitholder only when
filing a tax return. Under normal circumstances, the Trustee obtains the
Unitholder's tax identification number from the selling broker. However,
any time a Unitholder elects to tender Units for redemption, such
Unitholder should make sure that the Trustee has been provided a
certified tax identification number in order to avoid this possible "back-
up withholding." In the event the Trustee has not been previously
provided such number, one must be provided at the time redemption is
requested.
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<PAGE>
Any amounts paid on redemption representing interest shall be
withdrawn from the Interest Account for such State Trust to the extent
that funds are available for such purpose. All other amounts paid on
redemption shall be withdrawn from the Principal Account for such State
Trust. The Trustee is empowered to sell Municipal Bonds for such State
Trust in order to make funds available for the redemption of Units of
such State Trust. Such sale may be required when Municipal Bonds would
not otherwise be sold and might result in lower prices then might
otherwise be realized. To the extent Municipal Bonds are sold, the size
and diversity of such State Trust will be reduced.
The Trustee is irrevocably authorized in its discretion, if the
Sponsor does not elect to purchase any Units tendered for redemption, in
lieu of redeeming such Units, to sell such Units in over-the-counter
market for the account of tendering Unitholders at prices which will
return to such Unitholders amounts in cash, net after brokerage
commissions, transfer taxes and other charges, equal to or in excess of
the Redemption Price for such Units. In the event of any such sale, the
Trustee shall pay the net proceeds thereof to the Unitholders on the day
they would otherwise be entitled to receive payment of the Redemption
Price.
The right of redemption may be suspended and payment postponed (1)
for any period during which the New York Stock Exchange is closed, other
than customary weekend and holiday closings, or during which (as
determined by the Securities and Exchange Commission) trading on the New
York Stock Exchange is restricted; (2) for any period during which an
emergency exists as a result of which disposal by the Trustee of
Municipal Bonds is not reasonably practicable or it is not reasonably
practicable to fairly determine the value of the underlying Municipal
Bonds in accordance with the Agreement; or (3) for such other period as
the Securities and Exchange Commission may by order permit. The Trustee
is not liable to any person or in any way for any loss or damage which
may result from any such suspension or postponement.
Computation of Redemption Price.
The Redemption Price for Units of each State Trust is computed by the
Evaluator as of the Evaluation Time stated under "ESSENTIAL INFORMATION"
in Part Two next occurring after the tendering of a Unit for redemption
and on any other business day desired by it, by
A. adding (1) the principal cash on hand held or owed by the
State Trust other than cash deposited in the Trust Fund to purchase
Municipal Bonds not applied to the purchase of such Bonds; (2) the
aggregate value of the Municipal Bonds held in the State Trust, as
determined by the Evaluator on the basis of bid prices therefor; and
(3) interest accrued and unpaid on the Municipal Bonds in the State
Trust as of the date of computation; and
B. deducting therefrom (1) amounts representing any
applicable taxes or governmental charges payable out of the State
Trust and for which no deductions have been previously made for the
purpose of additions to the Reserve Account described under
"EXPENSES OF THE TRUST"; (2) amounts representing estimated accrued
expenses of the State Trust including, but not limited to, unpaid
fees and expenses of the Trustee (including legal and auditing fees
and any insurance costs), the Evaluator, the Sponsor and bond
counsel, if any; (3) cash held for distribution to Unitholders of
record as of the business day prior to the evaluation being made;
and (4) other liabilities incurred by the State Trust; and
C. finally, dividing the results of such computation by the
number of Units of the State Trust outstanding as of the date
thereof.
UNITHOLDERS
Ownership of Units. Ownership of Units of any
State Trust will not be evidenced by a certificate unless a Unitholder or
the Unitholder's registered broker/dealer or the clearing agent for such
broker/dealer makes a written request to the Trustee. Certificates, if
issued, will be so noted on the confirmation statement sent to the
Underwriter and broker. Non-receipt of such certificate(s) must be
reported to the Trustee within one year; otherwise, a 2% surety bond fee
will be required for replacement.
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<PAGE>
Units are transferable by making a written request to the Trustee
and, in the case of Units evidenced by a certificate, by presenting and
surrendering such certificate to the Trustee properly endorsed or
accompanied by a written instrument or instruments of transfer which
should be sent registered or certified mail for the protection of
Unitholders. Unitholders must sign such written request, and such
certificate or transfer instrument, exactly as their names appear on the
records of the Trustee and on any certificate representing the Units to
be transferred. Such signatures must be guaranteed by a participant in
the Securities Transfer Agents Medallion Program ("STAMP") or such other
signature guaranty program in addition to, or in substitution for, STAMP,
as may be accepted by the Trustee.
Units may be purchased and certificates, if requested, will be
issued in denominations of one Unit or any multiple thereof subject to
any minimum investment requirement established by the Sponsor from time
to time. Any certificate issued will be numbered serially for
identification, issued in fully registered form and will be transferable
only on the books of the trustee. The Trustee may require a Unitholder
to pay a fee for each certificate re-issued or transferred, and to pay
any governmental charge that may be imposed in connection with each such
transfer or interchange. The Trustee at the present time does not intend
to charge for the normal transfer or interchange of certificates.
Destroyed, stolen, mutilated or lost certificates will be replaced upon
delivery to the Trustee of satisfactory indemnity (generally amounting to
3% of the market value of the Units), affidavit of loss, evidence of
ownership and payment of expenses incurred.
Distributions to Unitholders. Interest
Distributions: Interest received by each State Trust, including any
portion of the proceeds from a disposition of Municipal Bonds which
represents accrued interest, is credited by the Trustee to the Interest
Account for such State Trust. All other receipts are credited by the
Trustee to a separate Principal Account for the State Trust. The Trustee
normally has no cash for distribution to Unitholders until it receives
interest payments on the Bonds in the State Trust. Since municipal
interest usually is paid semi-annually, during the initial months of the
Trust, the Interest Account of each State Trust, consisting of accrued
but uncollected interest and collected interest (cash), will be
predominantly the uncollected accrued interest that is not available for
distribution.
Thereafter, assuming the State Trust retains its original size and
composition, after deduction of the fees and expenses of the Trustee, the
Sponsor and Evaluator and reimbursements (without interest) to the
Trustee for any amount advanced to a State Trust, the Trustee will
normally distribute on each Interest Distribution Date (the fifteenth of
the month) or shortly thereafter to Unitholders of record of such State
Trust on the preceding Record Date. Unitholders of the State Trusts will
receive an amount substantially equal to one-twelfth, one-fourth or one-
half (depending on the distribution option selected) of such holders' pro
rata share of the estimated net annual interest income to the Interest
Account of such State Trust. However, interest earned at any point in
time will be greater than the amount actually received by the Trustee and
distributed to the Unitholders. Therefore, there will always remain an
item of accrued interest that is added to the daily value of the Units.
If Unitholders of a State Trust sell or redeem all or a portion of their
Units, they will be paid their proportionate share of the accrued
interest of such State Trust to, but not including, the fifth business
day after the date of a sale or to the date of tender in the case of a
redemption.
In order to equalize distributions and keep the undistributed
interest income of the Trusts at a low level, all Unitholders of record
on the first Record Date in such State Trust received an interest
distribution on the first Interest Distribution Date. Because the period
of time between the first Interest Distribution Date and the regular
distribution dates may not have been a full period, the first regular
distributions may have been partial distributions.
Persons who purchase Units between a Record Date and a Distribution
Date will receive their first distribution on the second Distribution
Date following their purchase of Units. Since interest on Municipal
Bonds in the State Trusts is payable at varying intervals, usually in
semi-annual installments, and distributions of income are made to
Unitholders at different intervals from receipt of interest, the interest
accruing to a State Trust may not be equal to the amount of money
received and available for distribution from the Interest Account.
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Therefore, on each Distribution Date, the amount of interest actually
deposited in the Interest Account of a State Trust and available for
distribution may be slightly more or less than the interest distribution
made. In order to eliminate fluctuations in interest distributions
resulting from variances, the Trustee is authorized by the Trust
Agreements to advance such amounts as may be necessary to provide
interest distributions of approximately equal amounts. The Trustee will
be reimbursed, without interest, for any such advances from funds
available in the Interest Account for such State Trust.
Unitholders of any series of Kemper Tax-Exempt Income Trust, Multi-
State Series or Ohio Tax-Exempt Bond Trust, Series 1-10 who desire to
receive distributions on a quarterly or semi-annual basis may elect to do
so, however, only monthly distributions are available for series of
Kemper Defined Funds. Record Dates for monthly distributions will be the
first day of each month; Record Dates for quarterly distributions will be
the first day of January, April, July and October; and Record Dates for
semi-annual distributions will be the first day of January and July. The
distribution option selected by a Unitholder of any series of Kemper Tax-
Exempt Income Trust, Multi-State Series or Ohio Tax-Exempt Bond Trust,
Series 1-10 will remain in effect until changed by written notice to the
Trustee.
Unitholders of any series of Kemper Tax-Exempt Income Trust, Multi-
State Series or Ohio Tax-Exempt Bond Trust, Series 1-10 purchasing Units
of the State Trusts in the secondary market will initially receive
distributions in accordance with the election of the prior owner.
Unitholders of such Trusts desiring to change their distribution option
may do so by sending written notice to the Trustee, together with their
certificate (if one was issued). Certificates should only be sent by
registered or certified mail to minimize the possibility of loss. If
written notice and any certificate are received by the Trustee not later
than January 1 or July 1 of a year, the change will become effective for
distributions commencing with February 15 or August 15, respectively, of
that year. If notice is not received by the Trustee, the Unitholder will
be deemed to have elected to continue with the same option.
Principal Distributions. The Trustee will distribute on each semi-
annual Distribution Date (or, in the case of Kemper Defined Funds, on
each Distribution Date) or shortly thereafter, to each Unitholder of
record of the State Trust of the preceding Record Date, an amount
substantially equal to such holder's pro rata share of the cash balance,
if any, in the Principal Account of such State Trust computed as of the
close of business on the preceding Record Date. However, no distribution
will be required if the balance in the Principal Account is less than
$1.00 per Unit (or $.001 per Unit for certain Series). Additionally, in
the case of any series of Kemper Tax-Exempt Income Trust, Multi-State
Series or Ohio Tax-Exempt Bond Trust, Series 1-10, if such balance is
between $5.00 and $10.00 per Unit, distributions will be made on each
quarterly Distribution Date; and if such balance exceeds $10.00 per Unit,
such amounts will be distributed on the next monthly Distribution Date.
Statements to Unitholders. With each
distribution, the Trustee will furnish each Unitholder a statement of the
amount of interest and the amount of other receipts, if any, which are
being distributed, expressed in each case as a dollar amount per Unit.
The accounts of each State Trust are required to be audited
annually, at the State Trust's expense, by independent auditors
designated by the Sponsor, unless the Trustee determines that such an
audit would not be in the best interest of the Unitholders of such State
Trust. The accountants' report will be furnished by the Trustee to any
Unitholder of such State Trust upon written request.
Within a reasonable period of time after the end of each calendar
year, the Trustee shall furnish to each person who at any time during the
calendar year was a Unitholder of a State Trust, a statement covering the
calendar year, setting forth: (a) As to the Interest Account: (i) the
amount of interest received on the Municipal Bonds and the percentage of
such amount by states and territories in which the issuers of such Bonds
are located; (ii) the amount paid from the Interest Account of such State
Trust representing accrued interest of any Units redeemed; (iii) the
deductions from the Interest Account of such State Trust for applicable
taxes, if any, fees and expenses (including auditing fees) of the
Trustee, the Evaluator, the Sponsor and bond counsel, if any; (iv) any
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amounts credited by the Trustee to a Reserve Account for such State Trust
described under "EXPENSES OF THE TRUST"; and (v) the net amount remaining
after such payments and deductions, expressed both as a total dollar
amount and a dollar amount per Unit outstanding on the last business day
of such calendar year; (b) As to the Principal Account: (i) the dates of
the maturity, liquidation or redemption of any of the Municipal Bonds in
such State Trust and the net proceeds received therefrom excluding any
portion credited to the Interest Account; (ii) the amount paid from the
Principal Account of such Series representing the principal of any Units
redeemed; (iii) the deductions from the Principal Account of such Series
for payment of applicable taxes, if any, fees and expenses (including
auditing expenses) of the Trustee, the Evaluator, the Sponsor and bond
counsel, if any; (iv) any amounts credited by the Trustee to a Reserve
Account for such Series described under "EXPENSES OF THE TRUST"; and
(v) the net amount remaining after distributions of principal and
deductions, expressed both as a dollar amount and as a dollar amount per
Unit outstanding on the last business day of such calendar year; (c) The
following information: (i) a list of the Municipal Bonds in such State
Trust as of the last business day of such calendar year; (ii) the number
of Units of such State Trust outstanding on the last business day of such
calendar year; (iii) the Redemption Price of such State Trust based on
the last Trust Fund Evaluation made during such calendar year; and
(iv) the amount actually distributed during such calendar year from the
Interest and Principal Accounts of such State Trust separately stated,
expressed both as total dollar amounts and as dollar amounts per Unit of
such State Trust outstanding on the Record Date for each such
distribution.
Rights of Unitholders. A Unitholder may at any
time tender Units to the Trustee for redemption. No Unitholder of a
State Trust shall have the right to control the operation and management
of the Trust or such State Trust in any manner, except to vote with
respect to amendment of the Agreement or termination of the Trust or such
State Trust. The death or incapacity of any Unitholder will not operate
to terminate the Trust or any State Trust nor entitle legal
representatives or heirs to claim an accounting or to bring any action or
proceeding in any court for partition or winding up of the Trust or any
State Trust.
INVESTMENT SUPERVISION
The Sponsor may not alter the portfolio of the State Trusts by the
purchase, sale or substitution of Municipal Bonds, except in the special
circumstances noted below. Thus, with the exception of the redemption or
maturity of Municipal Bonds in accordance with their terms, and/or the
sale of Municipal Bonds to meet redemption requests, the assets of the
State Trusts will remain unchanged under normal circumstances.
The Sponsor may direct the Trustee to dispose of Municipal Bonds the
value of which has been affected by certain adverse events including
default in the payment of principal or interest, institution of certain
legal proceedings, default under other documents which may adversely
affect debt service, default in the payment of interest on other
obligations of the same issuer, decline in projected income pledged for
debt service on revenue bonds, or decline in their price or the
occurrence of other market factors, including advance refunding, so that
in the opinion of the Sponsor, the retention of such Municipal Bonds in a
State Trust would be detrimental to the interest of its Unitholders. The
proceeds from any such sales, exclusive of any portion which represents
accrued interest, will be credited to the Principal Account of such Trust
Fund for distribution to its Unitholders.
The Sponsor is required to instruct the Trustee to reject any offer
made by an issuer of the Municipal Bonds to issue new obligations in
exchange or substitution for any of such Municipal Bonds pursuant to a
refunding financing plan, except that the Sponsor may instruct the
Trustee to accept or reject such an offer or to take any other action
with respect thereto as the Sponsor may deem proper if (a) the issuer is
in default with respect to such Municipal Bonds; or (b) in the written
opinion of the Sponsor, there is a reasonable basis to believe that the
issuer will default with respect to such Municipal Bonds in the
foreseeable future. Any obligations received in exchange or substitution
will be held by the Trustee subject to the terms and conditions of the
Agreement to the same extent as the Municipal Bonds originally deposited
thereunder. Within five days after such deposit, notice of such exchange
and deposit shall be given by the Trustee to each unitholder of such
State Trust registered on the books of the Trustee, including an
identification of the Municipal Bonds eliminated and the Municipal Bonds
substituted therefor.
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The Trustee may sell Municipal Bonds, designated by the Sponsor,
from a State Trust for the purpose of redeeming Units of such State Trust
tendered for redemption and the payment of expenses.
ADMINISTRATION OF THE TRUST
The Trustee. The Trustee is The Bank of New York, a
trust company organized under the laws of New York. The Bank of New York
has its offices at 101 Barclay Street, New York, New York 10286,
telephone 1(800) 701-8178. The Bank of New York is the successor trustee
to Investors Fiduciary Trust Company for certain State Trusts under their
respective Trust Agreements. The Bank of New York is subject to
supervision and examination by the Superintendent of Banks of the State
of New York and the Board of Governors of the Federal Reserve System, and
its deposits are insured by the Federal Deposit Insurance Corporation to
the extent permitted by law.
The Trustee, whose duties are ministerial in nature, has not
participated in selecting the portfolio of any Trust Fund. For
information relating to the responsibilities of the Trustee under the
Agreement, reference is made to the material set forth under
"UNITHOLDERS."
In accordance with the Agreements, the Trustee shall keep proper
books of record and account of all transactions at its office. Such
records shall include the name and address of, and the number of Units
held by, every Unitholder of each State Trust. Such books and records
shall be open to inspection by any Unitholder of such State Trust at all
reasonable times during the usual business hours. The Trustee shall make
such annual or other reports as may from time to time be required under
any applicable state or Federal statute, rule or regulation. The Trustee
shall keep a certified copy or duplicate original of the Agreements on
file in its office available for inspection at all reasonable times
during usual business hours by any Unitholder, together with a current
list of the Municipal Bonds held in each State Trust. Pursuant to the
Agreements, the Trustee may employ one or more agents for the purpose of
custody and safeguarding of Municipal Bonds comprising the portfolios.
Under the Agreement, the Trustee or any successor trustee may resign
and be discharged of the trust created by the Agreement by executing an
instrument in writing and filing the same with the Sponsor.
The Trustee or successor trustee must mail a copy of the notice of
resignation to all Unitholders then of record, not less than sixty days
before the date specified in such notice when such resignation is to take
effect. The Sponsor, upon receiving notice of such resignation, is
obligated to appoint a successor trustee promptly. If, upon such
resignation, no successor trustee has been appointed and has accepted the
appointment within thirty days after notification, the retiring Trustee
may apply to a court of competent jurisdiction for the appointment of a
successor. The Sponsor may, at any time, remove the Trustee with or
without cause and appoint a successor trustee as provided in the
Agreement. Notice of such removal and appointment shall be mailed to
each Unitholder by the Sponsor. Upon execution of a written acceptance
of such appointment by a successor trustee, all the rights, powers,
duties and obligations of the original Trustee shall vest in the
successor.
The Trustee shall be a corporation organized under the laws of the
United States or any state thereof, which is authorized under such laws
to exercise trust powers. The Trustee shall have at all times an
aggregate capital, surplus and undivided profits of not less than
$5,000,000.
The Evaluator. Ranson & Associates, Inc., the Sponsor,
also serves as Evaluator. The Evaluator may resign or be removed by the
Trustee, which is to use its best efforts to appoint a satisfactory
successor. Such resignation or removal shall become effective upon
acceptance of appointment by the successor evaluator. If, upon
resignation of the Evaluator, no successor has accepted appointment
within thirty days after notice of resignation, the Evaluator may apply
to a court of competent jurisdiction for the appointment of a successor.
Notice of such resignation or removal and appointment shall be mailed by
the Trustee to each Unitholder. At the present time, pursuant to a
contract with the Evaluator, a non-affiliated firm regularly engaged in
the business of evaluating, quoting or appraising comparable securities,
provides portfolio evaluations of the Municipal Bonds in the State Trusts
which are then reviewed by the Evaluator. In the event the Sponsor is
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unable to obtain current evaluations, it may make its own evaluations or
it may utilize the services of any other non-affiliated evaluator or
evaluators it deems appropriate.
Amendment and Termination. The Agreement
may be amended by the Trustee and the Sponsor without the consent of any
of the Unitholders: (1) to cure any ambiguity or to correct or
supplement any provision which may be defective or inconsistent; (2) to
change any provision thereof as may be required by the Securities and
Exchange Commission or any successor governmental agency; or (3) to make
such provisions as shall not adversely affect the interest of the
Unitholders. The Agreement with respect to any State Trust may also be
amended in any respect by the Sponsor and the Trustee, or any of the
provisions thereof may be waived, with the written consent of the holders
of Units representing 66-2/3% of the Units then outstanding of such State
Trust, provided that no such amendment or waiver will reduce the interest
in the State Trust of any Unitholder thereof without the consent of such
Unitholder or reduce the percentage of Units required to consent to any
such amendment or waiver without the consent of all Unitholders of such
State Trust. In no event shall the Agreement be amended to increase the
number of Units of a State Trust issuable thereunder or to permit, except
in accordance with the provisions of the Agreement, the acquisition of
any Municipal Bonds in addition to or in substitution for those in a
State Trust. The Trustee shall promptly notify Unitholders of the
substance of any such amendment.
The Agreement provides that each State Trust shall terminate upon
the maturity, redemption or other disposition, as the case may be, of the
last of the Municipal Bonds held in such State Trust. If the value of a
State Trust shall be less than the applicable minimum value stated under
"ESSENTIAL INFORMATION" in Part Two, the Trustee may, in its discretion,
and shall, when so directed by the Sponsor, terminate the State Trust. A
State Trust may be terminated at any time by the holders of Units
representing 66-2/3% of the Units thereof then outstanding.
Notwithstanding the foregoing, in no event shall any State Trust continue
beyond the mandatory termination date shown in Part Two under "ESSENTIAL
INFORMATION." In the event of termination of a State Trust, written
notice thereof will be sent by the Trustee to all Unitholders of such
State Trust. Within a reasonable period after termination, the Trustee
will sell any Municipal Bonds remaining in the State Trust and, after
paying all expenses and charges incurred by the State Trust, will
distribute to Unitholders thereof (upon surrender for cancellation of
certificates for Units, if issued) their pro rata share of the balances
remaining in the Interest and Principal Accounts of such State Trust.
Limitations on Liability. The Sponsor. The Sponsor is liable for
the performance of its obligations arising from its responsibilities
under the Agreement, but will be under no liability to the Unitholders
for taking any action or refraining from any action in good faith
pursuant to the Agreement or for errors in judgment, except in cases of
its own gross negligence, bad faith or willful misconduct. The Sponsor
shall not be liable or responsible in any way for depreciation or loss
incurred by reason of the sale of any Municipal Bonds.
The Trustee. The Agreement provides that the Trustee shall be under
no liability for any action taken in good faith in reliance upon prima
facie properly executed documents or for the disposition of monies,
Municipal Bonds, or certificates except by reason of its own negligence,
bad faith or willful misconduct, nor shall the Trustee be liable or
responsible in any way for depreciation or loss incurred by reason of the
sale by the Trustee of any Municipal Bonds. In the event that the
Sponsor shall fail to act, the Trustee may act and shall not be liable
for any such action taken by it in good faith. The Trustee shall not be
personally liable for any taxes or other governmental charges imposed
upon or in respect of the Municipal Bonds or upon the interest thereon.
In addition, the Agreement contains other customary provisions limiting
the liability of the Trustee. The Trustee, whose duties are ministerial,
did not participate in the selection of Municipal Bonds for the State
Trusts.
The Evaluator. The Trustee and Unitholders may rely on any
evaluation furnished by the Evaluator and shall have no responsibility
for the accuracy thereof. The Agreement provides that the determinations
made by the Evaluator shall be made in good faith upon the basis of the
best information available to it; provided, however, that the Evaluator
shall be under no liability to the Trustee or Unitholders for errors in
judgment, but shall be liable only for its gross negligence, lack of good
faith or willful misconduct.
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EXPENSES OF THE TRUST
Except with respect to those series indicated in the next sentence
and except as otherwise stated under "ESSENTIAL INFORMATION" in Part Two
of the Prospectus, the Sponsor will not charge any State Trust an
advisory fee and will receive no fee from the Trust for services
performed as Sponsor. The Sponsor will charge Kemper Tax-Exempt Income
Trust, Multi-State Series 45 and subsequent series and all series of
Kemper Defined Funds an annual surveillance fee for services performed
for such Trust Funds in an amount not to exceed the amount shown under
"ESSENTIAL INFORMATION" in Part Two, but in no event will such
compensation when combined with all compensation received from other unit
investment trusts for which the Sponsor acts as Sponsor and provides
portfolio surveillance, exceed the aggregate cost to the Sponsor for
providing such services. Such fee shall be based on the total number of
Units of such State Trust outstanding as of the January Record Date for
any annual period. The Sponsor and other Underwriters paid all the
expenses of creating and establishing the Trust, including the cost of
the initial preparation, printing and execution of the Prospectus,
Agreements and the certificates, legal and accounting expenses,
advertising and selling expenses, payment of closing fees, expenses of
the Trustee, initial evaluation fees and other out-of-pocket expenses.
The Trustee receives for its services a fee calculated on the basis
of the annual rate set forth under "ESSENTIAL INFORMATION" in Part Two
per $1,000 principal amount of Municipal Bonds in each State Trust, based
on the largest aggregate principal amount of Municipal Bonds in the State
Trust at any time during the monthly, quarterly or semi-annual period, as
appropriate. The Trustee also receives indirect benefits to the extent
that it holds funds on deposit in the various non-interest bearing
accounts created pursuant to the Agreement; however, the Trustee is also
authorized by the Agreement to make from time to time certain non-
interest bearing advances to the State Trusts. See
"UNITHOLDERS-Distributions to Unitholders."
For evaluation of Municipal Bonds in the State Trusts, the Evaluator
receives a fee, payable monthly calculated on an annual rate as set forth
under "ESSENTIAL INFORMATION" in Part Two, based upon the largest
aggregate principal amount of Municipal Bonds in such State Trust at any
time during such monthly period.
The Trustee's, Sponsor's (if any) and Evaluator's fees for the State
Trusts are payable monthly on or before each Distribution Date by
deductions from the Interest Accounts thereof to the extent funds are
available and then from the Principal Accounts. Such fees may be
increased without approval of the Unitholders by amounts not exceeding a
proportionate increase in the Consumer Price Index entitled "All Services
Less Rent of Shelter," published by the United States Department of
Labor, or any equivalent index substituted therefor.
The following additional charges are or may be incurred by a State
Trust: (a) fees for the Trustee's extraordinary services; (b) expenses
of the Trustee (including legal and auditing expenses, but not including
any fees and expenses charged by any agent for custody and safeguarding
of Municipal Bonds) and of bond counsel, if any; (c) various governmental
charges; (d) expenses and costs of any action taken by the Trustee to
protect the Trust or such State Trust, or the rights and interests of the
Unitholders; (e) indemnification of the Trustee for any loss, liability
or expense incurred by it in the administration of the Trust or such
State Trust without negligence, bad faith or willful misconduct on its
part; (f) indemnification of the Sponsor for any loss, liability or
expense incurred in acting as Sponsor of the State Trust without gross
negligence, bad faith or willful misconduct; and (g) expenditures
incurred in contacting Unitholders upon termination of the State Trust.
The fees and expenses set forth herein are payable out of the appropriate
State Trust and, when owed to the Trustee, are secured by a lien on such
State Trust.
Fees and expenses of a State Trust shall be deducted from the
Interest Account thereof, or, to the extent funds are not available in
such Account, from the Principal Account. The Trustee may withdraw from
the Principal Account or the Interest Account of any State Trust such
amounts, if any, as it deems necessary to establish a reserve for any
taxes or other governmental charges or other extraordinary expenses
payable out of the State Trust. Amounts so withdrawn shall be credited
to a separate account maintained for the State Trust known as the Reserve
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Account and shall not be considered a part of the State Trust when
determining the value of the Units until such time as the Trustee shall
return all or any part of such amounts to the appropriate account.
THE SPONSOR
Ranson & Associates, Inc., the Sponsor of the Trusts, is an
investment banking firm created in 1995 by a number of former owners and
employees of Ranson Capital Corporation. On November 26, 1996, Ranson &
Associates, Inc. purchased all existing unit investment trusts sponsored
by EVEREN Securities, Inc. Accordingly, Ranson & Associates is the
successor sponsor to unit investment trusts formerly sponsored by EVEREN
Unit Investment Trusts, a service of EVEREN Securities, Inc. Ranson &
Associates, Inc. is also the sponsor and successor sponsor of Series of
The Kansas Tax-Exempt Trust and Multi-State Series of The Ranson
Municipal Trust. Ranson & Associates, Inc. is the successor to a series
of companies, the first of which was originally organized in Kansas in
1935. During its history, Ranson & Associates, Inc. and its predecessors
have been active in public and corporate finance and have sold bonds and
unit investment trusts and maintained secondary market activities
relating thereto. At present, Ranson & Associates, Inc., which is a
member of the National Association of Securities Dealers, Inc., is the
sponsor to each of the above-named unit investment trusts and serves as
the financial advisor and as an underwriter for issuers in the Midwest
and Southwest, especially in Kansas, Missouri and Texas. The Company's
offices are located at 250 North Rock Road, Suite 150, Wichita, Kansas
67206-2241.
If at any time the Sponsor shall fail to perform any of its duties
under the Trust Agreements or shall become incapable of acting or shall
be adjudged a bankrupt or insolvent or shall have its affairs taken over
by public authorities, then the Trustee may (a) appoint a successor
sponsor at rates of compensation deemed by the Trustee to be reasonable
and not exceeding such reasonable amounts as may be prescribed by the
Securities and Exchange Commission, or (b) terminate the Trust Agreements
and liquidate the Trusts as provided therein, or (c) continue to act as
Trustee without terminating the Trust Agreements.
The foregoing financial information with regard to the Sponsor
relates to the Sponsor only and not to these Trusts. Such information is
included in this Prospectus only for the purpose of informing investors
as to the financial responsibility of the Sponsor and its ability to
carry out its contractual obligations with respect to the Trusts. More
comprehensive financial information can be obtained upon request from the
Sponsor.
LEGAL OPINIONS
The legality of the Units offered hereby and certain matters
relating to federal tax law were originally passed upon by Chapman and
Cutler, 111 West Monroe Street, Chicago, Illinois 60603, as counsel for
the Sponsor.
INDEPENDENT AUDITORS
The statement of net assets, including the schedule of investments,
appearing in Part Two of this Prospectus and Registration Statement, with
information pertaining to the specific State Trust to which such
statement relates, has been audited by Ernst & Young LLP, independent
auditors, as set forth in their report appearing in Part Two and is
included in reliance upon such report given upon the authority of such
firm as experts in accounting and auditing.
DESCRIPTION OF SECURITIES RATINGS
Standard & Poor's, a division of The McGraw-Hill Companies. A brief
description of the applicable Standard & Poor's rating symbols and their
meanings as described by Standard & Poor's follows:
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A Standard & Poor's corporate or municipal bond rating is a current
assessment of the creditworthiness of an obligor with respect to a
specific debt obligation. This assessment may take into consideration
obligors such as guarantors, insurers, or lessees.
The bond rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or
suitability for a particular investor.
The ratings are based on current information furnished by the issuer
and obtained by Standard & Poor's from other sources it considers
reliable. Standard & Poor's does not perform an audit in connection with
any rating and may, on occasion, rely on unaudited financial information.
The ratings may be changed, suspended, or withdrawn as a result of
changes in, or unavailability of, such information, or for other
circumstances.
The ratings are based, in varying degrees, on the following
considerations:
I. Likelihood of default- capacity and willingness of the
obligor as to the timely payment of interest and repayment of
principal in accordance with the terms of the obligation;
II. Nature of and provisions of the obligations;
III. Protection afforded by, and relative position of, the
obligation in the event of bankruptcy, reorganization or other
arrangement, under the laws of bankruptcy and other laws affecting
creditors' rights.
AAA. Bonds rated AAA have the highest rating assigned by Standard &
Poor's to a debt obligation. Capacity to pay interest and repay
principal is extremely strong.
AA. Bonds rated AA have a very strong capacity to pay interest and
repay principal and differ from the highest rated issues only in small
degree.
A. Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than bonds in
higher rated categories.
BBB. Bonds rated BBB are regarded as having an adequate capacity to
pay interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for bonds in this category than for bonds in
higher rated categories.
Plus (+) or Minus (-). The ratings from "AA" to "A" may be modified
by the addition of a plus or minus sign to show relative standing within
the major rating categories.
Provisional Ratings. The letter "p" indicates the rating is
provisional. A provisional rating assumes the successful completion of
the project being financed by the bonds being rated and indicates that
payment of debt service requirements is largely or entirely dependent
upon the successful and timely completion of the project. This rating,
however, while addressing credit quality subsequent to completion of the
project, makes no comment on the likelihood of, or the risk of default
upon failure of, such completion. The investor should exercise his own
judgment with respect to such likelihood and risk.
Moody's Investors Service, Inc. A brief description of the
applicable Moody's Investors Service, Inc. rating symbols and their
meanings as described by Moody's follow:
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Aaa. Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and are
generally referred to as "gilt edge." Interest payments are protected by
a large or by an exceptionally stable margin and principal is secure.
While the various protective elements are likely to change, such changes
as can be visualized are most unlikely to impair the fundamentally strong
position of such issues. Their safety is so absolute that with the
occasional exception of oversupply in a few specific instances,
characteristically, their market value is affected solely by money market
fluctuations.
Aa. Bonds which are rated Aa are judged to be of high quality by
all standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than the best
bonds because margins of protection may not be as large as in Aaa
securities or fluctuations of protective elements may be of greater
amplitude or there may be other elements present which make the long term
risks appear somewhat larger than in Aaa securities. Their market value
is virtually immune to all but money market influences, with the
occasional exception of oversupply in a few specific instances.
A. Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations.
Factors giving security to principal and interest are considered
adequate, but elements may be present which suggest a susceptibility to
impairment sometime in the future. The market value of A-rated bonds may
be influenced to some degree by economic performance during a sustained
period of depressed business conditions, but, during periods of normalcy,
A-rated bonds frequently move in parallel with Aaa and Aa obligations,
with the occasional exception of oversupply in a few specific instances.
A1. Bonds which are rated A1 offer the maximum in security within
their quality group, can be bought for possible upgrading in quality, and
additionally, afford the investor an opportunity to gauge more precisely
the relative attractiveness of offerings in the market place.
Baa. Bonds which are rated Baa are considered as lower medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present
but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds
lack outstanding investment characteristics and, in fact, have
speculative characteristics as well. The market value of Baa-rated bonds
is more sensitive to changes in economic circumstances and, aside from
occasional speculative factors applying to some bonds of this class, Baa
market valuations move in parallel with Aaa, Aa and A obligations during
periods of economic normalcy, except in instances of oversupply.
Conditional Ratings. Bonds rated "Con(-)" are ones for which the
security depends upon the completion of some act or the fulfillment of
some condition. These are bonds secured by (a) earnings of projects
under construction, (b) earnings of projects unseasoned in operation
experience, (c) rentals which begin when facilities are completed, or (d)
payments to which some other limiting condition attaches. Parenthetical
rating denotes probable credit stature upon completion of construction or
elimination of basis of condition.
Note: Moody's applies numerical modifiers, 1, 2, and 3 in each
generic rating classification from Aa through B in certain areas of its
bond rating system. The modifier 1 indicates that the security ranks in
the higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the issue ranks in
the lower end of its generic rating category.
-81-
<PAGE>
Kemper Tax-Exempt Income Trust
Multi-States Series 48
Arkansas Trust
Part Two
Dated December 28, 2000
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
NOTE: Part Two of this Prospectus May Not Be Distributed Unless Accompanied by
Part One.
<PAGE>
Kemper Tax-Exempt Income Trust
Multi-States Series 48
Arkansas Trust
Essential Information
As of August 31, 2000
Sponsor and Evaluator: Ranson & Associates, Inc.
Trustee: The Bank of New York Co.
<TABLE>
<CAPTION>
General Information
<S> <C>
Principal Amount of Municipal Bonds $1,910,000
Number of Units 2,545.880
Fractional Undivided Interest in the Trust per Unit 1/2,545.880
Principal Amount of Municipal Bonds per Unit $750.232
Public Offering Price:
Aggregate Bid Price of Municipal Bonds in the Portfolio $1,956,620
Aggregate Bid Price of Municipal Bonds per Unit $768.544
Cash per Unit (1) $(2.939)
Sales Charge of 4.712% (4.50% of Public Offering Price) $36.075
Public Offering Price per Unit (exclusive of accrued
interest) (2) $801.680
Redemption Price per Unit (exclusive of accrued interest) $765.605
Excess of Public Offering Price per Unit Over Redemption
Price per Unit $36.075
Minimum Value of the Trust under which Trust Agreement
may be terminated $652,000
</TABLE>
Date of Trust September 16, 1992
Mandatory Termination Date December 31, 2042
Evaluations for purpose of sale, purchase or redemption of Units are made as
of the close of business of the Sponsor next following receipt of an order for
a sale or purchase of Units or receipt by The Bank of New York Co. of Units
tendered for redemption.
[FN]
1. This amount, if any, represents principal cash or overdraft which is an
asset or liability of the Trust and is included in the Public Offering Price.
2. Units are offered at the Public Offering Price plus accrued interest to the
date of settlement (three business days after purchase). On August 31, 2000,
there was added to the Public Offering Price of $801.68, accrued interest to
the settlement date of September 6, 2000 of $8.94, $15.89 and $15.96 for a total
price of $810.62, $817.57 and $817.64 for the monthly, quarterly and semiannual
distribution options, respectively.
<PAGE>
Kemper Tax-Exempt Income Trust
Multi-States Series 48
Arkansas Trust
Essential Information (continued)
As of August 31, 2000
Sponsor and Evaluator: Ranson & Associates, Inc.
Trustee: The Bank of New York Co.
<TABLE>
<CAPTION>
Special Information Based on Various Distribution Options
Monthly Quarterly Semiannual
<S> <C> <C> <C>
--------- --------- ---------
Calculation of Estimated Net Annual
Interest Income per Unit (3):
Estimated Annual Interest Income $43.265983 $43.265983 $43.265983
Less: Estimated Annual Expense 2.175483 2.054011 1.818779
--------- --------- ---------
Estimated Net Annual Interest Income $41.090500 $41.211972 $41.447204
========= ========= =========
Calculation of Interest Distribution
per Unit:
Estimated Net Annual Interest Income $41.090500 $41.211972 $41.447204
Divided by 12, 4 and 2, respectively $3.424208 $10.302993 $20.723602
Estimated Daily Rate of Net Interest
Accrual per Unit $.114140 $.114478 $.115131
Estimated Current Return Based on Public
Offering Price (3) 5.13% 5.14% 5.17%
Estimated Long-Term Return (3) 3.69% 3.71% 3.74%
Trustee's Annual Fees per $1,000
Principal Amount $1.020900 $.819000 $.572100
Evaluation Fees per $1,000 Principal Amount $.300000 $.300000 $.300000
Trustee's Miscellaneous Expenses per Unit $.748826 $.778826 $.728826
Surveillance Fees per Unit $.200000 $.200000 $.200000
</TABLE>
Record and Computation Dates: First day of the month, as follows: monthly - each
month; quarterly - January, April, July and October; semiannual - January and
July.
Distribution Dates: Fifteenth day of the month, as follows: monthly - each
month; quarterly - January, April, July and October; semiannual - January and
July.
[FN]
3. The Estimated Long-Term Return and Estimated Current Return will vary. For
detailed explanation, see Part One of this prospectus.
<PAGE>
Report of Independent Auditors
Unitholders
Kemper Tax-Exempt Income Trust
Multi-States Series 48
Arkansas Trust
We have audited the accompanying statement of assets and liabilities of Kemper
Tax-Exempt Income Trust Multi-States Series 48 Arkansas Trust, including the
schedule of investments, as of August 31, 2000, and the related statements of
operations and changes in net assets for each of the three years in the period
then ended. These financial statements are the responsibility of the Trust's
sponsor. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
Our procedures included confirmation of investments owned as of August 31, 2000,
by correspondence with the custodial bank. An audit also includes assessing the
accounting principles used and significant estimates made by the sponsor, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Kemper Tax-Exempt Income Trust
Multi-States Series 48 Arkansas Trust at August 31, 2000, and the results of its
operations and changes in its net assets for the periods indicated above in
conformity with accounting principles generally accepted in the United States.
Ernst & Young LLP
Kansas City, Missouri
December 14, 2000
<PAGE>
Kemper Tax-Exempt Income Trust
Multi-States Series 48
Arkansas Trust
Statement of Assets and Liabilities
August 31, 2000
<TABLE>
<CAPTION>
<S> <C> <C>
Assets
Municipal Bonds, at value (cost $1,845,704) $1,956,620
Interest receivable 29,546
---------
Total assets 1,986,166
Liabilities and net assets
Cash overdraft 4,138
Accrued liabilities 1,680
---------
5,818
Net assets, applicable to 2,546 Units outstanding:
Cost of Trust assets, exclusive of interest $1,845,704
Unrealized appreciation 110,916
Distributable funds 23,728
--------- ---------
Net assets $1,980,348
=========
</TABLE>
[FN]
See accompanying notes to financial statements.
<PAGE>
Kemper Tax-Exempt Income Trust
Multi-States Series 48
Arkansas Trust
Statements of Operations
<TABLE>
<CAPTION>
Year ended August 31
2000 1999 1998
<S> <C> <C> <C>
--------- --------- ---------
Investment income - interest $119,539 $149,280 $159,411
Expenses:
Trustee's fees and related expenses 3,881 5,033 4,155
Evaluator's and portfolio
surveillance fees 1,149 1,317 1,397
--------- --------- ---------
Total expenses 5,030 6,350 5,552
--------- --------- ---------
Net investment income 114,509 142,930 153,859
Realized and unrealized gain (loss) on
investments:
Realized gain (loss) on investments (11,000) 6,047 443
Unrealized appreciation (depreciation)
during the year (6,165) (97,639) 155,573
--------- --------- ---------
Net gain (loss) on investments (17,165) (91,592) 156,016
--------- --------- ---------
Net increase in net assets resulting
from operations $97,344 $51,338 $309,875
========= ========= =========
</TABLE>
[FN]
See accompanying notes to financial statements.
<PAGE>
Kemper Tax-Exempt Income Trust
Multi-States Series 48
Arkansas Trust
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Year ended August 31
2000 1999 1998
<S> <C> <C> <C>
--------- --------- ---------
Operations:
Net investment income $114,509 $142,930 $153,859
Realized gain (loss) on investments (11,000) 6,047 443
Unrealized appreciation (depreciation)
on investments during the year (6,165) (97,639) 155,573
--------- --------- ---------
Net increase in net assets resulting
from operations 97,344 51,338 309,875
Distributions to Unitholders:
Net investment income (119,816) (146,644) (154,256)
Principal from investment transactions (372,754) - -
--------- --------- ---------
Total distributions to Unitholders (492,570) (146,644) (154,256)
Capital transactions:
Redemption of Units (158,771) (194,235) (54,355)
--------- --------- ---------
Total increase (decrease) in net assets (553,997) (289,541) 101,264
Net assets:
At the beginning of the year 2,534,345 2,823,886 2,722,622
--------- --------- ---------
At the end of the year (including
distributable funds applicable to
Trust Units of $23,728, $28,825
and $28,673 at August 31, 2000,
1999 and 1998, respectively) $1,980,348 $2,534,345 $2,823,886
========= ========= =========
Trust Units outstanding at the end of
the year 2,546 2,741 2,947
========= ========= =========
Net asset value per Unit at the end of
the year:
Monthly $777.09 $923.71 $957.32
========= ========= =========
Quarterly $780.59 $927.97 $961.63
========= ========= =========
Semiannual $780.66 $928.05 $961.71
========= ========= =========
</TABLE>
[FN]
See accompanying notes to financial statements.
<PAGE>
<TABLE>
Kemper Tax-Exempt Income Trust
Multi-States Series 48
Arkansas Trust
Schedule of Investments
August 31, 2000
<CAPTION>
Coupon Maturity Redemption Principal
Name of Issuer and Title of Bond (6) Rate Date Provisions(2) Rating(1) Amount Value(3)
<S> <C> <C> <C> <C> <C> <C>
--------------------- --- --- ----- --- --------- ---
+State of Arkansas, Waste Disposal and Pollution 6.250% 7/01/2022 2002 @ 100 AAA $390,000 $402,749
Abatement Facilities General Obligation Bonds,
Series 1992A
+Arkansas Development Finance Authority, Waste Water 6.400 6/01/2015 2002 @ 101 AAA 375,000 391,125
System Revolving Loan Fund Revenue Bonds, 1992
Series A. Insured by MBIA. (4)
City of Little Rock, Arkansas, Health Facilities 7.000 10/01/2017 2006 @ 100 S.F. A 200,000 208,146
Board, (Baptist Medical Center), Refunding Revenue 2002 @ 102
Bonds (Parkway Village Project), Series 1992.
City of North Little Rock, Arkansas, Electric System 6.500 7/01/2015 2011 @ 100 S.F. AAA 385,000 437,040
Revenue Refunding Bonds, Series 1992A. Insured by Non-Callable
MBIA. (4)
Commonwealth of Puerto Rico, Public Improvement 0.000 7/01/2006 Non-Callable AAA 210,000 160,266
Refunding Bonds (General Obligation Bonds), Series
1988. Insured by MBIA. (4) (5)
The Community Health Facility Board For Pulaski 6.500 10/01/2012 2008 @ 100 S.F. NR 350,000 357,294
County, Arkansas, Project Bonds, (The Community 2000 @ 102
Health Clinic Project), Series 1992.
--------- ---------
$1,910,000 $1,956,620
========= =========
</TABLE>
[FN]
See accompanying notes to Schedule of Investments.
<PAGE>
Kemper Tax-Exempt Income Trust
Multi-States Series 48
Arkansas Trust
Notes to Schedule of Investments
1. All ratings are by Standard & Poor's Corporation, unless marked with the
symbol "*", in which case the rating is by Moody's Investors Service, Inc. The
symbol "NR" indicates Bonds for which no rating is available.
2. There is shown under this heading the year in which each issue of Bonds is
initially redeemable and the redemption price for that year or, if currently
redeemable, the redemption price currently in effect; unless otherwise
indicated, each issue continues to be redeemable at declining prices thereafter,
but not below par value. In addition, certain Bonds in the Portfolio may be
redeemed in whole or in part other than by operation of the stated redemption or
sinking fund provisions under certain unusual or extraordinary circumstances
specified in the instruments setting forth the terms and provisions of such
Bonds. "S.F." indicates a sinking fund is established with respect to an issue
of Bonds. Redemption pursuant to call provisions generally will, and redemption
pursuant to sinking fund provisions may, occur at times when the redeemed Bonds
have a valuation which represents a premium over the call price or par.
To the extent that the Bonds were deposited in the Trust at a price higher
than the price at which they are redeemed, this will represent a loss of capital
when compared with the original Public Offering Price of the Units. To the
extent that the Bonds were acquired at a price lower than the redemption price,
this may represent an increase in capital when compared with the original Public
Offering Price of the Units. Distributions of net income will generally be
reduced by the amount of the income which would otherwise have been paid with
respect to redeemed Bonds and, unless utilized to pay for Units tendered for
redemption, there will be distributed to Unitholders the principal amount and
any premium received on such redemption. In this event the estimated current
return and estimated long-term return may be affected by such redemptions.
3. See Note 1 to the accompanying financial statements for a description of the
method of determining cost and value.
4. Insurance on this Bond in the Trust was obtained by the issuer of the Bond.
No representation is made as to any insurer's ability to meet its commitments.
5. This Bond has been purchased at a discount from the par value because there
is no stated interest income thereon. Such Bond is normally described as a
"zero coupon" Bond. Over the life of the Bond the value increases, so that upon
maturity, the holders of the Bond will receive 100% of the principal amount
thereof.
6. The securities preceded by (+) are secured by, and payable from, escrowed
U.S. Government securities.
See accompanying notes to financial statements.
<PAGE>
Kemper Tax-Exempt Income Trust
Multi-States Series 48
Arkansas Trust
Notes to Financial Statements
1. Significant Accounting Policies
Trust Sponsor and Evaluator
Ranson & Associates, Inc. serves as the Trust's sponsor and evaluator.
Valuation of Municipal Bonds
Municipal Bonds (Bonds) are stated at bid prices as determined by Ranson &
Associates, Inc., the "Evaluator" of the Trust. The aggregate bid prices of the
Bonds are determined by the Evaluator based on (a) current bid prices of the
Bonds, (b) current bid prices for comparable bonds, (c) appraisal, or (d) any
combination of the above.
Cost of Municipal Bonds
Cost of the Trust's Bonds was based on the offering prices of the Bonds on
September 16, 1992 (Date of Deposit). The premium or discount (including any
original issue discount) existing at September 16, 1992, is not being
amortized. Realized gain (loss) from Bond transactions is reported on an
identified cost basis.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires the Trust's sponsor to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from such
estimates.
2. Unrealized Appreciation and Depreciation
Following is an analysis of net unrealized appreciation at August 31, 2000:
<TABLE>
<CAPTION>
<S> <C>
Gross unrealized appreciation $110,916
Gross unrealized depreciation -
----------
Net unrealized appreciation $110,916
=========
</TABLE>
3. Federal Income Taxes
The Trust is not an association taxable as a corporation for federal income tax
purposes. Each Unitholder is considered to be the owner of a pro rata portion
of the Trust under Subpart E, Subchapter J of Chapter 1 of the Internal Revenue
Code of 1986, as amended. Accordingly, no provision has been made for federal
income taxes.
<PAGE>
Kemper Tax-Exempt Income Trust
Multi-States Series 48
Arkansas Trust
Notes to Financial Statements (continued)
4. Other Information
Cost to Investors
The cost to original investors of Units of the Trust was based on the aggregate
offering price of the Bonds on the date of an investor's purchase, plus a sales
charge of 3.90% of the Public Offering Price (equivalent to 4.058% of the net
amount invested). The Public Offering Price for secondary market transactions
is based on the aggregate bid price of the Bonds plus or minus a pro rata share
of cash or overdraft in the Principal Account, if any, and daily accrued
interest on the date of an investor's purchase, plus a sales charge of 4.50% of
the Public Offering Price (equivalent to 4.712% of the net amount invested).
Distributions
Distributions of net investment income to Unitholders are declared and paid in
accordance with the option (monthly, quarterly or semiannual) selected by the
investor. Income distributions, on a record date basis, are as follows:
<TABLE>
<CAPTION>
Year ended Year ended Year ended
Distribution August 31, 2000 August 31, 1999 August 31, 1998
Plan Per Unit Total Per Unit Total Per Unit Total
<S> <C> <C> <C> <C> <C> <C>
----- --------- ---------- --------- ---------- --------- ----------
Monthly $44.35 $90,979 $50.94 $112,758 $51.12 $120,576
Quarterly 45.24 1,583 51.16 1,790 51.30 2,052
Semiannual 45.50 24,972 51.42 29,254 51.57 30,939
---------- ---------- ----------
$117,534 $143,802 $153,567
========= ========= =========
</TABLE>
In addition, the Trust redeemed Units with proceeds from the sale of Bonds as
follows:
<TABLE>
<CAPTION>
Year ended August 31
2000 1999 1998
<S> <C> <C> <C>
---------- ---------- ----------
Principal portion $158,771 $194,235 $54,355
Net interest accrued 2,282 2,842 689
---------- ---------- ----------
$161,053 $197,077 $55,044
========= ========= =========
Units 195 206 58
========= ========= =========
</TABLE>
In addition, distribution of principal related to the sale or call of securities
is $139.56 per Unit for the year ended August 31, 2000.
<PAGE>
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Independent Auditors"
and to the use of our report dated December 14, 2000, in this Post-Effective
Amendment to the Registration Statement (Form S-6) and related Prospectus of
Kemper Tax-Exempt Income Trust Multi-States Series 48 Arkansas Trust dated
December 28, 2000.
Ernst & Young LLP
Kansas City, Missouri
December 28, 2000
<PAGE>
Contents of Post-Effective Amendment
To Registration Statement
This Post-Effective amendment to the Registration Statement comprises the
following papers and documents:
The facing sheet
The prospectus
The signatures
The Consent of Independent Accountants
<PAGE>
Signatures
Pursuant to the requirements of the Securities Act of 1933, The Registrant,
Kemper Tax-Exempt Insured Income Trust, Series A-84, Kemper Tax-Exempt Insured
Income Trust Multi-State, Series 54 and Kemper Tax-Exempt Income Trust Multi-
State, Series 48, certifies that it meets all of the requirements for
effectiveness of this registration statement pursuant to Rule 485(b) under the
Securities Act of 1933 and has duly caused this Amendment to the Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Wichita, and State of Kansas, on the 29th day of
December, 2000.
Kemper Tax-Exempt Insured Income Trust, Series A-
84, Kemper Tax-Exempt Insured Income Trust
Multi-State, Series 54 and Kemper Tax-Exempt
Income Trust Multi-State, Series 48
Registrant
By: Ranson & Associates, Inc.
Depositor
By: Robin Pinkerton
President
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the Registration Statement has been signed below on December 29, 2000 by the
following persons, who constitute a majority of the Board of Directors of Ranson
& Associates, Inc.
Signature Title
Douglas K. Rogers Executive Vice and President and Director
Douglas K. Rogers
Alex R. Meitzner Chairman of the Board and Director
Alex R. Meitzner
Robin K. Pinkerton President, Secretary, Treasurer and
Robin K. Pinkerton Director
Robin Pinkerton
An executed copy of each of the related powers of attorney was filed with
the Securities and Exchange Commission in connection with the Registration
Statement on Form S-6 of The Kansas Tax-Exempt Trust, Series 51 (File No. 33-
46376) and Series 52 (File No. 33-47687) and the same are hereby incorporated
herein by this reference.
