<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 6, 1994
REGISTRATION NO. 33-52981
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 1
TO
FORM S-6
----------------
FOR REGISTRATION UNDER THE SECURITIES ACT
OF 1933 OF SECURITIES OF UNIT INVESTMENT
TRUSTS REGISTERED ON FORM N-8B-2
A. EXACT NAME OF TRUST:
KEMPER DEFINED FUNDS SERIES 18
B. NAME OF DEPOSITOR:
KEMPER UNIT INVESTMENT TRUSTS
(a service of Kemper Securities, Inc.)
C. COMPLETE ADDRESS OF DEPOSITOR'S PRINCIPAL EXECUTIVE OFFICES:
KEMPER UNIT INVESTMENT TRUSTS
77 West Wacker Drive, 5th Floor
Chicago, Illinois 60601
D. NAME AND COMPLETE ADDRESS OF AGENT FOR SERVICE: Copy to:
C. PERRY MOORE MARK J. KNEEDY
77 West Wacker Drive, 5th Floor c/o Chapman and Cutler
Chicago, Illinois 60601 111 West Monroe Street
Chicago, Illinois 60603
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
AMOUNT OF
TITLE AND AMOUNT OF PROPOSED MAXIMUM REGISTRATION
SECURITIES BEING REGISTERED AGGREGATE OFFERING PRICE FEE
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<S> <C> <C> <C>
Kemper De- An indefinite number of Indefinite $500
fined Funds Units of Beneficial Inter-
Series 18 est pursuant to Rule 24f-2
under the Investment Com-
pany Act of 1940
</TABLE>
E. APPROXIMATE DATE OF PROPOSED SALE TO PUBLIC:
As soon as practicable after the effective date of the Registration Statement.
[X] Check box if it is proposed that this filing will become effective at
2:00 P.M. on April 6, 1994 pursuant to paragraph (b) of Rule 487.
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The registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a)
may determine.
<PAGE>
KEMPER DEFINED FUNDS SERIES 18
----------------
CROSS-REFERENCE SHEET
(FORM N-8B-2 ITEMS REQUIRED BY INSTRUCTIONS AS
TO THE PROSPECTUS IN FORM S-6)
<TABLE>
<CAPTION>
Form N-8B-2 Form S-6
Item Number Heading in Prospectus
----------- ---------------------
I. ORGANIZATION AND GENERAL INFORMATION
<C> <S> <C>
1. (a)Name of trust................... Prospectus front cover
(b)Title of securities issued...... Essential Information
2. Name and address of each depositor. Administration of the Trusts
3. Name and address of trustee........
Name and address of principal
4. underwriters...................... Underwriting
5. State of organization of trust..... The Trust Funds
6. Execution and termination of trust The Trust Funds; Administration of the
agreement......................... Trusts
7. Changes of name.................... The Trust Funds
8. Fiscal year........................ *
9. Litigation.........................
II. GENERAL DESCRIPTION OF THE TRUST AND
SECURITIES OF THE TRUST
10. (a)Registered or bearer securities. Unitholders
(b)Cumulative or distributive
securities........................ The Trust Funds
(c)Redemption...................... Redemption
(d)Conversion, transfer, etc....... Unitholders; Market for Units
(e)Periodic payment plan........... *
(f)Voting rights................... Unitholders
Investment Supervision;
(g)Notice of certificateholders.... Administration of the Trusts;
Unitholders
Unitholders; Administration of the
(h)Consents required............... Trusts
(i)Other provisions................ Federal Tax Status; Insurance on the
Portfolios of the Insured Trust Funds
Type of securities comprising
11. units............................. The Trust Funds; Portfolios
12. Certain information regarding peri-
odic payment
certificates...................... *
Essential Information; Public Offering
13. (a) Load, fees, expenses, etc...... of Units; Interest, Estimated Long-
Term Return and Estimated Current
Return; Expenses of the Trust
</TABLE>
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* Inapplicable, answer negative or not required.
i
<PAGE>
<TABLE>
<CAPTION>
Form N-8B-2 Form S-6
Item Number Heading in Prospectus
----------- ---------------------
<C> <S> <C>
(b)Certain information regarding
periodic payment certifi-
cates....................... *
(c)Certain percentages........... Essential Information; Public Offering
of Units; Insurance on the Portfolios
of the Insured Trust Funds
(d)Certain other fees, etc. pay-
able by holders................. Unitholders
(e)Certain profits receivable by
depositor, principal under-
writers, trustee or affili- Expenses of the Trust; Public Offering
ated persons................ of Units
(f)Ratio of annual charges to in-
come............................ *
The Trust Funds;
14. Issuance of trust's securities... Unitholders
Receipt and handling of payments
15. from purchasers................. *
Acquisition and disposition of The Trust Funds; Portfolios;
16. underlying securities........... Investment Supervision
Market for Units; Redemption; Public
17. Withdrawal or redemption......... Offering of Units
(a)Receipt, custody and disposi-
18. tion of income.................. Unitholders
(b)Reinvestment of distributions. Distribution Reinvestment
(c)Reserves or special funds..... Expenses of the Trust
(d)Schedule of distributions..... *
Unitholders;
Redemption; Administration
19. Records, accounts and reports.... of the Trusts
Certain miscellaneous provisions
20. of trust agreement
(a)Amendment.....................
(b)Termination................... Administration of the Trusts
(c)and (d) Trustee, removal and
successor....................... Administration of the Trusts
(e)and (f) Depositor, removal and
successor....................... Administration of the Trusts
21. Loans to security holders........ *
22. Limitations on liability......... Administration of the Trusts
23. Bonding arrangements............. *
Other material provisions of
24. trust agreement................. *
III. ORGANIZATION, PERSONNEL AND
AFFILIATED PERSONS OF DEPOSITOR
25. Organization of depositor........ Administration of the Trusts
26. Fees received by depositor....... See Items 13(a) and 13(e)
27. Business of depositor............ Administration of the Trusts
28. Certain information as to offi-
cials and affiliated persons of
depositor....................... Administration of the Trusts
29. Voting securities of depositor...
30. Persons controlling depositor.... Administration of the Trusts
</TABLE>
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* Inapplicable, answer negative or not required.
ii
<PAGE>
<TABLE>
<CAPTION>
Form N-8B-2 Form S-6
Item Number Heading in Prospectus
----------- ---------------------
<C> <S> <C>
31. Payment by depositor for certain services
rendered to trust.......................
32. Payment by depositor for certain other *
services rendered to trust..............
33. Remuneration of employees of depositor
for certain services rendered to trust..
34. Remuneration of other persons for certain
services rendered to trust..............
IV. DISTRIBUTION AND REDEMPTION
35. Distribution of trust's securities by Public Offering of Units.
states..................................
36. Suspension of sales of trust's securi- *
ties....................................
37. Revocation of authority to distribute....
38. (a)Method of distribution................ Public Offering of Units;
(b)Underwriting agreements............... Market for Units;
(c)Selling agreements.................... Public Offering of Units
39. (a)Organization of principal underwrit-
ers.....................................
(b)N.A.S.D. membership of principal un- Administration of the Trusts
derwriters..............................
40. Certain fees received by principal under- See Items 13(a) and 13(e)
writers.................................
41. (a)Business of principal underwriters.... Administration of the Trusts
(b)Branch offices of principal underwrit-
ers.....................................
(c)Salesmen of principal underwriters.... *
42. Ownership of trust's securities by cer-
tain persons............................
43. Certain brokerage commissions received by
principal underwriters.................. Public Offering of Units
44. (a)Method of valuation................... Public Offering of Units
(b)Schedule as to offering price......... *
(c)Variation in offering price to certain Public Offering of Units
persons.................................
45. Suspension of redemption rights.......... Redemption
46. (a)Redemption valuation.................. Redemption; Market for Units;
Public Offering of Units
(b)Schedule as to redemption price....... *
Market for Units;
47. Maintenance of position in underlying se- Public Offering of Units;
curities................................
Redemption
V. INFORMATION CONCERNING THE TRUSTEE
OR CUSTODIAN
48. Organization and regulation of trustee... Administration of the Trusts
49. Fees and expenses of trustee.............
50. Trustee's lien........................... Expenses of the Trust
</TABLE>
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* Inapplicable, answer negative or not required.
iii
<PAGE>
<TABLE>
<CAPTION>
Form N-8B-2 Form S-6
Item Number Heading in Prospectus
----------- ---------------------
VI. INFORMATION CONCERNING INSURANCE OF
HOLDERS OF SECURITIES
<C> <S> <C>
51. Insurance of holders of trust's Cover Page; Expenses of the Trust;
securities....................... Insurance on the Portfolios of the
Insured Trust Funds
VII. POLICY OF REGISTRANT
52. (a) Provisions of trust agreement
with respect to selection or
elimination of underlying se- The Trust Funds; Portfolios;
curities..................... Investment Supervision
(b) Transactions involving elimi-
nation of underlying securi-
ties......................... *
(c) Policy regarding substitution
or elimination of underlying
securities................... Investment Supervision
(d) Fundamental policy not other-
wise covered................. *
Essential Information;
53. Tax status of Trust.............. Portfolios;
Federal Tax Status
VIII. FINANCIAL AND STATISTICAL INFORMATION
Trust's securities during last
54. ten years........................
55.
56. Certain information regarding pe-
riodic payment certificates..... *
57.
58.
Financial statements (Instruction
59. 1(c) to Form S-6)................ *
</TABLE>
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* Inapplicable, answer negative or not required.
iv
<PAGE>
KEMPER DEFINED FUNDS SERIES 18
(TAX-EXEMPT PORTFOLIO)
Insured Arizona Series 3, Insured California Series 5 and Insured Michigan
Series 4 (the "Insured State Trusts") were formed for the purpose of gaining
interest income free from Federal and State income taxes and, where
applicable, local income taxes and/or property taxes while conserving capital
and diversifying risks by investing in an insured, fixed portfolio consisting
of obligations issued by or on behalf of the State for which such Trust Fund
is named or counties, municipalities, authorities or political subdivisions
thereof.
Units of the Trust are not deposits or obligations of, or guaranteed by, any
bank, and Units are not federally insured or otherwise protected by the
Federal Deposit Insurance Corporation and involve investment risk including
loss of principal.
Insurance guaranteeing the scheduled payment of principal and interest on all
of the Municipal Bonds in the portfolio of each Insured Trust has been
obtained directly by the issuer or the Sponsor from Municipal Bond Investors
Assurance Corporation or other insurers. See "Insurance on the Portfolios of
the Insured Trust Funds" on page A-9 and "Portfolios." Insurance obtained by a
Municipal Bond issuer is effective so long as such Bonds are outstanding. THE
INSURANCE DOES NOT RELATE TO THE UNITS OF THE INSURED TRUSTS OFFERED HEREBY OR
TO THEIR MARKET VALUE. As a result of such insurance, the Units of the Insured
Trusts have received a rating of "Aaa" by Moody's Investors Service, Inc. See
"Insurance on the Portfolios of the Insured Trust Funds." No representation is
made as to any insurer's ability to meet its commitments.
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SPONSOR: KEMPER UNIT INVESTMENT TRUSTS
a service of Kemper Securities, Inc.
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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.
The investor is advised to read and retain this Prospectus for future
reference.
THE DATE OF THIS PROSPECTUS IS APRIL 6, 1994.
<PAGE>
SUMMARY
PUBLIC OFFERING PRICE. The Public Offering Price per Unit of a Trust Fund
during the initial offering period is equal to a pro rata share of the
offering prices of the Municipal Bonds in such Trust Fund plus or minus a pro
rata share of (a) cash, if any, in the Principal Account held or owned by such
Trust Fund, (b) Purchased Interest and (c) Daily Accrued Interest plus that
sales charge indicated under "Essential Information." The secondary market
Public Offering Price per Unit will be based upon a pro rata share of the bid
prices of the Municipal Bonds in each Trust Fund plus or minus a pro rata
share of (a) cash, if any, in the Principal Account held or owned by such
Trust Fund, (b) Purchased Interest and (c) Daily Accrued Interest plus the
applicable sales charge. For sales charges in the secondary market, see
"Public Offering of Units--Public Offering Price." The sales charge is reduced
on a graduated scale for sales involving at least $100,000 or 10,000 Units and
will be applied on whichever basis is more favorable to the investor. The
minimum purchase for each Trust is $1,000.
INTEREST AND PRINCIPAL DISTRIBUTIONS. Distributions of the estimated annual
interest income to be received by each Trust Fund, after deduction of
estimated expenses, will be made monthly. See "Essential Information."
Distributions of funds, if any, in the Principal Account will be made as
provided in "Unitholders--Distributions to Unitholders."
REINVESTMENT. Each Unitholder of a Trust Fund offered herein may elect to have
distributions of principal or interest or both automatically invested without
charge in shares of certain mutual funds sponsored by Kemper Financial
Services, Inc. See "Distribution Reinvestment."
ESTIMATED LONG-TERM RETURN AND ESTIMATED CURRENT RETURN. As of the opening of
business on the Date of Deposit, the Estimated Long-Term Return and the
Estimated Current Return, if applicable, for each Trust were as set forth in
"Essential Information." The Estimated Current Return is 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 Evaluator
and with the principal prepayment, redemption, maturity, exchange or sale of
Bonds while the Public Offering Price will vary with changes in the offering
price of the underlying Bonds and with changes in the Purchased Interest and
Daily Accrued Interest; 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 retirement dates of all of the Bonds in
the applicable Trust and (2) takes into account the expenses and sales charge
associated with each Trust Unit. Since the market values and estimated
retirement dates of the Bonds and the expenses of a 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. After the initial offering period, while under no obligation
to do so, the Sponsor intends to, and certain of the other Underwriters may,
maintain a market for the Units and to offer to repurchase such Units at
prices subject to change at any time which are based on the aggregate bid side
evaluation of the Municipal Bonds in the Trust Fund plus Purchased Interest
and Daily Accrued Interest.
2
<PAGE>
KEMPER DEFINED FUNDS SERIES 18
ESSENTIAL INFORMATION
AS OF THE OPENING OF BUSINESS ON THE DATE OF DEPOSIT
<TABLE>
<C> <S>
SPONSOR AND EVALUATOR: KEMPER UNIT INVESTMENT TRUSTS, A SERVICE OF
KEMPER SECURITIES, INC.
TRUSTEE: INVESTORS FIDUCIARY TRUST COMPANY
</TABLE>
The income, expense and distribution data set forth below has been calculated
for Unitholders purchasing less than 10,000 Units. Unitholders purchasing more
than 10,000 Units will receive a slightly higher return because of the reduced
sales charge for larger purchases.
<TABLE>
<CAPTION>
INSURED INSURED INSURED
ARIZONA CALIFORNIA MICHIGAN
SERIES 3 SERIES 5 SERIES 4
------- ------- -------
<S> <C> <C> <C>
Public Offering Price per Unit (1)(2)................................ $ 10.000 $ 10.000 $ 9.661
Principal Amount of Municipal Bonds per Unit......................... $ 9.969 $ 10.000 $ 10.000
Estimated Current Return based on Public Offering Price
(3)(4)(5)(7)....................................................... 4.47% 5.10% 5.78%
Estimated Long-Term Return (3)(4)(5)(7).............................. 4.95% 5.46% 5.93%
Estimated Normal Annual Distribution per Unit (7).................... $ 0.44676 $ 0.51048 $ 0.55800
Principal Amount of Municipal Bonds.................................. $ 3,750,000 $ 3,275,000 $ 3,505,000
Number of Units...................................................... 376,182 327,512 350,500
Fractional Undivided Interest per Unit............................... 1/376,182 1/327,512 1/350,500
Calculation of Public Offering Price--Less than 10,000 Units:
Aggregate Offering Price of Bonds................................ $ 3,577,138 $ 3,113,136 $ 3,220,513
Aggregate Offering Price of Bonds per Unit....................... $ 9.509 $ 9.505 $ 9.188
Purchased Interest (1)........................................... $ 37,871 $ 34,257 $ 23,576
Purchased Interest per Unit...................................... $ 0.101 $ 0.105 $ 0.067
Total Offering Price and Purchased Interest Per Unit (1)....... $ 9.610 $ 9.610 $ 9.255
Plus Sales Charge per Unit (9)................................... $ 0.390 $ 0.390 $ 0.406
Public Offering Price per Unit (1)(2).............................. $ 10.000 $ 10.000 $ 9.661
Redemption Price per Unit............................................ $ 9.354 $ 9.372 $ 8.981
Sponsor's Initial Repurchase Price per Unit.......................... $ 9.610 $ 9.610 $ 9.255
Excess of Public Offering Price per Unit over Redemption Price per
Unit............................................................... $ 0.646 $ 0.628 $ 0.680
Excess of Public Offering Price per Unit over Sponsor's Initial
Repurchase Price per Unit.......................................... $ 0.390 $ 0.390 $ 0.406
Calculation of Estimated Net Annual Interest Income per Unit (7):
Estimated Annual Interest Income................................. $ 0.46354 $ 0.52756 $ 0.57693
Less: Estimated Annual Expense................................... $ 0.01663 $ 0.01710 $ 0.01893
---------- ---------- ----------
Estimated Net Annual Interest Income............................. $ 0.44691 $ 0.51046 $ 0.55800
Estimated Daily Rate of Net Interest Accrual per Unit................ $ 0.001241 $ 0.001418 $ 0.001550
Minimum Principal Value of the Trust under which Trust Agreement may
be terminated...................................................... $ 750,000 $ 655,000 $ 701,000
</TABLE>
Evaluations for purposes of sale, purchase or redemption of Units are made as
of the close of business of the Sponsor (3:15 p.m. Central Time) next
following receipt of an order for a sale or purchase of Units or receipt by
Investors Fiduciary Trust Company of Units tendered for redemption.
3
<PAGE>
ESSENTIAL INFORMATION--(CONTINUED)
<TABLE>
<CAPTION>
INSURED INSURED INSURED
ARIZONA CALIFORNIA MICHIGAN
SERIES 3 SERIES 5 SERIES 4
<S> <C> <C> <C>
-------------- -------------- --------------
Trustee's Annual Fee per $1,000 principal amount of Municipal Bonds
(6)................................................................. $0.760 $0.770 $0.970
Reduction of Trustee's fee per Unit during the first year (7)............ $0.00245 $0.00035 $0.00084
Estimated annual interest income per Unit during the first year (7)...... $0.46109 $0.52721 $0.57609
Interest Payments (8):
First Payment per Unit, representing 18 days............................. $0.02234 $0.02552 $0.02790
Estimated Normal Monthly Distribution per Unit........................... $0.03723 $0.04254 $0.04650
Estimated Normal Annual Distribution per Unit............................ $0.44676 $0.51048 $0.55800
Sales Charge (9):
As a percentage of Public Offering Price per Unit........................ 3.900% 3.900% 4.200%
As a percentage of net amount invested................................... 4.058% 4.058% 4.387%
As a percentage of net amount invested in earning assets................. 4.101% 4.103% 4.419%
Date of Trust Agreements............................................... April 6, 1994
First Settlement Date.................................................. April 13, 1994
Mandatory Termination Date............................................. December 31, 2024
Evaluator's Annual Evaluation Fee...................................... Maximum of $0.30 per $1,000 Principal
Amount of Municipal Bonds
Sponsor's Annual Surveillance Fee...................................... Maximum of $0.002 per Unit
</TABLE>
- ------------------------------
(1) Purchased Interest is a portion of the unpaid interest that has
accumulated on the Bonds in a Trust from the later of the last payment
date on the Bonds or the date of issuance thereof through the First
Settlement Date of such Trust. In addition, anyone ordering Units after
the Date of Deposit will pay Daily Accrued Interest from the later of the
First Settlement Date or the last Record Date for such Trust to the date
of settlement (five business days after order). Daily Accrued Interest is
the estimated daily rate of net interest accrued on the Bonds in a Trust.
(2) Many unit investment trusts comprised of municipal securities issue a
number of units such that each unit represents approximately $1,000
principal amount of underlying securities. The Sponsor, on the other
hand, in determining the number of Units for each Trust has elected not
to follow this format but rather to provide that number of Units which
will establish as close as possible as of the Date of Deposit a Public
Offering Price per Unit of $10 for Insured Arizona Series 3 and Insured
California Series 5. Insured Michigan Series 4 represents approximately
$10 principal amount of underlying securities per Unit.
(3) The Estimated Current Return and Estimated Long-Term Return are increased
for transactions entitled to a reduced sales charge. See "Public Offering
of Units--Public Offering Price."
(4) The 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 Bonds
while the Public Offering Price will vary with changes in the offering
price of the underlying Bonds and with changes in the Purchased Interest
and Daily Accrued Interest; therefore, there is no assurance that the
present Estimated Current Returns indicated above will be realized in the
future. The 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 retirement dates of all of the Bonds in the applicable Trust
and (2) takes into account the expenses and sales charge associated with
each Trust Unit. Since the market values and estimated retirement dates
of the Bonds and expenses of each Trust will change, there is no
assurance that the present Estimated Long-Term Returns as indicated above
will be realized in the future. The Estimated Current Returns and
Estimated Long-Term Returns are expected to differ because the
calculation of the Estimated Long-Term Returns reflects the estimated
date and amount of principal returned while the Estimated Current Return
calculations include only net annual interest income and Public Offering
Price.
(5) This figure is based on estimated per Unit cash flows. Estimated cash
flows will vary with changes in fees and expenses, with changes in
current interest rates and with the principal prepayment, redemption,
maturity, call, exchange or sale of the underlying Bonds. The estimated
cash flows to Unitholders for the Trusts are either set forth under
"Estimated Cash Flows to Unitholders" or are available upon request at no
charge from the Sponsor.
(6) See "Expenses of the Trusts."
(7) During the first year, the Trustee has agreed to reduce its fee (and to
the extent necessary pay expenses of the Trust Funds) in the amounts
stated above. The Trustee has agreed to the foregoing to cover all or a
portion of the interest on any Municipal Bonds accruing prior to their
expected dates of delivery, since interest will not accrue to the benefit
of Unitholders of a Trust Fund until such Bonds are actually delivered to
the Trust Fund. The estimated net annual interest income per Unit will
remain as indicated. See "The Trust Funds" and "Interest, Estimated
Long-Term Return and Estimated Current Return."
(8) Unitholders will receive interest distributions monthly. The Record Date
is the first day of the month, commencing May 1, 1994, and the
distribution date is the fifteenth day of the month, commencing May 15,
1994.
(9) The sales charge as a percentage of the net amount invested in earning
assets will increase as Daily Accrued Interest increases. Transactions
subject to quantity discounts (see "Public Offering of Units-Public
Offering Price") will have reduced sales charges, thereby reducing all
percentages in the table.
4
<PAGE>
THE TRUST FUNDS
GENERAL
Kemper Defined Funds Series 18 includes the following separate unit investment
trusts created by the Sponsor under the name Kemper Defined Funds: "Insured
Arizona Series 3", "Insured California Series 5" and "Insured Michigan Series
4" (the "Insured State Trusts") (hereinafter collectively called the "Trusts"
or "Trust Funds"). Each of the Trust Funds is generally similar but each is
separate and is designated by a different series number. Each of the Trust
Funds was created under the laws of the State of Missouri pursuant to a trust
indenture dated the Date of Deposit (the "Trust Agreements") between Kemper
Unit Investment Trusts, a service of Kemper Securities, Inc. (the "Sponsor")
and Investors Fiduciary Trust Company (the "Trustee").*
The Insured State Trust was formed for the purpose of gaining interest income
free from Federal and State income taxes and, where applicable, local income
and/or property taxes while conserving capital and diversifying risks by
investing in an insured, fixed portfolio consisting of obligations issued by
or on behalf of the State for which such Trust Fund is named or counties,
municipalities, authorities or political subdivisions thereof.
There is, of course, no guarantee that the Trust Funds' objectives will be
achieved.
On the Date of Deposit, the Sponsor delivered to the Trustee that aggregate
principal amount of Municipal Bonds or contracts for the purchase thereof for
deposit in the Trust Funds as set forth under "Essential Information." Of such
principal amount, the amount specified in "Essential Information" was
deposited in each State Trust. In exchange for the Municipal Bonds so
deposited, the Trustee delivered to the Sponsor documentation evidencing the
ownership of that number of Units for each Trust Fund as indicated under
"Essential Information."
Each Trust Fund initially consists of delivery statements (i.e., contracts) to
purchase obligations (the "Municipal Bonds" or the "Bonds"). The Sponsor has a
limited right of substitution for such Bonds in the event of a failed
contract. See "Portfolios."
Certain of the Bonds in certain of the Trust Funds may have been purchased on
a "when, as and if issued" or "delayed delivery" basis with delivery expected
to take place after the First Settlement Date. See "The Trust Fund--Series
Information" and "Notes to Portfolios." Accordingly, the delivery of such
Bonds may be delayed or may not occur. Interest on these Municipal Bonds
begins accruing to the benefit of Unitholders on their respective dates of
delivery. To the extent any Municipal Bonds are actually delivered to a Trust
Fund after their respective expected dates of delivery, Unitholders who
purchase Units in such Trust Fund prior to the date such "when, as and if
issued" or "delayed delivery" Municipal Bonds are actually delivered to the
Trustee would, to the extent such income is not offset by a reduction in the
Trustee's fee (or, to the extent necessary, other expenses), be required to
reduce their tax basis in their Units of such Trust Fund since the interest
accruing on such Bonds during the interval between their purchase of Units and
the actual delivery of such Bonds would, for tax purposes, be considered a
non-taxable return of principal rather than as tax-exempt interest. The result
of such adjustment, if necessary, would be, during the first year only, that
the Estimated Long-Term Returns may be, and the Estimated Current Returns
would be, slightly lower than those shown herein, assuming the Trust Fund
portfolios and estimated annual expenses do not vary. Holders of Units will be
"at risk" with respect to these Bonds (i.e., may derive either gain or loss
from fluctuations in the evaluation of such Bonds) from the date they commit
for Units.
All of the Municipal Bonds in each Trust Fund are rated in the category "BBB"
or better by Standard & Poor's or "Baa" or better by Moody's. See "Description
of Municipal Bond Ratings" and "The Trust Fund-- Portfolios."
- ---------------------------
* Reference is made to the Trust Agreements, and any statements contained
herein are qualified in their entirety by the provisions of the Trust
Agreements.
5
<PAGE>
Each Unit represents an undivided fractional interest in the Municipal Bonds
deposited in the appropriate Trust Fund, as shown under "Essential
Information." All Municipal Bonds deposited were accompanied by copies of
opinions of bond counsel given at the time of original delivery of such
obligations to the effect that interest thereon is exempt from all Federal
income taxes, except in certain instances depending on the holder, and from
State income taxes and, where applicable, local income and/or property taxes
for residents of the State for which such Trust Fund is named. Capital gains,
if any, are subject to Federal income taxation, payable by Unitholders. See
"Federal Tax Status."
An investment in Units of a Trust Fund 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 the degree to which such fluctuations will continue in the
future.
SERIES INFORMATION
<TABLE>
<CAPTION>
INSURED INSURED INSURED
ARIZONA CALIFORNIA MICHIGAN
SERIES 3 SERIES 5 SERIES 4
<S> <C> <C> <C>
------------ ------------ ------------
Number of Obligations........................................................ 6 7 7
Territorial Obligations (1)..................................................
General Obligation Bonds (2)(4).............................................. 4 (60%) 0 3 (36%)
Revenue Bonds (3)(4)......................................................... 2 (40%) 7 (100%) 4 (64%)
Revenue Bond Concentrations (4):
Airport...................................................................... 1 (15%)
Correctional Facilities...................................................... 1 (15%)
Education.................................................................... 1 (20%)
Electric Systems............................................................. 1 (15%) 1 (14%)
Excise Tax Revenue........................................................... 1 (20%) 1 (23%)
Hospital.....................................................................
Housing...................................................................... 1 (14%)
Lease Revenue................................................................ 1 (21%)
Port Authority...............................................................
Wastewater................................................................... 2 (18%)
Tax Allocation...............................................................
Transportation...............................................................
Tollroad.....................................................................
Utilities....................................................................
Water and Sewer..............................................................
Sales Tax Revenue............................................................ 2 (29%)
Average life of the Municipal Bonds in the
Trust (5).................................................................. 9 12 28
Percentage of "when, as and if issued " or "delayed delivery" Bonds purchased
by the Trust............................................................... 36% 23% 50%
Syndication (6).............................................................. 0 0 37
</TABLE>
- ------------------------------
(1) Municipal Bonds issued by Territories of the United States (which term
includes the Commonwealth of Puerto Rico and the District of Columbia)
generally receive the same tax exempt treatment for both state and
Federal tax purposes as Municipal Bonds issued by political entities in
the named State Trust. See "Special Considerations and State Tax Status"
for each Trust.
(2) General obligation bonds are general obligations of governmental entities
and are backed by the taxing powers of such entities.
(3) Revenue bonds are payable from the income of a specific project or
authority and are not supported by an issuer's power to levy taxes.
(4) The portfolio percentage in parenthesis represents the principal amount
of such Bonds to the total principal amount of Bonds in the Trust. For a
discussion of the risks associated with investments in the bonds of such
issuers, see "Portfolios--General Trust Information."
(5) The average life of the Bonds in a Trust is calculated based upon the
stated maturities of the Bonds in such Trust (or, with respect to Bonds
for which funds or securities have been placed in escrow to redeem such
Bonds on a stated call date, based upon such call date). The average life
of the Bonds in a Trust may increase or decrease from time to time as
Bonds mature or are called or sold.
(6) The Sponsor and/or affiliated Underwriters have participated as either
the sole underwriter or manager or a member of underwriting syndicates
from which approximately that percentage listed above of the aggregate
principal amount of the Bonds in such Trust were acquired.
TAXABLE EQUIVALENT ESTIMATED CURRENT RETURN TABLES
As of the date of this Prospectus, the following tables show the approximate
taxable estimated current returns for individuals that are equivalent to
tax-exempt estimated current returns under combined Federal and State taxes
(where applicable) using the published Federal and State tax rates (where
applicable) scheduled to be in effect in 1994. They incorporate increased tax
rates for higher income
6
<PAGE>
taxpayers that were included in the Revenue Reconciliation Act of 1993. These
tables illustrate approximately what you would have to earn on taxable
investments to equal the tax-exempt estimated current return in your income
tax bracket. For cases in which more than one State bracket falls within a
Federal bracket the highest State bracket is combined with the Federal
bracket. The combined State and Federal tax rates shown reflect the fact that
State tax payments are currently deductible for Federal tax purposes, and have
been rounded to the nearest 1/10 of 1%. The tables do not show the approximate
taxable estimated current returns for individuals that are subject to the
alternative minimum tax. The taxable equivalent estimated current returns may
be somewhat higher than the equivalent returns indicated in the following
tables for those individuals who have adjusted gross incomes in excess of
$108,450. The tables do not reflect the effect of limitations on itemized
deductions and the deduction for personal exemptions. They were designed to
phase out certain benefits of these deductions for higher income taxpayers.
These limitations, in effect, raise the marginal Federal tax rate to
approximately 44 percent for taxpayers filing a joint return and entitled to
four personal exemptions and to approximately 41 percent for taxpayers filing
a single return entitled to only one personal exemption. These limitations are
subject to certain maximums, which depend on the number of exemptions claimed
and the total amount of the taxpayer's itemized deductions. For example, the
limitation on itemized deductions will not cause a taxpayer to lose more than
80% of his allowable itemized deductions, with certain exceptions. See
"Federal Tax Status" for a more detailed discussion of recent Federal tax
legislation, including a discussion of provisions affecting corporations.
ARIZONA
<TABLE>
<CAPTION>
TAXABLE INCOME ($1,000'S) TAX-EXEMPT ESTIMATED CURRENT RETURN
------------------------------------ ---------------------------------------------------------------
SINGLE JOINT TAX 3 1/2% 4% 4 1/2% 5% 5 1/2% 6% 6 1/2%
RETURN RETURN BRACKET EQUIVALENT TAXABLE ESTIMATED CURRENT RETURN
------ ------ -------- ---------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0 - 22.75 $ 0 - 38.00 18.7 % 4.31% 4.92% 5.54% 6.15% 6.77% 7.38% 8.00%
38.00 - 91.85 31.8 5.13 5.87 6.60 7.33 8.06 8.80 9.53
22.75 - 55.10 32.7 5.20 5.94 6.69 7.43 8.17 8.92 9.66
55.10 - 115.00 91.85 - 140.00 35.5 5.43 6.20 6.98 7.75 8.53 9.30 10.08
140.00 - 250.00 40.2 5.85 6.69 7.53 8.36 9.20 10.03 10.87
115.00 - 250.00 40.5 5.88 6.72 7.56 8.40 9.24 10.08 10.92
Over 250.00 Over 250.00 43.8 6.23 7.12 8.01 8.90 9.79 10.68 11.57
</TABLE>
CALIFORNIA
<TABLE>
<CAPTION>
TAXABLE INCOME ($1,000'S) TAX-EXEMPT ESTIMATED CURRENT RETURN
------------------------------------ ---------------------------------------------------------------
SINGLE JOINT TAX 3 1/2% 4% 4 1/2% 5% 5 1/2% 6% 6 1/2%
RETURN RETURN BRACKET* EQUIVALENT TAXABLE ESTIMATED CURRENT RETURN
------ ------ -------- ---------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0 - 22.75 $ 0 - 38.00 20.1 % 4.38% 5.01% 5.63% 6.26% 6.88% 7.51% 8.14%
22.75 - 55.10 38.00 - 91.85 34.7 5.36 6.13 6.89 7.66 8.42 9.19 9.95
91.85 - 140.00 37.4 5.59 6.39 7.19 7.99 8.79 9.58 10.38
55.10 - 115.00 37.9 5.64 6.44 7.25 8.05 8.86 9.66 10.47
115.00 - 212.38 140.00 - 250.00 42.4 6.08 6.94 7.81 8.68 9.55 10.42 11.28
212.38 - 250.00 43.0 6.14 7.02 7.89 8.77 9.65 10.53 11.40
250.00 - 424.76 45.6 6.43 7.35 8.27 9.19 10.11 11.03 11.95
Over 250.00 Over 424.76 46.2 6.51 7.43 8.36 9.29 10.22 11.15 12.08
</TABLE>
- ------------
*The State tax rates assumed do not take into account possible adjustment of
tax brackets based on changes in the Consumer Price Index. The table reflects
California income tax laws that increase State income tax rates for high
income taxpayers. However, the table does not reflect the limitation on
itemized deductions and the phase out of the benefit for the personal
exemption credit and the dependent exemption credit that are imposed by the
California income tax laws in a manner similar to Federal tax law.
7
<PAGE>
MICHIGAN
<TABLE>
<CAPTION>
TAXABLE INCOME ($1,000'S) TAX-EXEMPT ESTIMATED CURRENT RETURN
------------------------------------ ---------------------------------------------------------------
SINGLE JOINT TAX 3 1/2% 4% 4 1/2% 5% 5 1/2% 6% 6 1/2%
RETURN RETURN BRACKET* EQUIVALENT TAXABLE ESTIMATED CURRENT RETURN
------ ------ -------- ---------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0 - 22.75 $ 0 - 38.00 21.8 % 4.48% 5.12% 5.75% 6.39% 7.03% 7.67% 8.31%
22.75 - 55.10 38.00 - 91.85 33.7 5.28 6.03 6.79 7.54 8.30 9.05 9.80
55.10 - 115.00 91.85 - 140.00 36.5 5.51 6.30 7.09 7.87 8.66 9.45 10.24
115.00 - 250.00 140.00 - 250.00 41.1 5.94 6.79 7.64 8.49 9.34 10.19 11.04
Over 250.00 Over 250.00 44.4 6.29 7.19 8.09 8.99 9.89 10.79 11.69
</TABLE>
- ------------
*The combined State and Federal tax bracket is computed utilizing a 4.47%
state personal income tax rate which is a weighted average rate that takes
into account a change in tax rates which was recently approved by Michigan
voters and a 3.5% tax on intangible income.
8
<PAGE>
<TABLE>
<S> <C>
KEMPER DEFINED FUNDS SERIES 18 INSURED ARIZONA SERIES 3
</TABLE>
PORTFOLIO
AS OF THE DATE OF DEPOSIT: APRIL 6, 1994
<TABLE>
<CAPTION>
NAME OF ISSUER, TITLE, COUPON RATE AND MATURITY DATE OF
BOND COST OF
AGGREGATE REPRESENTED BY SPONSOR'S CONTRACTS TO PURCHASE REDEMPTION BONDS
PRINCIPAL BONDS(1)(5) RATING(2) PROVISIONS(3) TO TRUST(4)
<C> <S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
$ 750,000(S) Sedona-Oak Creek Joint Unified School District No. 9 of AAA Non-Callable $ 745,988
Coconino and Yavapai Counties, Arizona, School
Improvement Bonds, Project of 1992, Series C 1994
(FGIC Insured), 5.00% Due 07/01/2000
750,000 Mesa Unified School District No.4 of Maricopa County, AAA Non-Callable 718,680
Arizona, Refunding Bonds, Second Series 1993 (FGIC
Insured), 4.50% Due 07/01/2001
750,000 Arizona Board of Regents, University of Arizona, AAA Non-Callable 737,393
Certificates of Participation (Residence Life
Project), Series 1994A (CGIC Insured), 5.05% Due
09/01/2002
750,000 Transportation Board of the State of Arizona, AAA Non-Callable 701,430
Department of Transportation, Subordinated
Transportation Excise Tax Revenue Bonds (Maricopa
County Regional Area Road Fund), 1993 Series (AMBAC
Insured), 4.50% Due 07/01/2003
150,000(P) Chandler Unified School District No. 80 of Maricopa AAA Non-Callable 85,305
County, Arizona, School Improvement and Refunding
Bonds, Series 1994 (FGIC Insured), 0.00% Due
07/01/2004
600,000(S) Phoenix Union High School District No. 210 of Maricopa AAA 2003 @ 101 588,342
County, Arizona, Revenue Refunding Bonds, Series 1993
(MBIA Insured), 5.25% Due 07/01/2004
---------- ----------
$ 3,750,000 $ 3,577,138
---------- ----------
---------- ----------
</TABLE>
- ------------
See "Notes to Portfolios."
9
<PAGE>
<TABLE>
<S> <C>
KEMPER DEFINED FUNDS SERIES 18 INSURED CALIFORNIA
SERIES 5
</TABLE>
PORTFOLIO
AS OF THE DATE OF DEPOSIT: APRIL 6, 1994
<TABLE>
<CAPTION>
NAME OF ISSUER, TITLE, COUPON RATE AND MATURITY DATE OF
BOND COST OF
AGGREGATE REPRESENTED BY SPONSOR'S CONTRACTS TO PURCHASE REDEMPTION BONDS
PRINCIPAL BONDS(1)(5) RATING(2) PROVISIONS(3) TO TRUST(4)
<C> <S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
$ 250,000 City of Woodland (Yolo County, California), AAA Non-Callable $ 250,500
Certificates of Participation (1992 Wastewater System
Refunding Project)(AMBAC Insured), 6.00% Due
03/01/2006
500,000 Imperial Irrigation District (California), Certficates AAA Non-Callable 462,475
of Participation (1994 Electric System Project),
(AMBAC Insured), 4.90% Due 11/01/2005
250,000 Riverside County Transportation Commission AAA Non-Callable 245,690
(California), Sales Tax Revenue Bonds (Limited Tax
Bonds), 1993 Series A (AMBAC Insured), 5.70% Due
06/01/2006
700,000 San Diego County Regional Transportation Commission, AAA Non-Callable 661,318
Second Senior Sales Tax Revenue Bonds (Limited Tax
Bonds), 1993 Series A Refunding (FGIC Insured), 5.25%
Due 04/01/2006
500,000 State Public Works Board of California, Lease Revenue AAA Non-Callable 454,765
Refunding Bonds (Department of Corrections)(Del
Norte), 1993 Series C (MBIA Insured), 4.875% Due
12/01/2006
750,000(S) Trabuco Canyon Public Finance Authority, Special Tax AAA Non-Callable 731,325
Refunding Revenue Bonds, 1994 Senior Lien Series A
(FSA Insured), 5.50% Due 10/01/2005
325,000 Vallejo Sanitation and Flood Control District (Solano AAA Non-Callable 307,063
County, California), Certificates of Participation,
Series 1993 (FGIC Insured), 5.125% Due 07/01/2005
---------- ----------
$ 3,275,000 $ 3,113,136
---------- ----------
---------- ----------
</TABLE>
- ------------
See "Notes to Portfolios."
10
<PAGE>
<TABLE>
<S> <C>
KEMPER DEFINED FUNDS SERIES 18 INSURED MICHIGAN
SERIES 4
</TABLE>
PORTFOLIO
AS OF THE DATE OF DEPOSIT: APRIL 6, 1994
<TABLE>
<CAPTION>
NAME OF ISSUER, TITLE, COUPON RATE AND MATURITY DATE OF
BOND COST OF
AGGREGATE REPRESENTED BY SPONSOR'S CONTRACTS TO PURCHASE REDEMPTION BONDS
PRINCIPAL BONDS(1)(5) RATING(2) PROVISIONS(3) TO TRUST(4)
<C> <S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
$ 500,000 Charter County of Wayne, Michigan, Airport Revenue AAA 2003 @ 102 $ 425,870
Refunding Bonds (Detroit Metropolitan Wayne County 2014 @ 100 S.F.
Airport) Subordinate Lien, Series 1993C (MBIA
Insured), 5.25% Due 12/01/2021
550,000 Livonia Public Schools School District, County of AAA 2003 @ 102 486,701
Wayne, State of Michigan, 1993 Refunding Bonds 2017 @ 100 S.F.
(General Obligation - Unlimited Tax)(FGIC Insured),
5.50% Due 05/01/2021
750,000(S) Michigan Municipal Bond Authority, Local Government AAA 2004 @ 102 724,530
Loan Program Revenue Bonds (Wayne County Building
Authority Bonds), Series 1994A (FGIC Insured), 6.125%
Due 12/01/2018
500,000(S) Michigan State Housing Development Authority, Rental AAA 2003 @ 102 467,220
Housing Revenue Bonds, 1993 Series A (AMBAC Insured), 2018 @ 100 S.F.
5.90% Due 04/01/2023
500,000(S) Michigan Strategic Fund, Limited Obligation Refunding AAA 2003 @ 102 476,915
Revenue Bonds (The Detroit Edison Company Pollution
Control Bonds Project)(MBIA Insured), 6.05% Due
10/01/2023
500,000 Romulus Community Schools, County of Wayne, State of AAA 2003 @ 102 457,870
Michigan, 1993 Refunding Bonds (General Obligation -
Unlimited Tax)(FGIC Insured), 5.75% Due 05/01/2022
205,000 Warren Consolidated Schools, Counties of Macomb and AAA 2003 @ 102 181,407
Oakland, State of Michigan,1993 Refunding Bonds 2015 @ 100 S.F.
(General Obligation - Unlimited Tax)(MBIA
Insured),5.50% Due 05/01/2021
---------- ----------
$ 3,505,000 $ 3,220,513
---------- ----------
---------- ----------
</TABLE>
- ------------
See "Notes to Portfolios."
11
<PAGE>
NOTES TO PORTFOLIOS:
All insured Bonds in the Trust Funds are insured only by the insurer indicated
in the description. The insurance was obtained directly by the issuer of the
Bonds or by the Sponsor.
(P) These Bonds have been purchased at an original issue discount from the
par value because there is little or no stated interest income thereon.
Over the life of these Bonds the value increases, so that upon maturity
the holders of the Bonds will receive 100% of the principal amount
thereof.
(S) These Municipal Bonds are "when, as and if issued" or "delayed
delivery" and have expected settlement dates after the "First Settlement
Date." Interest on these Bonds begins accruing to the benefit of
Unitholders on the date of delivery.
(C) This Bond is of the same issue as another Bond in the Trust.
(D) This issue of Bonds is secured by, and payable from, escrowed U.S.
Government securities.
(1) Contracts to acquire Municipal Bonds were entered into by the Sponsor
between March 23, 1994 and April 5, 1994. All Bonds are represented by
regular way contracts, unless otherwise indicated, for the performance of
which an irrevocable letter of credit has been deposited with the
Trustee.
(2) The ratings have been provided by Muller Data Corporation as reported to
Muller Data Corporation by the respective rating agencies. All ratings
represent Standard & Poor's Corporation ratings unless marked with the
symbol "(STAR)" in which case the rating represents a Moody's Investors
Service, Inc. rating. A brief description of the applicable Standard &
Poor's and Moody's rating symbols and their meanings is set forth under
"Description of Municipal Bond Ratings." A rating marked by "g" is
contingent upon Standard & Poor's Corporation receiving final
documentation from the insurer.
(3) There is shown under this heading the year in which each issue of
Municipal Bonds is initially redeemable and the redemption price for that
year; unless otherwise indicated, each issue continues to be redeemable
at declining prices thereafter, but not below par value. The prices at
which the Bonds may be redeemed or called prior to maturity may or may
not include a premium and, in certain cases, may be less than the cost of
the Bonds to the Trust. 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 that a sinking
fund is established with respect to an issue of Municipal Bonds.
(4) During the initial offering period, evaluations of Municipal Bonds are
made on the basis of current offering side evaluations of the Municipal
Bonds. The aggregate offering price is greater than the aggregate bid
price of the Municipal Bonds, which is the basis on which Redemption
Prices will be determined for purposes of redemption of Units after the
initial offering period.
(5) Other information regarding the Municipal Bonds in the Trust Funds, at
the opening of business on the Date of Deposit, is as follows:
<TABLE>
<CAPTION>
ANNUAL
COST OF PROFIT OR INTEREST BID SIDE
BONDS (LOSS) TO INCOME TO VALUE
TRUST FUND TO SPONSOR SPONSOR TRUST OF BONDS
----------- --------- --------- -----------
<S> <C> <C> <C> <C>
Insured Arizona Series 3.................................. $ 3,588,942 $ (11,804) $ 174,375 $ 3,480,926
Insured California Series 5............................... $ 3,127,602 $ (14,466) $ 172,781 $ 3,035,253
Insured Michigan Series 4................................. $ 3,246,014 $ (25,501) $ 202,213 $ 3,124,253
</TABLE>
Neither Cost of Bonds to Sponsor nor Profit or (Loss) to Sponsor reflects
underwriting profits or losses received or incurred by the Sponsor
through its participation in underwriting syndicates but such amounts
reflect portfolio hedging transaction costs, hedging gains or losses,
certain other carrying costs and the cost of insurance obtained by the
Sponsor, if any, prior to the Date of Deposit for individual Bonds.
12
<PAGE>
UNDERWRITING
The Underwriters named below have severally purchased Units of the Trusts in
the following respective aggregate percentages:
<TABLE>
<CAPTION>
INSURED INSURED INSURED
ARIZONA CALIFORNIA MICHIGAN
SERIES 3 SERIES 5 SERIES 4
<S> <C> <C> <C>
-------------- -------------- --------------
*Kemper Unit Investment Trusts 296,182 257,512 270,500
*Kemper Securities, Inc. 50,000 50,000 10,000
Roney & Company 60,000
Crowell, Weedon & Co. 10,000
Dean Witter Reynolds, Inc. 10,000
First of Michigan Corporation 10,000
Gruntal & Company, Inc. 10,000 10,000
Rauscher Pierce Refsnes, Inc. 10,000
-------------- -------------- --------------
TOTAL UNITS: 376,182 327,512 350,500
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
Underwriter Addresses:
Crowell, Weedon & Co., One Wilshire Boulevard, 25th Floor, Los Angeles, CA
90017
Dean Witter Reynolds, Inc., Two World Trade Center, 59th Floor, New York, NY
10048
First of Michigan Corporation, 100 Renaissance Center, 26th Floor, Detroit, MI
48243
Gruntal & Company, Inc., 14 Wall Street, 14th Floor, New York, NY 10005
*Kemper Securities, Inc., 77 West Wacker Drive, 28th Floor, Chicago, IL
60601-1994
*Kemper Unit Investment Trusts a service of Kemper Securities, Inc., 77 West
Wacker Drive, 5th Floor, Chicago, IL 60601-1994
Rauscher Pierce Refsnes, Inc., 2500 RPR Tower, Dallas, TX 75201
Roney & Company, One Griswold Street, Sixth Floor - UITs, Detroit, MI 48226
- ------------
*Kemper Corporation owns or has a controlling interest in Kemper Unit
Investment Trusts (the Trusts's Sponsor and Evaluator) and Kemper Securities,
Inc. Kemper Unit Investment Trusts is a service of Kemper Securities, Inc. For
additional information about the Underwriters, see "Underwriting."
The Underwriters acquired the Units of the Trust Funds at a price per Unit
equal to the Public Offering Prices set forth under "Essential Information"
less the Underwriters' takedown. The amount of the Underwriters' takedown for
Trusts with a weighted average maturity less than 7.5 years for each Unit is
$.22 for those firms committing for 10,000-24,999 Units, $.22 plus 50% of any
net portfolio profit for those firms committing for 25,000-99,999 Units and
$.23 plus 50% of any net portfolio profit for those firms committing for
100,000 or more Units. The amount of the Underwriters' takedown for Trusts
with a weighted average maturity between 7.5 and 14.99 years for each Unit is
$.28 for those firms committing for 10,000-24,999 Units, $.28 plus 50% of any
net portfolio profit for those firms committing for 25,000-49,999 Units, $.29
plus 50% of any net portfolio profit for those firms committing for
50,000-99,999 Units and $.30 plus 50% of any net portfolio profit for those
firms committing for 100,000 or more Units. The amount of the Underwriters'
takedown for Trusts with a weighted average maturity greater than 14.99 years
for each Unit is $.31 for those firms committing for 10,000-24,999 Units, $.31
plus 50% of any net portfolio profit for those firms committing for
25,000-49,000 Units, $.32 plus 50% of any net portfolio profit for those firms
committing for 50,000-99,000 Units and $.33 plus 50% of any net portfolio
profit for those firms committing for 100,000 or more Units. In connection
with any quantity discounts (see "Public Offering of Units--Public Offering
Price"), the Sponsor and the applicable Underwriter will each receive reduced
concessions as a result of the
13
<PAGE>
reduced sales charges to the investor. 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 who underwrite additional Units
of a Trust or who sell, during a specified time period, a minimum dollar
amount of Units of a Trust and other unit investment trusts underwritten by
the Sponsor. The Underwriting Agreement provides that the Sponsor will select
and purchase the Municipal Bonds for deposit in the Trust Funds on its own
behalf and on behalf of the other Underwriters.
The Underwriting Agreement provides that a public offering of the Units of the
Trust Funds will be made by the Underwriters at the Public Offering Price
described in the Prospectus. Units may also be sold to or through dealers, who
are members of the National Association of Securities Dealers, Inc., and
others at prices representing discounts from the Public Offering Price.
However, resales of Units of the Trust Funds to the public will be made at the
Public Offering Price thereof.
Underwriters and broker-dealers of the Trusts, banks and/or others are
eligible to participate in a program in which such firms receive from the
Sponsor a nominal award for each of their representatives who have sold a
minimum number of Units of unit investment trusts created by the Sponsor
during a specified time period. In addition, at various times the Sponsor may
implement other programs under which the sales forces of Underwriters,
brokers, dealers, banks and/or others may be eligible to win other nominal
awards for certain sales efforts, or under which the Sponsor will reallow to
any such Underwriters, brokers, dealers, banks and/or others that sponsor
sales contests or recognition programs conforming to criteria established by
the Sponsor, or participate in sales programs sponsored by the Sponsor, an
amount not exceeding the total applicable sales charges on the sales generated
by such persons at the public offering price during such programs. Also, the
Sponsor in its discretion may from time to time pursuant to objective criteria
established by the Sponsor pay fees to qualifying underwriters, brokers,
dealers, banks or others for certain services or activities which are
primarily intended to result in sales of Units of the Trusts. Such payments
are made by the Sponsor out of its own assets, and not out of the assets of
the Trusts. These programs will not change the price Unitholders pay for their
Units or the amount that the Trusts will receive from the Units sold.
Approximately every eighteen months the Sponsor holds a business seminar which
is open to Underwriters that sell units of trusts it sponsors. The Sponsor
pays substantially all costs associated with the seminar, excluding
Underwriter travel costs. Each Underwriter is invited to send a certain number
of representatives based on the gross number of units such firm underwrites
during a designated time period.
14
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
UNITHOLDERS
KEMPER DEFINED FUNDS SERIES 18:
We have audited the accompanying statements of condition and the related
portfolios of Kemper Defined Funds Series 18 (Insured Arizona Series 3,
Insured California Series 5 and Insured Michigan Series 4) as of April 6,
1994. The statements of condition and portfolios are the responsibility of the
Sponsor. Our responsibility is to express an opinion on such financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of Municipal Bonds owned at April 6, 1994 and
a letter of credit deposited to purchase Municipal Bonds by correspondence
with the Trustee. 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 our audit provides 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 Defined Funds Series
18 (Insured Arizona Series 3, Insured California Series 5 and Insured Michigan
Series 4) as of April 6, 1994, in conformity with generally accepted
accounting principles.
GRANT THORNTON
Chicago, Illinois
April 6, 1994
15
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KEMPER DEFINED FUNDS SERIES 18
STATEMENTS OF CONDITION
AT THE OPENING OF BUSINESS ON APRIL 6, 1994, THE DATE OF DEPOSIT
<TABLE>
<CAPTION>
INSURED INSURED INSURED
ARIZONA CALIFORNIA MICHIGAN
SERIES 3 SERIES 5 SERIES 4
------------- ------------- -------------
<S> <C> <C> <C>
INVESTMENT IN MUNICIPAL BONDS
Municipal Bonds deposited in the Trusts (1)(4)...................... $ 2,157,503 $ 917,240 $ 486,701
Contracts to purchase Municipal Bonds (1)(4)........................ 1,419,635 2,195,896 2,733,812
Accrued Interest to First Settlement Date on Municipal Bonds
(1)(2)............................................................ 37,871 34,257 49,001
----------- ---------- ----------
Total............................................................... $ 3,615,009 $ 3,147,393 $ 3,269,514
----------- ---------- ----------
----------- ---------- ----------
Number of Units..................................................... 376,182 327,512 350,500
LIABILITIES AND INTEREST OF UNITHOLDERS
Accrued Interest payable to Sponsor (1)(2).......................... $ -- $ -- $ 25,425
Interest of Unitholders--
Cost to investors (3)............................................... $ 3,761,820 $ 3,275,120 $ 3,386,181
Less: Gross underwriting commission (3)......................... 146,811 127,727 142,092
------------ ----------- -----------
Net interest to Unitholders (1)(2)(3)............................... $ 3,615,009 $ 3,147,393 $ 3,244,089
------------ ----------- -----------
Total............................................................... $ 3,615,009 $ 3,147,393 $ 3,269,514
------------ ----------- -----------
------------ ----------- -----------
</TABLE>
- ------------
NOTES:
(1) The aggregate value of the Municipal Bonds listed in each Portfolio and
their cost to the Trust are the same. The value of the Municipal Bonds is
determined by Muller Data Corporation on the bases set forth under
"Public Offering of Units--Public Offering Price". The contracts to
purchase Municipal Bonds are collateralized by an irrevocable letter of
credit of $6,410,530 which has been deposited with the Trustee. Of this
amount, $6,349,343 relates to the offering price of amount of Municipal
Bonds to be purchased and $61,187 relates to accrued interest on such
Municipal Bonds to the expected dates of delivery.
(2) Accrued interest on the underlying Municipal Bonds represents the
interest accrued as of the First Settlement Date from the later of the
last payment date on the Bonds of the date of issuance thereof. The
Trustee may advance to the Trust a portion of the accrued interest on the
underlying Municipal Bonds for distribution to the Sponsor as the
Unitholder of record as of the First Settlement Date. A portion of the
accrued interest on the underlying Municipal Bonds is payable by
investors and is included in the Public Offering Price. This portion is
called Purchased Interest and represents the difference between Accrued
Interest to First Settlement Date on Municipal Bonds and Accrued Interest
payable to Sponsor (see "Essential Information").
(3) The aggregate public offering price includes a sales charge for the
Trust as set forth under "Essential Information", assuming all single
transactions involve less than 10,000 Units. For single transactions
involving 10,000 or more Units, the sales charge is reduced (see "Public
Offering of Units--Public Offering Price") resulting in an equal
reduction in both the Cost to investors and the Gross underwriting
commission while the Net interest to Unitholders remains unchanged.
(4) Insurance coverage providing for the timely payment of principal and
interest on the Municipal Bonds in the Insured Trusts has been obtained
directly by the issuer of such Municipal Bonds or by the Sponsor from
Municipal Bond Investors Assurance Corporation or other insurers.
16
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SPECIAL CONSIDERATIONS AND STATE TAX STATUS
INSURED ARIZONA SERIES 3
SPECIAL CONSIDERATIONS
General Economic Conditions. 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
Municipal Obligations. The Sponsor has not independently verified any of the
information contained in such publicly available documents. Arizona is the
nation's sixth largest state in terms of area. Arizona's main economic sectors
include services, tourism and manufacturing. Mining and agriculture are also
significant, although they tend to be more capital than labor intensive.
Services is the single largest economic sector. Many of these jobs are
directly related to tourism.
According to the Arizona Department of Economic Security, 1992 unemployment
figures show 7.4 percent of Arizona's population was unemployed, compared to a
national level of 7.4 percent unemployment at the same time. Maricopa County
reported 6.3 percent unemployment and Pima County reported 5.2 percent
unemployment. Significant employers in the state include the government, the
service industry and the trade industry. Building permits in 1992 were up in
both Maricopa County and Pima County.
In June, 1991, America West Airlines filed a Chapter 11 reorganization
petition in bankruptcy. America West is currently the fifth largest employer
in Maricopa County, employing approximately 7,100 persons within the county.
The effect of the America West bankruptcy on the state economy and, more
particularly, the Phoenix economy, is uncertain.
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, since
population growth is still strong by most standards, and Arizona's climate and
tourist industry still continue to stimulate the state's economy. However, the
previously robust pace of growth by financial institutions is not likely to be
repeated over an extended period.
The state operates on a fiscal year beginning July 1 and ending June 30.
Fiscal year 1993 refers to the year ended June 30, 1993.
Total General Fund revenues increased 10.8% from fiscal year 1992 to $3.77
billion during fiscal year 1993. Approximately 45% of this budgeted revenue
comes from sales and use taxes, 40% from income taxes (both individual and
corporate) and 6% from property taxes and other taxes represented
approximately 9%.
For fiscal year 1993 total general fund expenditures were $3.4 billion. These
expenditures fell into the following major categories: education (54%), health
and welfare (29%), protection and safety (9%), general government (6%) and
inspection and regulation, natural resources and transportation (2.0%).
Most or all of the Debt Obligations 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 Debt Obligations
is detailed in the instruments themselves and in related offering materials.
There can be no
17
<PAGE>
assurances, however, with respect to whether the market value or marketability
of any of the Debt Obligations 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.
The State of Arizona was recently sued by four named school districts with an
additional fifty school districts within the state participating in the suit,
claiming that the state's funding system for school buildings and equipment is
unconstitutional. The lawsuit does not seek damages, but requests that the
court order the state to create a new financing system that sets minimum
standards for buildings and furnishings that apply on a statewide basis. A
superior court ruling has upheld the constitutionality of the State's school
funding system. This decision has been appealed and is currently in the State
Court of Appeals. It is unclear, at this time, what affect any judgment would
have on state finances or school district budgets. The U.S. Department of
Education recently determined that Arizona's educational funding system did
not meet federal requirements of equity. This determination could mean a loss
in federal funds of approximately $50 million.
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 attempted unsuccessfully in its 1984 regular
and special sessions to enact legislation designed to control health care
costs, ultimately adopting three referenda measures placed on the November,
1984 general election ballot which in various ways would have regulated
hospital and health care facility expansions, rates and revenues. At the same
time, a coalition of Arizona employers proposed two initiatives voted on in
the November, 1984 general election which would have created a State agency
with power to regulate hospital and health care facility expansions and rates
generally. All of these referenda and initiative propositions were rejected by
the voters in the November, 1984 general election. Pre-existing State
certificate-of-need laws regulating hospital and health care facilities'
expansions and services have expired, and a temporary moratorium prohibiting
hospital bed increases and new hospital construction projects and a temporary
freeze on hospital rates and charges at June, 1984 levels has also expired.
Because of such expirations and increasing health care costs, it is expected
that the Arizona Legislature will at future sessions continue to attempt to
adopt legislation concerning these matters. The effect of any 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 eligibility requirements, through managed
care programs. In fiscal year 1992, AHCCCS was financed approximately 52.7% by
federal funds, 33.1% by state funds, and 13.6% 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 profitabilty 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.
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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 9.6% 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.
ARIZONA TAX STATUS
The assets of the Trust will consist of interest-bearing obligations issued:
By or on behalf of the State of Arizona (the "State"), its political
subdivisions and authorities (the "Arizona Bonds"), and by or on behalf of the
government of Puerto Rico, the government of Guam, or the government of the
Virgin Islands (collectively the "Possession Bonds") (collectively the Arizona
Bonds and Possession Bonds shall be referred to herein as the "Bonds"),
provided the interest on such Bonds is exempt from State income taxes.
In the opinion of Chapman and Cutler, counsel to the Sponsor, under existing
Arizona law:
(1) For Arizona income tax purposes, each Unitholder will be treated as
the owner of a pro rata portion of the Insured Arizona Trust, and the
income of the Trust therefore will be treated as the income of the
Unitholder under State law.
(2) 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 Insured 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 Insured Arizona
Trust and distributed to the Unitholders.
(3) To the extent that interest derived from the Insured 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.
(4) Each Unitholder will receive taxable gain or loss for Arizona
income tax purposes when Bonds held in the Insured Arizona Trust are
sold, exchanged, redeemed or paid at maturity, or when the Unitholder
redeems or sells Units, at a price that differs from original cost as
adjusted for amortization of Bond discount or premium and other basis
adjustments, including any basis reduction that may be required to
reflect a Unitholder's share of interest, if any, accruing on Bonds
during the interval between the Unitholder's settlement date and the
date such Bonds are delivered to the Insured Arizona Trust, if later.
19
<PAGE>
(5) Arizona law does not permit a deduction for interest paid or
incurred on indebtedness incurred or continued to purchase or carry
Units in the Insured Arizona Trust, the interest on which is exempt
from Arizona income taxes.
(6) Neither the Bonds nor the Units will be subject to Arizona property
taxes, sales tax or use tax.
(7) In the case of Trusts for which an insurance policy or policies
with respect to the payment of principal and interest on the Arizona
Bonds has been obtained by the Depositor, any proceeds paid under such
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.
For a discussion of Federal tax matters relating to distributions from the
Trust Fund, see "Federal Tax Status."
INSURED CALIFORNIA SERIES 5
SPECIAL CONSIDERATIONS
As described above, the Fund will invest substantially all of its assets in
California Municipal Obligations. The Fund is therefore susceptible to
political, economic or regulatory factors affecting issuers of California
Municipal Obligations. These include the possible adverse effects of certain
California constitutional amendments, legislative measures, voter initiatives
and other matters that are described below. The following information provides
only a brief summary of the complex factors affecting the financial situation
in California (the "State") and is derived from sources that are generally
available to investors and are believed to be accurate. No independent
verification has been made of the accuracy or completeness of any of the
following information. It is based in part on information obtained from
various State and local agencies in California or contained in Official
Statements for various California Municipal Obligations.
There can be no assurance that future statewide or regional economic
difficulties, and the resulting impact on State or local governmental finances
generally, will not adversely affect the market value of California municipal
obligations held in the portfolio of the Fund or the ability of particular
obligors to make timely payments of debt service on (or relating to) those
obligations.
Economic Overview. California's economy is the largest among the 50 states and
one of the largest in the world. The State's population of over 30 million
represents 12% of the total United States population and grew by 27% in the
1980s. Total personal income in the State, at an estimated $630 billion in
1991, accounts for 13% of all personal income in the nation. Total employment
is almost 14 million, the majority of which is in the service, trade and
manufacturing sectors.
Reports issued by the State Department of Finance and the Commission on State
Finance (the "COSF") indicate that the State's economy is suffering its worst
recession since the 1930s, with prospects for recovery slower than for the
nation as a whole. The State has lost over 800,000 jobs since the start of the
recession and additional significant job losses are expected before an upturn
begins. The largest job losses have been in Southern California, led by
declines in the aerospace and construction industries. Weakness statewide
occurred in manufacturing, construction, services and trade. Unemployment was
7.5% for 1991 (compared to 6.7% nationally), and is expected to be higher than
the national average in the near future. The State's economy is only expected
to pull out of the recession slowly, once the national recovery has begun.
Delay in recovery will exacerbate shortfalls in State revenues.
20
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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 2/3 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.
The State 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 consist of tax revenues and
certain other funds, including proceeds from regulatory licenses, user charges
or other fees to the extent that such proceeds exceed the cost of providing
the product or service, but "proceeds of taxes" excludes most State
subventions to local governments. No limit is imposed on appropriations or
funds which are not "proceeds of taxes," such as reasonable user charges or
fees, and certain other non-tax funds, including bond proceeds.
Among the expenditures not included in the Article XIIIB appropriations limit
are (1) the debt service cost of bonds issued or authorized prior to January
1, 1979, or subsequently authorized by the voters, (2) appropriations arising
from certain emergencies declared by the Governor, (3) appropriations for
certain capital outlay projects, (4) appropriations by the State of post-1989
increases in gasoline taxes and vehicle weight fees, and (5) appropriations
made in certain cases of emergency.
The appropriations limit for each year is adjusted annually to reflect changes
in cost of living and population, and any transfers of service
responsibilities between government units. The definitions for such
adjustments were liberalized in 1990 to more closely follow growth in the
State's economy.
"Excess" revenues are measured over a two-year cycle. Local governments must
return any excess to taxpayers by rate reduction. The State must refund 50% of
any excess, with the other 50% paid to schools and community colleges. With
more liberal annual adjustment factors since 1988, and depressed revenues
since 1990 because of the recession, few governments are currently operating
near their spending limits, but
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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.
Appropriations subject to limitation were under the State limit by $1.2
billion, $259 million, $1.6 billion, $7.5 billion and $5.2 billion for the
five most recent fiscal years ending with 1991-92. State appropriations are
expected to be $4.2 billion under the limit for fiscal year 1992-93.
Because of the complex nature of Articles XIIIA and XIIIB of the California
Constitution, the ambiguities and possible inconsistencies in their terms, and
the impossibility of predicting future appropriations or changes in population
and cost of living, and the probability of continuing legal challenges, it is
not currently possible to determine fully the impact of Article XIIIA or
Article XIIIB on California Municipal Obligations or on the ability of the
State or local governments to pay debt service on such California Municipal
Obligations. It is not presently possible to predict the outcome of any
pending litigation with respect to the ultimate scope, impact or
constitutionality of either Article XIIIA or Article XIIIB, or the impact of
any such determinations upon State agencies or local governments, or upon
their ability to pay debt service on their obligations. Future initiative or
legislative changes in laws or the California Constitution may also affect the
ability of the State or local issuers to repay their obligations.
As of July 1, 1993, the State had approximately $17.6 billion of general
obligation bonds outstanding, and $7.2 billion remained authorized but
unissued. In addition, at June 30, 1993, the State had lease-purchase
obligations, payable from the State's General Fund, of approximately $4.0
billion. In fiscal year 1992-93, debt service on general obligation bonds and
lease-purchase debt was approximately 4.1% of General Fund revenues. The State
has paid the principal of and interest on its general obligation bonds,
lease-purchase debt and short-term obligations when due.
The principal sources of General Fund revenues are the California personal
income tax (45% of total revenues), the sales tax (35%), bank and corporation
taxes (12%), and the gross premium tax on insurance (3%). The State 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 is budgeted in 1992-93.
Throughout the 1980's, 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 (generally about
33%).
Since the start of 1990-91 Fiscal Year, the State has faced adverse economic,
fiscal, and budget conditions. The economic recession seriously affected State
tax revenues. It also caused increased expenditures for health and welfare
programs. The State is also facing a structural imbalance in its budget with
the largest programs supported by the General Fund (K-14 education, health,
welfare and corrections) growing at rates significantly higher than the growth
rates for the principal revenue sources of the General Fund. As a result, the
State entered a period of chronic budget imbalance, with expenditures
exceeding revenues for four of the
22
<PAGE>
last five fiscal years. Revenues declined in 1990-91 over 1989-90, the first
time since the 1930s. By June 30, 1992, the State's General Fund had an
accumulated deficit, on a budget basis, of approximately $2.2 billion.
As a consequence of the large budget imbalances built up over two consecutive
years, the State depleted its available cash resources. The State has to rely
increasingly on a series of external borrowings to meet its cash flow
requirements.
1992-93 Fiscal Year. At the outset of the 1992-93 Fiscal Year, the State
estimated that approximately $7.9 billion of budget actions would be required
to end the fiscal year without a budget deficit. The difficulty of taking
these actions delayed enactment of a budget for more than two months past the
start of the 1992-93 Fiscal Year. With the failure to enact a budget by July
1, 1992, the State had no legal authority to pay many of its vendors until the
budget was passed; nevertheless, certain obligations (such as debt service,
school apportionments, welfare payments, and employee salaries) were payable
because of continuing or special appropriations, or court orders. However, the
State Controller did not have enough cash to pay as they came due all of these
ongoing obligations, as well as valid obligations incurred in the prior fiscal
year.
Because of the delay in enacting the budget, the State could not carry out its
normal cash flow borrowing and, starting on July 1, 1992, the Controller was
required to issue "registered warrants" in lieu of normal warrants backed by
cash to pay many State obligations. Available cash was used to pay
constitutionally mandated and priority obligations. Between July 1 and
September 3, 1992, the Controller issued an aggregate of approximately $3.8
billion of registered warrants, all of which were called for redemption by
September 4, 1992 following enactment of the 1992-93 Budget Act and issuance
by the State of $3.3 billion of Interim Notes.
The 1992-93 Budget Bill was signed on September 2, 1992. The 1992-93 Budget
Act provides for expenditures of $57.4 billion and consists of General Fund
expenditures of $40.8 billion and Special Fund and Bond Fund expenditures of
$16.6 billion. The Department of Finance estimated there would be a balance in
the Special Fund for Economic Uncertainties of $28 million on June 30, 1993.
The $7.9 billion budget gap was closed through a combination of increased
revenues and transfers and expenditure cuts. The principle reductions were in
health and welfare, K-12 schools and community colleges. State aid to local
governments, higher education (partially offset by increased student fees),
and various other programs. In addition, funds were transferred from special
funds, collections of State revenues were accelerated, and other adjustments
were made.
As in the prior year, the economic and fiscal assumptions on which the 1992-93
Budget Act was based proved to be too optimistic. As the recession in the
State entered its third year, with no real upturn predicted until 1994, State
revenues again lagged projections. The Department of Finance projects
current-year revenues will be about $2.4 billion below projections and
expenditures $300 million higher. As a result, the Department predicts the
General Fund will end at June 30, 1993 with a fund balance deficit of about
$2.2 billion, almost unchanged from June 30, 1992. The projected negative
balance of the Special Fund for Economic Uncertainties is $2.75 billion.
1993-94 Budget. The 1993-94 Budget represents the third consecutive year of
extremely difficult budget choices for the State, in view of the continuing
recession. The Budget Act, signed on June 30, 1993, provides for General Fund
expenditures of $38.5 billion, a 6.3% decline from the prior year. Revenues
are projected at $40.6 billion, about $400 million below the prior year. To
bring the budget into balance, the Budget Act and related legislation provided
for transfer of $2.6 billion of local property taxes to school districts, thus
relieving State support obligations; reductions in health and welfare
expenditures; reductions in support for higher education institutions; a
two-year suspension of the renters' tax credit; and miscellaneous cuts in
23
<PAGE>
general government spending and certain one-time and accounting adjustments.
There were no general state tax increases, but a 0.5% temporary state sales
tax scheduled to expire on June 30 was extended for six months, and dedicated
to support local government public safety costs.
As part of the 1993-94 Budget, the Governor implemented a plan to repay the
accumulated $2.75 billion deficit in the Special Fund for Economic
Uncertainties over 18 months, funding the deficit with external borrowing
maturing not later than December 31, 1994. About $1.6 billion of the deficit
is scheduled to be repaid by June 30, 1994, with the balance paid by December
31, 1994. Taking this borrowing into account, the Department of Finance
projects the Special Fund for Economic Uncertainties would have a balance of
about $600 million at June 30, 1994, and about $100 million at June 30, 1995.
The State's severe financial difficulties for the current budget year will
result in continued pressure upon almost all local governments, particularly
school districts and counties which depend on State aid. Despite efforts in
recent years to increase taxes and reduce governmental expenditures there can
be no assurance that the State will not face budget gaps in the future.
State general obligation bonds are currently rated "Aa" 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.
Other Issuers of California Municipal Obligations. 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.
State Assistance. 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. Through 1990-91, local assistance (including public schools)
accounted for around 75% of General Fund spending. To reduce State General
Fund support for school districts, the 1992-93 Budget Act caused local
governments to transfer $1.3 billion of property tax revenues to school
districts, representing loss of almost half the post-Proposition 13 "bail-out"
aid. The 1993-94 Budget Act transfers about $2.6 billion of local property
taxes to school districts, the largest share ($2 billion) coming from
counties, and the balance from cities ($288 million), special districts ($244
million) and redevelopment agencies ($65 million). In order to make up this
shortfall to cities and counties, the Legislature has dedicated 0.5% sales tax
to local public safety purposes through December 31, 1993. Voters at a
statewide election in November, 1993 will vote on a permanent extension of
this sales tax for local public safety. In addition, the Legislature has
changed laws to relieve local governments of certain mandates, allowing them
to reduce costs.
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To the extent that the State should be constrained by its Article XIIIB
appropriations limit, or its obligation to conform to Proposition 98, or other
fiscal considerations, the absolute level, or the rate of growth, of State
assistance to local governments may be reduced. Any such reductions in State
aid could compound the serious fiscal constraints already experienced by many
local governments, particularly counties. 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.
Assessment Bonds. 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.
California Long Term Lease Obligations. Certain California long term lease
obligations, though typically payable from the general fund of the
municipality, are subject to "abatement" in the event the facility being
leased is unavailable for beneficial use and occupancy by the municipality
during the term of the lease. Abatement is not a default, and there may be no
remedies available to the holders of the certificates evidencing the lease
obligation in the event abatement occurs. The most common causes of abatement
are failure to complete construction of the facility before the end of the
period during which lease payments have been capitalized and uninsured
casualty losses to the facility (e.g., due to earthquake). In the event
abatement occurs with respect to a lease obligation, lease payments may be
interrupted (if all available insurance proceeds and reserves are exhausted)
and the certificates may not be paid when due.
Several years ago the Richmond Unified 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 case is
still in very preliminary stages, and it is not known how it will be resolved.
If the case goes to trial, a judgment against the Trustee may have adverse
implications for lease transactions of a similar nature by other California
entities.
The repayment of Industrial Development Securities secured by real property
may be affected by California laws limiting foreclosure rights of creditors.
Securities backed by health care and hospital revenues may be affected by
changes in State regulations governing cost reimbursements to health care
providers under Medi-Cal (the State's Medicaid program), including risks
related to the policy of awarding exclusive contracts to certain hospitals.
Limitations on ad valorem property taxes may particularly affect "tax
allocation" bonds issued by California redevelopment agencies. Such bonds are
secured solely by the increase in assessed valuation of a redevelopment
project area after the start of redevelopment activity. In the event that
assessed values in the
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redevelopment project decline (for example, because of a major natural
disaster such as an earthquake), the tax increment revenue may be insufficient
to make principal and interest payments on these bonds. Both Moody's and S&P
suspended ratings on California tax allocation bonds after the enactment of
Articles XIIIA and XIIIB, and only resumed such ratings on a selective basis.
Proposition 87, approved by California voters in 1988, requires that all
revenues produced by a tax rate increase go directly to the taxing entity
which increased such tax rate to repay that entity's general obligation
indebtedness. As a result, redevelopment agencies (which, typically, are the
issuers of tax allocation securities) no longer receive an increase in tax
increment when taxes on property in the project area are increased to repay
voter-approved bonded indebtedness.
The effect of these various constitutional and statutory changes upon the
ability of California municipal securities issuers to pay interest and
principal on their obligations remains unclear. Furthermore, other measures
affecting the taxing or spending authority of California or its political
subdivisions may be approved or enacted in the future. Legislation has been or
may be introduced which would modify existing taxes or other revenue-raising
measures or which either would further limit or, alternatively, would increase
the abilities of state and local governments to impose new taxes or increase
existing taxes. It is not presently possible to determine the impact of any
such legislation on California Municipal Obligations in which the Fund may
invest, future allocations of state revenues to local governments or the
abilities of state or local governments to pay the interest on, or repay the
principal of, such California Municipal Obligations.
Substantially all of California is within an active geologic region subject to
major seismic activity. Any California municipal obligation in the Portfolio
could be affected by an interruption of revenues because of damaged
facilities, or, consequently, income tax deductions for casualty losses or
property tax assessment reductions. Compensatory financial assistance could be
constrained by the inability of (i) an issuer to have obtained earthquake
insurance coverage at reasonable rates; (ii) an insurer to perform on its
contracts of insurance in the event of widespread losses; or (iii) the Federal
or State government to appropriate sufficient funds within their respective
budget limitations.
CALIFORNIA TAX STATUS
In the opinion of Orrick, Herrington & Sutcliffe, special California tax
counsel to Insured California Series 5, under existing law:
Insured California Series 5 is not an association taxable as a
corporation and the income of Insured California Series 5 will be treated
as the income of the Unitholders under the income tax laws of California;
Amounts treated as interest on the underlying bonds in Insured California
Series 5 which are exempt from tax under California personal income tax
and property tax laws when received by Insured California Series 5 will,
under such laws, retain their status as tax-exempt interest when
distributed to Unitholders. However, interest on the underlying Bonds
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
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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;
Under California income tax law, each Unitholder in Insured California
Series 5 will have a taxable event when Insured California Series 5
disposes of a Bond (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 Insured
California Series 5 to a Unitholder is allocated among each of the Bond
issues held in Insured California Series 5 (in accordance with the
proportion of Insured California Series 5 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 cost of each Bond issue.
Unitholders' bases in their Units, and the bases for their fractional
interest in each Insured California Series 5 asset, may have to be
adjusted for their pro rata share of accrued interest received, if any,
on Bonds delivered after the Unitholders' respective settlement dates;
Under the California personal property tax laws, bonds (including the
Bonds in Insured California Series 5) or any interest therein is exempt
from such tax;
Under Section 17280(b)(2) of the California Revenue and Taxation Code,
interest on indebtedness incurred or continued to purchase or carry Units
of Insured California Series 5 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 accordance with Internal Revenue Service
interpretations of similar Federal provisions.
At the respective times of issuance of the Bonds, 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 and we have relied solely upon such opinions,
or, as to securities not yet delivered, forms of such opinions contained in
official statements relating to such securities. Except in certain instances
in which Orrick, Herrington & Sutcliffe acted as bond counsel to issuers of
Bonds in Insured California Series 5, and as such made a review of proceedings
relating to the issuance of certain Bonds at the time of their issuance,
Orrick, Herrington & Sutcliffe has not made any review for the Trust of the
proceedings relating to the issuance of the Bonds in Insured California Series
5 or of the basis for such opinions.
For a discussion of Federal tax matters relating to distributions from the
Trust Fund, see "Federal Tax Status."
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INSURED MICHIGAN SERIES 4
SPECIAL CONSIDERATIONS
Investors should be aware that the economy of the State of Michigan has, in
the past, proven to be cyclical, due primarily to the fact that the leading
sector of the State's economy is the manufacturing of durable goods. While the
State's efforts to diversify its economy have proven successful, as reflected
by the fact that the share of employment in the State in the durable goods
sector has fallen from 33.1 percent in 1960 to 17.9 percent in 1990, durable
goods manufacturing still represents a sizable portion of the State's economy.
As a result, any substantial national economic downturn is likely to have an
adverse effect on the economy of the State and on the revenues of the State
and some of its local governmental units.
In May 1986, Moody's Investors Service raised the State's general obligation
bond rating to "A1". In October 1989, Standard & Poor's Corporation raised its
rating on the State's general obligation bonds to "AA".
The State's economy could continue to be affected by changes in the auto
industry, notably consolidation and plant closings resulting from competitive
pressures and over-capacity. Such actions could adversely affect State
revenues and the financial impact on the local units of government in the
areas in which plants are closed could be more severe.
General Motors Corporation has announced the scheduled closing of several of
its plants in Michigan in 1993 and 1994. The impact these closures will have
on the State's revenues and expenditures is not currently known. The impact on
the financial condition of the municipalities in which the plants are located
may be more severe than the impact on the State itself.
In recent years, the State has reported its financial results in accordance
with generally accepted accounting principles. For each of the five fiscal
years ending with the fiscal year ended September 30, 1989, the State reported
positive year-end General Fund balances and positive cash balances in the
combined General Fund/School Aid Fund. For the fiscal years ending September
30, 1990 and 1991, the State reported negative year-end General Fund Balances
of $310.4 million and $169.4 million, respectively, but ended the 1992 fiscal
year with its general fund in balance. In the 1993 fiscal year, the State took
actions to eliminate a projected year-end general fund deficit of $370
million, but the results of such actions are not yet known, since the State's
final Financial Reports for the 1993 fiscal year have not yet been released. A
positive cash balance in the combined General Fund/School Aid Fund was
recorded at September 30, 1990. In the 1991 thru 1993 fiscal years the State
experienced deteriorating cash balances which necessitated short term
borrowing and the deferral of certain scheduled cash payments. The State
borrowed $900 million for cash flow purposes in the 1993 fiscal year, which
was repaid on September 30, 1993. The State's Budget Stabilization Fund was
nearly depleted with a $168 million transfer to the General Fund for the 1992
State fiscal year.
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, increases the State
sales tax rate from 4% to 6% and places a cap on property assessment increases
for all property taxes. Such approval triggers the effectiveness of
legislation under which the State's income tax rate will be cut from 4.6% to
4.4%, some property taxes will be reduced
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and school funding will be provided from a combination of property taxes and
state revenues, some of which will be provided from other new or increased
State taxes. The legislation also contains other proposals that may reduce or
alter the revenues of local units of government, and tax increment bonds could
be particularly affected. While the ultimate impact of the constitutional
amendment and related legislation cannot yet be accurately predicted,
investors should be alert to the potential effect of such measures upon the
operations and revenues of Michigan local units of government.
Although all or most of the Bonds in Insured Michigan Series 4 (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 and $34.4 million in the 1992 fiscal year.
Insured Michigan Series 4 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 abiltiy to raise funds for
operation and debt service requirements.
MICHIGAN TAX STATUS
In the opinion of Miller, Canfield, Paddock and Stone, special counsel to the
Fund for Michigan tax matters, under existing Michigan law:
Insured Michigan Series 4 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 Chapman and
Cutler as to the applicability of Federal income tax under the Internal
Revenue Code of 1986 to Insured Michigan Series 4 and the Unitholders.
Under the income tax laws of the State of Michigan, Insured Michigan Series 4
is not an association taxable as a corporation; the income of Insured Michigan
Series 4 will be treated as the income of the Unitholders and be deemed to
have been received by them when received by Insured Michigan Series 4.
Interest on the underlying Bonds which is exempt from tax under these laws
when received by Insured Michigan Series 4 will retain its status as tax
exempt interest to the Unitholders.
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For purposes of the foregoing Michigan tax laws, each Unitholder will be
considered to have received his pro rata share of Bond interest when it is
received by Insured Michigan Series 4, and each Unitholder will have a taxable
event when Insured Michigan Series 4 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 these Michigan tax laws in the same
manner as such cost is established and allocated for Federal income tax
purposes.
Under the Michigan Intangibles Tax, Insured Michigan Series 4 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 Insured Michigan
Series 4 consists of obligations of the State of Michigan or its political
subdivisions or municipalities, or of obligations of the Commonwealth of
Puerto Rico, Guam or of the United States Virgin Islands.
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 Insured Michigan Series 4 on the underlying Bonds
and any amount distributed from Insured Michigan Series 4 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 Insured Michigan Series 4 or the Unitholders. If
Insured Michigan Series 4 or the Unitholders have a taxable event for Federal
income tax purposes when Insured Michigan Series 4 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 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
Insured Michigan Series 4 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.
For a discussion of Federal tax matters relating to distributions from the
Trust Fund, see "Federal Tax Status."
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FEDERAL TAX STATUS
All Municipal Bonds deposited in the Trust Funds will be 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 the Trust Funds, neither the Sponsor,
the Trustee, the auditors nor their respective counsel have made any review of
the proceedings relating to the issuance of the Municipal Bonds or the basis
for such opinions. Gain realized on the sale or redemption of the Municipal
Bonds by the Trustee or of a Unit by a Unitholder is, however, includable in
gross income for Federal income tax purposes. Such gain does not include any
amounts received in respect of accrued interest or earned original issue
discount. It should be noted that under recently enacted legislation described
below that subjects accretion of market discount on tax-exempt bonds to
taxation as ordinary income, gain realized on the sale or redemption of
Municipal Bonds by the Trustee or of Units by a Unitholder that would have
been treated as capital gain under prior law is treated as ordinary income to
the extent it is attributable to accretion of market discount. Market discount
can arise based on the price a Trust Fund pays for Municipal Bonds or the
price a Unitholder pays for his or her Units. In addition, bond counsel to the
issuing authorities rendered opinions as to the exemption of interest on such
Bonds, when held by residents of the state in which the issuers of such bonds
are located, from state income taxes and, where applicable, local income
taxes.
In the opinion of Chapman and Cutler, counsel for the Sponsor, under existing
law:
Each Trust Fund is not an association taxable as a corporation for
Federal income tax purposes and interest and accrued original issue
discount on Bonds which is excludable from gross income under the
Internal Revenue Code of 1986 (the "Code") will retain its status when
distributed to Unitholders, except to the extent such interest is subject
to the alternative minimum tax, an additional tax on branches of foreign
corporations and the environmental tax (the "Superfund Tax"), as noted
below.
Each Unitholder is considered to be the owner of a pro rata portion of
each asset of the respective Trust Fund in the proportion that the number
of Units of such Trust Fund held by him bears to the total number of
Units outstanding of such Trust Fund under subpart E, subchapter J of
chapter 1 of the Code and will have a taxable event when such Trust Fund
disposes of a Bond, or when the Unitholder redeems or sells his Units.
Unitholders must reduce the tax basis of their Units for their share of
accrued interest received by a Trust Fund, if any, on 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 Fund and,
consequently, such Unitholders may have an increase in taxable gain or
reduction in capital loss upon the disposition of such Units. Gain or
loss upon the sale or redemption of Units is measured by comparing the
proceeds of such sale or redemption with the adjusted basis of the Units.
If the Trustee disposes of Bonds (whether by sale, payment on maturity,
redemption or otherwise), gain or loss is recognized to the Unitholder.
The amount of any such gain or loss is measured by comparing the
Unitholder's pro rata share of the total proceeds from such disposition
with the Unitholder's basis for his or her fractional interest in the
asset disposed of. In the case of a Unitholder who purchases Units, such
basis (before adjustment for earned original issue discount and amortized
bond premium, if any) is determined by apportioning the cost of the Units
among each of the Trust Fund's assets ratably according to value as of
the date of acquisition of the Units. The tax cost reduction requirements
of the Code relating to amortization of bond premium may, under some
circumstances, result in the Unitholder realizing a taxable gain when his
Units are sold or redeemed for an amount equal to his original cost.
Any proceeds paid under individual policies obtained by issuers of Bonds
which represent maturing interest on defaulted obligations held by the
Trustee will be excludable from Federal gross income if, and to the same
extent as, such interest would have been so excludable if paid in the
normal course by the issuer of the defaulted obligations.
Sections 1288 and 1272 of the Internal Revenue Code of 1986 (the "Code")
provide a complex set of rules governing the accrual of original issue
discount. These rules provide that original issue discount accrues either on
the basis of a constant compound interest rate or ratably over the term of the
Municipal Bond,
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depending on the date the Municipal Bond was issued. In addition, special
rules apply if the purchase price of a Municipal Bond exceeds the original
issue price plus the amount of original issue discount which would have
previously accrued based upon its issue price (its "adjusted issue price").
The application of these rules will also vary depending on the value of the
Municipal Bond on the date a Unitholder acquires his Units, and the price the
Unitholder pays for his Units. Investors with questions regarding these Code
sections should consult with their tax advisers.
The Revenue Reconciliation Act of 1993 (the "Tax Act") subjects tax-exempt
bonds to the market discount rules of the Code effective for bonds purchased
after April 30, 1993. In general, market discount is the amount (if any) by
which the stated redemption price at maturity exceeds an investor's purchase
price (except to the extent that such difference, if any, is attributable to
original issue discount not yet accrued). Under the Tax Act, accretion of
market discount is taxable as ordinary income; under prior law the accretion
had been treated as capital gain. Market discount that accretes while a Trust
Fund holds a Municipal Bond would be recognized as ordinary income by the
Unitholders when principal payments are received on the Municipal Bond, upon
sale or at redemption (including early redemption), or upon the sale or
redemption of his or her Units, unless a Unitholder elects to include market
discount in taxable income as it accrues. The market discount rules are
complex and Unitholders should consult their tax advisers regarding these
rules and their application.
In the case of certain corporations, the alternative minimum tax and the
Superfund Tax depend upon the corporation's alternative minimum taxable
income, which is the corporation's taxable income with certain adjustments.
One of the adjustment items used in computing the alternative minimum taxable
income and the Superfund Tax of a corporation (other than an S Corporation,
Regulated Investment Company, Real Estate Investment Trust, or REMIC) is an
amount equal to 75% of the excess of such corporation's "adjusted current
earnings" over an amount equal to its alternative minimum taxable income
(before such adjustment item and the alternative tax net operating loss
deduction). "Adjusted current earnings" includes all tax-exempt interest,
including interest on all of the Bonds in a Trust Fund. Unitholders are urged
to consult their tax advisers with respect to the particular tax consequences
to them including the corporate alternative minimum tax, the Superfund Tax and
the branch 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 Fund is not deductible for Federal income tax purposes. The Internal
Revenue Service has taken the position that such indebtedness need not be
directly traceable to the purchase or carrying of Units (however, these rules
generally do not apply to interest paid on indebtedness incurred to purchase
or improve a personal residence). Also, under Section 265 of the Code, certain
financial institutions that acquire Units would generally not be able to
deduct any of the interest expense attributable to ownership of such Units.
Investors with questions regarding these issues should consult with their tax
advisers.
In the case of certain Municipal Bonds in the Trust Funds, the opinions of
bond counsel indicate that interest on such securities received by a
"substantial user" of the facilities being financed with the proceeds of these
securities or persons related thereto, for periods while such securities are
held by such a user or related person, will not be excludable from Federal
gross income, although interest on such securities received by others would be
excludable from Federal gross income. "Substantial user" and "related person"
are defined under U.S. Treasury Regulations. Any person who believes that he
or she may be a "substantial user" or a "related person" as so defined should
contact his or her tax adviser.
Under existing law, the Trust Funds are not associations taxable as a
corporation and the income of the Trust Funds will be treated as the income of
the Unitholders under the income tax laws of the State of Missouri.
All statements of law in the Prospectus concerning exclusion from gross income
for Federal, state or other tax purposes are the opinions of counsel and are
to be so construed.
At the respective times of 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.
32
<PAGE>
For taxpayers other than corporations, net capital gains are presently subject
to a maximum marginal stated tax rate of 28 percent. 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.
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 base 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 Fund, will be subject to tax. A taxpayer whose
adjusted gross income already exceeds the base amount must include fifty
percent of his Social Security benefits in gross income whether or not he
receives any tax-exempt interest. A taxpayer whose modified adjusted gross
income (after inclusion of tax-exempt interest) does not exceed the base
amount need not include any Social Security benefits in gross income.
For a discussion of the state tax status of income earned on Units of a state
trust, see the discussion of tax status for the applicable trust. Except as
noted therein, the exemption of interest on state and local obligations for
Federal income tax purposes discussed above does not necessarily result in
exemption under the income or other tax laws of any state or city. The laws of
the several states vary with respect to the taxation of such obligations.
33
<PAGE>
ESTIMATED CASHFLOWS TO UNITHOLDERS
The tables below set forth the estimated monthly distributions of interest,
principal and rebates of Purchased Interest to Unitholders on a per 100 Units
basis. The tables assume no changes in expenses, no changes in the current
interest rates, no exchanges, redemptions, sales or prepayments of the
underlying Securities prior to maturity or expected retirement date and the
receipt of principal upon maturity or expected retirement date. To the extent
the foregoing assumptions change actual distributions will vary.
INSURED ARIZONA TRUST
- ------------------------
Monthly
- ---------
<TABLE>
<CAPTION>
ESTIMATED
ESTIMATED ESTIMATED PURCHASED ESTIMATED
INTEREST PRINCIPAL INTEREST TOTAL
DATES DISTRIBUTION DISTRIBUTION REBATE DISTRIBUTION
<S> <C> <C> <C> <C> <C>
- ------------------------------------------ ------------- ------------- ------------- -------------
May 15, 1994 $ 2.23 $ 2.23
Jun 15, 1994 to Jun 15, 2000 $ 3.72 $ 3.72
Jul 15, 2000 $ 3.72 $ 199.37 $ 0.33 $ 203.42
Aug 15, 2000 to Jun 15, 2001 $ 2.91 $ 2.91
Jul 15, 2001 $ 2.91 $ 199.37 $ 3.29 $ 205.57
Aug 15, 2001 to Aug 15, 2002 $ 2.18 $ 2.18
Sep 15, 2002 $ 2.18 $ 199.37 $ 0.78 $ 202.33
Oct 15, 2002 to Jun 15, 2003 $ 1.36 $ 1.36
Jul 15, 2003 $ 1.36 $ 199.37 $ 3.29 $ 204.02
Aug 15, 2003 to Jun 15, 2004 $ 0.63 $ 0.63
Jul 15, 2004 $ 0.63 $ 199.37 $ 2.37 $ 202.37
</TABLE>
34
<PAGE>
DESCRIPTION OF MUNICIPAL BOND RATINGS*
STANDARD & POOR'S CORPORATION.--A brief description of the applicable Standard
& Poor's Corporation rating symbols and their meanings follow:
A Standard & Poor's corporate or municipal bond rating is a current assessment
of the creditworthiness of an obligor with respect to a specific debt
obligation. This assessment may take into consideration obligors such as
guarantors, insurers, or lessees.
The bond rating is not a recommendation to purchase, sell or hold a security,
inasmuch as it does not comment as to market price or suitability for a
particular investor.
The ratings are based on current information furnished by the issuer and
obtained by Standard & Poor's from other sources it considers reliable.
Standard & Poor's does not perform an audit in connection with any rating and
may, on occasion, rely on unaudited financial information. The ratings may be
changed, suspended, or withdrawn as a result of changes in, or unavailability
of, such information, or for other circumstances.
The ratings are based, in varying degrees, on the following considerations:
I. Likelihood of default--capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with the
terms of the obligation;
II. Nature of and provisions of the obligation;
III. Protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization or other arrangement, under the laws of
bankruptcy and other laws affecting creditors' rights.
AAA--Bonds rated AAA have the highest rating assigned by Standard and 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.
- ---------------------------
* As described by the rating company itself.
A-1
<PAGE>
MOODY'S INVESTORS SERVICE, INC.--A brief description of the applicable Moody's
Investors Service, Inc. rating symbols and their meanings follow:
Aaa--Bonds which are rated Aaa are judged to be 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 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, 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.
A-2
<PAGE>
PORTFOLIOS
The Trust Funds may be an appropriate investment vehicle for investors who
desire to participate in a portfolio of tax-exempt fixed income securities
with greater diversification than they might be able to acquire individually.
In addition, Municipal Bonds of the type deposited in the Trust Fund are often
not available in small amounts.
The selection of Municipal Bonds for each Trust Fund was based largely upon
the experience and judgment of the Sponsor. In making such selections the
Sponsor considered the following factors: (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 Trust; (e) in the case of insured Trust Funds whether such Bonds were
insured or the availability and cost of insurance for the scheduled payment of
principal and interest on the Municipal Bonds; and (f) the dates of maturity
of the Bonds.
All of the Municipal Bonds in each Trust Fund's portfolio are rated in the
category "BBB" or better (including provisional or conditional ratings) by
Standard & Poor's or "Baa" or better by Moody's. See "Description of Municipal
Bond Ratings" and "The Trust Funds--Portfolios."
All Municipal Bonds deposited in the Trust Funds on the Date of Deposit were
represented by purchase contracts assigned to the Trustee together with cash,
cash equivalents or irrevocable letters of credit issued by a major commercial
bank in the amounts necessary to complete the purchase thereof.
Bonds in certain of the Trust Funds may have been purchased on a "when, as and
if issued" or delayed delivery basis with delivery expected to take place
after the First Settlement Date. See "Notes to Portfolio." Accordingly, the
delivery of such Bonds may be delayed or may not occur. Interest on these
Municipal Bonds begins accruing to the benefit of Unitholders on their
respective dates of delivery. To the extent any Municipal Bonds are actually
delivered to a Trust Fund after their respective expected dates of delivery,
Unitholders who purchase Units in such Trust Fund prior to the date such
"when, as and if issued" or "delayed delivery" Municipal Bonds are actually
delivered to the Trustee would, to the extent such income is not offset by a
reduction in the Trustee's fee (or, to the extent necessary, other expenses),
be required to reduce their tax basis in their Units of such Trust Fund since
the interest accruing on such Bonds during the interval between their purchase
of Units and the actual delivery of such Bonds would, for tax purposes, be
considered a non-taxable return of principal rather than as tax-exempt
interest. The result of such adjustment, if necesssary, would be, during the
first year only, that the Estimated Long-Term Returns may be, and the
Estimated Current Returns would be, slightly lower than those shown herein,
assuming the Trust Fund portfolios and estimated annual expenses do not vary.
See footnote (3) to "Essential Information." Holders of Units will be "at
risk" with respect to these Bonds (i.e., may derive either gain or loss from
fluctuations in the evaluation of such Bonds) from the date they commit for
Units.
The Sponsor and the Trustee shall not be liable in any way for any default,
failure or defect in any Municipal Bond. In the event of a notice that any
Bonds, including "when, as and if issued" Bonds that have been purchased for
the Trust under contracts, will not be delivered ("Failed Bonds"), the Sponsor
is authorized under the Trust Agreement to direct the Trustee to acquire other
bonds ("Replacement Bonds").
The Replacement Bonds must be purchased within 20 days after delivery of the
notice that a contract to deliver a Municipal Bond will not be honored and the
purchase price may not exceed the amount of funds reserved for the purchase of
the Failed Bonds. The Replacement Bonds (i) must be tax-exempt bonds issued by
the appropriate state or counties, municipalities, authorities or political
subdivisions thereof, (ii) must have a fixed maturity date of at least three
years if the Bonds are to be deposited in a trust other than a long-term
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<PAGE>
Trust or at least 10 years if the Bonds are to be deposited in a long-term
Trust, (iii) must be purchased at a price that results in a yield to maturity
and a current return at least equal to that of the Failed Bonds as of the Date
of Deposit, (iv) shall not be "when, as and if issued" bonds, (v) must satisfy
the rating criteria for Bonds originally included in such Trust and (vi) in
the case of Insured Trust Funds must be insured. Whenever a Replacement Bond
is acquired for a Trust Fund, the Trustee shall, within five days thereafter,
notify all Unitholders of the Trust Fund of the acquisition of the Replacement
Bond. Once all of the Bonds in a Trust Fund are acquired, the Trustee will
have no power to vary the investments of the Trust Fund, i.e., the Trustee
will have no managerial power to take advantage of market variations to
improve a Unitholder's investment.
If the right of limited substitution described in the preceding paragraphs is
not utilized to acquire Replacement Bonds in the event of a failed contract,
the Sponsor will refund the sales charge attributable to such Failed Bonds to
all Unitholders of the Trust Fund and the Trustee will distribute the
principal, Purchased Interest and Daily Accrued Interest attributable to such
Failed Bonds not more than 30 days after the date on which the Trustee would
have been required to purchase a Replacement Bond. In addition, Unitholders
should be aware that, at the time of receipt of such principal, they may not
be able to reinvest such proceeds in other securities at a yield equal to or
in excess of the yield which such proceeds would have earned for Unitholders
of such Trust Fund.
Whether or not a Replacement Bond is acquired, an amount equal to the accrued
interest (at the coupon rate of the Failed Bonds) will be paid to Unitholders
of the Trust Fund to the date the Sponsor is notified of the failure if the
Sponsor determines not to purchase a Replacement Bond or to the date of
substitution if a Replacement Bond is purchased. All such interest paid to
Unitholders which accrued after the date of settlement for a purchase of Units
will be paid by the Sponsor. In the event a Replacement Bond could not be
acquired by the Trust Fund, the net annual interest income per Unit for such
Trust Fund would be reduced and the Estimated Current Return and Estimated
Long-Term Return might be lowered.
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
Trust Fund, but may be considered in the Sponsor's determination to direct the
Trustee to dispose of such investment. See "Investment Supervision."
The Sponsor may not alter the portfolio of a Trust Fund except upon the
happening of certain extraordinary circumstances. See "Investment
Supervision." Municipal Bonds in such Trust Fund are subject to optional call
or mandatory redemption pursuant to sinking fund provisions, in each case
prior to their stated maturity. A bond subject to optional call is one which
is subject to redemption or refunding prior to maturity at the option of the
issuer, often at a premium over par. A refunding is a method by which a bond
issue is redeemed, at or before maturity, by the proceeds of a new bond issue.
A bond subject to sinking fund redemption is one which is subject to partial
call from time to time at par with proceeds from a fund accumulated for the
scheduled retirement of a portion of an issue prior to maturity. Special or
extraordinary redemption provisions may provide for redemption at par of all
or a portion of an issue upon the occurrence of certain circumstances, which
may be prior to the optional call dates shown in "The Trust Funds--
Portfolios." Redemption pursuant to optional call provisions is more likely to
occur, and redemption pursuant to special or extraordinary redemption
provisions may occur, when the Bonds have an offering side evaluation which
represents a premium over par, that is, when they are able to be refinanced at
a lower cost. The proceeds from any such call or redemption pursuant to
sinking fund provisions, as well as proceeds from the sale of Municipal Bonds
and from Municipal Bonds which mature in accordance with their terms from a
Trust Fund, unless utilized to pay for Units tendered for redemption, will be
distributed to Unitholders of such Trust Fund and will not be used to purchase
additional Municipal Bonds for the Trust Fund. Accordingly, any such call,
redemption, sale or maturity will reduce the size and diversity of the Trust
Fund and the net annual
A-4
<PAGE>
interest income of the Trust Fund and may reduce the Estimated Current Return
and the Estimated Long-Term Return. See "Interest, Estimated Long-Term Return
and Estimated Current Return." The call, redemption, sale or maturity of
Municipal Bonds also may have tax consequences to a Unitholder. See "Federal
Tax Status." Information with respect to the call provisions and maturity
dates of the Municipal Bonds is contained in "The Trust Funds--Portfolios."
Insurance guaranteeing the scheduled payment of principal and interest on all
of the Municipal Bonds in an Insured Trust Fund has been obtained directly by
the issuer or the Sponsor. See "Insurance on the Portfolios of the Insured
Trust Funds" and "The Trust Funds--Portfolios." The value of insurance
obtained by the issuer or the Sponsor of a Municipal Bond is reflected and
included in the market value of such Bonds. See "Insurance on the Portfolios
of the Insured Trust Funds."
Each Unit of a Trust Fund represents an undivided fractional interest in the
Municipal Bonds deposited therein, in the ratio shown under "Essential
Information." Units may be purchased and certificates, if requested, will be
issued in denominations of one Unit or any multiple or fraction thereof,
subject to the Trust's minimum investment requirement of one Unit. Fractions
of Units will be computed to three decimal points. To the extent that Units of
a Trust Fund are redeemed, the principal amount of Municipal Bonds in the
Trust Fund will be reduced and the undivided fractional interest represented
by each outstanding Unit of such Trust Fund will increase. See "Redemption."
GENERAL TRUST INFORMATION
None of the special counsel to the various Trust Funds has expressed any
opinion regarding the completeness or materiality of any matters contained in
this Prospectus other than the tax opinions set forth under "Federal Tax
Status."
Certain of the Bonds in the Trust Funds may be general obligations of a
governmental entity that are backed by the taxing power of such entity. All
other Bonds in the 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 Bonds in the Trust Funds,
both within a particular classification and between classifications, depending
on numerous factors.
Certain of the Bonds in the Trust Funds may be obligations of issuers whose
revenues are derived from services provided by hospitals and other health care
facilities, including nursing homes. Ratings of bonds issued for health care
facilities are often based on feasibility studies that contain projections of
occupancy levels, revenues and expenses. A facility's gross receipts and net
income available for debt service will be affected by future events and
conditions including, among other things, demand for services and the ability
of the facility to provide the services required, physicians' confidence in
the facility, management's capabilities, economic developments in the service
area, competition, efforts by insurers and governmental agencies to limit
rates, legislation establishing state rate-setting agencies, expenses, the
cost and possible unavailability of malpractice insurance, the funding of
Medicare, Medicaid and other similar third party payor programs, and
government regulation. Federal legislation has been enacted which 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 affect the
ability of such issuers to make payments of
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<PAGE>
principal and interest on Municipal Bonds held in the portfolios of the Trust
Funds. Such adverse changes also may affect the ratings of the Municipal Bonds
held in the portfolios of the Trust Funds.
Certain of the Bonds in the Trust Funds 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 Bonds are subject to
extraordinary mandatory redemption in whole or in part from such prepayments
of mortgage loans, a substantial portion of such 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 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 Bond issuer of the
mortgage loans. Failure of the originating financial institutions to make
mortgage loans would be due principally to the interest rates on mortgage
loans funded from other sources becoming competitive with the interest rates
on the mortgage loans funded with the proceeds of the single family mortgage
revenue bonds. Additionally, unusually high rates of default on the underlying
mortgage loans may reduce revenues available for the payment of principal of
or interest on such mortgage revenue bonds. Single family mortgage revenue
bonds issued after December 31, 1980 were issued under Section 103A of the
Internal Revenue Code of 1954, which Section contains certain ongoing
requirements relating to the use of the proceeds of such Bonds in order for
the interest on such Bonds to retain its tax-exempt status. In each case, the
issuer of the Bonds has covenanted to comply with applicable ongoing
requirements and bond counsel to such issuer has issued an opinion that the
interest on the 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
Bonds to become taxable, possibly retroactively from the date of issuance.
Certain of the Bonds in the Trust Funds may be obligations of issuers whose
revenues are primarily derived from mortgage loans to housing projects for low
to moderate income families. The ability of such issuers to make debt service
payments will be affected by events and conditions affecting financed
projects, including, among other things, the achievement and maintenance of
sufficient occupancy levels and adequate rental income, increases in taxes,
employment and income conditions prevailing in local labor markets, utility
costs and other operating expenses, the managerial ability of project
managers, changes in laws and governmental regulations, the appropriation of
subsidies and social and economic trends affecting the localities in which the
projects are located. The occupancy of housing projects may be adversely
affected by high rent levels and income limitations imposed under Federal and
state programs. Like single family mortgage revenue bonds, multi-family
mortgage revenue bonds are subject to redemption and call features, including
extraordinary mandatory redemption features, upon prepayment, sale or
non-origination of mortgage loans as well as upon the occurrence of other
events. Certain issuers of single or multi-family housing bonds have
considered various ways to redeem bonds they have issued prior to the stated
first redemption dates for such bonds. In connection with the housing Bonds
held by the Trust Funds, the Sponsor has not had any direct communications
with any of the issuers thereof, but at the Date of Deposit it is not aware
that any of the respective issuers of such Bonds are actively considering the
redemption of such Bonds prior to their respective stated initial call dates.
However, there can be no assurance that an issuer of a Bond in the Trusts will
not attempt to so redeem a Bond in the Trust Funds.
Certain of the Bonds in the Trust Funds 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.
A-6
<PAGE>
Problems faced by such issuers include the ability to obtain timely and
adequate rate increases, a decline in population resulting in decreased user
fees, the difficulty of financing large construction programs, the limitations
on operations and increased costs and delays attributable to environmental
considerations, the increasing difficulty of obtaining or discovering new
supplies of fresh water, the effect of conservation programs and the impact of
"no-growth" zoning ordinances. Issuers may have experienced these problems in
varying degrees.
Certain of the Bonds in the Trust Funds 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 Bonds to make payments of principal and/or
interest on such Bonds.
Certain of the Bonds in the Trust Funds 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
Trust Funds 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
Bonds in the Trust Funds prior to the stated maturity of such Bonds.
Certain of the Bonds in the Trust Funds 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
A-7
<PAGE>
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 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 Bonds in the Trust Funds may be obligations of issuers which
are, or which govern the operation of, schools, colleges and universities and
whose revenues are derived mainly from ad valorem taxes, or for higher
education systems, from tuition, dormitory revenues, grants and endowments.
General problems relating to school bonds include litigation contesting the
state constitutionality of financing public education in part from ad valorem
taxes, thereby creating a disparity in educational funds available to schools
in wealthy areas and schools in poor areas. Litigation or legislation on this
issue may affect the sources of funds available for the payment of school
bonds in the Trusts. General problems relating to college and university
obligations would include the prospect of a declining percentage of the
population consisting of "college" age individuals, possible inability to
raise tuition and fees sufficiently to cover increased operating costs, the
uncertainty of continued receipt of Federal grants and state funding and new
government legislation or regulations which may adversely affect the revenues
or costs of such issuers. All of such issuers have been experiencing certain
of these problems in varying degrees.
Certain of the Bonds in the Trust Funds 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 Bonds in the Trust Funds 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 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 Bonds.
Certain of the Bonds in the Trust Funds may be sales and/or use tax revenue
bonds whose revenues are derived from the proceeds of a special sales or use
tax. Such taxes are generally subject to continuing Legislature approval.
Payments may be adversely affected by reduction of revenues due to decreased
use of a facility or decreased sales.
Certain of the Bonds in the Trust Funds 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 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
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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."
Investors should be aware that many of the Bonds in the Trust Funds are
subject to continuing requirements such as the actual use of Bond proceeds or
manner of operation of the project financed from Bond proceeds that may affect
the exemption of interest on such Bonds from Federal income taxation. Although
at the time of issuance of each of the Bonds in the Trusts an opinion of bond
counsel was rendered as to the exemption of interest on such obligations from
Federal income taxation, there can be no assurance that the respective issuers
or other obligors on such obligations will fulfill the various continuing
requirements established upon issuance of the 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 Bonds, thereby reducing the value of the Bonds and
subjecting Unitholders to unanticipated tax liabilities.
Federal bankruptcy statutes relating to the adjustment of debts of political
subdivisions or authorities of states of the United States provide that, in
certain circumstances, such subdivisions or authorities may be authorized to
initiate bankruptcy proceedings without prior notice to or consent of
creditors, which proceedings could result in material and adverse modification
or alteration of the rights of holders of obligations issued by such
subdivisions or authorities.
Certain of the Bonds in the Trust Funds may represent "moral obligations" of a
governmental entity other than the issuer. In the event that the issuer of a
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.
To the best of the Sponsor's knowledge, there is no litigation pending as of
the Date of Deposit in respect of any Municipal Bond which might reasonably be
expected to have a material adverse effect on the Trusts or any Trust Fund. At
any time after the Date of Deposit, litigation may be instituted on a variety
of grounds with respect to the Municipal Bonds. Although the Sponsor is unable
to predict whether any such litigation may be instituted, or if instituted,
whether such litigation might have a material adverse effect on any Trust
Fund, the Trust Funds receive copies of the opinions of bond counsel given at
the time of original delivery of each of the Municipal Bonds to the effect
that the Municipal Bonds have been validly issued and that the interest
thereon is exempt from Federal income taxes.
INSURANCE ON THE PORTFOLIOS OF THE INSURED TRUST FUNDS
All Municipal Bonds in the portfolios of the Insured Trust Funds are insured
as to the scheduled payment of interest and principal by the issuer or the
Sponsor from Municipal Bond Investors Assurance Corporation or other insurers.
See "The Trust Funds--Portfolios" and the Notes thereto. 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-cancellable and will remain in force so long as the
Municipal Bonds so insured are outstanding and the insurer and/or insurers
thereof remain in business. Where Municipal Bond insurance is obtained by the
issuer or the Sponsor directly from Municipal Bond Investors Assurance
Corporation or another insurer, no premiums for insurance are paid by an
Insured Trust Fund. 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.
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<PAGE>
The aforementioned insurance guarantees the scheduled payment of principal and
interest on all of the Municipal Bonds in an Insured Trust Fund. It does not
guarantee the market value of the Municipal Bonds or the value of the Units of
the Insured Trust Fund. Insurance obtained by the issuer of a Municipal Bond
or the Sponsor is effective so long as the Bond is outstanding, whether or not
held by an Insured Trust Fund. Therefore, any such insurance may be considered
to represent an element of market value in regard to the Bonds thus insured,
but the exact effect, if any, of this insurance on such market value cannot be
predicted.
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 of General Electric
Capital Corporation ("GECC"). Neither the Corporation nor GECC is obligated to
pay the debts 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 December 31, 1993, the total capital
and surplus of Financial Guaranty was approximately $777,000,000. Copies of
Financial Guaranty's financial statements, prepared on the basis of statutory
accounting principles, and the Corporation's financial statements, prepared on
the basis of generally accepted accounting principles, may be obtained by
writing to Financial Guaranty at 115 Broadway, New York, New York 10006,
Attention: Communications Department (telephone number is (212) 312-3000) or
to the New York State Insurance Department at 160 West Broadway, 18th Floor,
New York, New York 10013, Attention: Property Companies Bureau (telephone
number (212) 621-0389).
In addition, Financial Guaranty Insurance Company is currently authorized to
write insurance in 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 $1,936,000,000 and
statutory capital (unaudited) of approximately $1,096,000,000 as of September
30, 1993. Statutory capital consists of AMBAC policyholders' surplus and
statutory contingency reserve. AMBAC is a wholly owned subsidiary of AMBAC
Inc., a 100% publicly-held company. Moody's Investors Service, Inc. and
Standard & Poor's 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, 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 bond insurance
programs of AMBAC has been and will be assumed by a number of foreign and
domestic unaffiliated reinsurers.
Municipal Bond Investors Assurance Corporation. Municipal Bond Investors
Assurance Corporation ("MBIA Corporation") is the principal operating
subsidiary of MBIA, Inc., a New York Stock Exchange listed company. MBIA, Inc.
is 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
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<PAGE>
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 December 31, 1993, MBIA had admitted assets of $3.1 billion (unaudited),
total liabilities of $2.1 billion (unaudited), and total capital and surplus
of $978 million (unaudited) determined in accordance with statutory accounting
practices prescribed or permitted by insurance regulatory authorities.
Standard & Poor's Corporation 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, 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. Through a reinsurance agreement, BIG has ceded all of its net
insured risks, as well as its unearned premium and contingency reserves, to
the Insurer and the Insurer has reinsured BIG's net outstanding exposure.
Moody's Investors Service rates all bond issues insured by MBIA "Aaa" and
short-term loans "MIG1," both designated to be of the highest quality.
Standard & Poor's Corporation rates all new issues insured by MBIA "AAA."
Financial Security Assurance. Financial Security Assurance ("Financial
Security" or "FSA") is a monoline insurance company incorporated on March 16,
1984 under the laws of the State of New York. The operations of Financial
Security commenced on July 25, 1985, and Financial Security received its New
York State insurance license on September 23, 1985. Financial Security and its
two wholly owned subsidiaries are licensed to engage in financial guaranty
insurance business in 49 states, the District of Columbia and Puerto Rico.
Financial Security and its subsidiaries are engaged exclusively in the
business of writing financial guaranty insurance, principally in respect of
asset-backed and other collateralized securities offered in domestic and
foreign markets. Financial Security and its subsidiaries also write financial
guaranty insurance in respect of municipal and other obligations and reinsure
financial guaranty insurance policies written by other leading insurance
companies. In general, financial guaranty insurance consists of the issuance
of a guaranty of scheduled payments of an issuer's securities, thereby
enhancing the credit rating of these securities, in consideration for payment
of a premium to the insurer.
Financial Security is approximately 91.6% owned by U S West, Inc. and 8.4%
owned by The Tokio Marine and Fire Insurance Co., Ltd. ("Tokio Marine").
Neither U S WEST, Inc. nor Tokio Marine is obligated to pay the debts of or
the claims against Financial Security. Financial Security is domiciled in the
State of New York and is subject to regulation by the State of New York
Insurance Department.
As of March 31, 1993, the total policyholders' surplus and contingency
reserves and the total unearned premium reserve, respectively, of Financial
Security and its consolidated subsidiaries were, in accordance with statutory
accounting principles, approximately $479,110,000 (unaudited) and $220,078,000
(unaudited), and the total shareholders' equity and the unearned premium
reserve, respectively, of Financial Security and its consolidated subsidiaries
were, in accordance with generally accepted accounting principles,
approximately $628,119,000 (unaudited) and $202,493,000 (unaudited).
Copies of Financial Security's financial statements may be obtained by writing
to Financial Security at 350 Park Avenue, New York, New York, 10022, Attention
Communications Department. Financial Security's telephone number is (212)
826-0100.
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<PAGE>
Pursuant to an intercompany agreement, liabilities on financial guaranty
insurance written by Financial Security or either of its subsidiaries are
reinsured among such companies at an agreed-upon percentage substantially
proportional to their respective capital, surplus and reserves, subject to
applicable statutory risk limitations. In addition, Financial Security
reinsures a portion of its liabilities under certain of its financial guaranty
insurance policies with unaffiliated 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 Corporation, Nippon Investors
Service Inc., Duff & Phelps Inc. and Australian Ratings Pty. Ltd. Such ratings
reflect only the views of the respective rating agencies, are not
recommendations to buy, sell or hold securities and are subject to revision or
withdrawal at any time by such rating agencies.
Capital Guaranty Insurance Company. Capital Guaranty Insurance Company
("Capital Guaranty" or "CGIC") Capital Guaranty Insurance Company 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 Insurance Company is authorized to provide insurance in 49
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, 1993, Capital Guaranty had $13.6 billion in net exposure
outstanding. The total statutory policyholders' surplus and contingency
reserve of Capital Guaranty was $181,383,432 (unaudited) and the total
admitted assets were $270,021,126 (unaudited) as reported to the Insurance
Department of the State of Maryland as of September 30, 1993.
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, Standard &
Poor's Corporation has assigned to the each of the Insured Trust Fund's Units
its "AAA" investment rating. These are the highest ratings assigned to
securities by such rating agencies. See "Description of Municipal Bond
Ratings." These ratings should not be construed as an approval of the offering
of the Units by Standard & Poor's Corporation or as a guarantee of the market
value of an Insured Trust Fund or the Units thereof. There is no guarantee
that the "AAA" investment rating will be maintained.
Bonds in an Insured Trust Fund for which insurance has been obtained by the
issuer or the Sponsor (all of which were rated "AAA" by Standard & Poor's
Corporation and/or "Aaa" by Moody's Investors Service, Inc.) may or may not
have a higher yield than uninsured bonds rated "AAA" by Standard & Poor's
Corporation or "Aaa" by Moody's Investors Service, Inc. In selecting Municipal
Bonds for the portfolios of an Insured Trust Fund, the Sponsor has applied the
criteria hereinbefore described.
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<PAGE>
Chapman and Cutler, counsel for the Sponsor, has given an opinion to the
effect that the payment of insurance proceeds representing maturing interest
on defaulting municipal obligations paid by Financial Guaranty or another
insurer would be excludable from Federal 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. See "Federal Tax Status."
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 other mutual fund underwritten or advised by
Kemper Financial Services, Inc., an affiliate of the Sponsor, (the "Kemper
Funds") which are registered in the Unitholder's state of residence, other
than those Kemper Funds sold with a contingent deferred sales charge. Since
the portfolio securities and investment objectives of such Kemper Funds may
differ significantly from that of the Trust Funds, Unitholders should
carefully consider the consequences, including the fact that distributions
from such Kemper Funds may be taxable, before selecting such Kemper Funds for
reinvestment. Detailed information with respect to the investment objectives
and the management of the Funds is contained in their respective prospectuses,
which can be obtained from any 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 remain in effect until a subsequent notice is received
by the Program Agent. See "Unitholders--Distributions to Unitholders."
The Program Agent is Investors Fiduciary Trust Company. All inquiries
concerning participation in distribution reinvestment should be directed to
the Kemper Service Company, service agent for the Program Agent, at P.O. Box
419430, Kansas City, Missouri 64173-0216, telephone (800) 422-2848.
INTEREST, ESTIMATED LONG-TERM RETURN AND ESTIMATED CURRENT RETURN
As of the opening of business on the Date of Deposit, the Estimated Long-Term
Return and the Estimated Current Return, if applicable, for each Trust Fund
were as set forth in the "Essential Information" for each Trust. Estimated
Current Return is 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 the Bonds while the Public Offering
Price will vary with changes in the offering price of the underlying Bonds;
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 Bonds 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 Bonds 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
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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.
In order to acquire certain of the Municipal Bonds contracted for by a Trust
Fund, it may be necessary for the Sponsor or Trustee to pay on the dates for
delivery of such Municipal Bonds amounts covering accrued interest on such
Municipal Bonds which exceed the amount which will be made available in the
letter of credit furnished by the Sponsor on the Date of Deposit. The Trustee
has agreed to pay any amounts necessary to cover any such excess and will be
reimbursed therefor, without interest, when funds become available from
interest payments on the Municipal Bonds deposited in that Trust Fund.
PUBLIC OFFERING OF UNITS
PUBLIC OFFERING PRICE. Units of each Trust Fund are offered at the Public
Offering Price thereof. During the initial offering period, the Public
Offering Price per Unit is equal to the aggregate of the offering side
evaluations of the Municipal Bonds in a Trust Fund (as determined, pursuant to
the terms of a contract with the Evaluator, by Muller Data Corporation, a
non-affiliated firm regularly engaged in the business of evaluating, quoting
or appraising comparable securities), plus or minus a pro rata share of (a)
cash, if any, in the Principal Account held or owned by a Trust Fund, (b)
Purchased Interest and (c) Daily Accrued Interest plus the applicable sales
charge referred to in the table below divided by the number of outstanding
Units of such Trust Fund. The Public Offering Price for secondary market
transactions, on the other hand, is based on the bid side evaluations of the
Municipal Bonds in a Trust Fund as determined by Kenny Information Systems,
Inc. plus or minus (a) cash, if any, in the Principal Account held or owned by
the Trust Fund, (b) Purchased Interest and (c) Daily Accrued Interest plus a
sales charge based upon the dollar weighted average maturity of the Trust
Fund.
The sales charge per Unit will be reduced during the initial offering period
pursuant to the following graduated scale:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE YEARS TO MATURITY
------------------------------------------------------------------------------------
0 TO 7.49 7.5 TO 14.99 15 OR MORE
------------------------- ------------------------- -------------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF PERCENT OF PERCENT OF
OFFERING NET AMOUNT OFFERING NET AMOUNT OFFERING NET AMOUNT
NUMBER OF UNITS PRICE INVESTED PRICE INVESTED PRICE INVESTED
--------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
1 to 9,999 Units......... 3.0 % 3.093 % 3.9 % 4.058 % 4.2 % 4.384 %
10,000 to 24,999 Units... 2.8 2.881 3.7 3.842 4.0 4.167
25,000 to 49,999 Units... 2.6 2.669 3.5 3.627 3.8 3.950
50,000 to 99,999 Units... 2.5 2.564 3.3 3.413 3.5 3.627
100,000 or more Units.... 1.8 1.883 2.0 2.001 2.2 2.249
</TABLE>
As indicated above, in connection with secondary market transactions the sales
charge is based upon the dollar weighted average maturity of the Trust Funds
and is determined in accordance with the table set forth below. For purposes
of this computation, Bonds will be deemed to mature on their expressed
maturity dates unless: (a) the 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 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 Funds based upon the
dollar weighted average maturity of such Trust Fund's portfolio, in accordance
with the following schedule:
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<TABLE>
<CAPTION>
PERCENT OF PERCENT OF NET
PUBLIC AMOUNT
YEARS TO MATURITY OFFERING PRICE INVESTED
<S> <C> <C>
-------------- --------------
0 to .99 years.............................. 0.00 % 0.000 %
1 to 3.99 years............................. 2.00 2.041
4 to 7.99 years............................. 3.50 3.627
8 to 14.99 years............................ 4.50 4.712
15 or more years............................ 5.50 5.820
</TABLE>
In connection with secondary market transactions the sales charge per Unit
will be reduced as set forth below:
<TABLE>
<CAPTION>
SECONDARY
-------------------------------------
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> <C>
$1,000 to $99,999............................ 3.50 % 4.50 % 5.50 %
$100,000 to $499,999......................... 3.25 4.25 5.00
$500,000 to $999,999......................... 3.00 4.00 4.50
$1,000,000 or more........................... 2.75 3.75 4.00
</TABLE>
- ---------------------------
* If the dollar weighted average maturity of the Trust Fund is from 1 to
3.99 years the sales charge is 2% and 1.5% of the Public Offering Price
for purchases of $1,000 to $249,999 and $250,000 or more, respectively.
The reduced sales charges resulting from quantity discounts as shown on the
tables above will apply to all purchases of Units on any one day by the same
purchaser from the same Underwriter or dealer and for this purpose, purchases
of Units of the Trust Fund 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 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.
Had the Units of the Trust Funds been available for sale at the opening of
business on the Date of Deposit, the Public Offering Prices would have been as
shown under "Essential Information." The Public Offering Price per Unit of a
Trust Fund on the date of the Prospectus or on any subsequent date will vary
from the amount stated under "Essential Information" in accordance with
fluctuations in the prices of the underlying Municipal Bonds and the amount of
accrued interest on the Units. On the Date of Deposit, pursuant to an
exemptive order from the Securities and Exchange Commission, the Public
Offering Price at which Units will be sold will not exceed the price
determined as of the opening of business on the Date of Deposit as shown under
"Essential Information", however, should the value of the underlying Bonds
decline, purchasers will, of course, be given the benefit of such lower price.
The aggregate bid and offering side evaluations of the Municipal Bonds shall
be determined (a) on the basis of current bid or offering prices of the
Municipal Bonds, (b) if bid or offering prices are not available for any
particular Municipal Bond, on the basis of current bid or offering prices for
comparable bonds, (c) by determining the value of Municipal Bonds on the bid
or offer side of the market by appraisal, or (d) by any combination of the
above. The value of insurance obtained by an issuer of Municipal Bonds is
reflected and included in the market value of such Municipal Bonds.
The Evaluator will consider the ability of the insurer of such Bonds, to meet
its commitments. For example, if an Insured Trust were to hold 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 such 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 quality. It is the position of the Sponsor that this is a fair method of
valuing insured Municipal Bonds and reflects a proper valuation
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<PAGE>
method in accordance with the provisions of the Investment Company Act of
1940. For a description of the circumstances under which a full or partial
suspension of the right of Unitholders to redeem their Units may occur, see
"Redemption."
The foregoing evaluations and computations shall be made as of the evaluation
time stated under "Essential Information," on each business day commencing
with the Date of Deposit of the Municipal Bonds, effective for all sales made
during the preceding 24-hour period.
The interest on the Municipal Bonds deposited in each Trust Fund, less the
related estimated fees and expenses, is estimated to accrue in the annual
amounts per Unit set forth under "Essential Information." 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 Trust Fund change or
the number of outstanding Units of such Trust Fund changes.
Although payment is normally made five business days following the order for
purchase, payment may be made prior thereto. A person will become the owner of
Units on the First Settlement Date or any date of settlement thereafter
provided payment has been received. 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 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.
PURCHASED AND DAILY ACCRUED INTEREST. Accrued interest consists of two
elements. The first element arises as a result of accrued interest which is
the accumulation of unpaid interest on a bond from the later of the last day
on which interest thereon was paid or the date of original issuance of the
bond. Interest on the coupon Bonds in the 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 is referred to
herein as "Purchased Interest." Included in the Public Offering Price 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 Settlement Date. The second element of
accrued interest arises because the estimated net interest on the 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 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 Trust
Fund.
COMPARISON OF PUBLIC OFFERING PRICE AND REDEMPTION PRICE. While the initial
Public Offering Price of Units will be determined on the basis of the current
offering prices of the Municipal Bonds in each Trust Fund, the redemption
price per Unit (as well as the secondary market price per Unit) at which Units
may be redeemed (see "Redemption") will be determined on the basis of the
current bid prices of such Bonds. As of the opening of business on the Date of
Deposit, the Public Offering Prices per Unit (based on the offering prices of
the Municipal Bonds in each Trust Fund and including the sales charge)
exceeded the redemption price at which Units could have been redeemed (based
upon the current bid prices of the Municipal Bonds in the Trust Fund) by the
amount shown under "Essential Information." In the past, bid prices on
municipal bonds similar to those in the Trust Funds have been lower than the
offering prices thereof by as much as 3% or more of principal amount in the
case of inactively traded municipal bonds or as little as 1/2 of 1% in the
case of actively traded municipal bonds but the difference between such
offering and bid prices may be expected to average 1% to 2% of principal
amount. For this reason, among others (including fluctuations in the market
prices of such Bonds and the fact that the Public Offering Prices include a
sales charge), the amount realized by a Unitholder upon any redemption of
Units may be less than the price paid for such Units.
PUBLIC DISTRIBUTION OF UNITS. The Sponsor intends to qualify the Units of an
Insured National Trust in all states and an Insured or Uninsured State Trust
for sale only in the State for which such Trust Fund is named. Units will be
sold through the Underwriters, through dealers who are members of the National
Association of
A-16
<PAGE>
Securities Dealers, Inc. and through others. Sales may be made to or through
dealers at prices which represent discounts from the Public Offering Price as
set forth below. Certain commercial banks are making Units of the Trust Funds
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 Fund 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. The
Sponsor reserves the right to change the discounts set forth below from time
to time. In addition to such discounts, the Sponsor may, from time to time,
pay or allow an additional discount, in the form of cash or other
compensation, to dealers employing registered representatives who sell, during
a specified time period, a minimum dollar amount of Units of the Trust and
other unit investment trusts underwritten by the Sponsor. The difference
between the discount and the sales charge will be retained by the Sponsor and
the Underwriters.
<TABLE>
<CAPTION>
PRIMARY
-------------------------------------------------------------------------
WEIGHTED AVERAGE YEARS TO MATURITY
0 TO 7.49 7.5 TO 14.99 15 OR MORE
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NUMBER OF UNITS DISCOUNT PER UNIT
-------------------------------------------------------------------------
1 to 9,999 Units.................. $0.20 $0.26 $0.30
10,000 to 24,999 Units............ $0.19 $0.25 $0.28
25,000 to 49,999 Units............ $0.18 $0.23 $0.26
50,000 to 99,999 Units............ $0.17 $0.22 $0.24
100,000 or more Units............. $0.10 $0.11 $0.12
</TABLE>
<TABLE>
<CAPTION>
SECONDARY
-------------------------------------
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> <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 Fund is from 1 to
3.99 years the concession or agency commission is 1.00% of the Public
Offering Price.
The Underwriters reserve the right to reject, in whole or in part, any order
for the purchase of Units.
A-17
<PAGE>
PROFITS OF SPONSOR AND UNDERWRITERS. As set forth under "Underwriting," the
Underwriters of each Trust Fund will receive gross sales charges equal to the
percentage of the Public Offering Price of the Units of such Trust Fund stated
under "Public Offering Price" and the Sponsor will receive a fixed portion of
such sales charges. In addition, the Underwriters and the Sponsor may realize
a profit (or the Sponsor may realize a loss) resulting from the difference
between the purchase prices of the Municipal Bonds to the Sponsor and the cost
of such Bonds to the Trust Funds, which is based on the offering side
evaluation of the Municipal Bonds on the Date of Deposit. See "The Trust
Funds--Portfolios" and "Underwriting." The Underwriters may also realize
profits or losses with respect to Municipal Bonds deposited in the Trust
Funds, which were acquired from underwriting syndicates of which any of the
Underwriters were members. An underwriter or underwriting syndicate purchases
bonds from the issuer on a negotiated or competitive bid basis, as principal,
with the motive of marketing such bonds to investors at a profit. The
Underwriters of a Trust Fund and the Sponsor may realize additional profits or
losses during the initial offering period on unsold Units as a result of
changes in the daily evaluation of the Municipal Bonds in the Trust Funds.
MARKET FOR UNITS
After the initial offering period, 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 the Trust Funds offered hereby and to
continuously offer to purchase said Units at prices, determined by the
Evaluator, based on the aggregate bid prices of the underlying Municipal Bonds
in such Trust Funds, together with Purchased Interest and Daily Accrued
Interest to the expected dates of settlement. To the extent that a market is
maintained during the initial offering period, the prices at which Units will
be repurchased will be based upon the aggregate offering side evaluation of
the Municipal Bonds in the Trust Funds. The aggregate bid prices of the
underlying Municipal Bonds in each Trust Fund are expected to be less than the
related aggregate offering prices (which is the evaluation method used during
the initial public offering period). Accordingly, Unitholders who wish to
dispose of their Units should inquire of their bank or broker as to 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 or Underwriters 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 and/or the Underwriters. The Sponsor and/or the
Underwriters 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 Units to be redeemed by the Trustee by making a written
request to the Trustee, Investors Fiduciary Trust Company, P.O. Box 419430,
Kansas City, Missouri, 64173-0216 and, in the case of Units evidenced by a
certificate, by tendering such certificate to the Trustee, properly endorsed
or accompanied by a written instrument or instruments of transfer in form
satisfactory to the Trustee. Unitholders must sign the request, and such
certificate or transfer instrument, exactly as their names appear on the
records of the Trustee and on any certificate representing the Units to be
redeemed. If the amount of the redemption is $25,000 or less and the proceeds
are payable to the Unitholder(s) of record at the address of record, no
signature guarantee is necessary for redemptions by individual account owners
(including joint owners). Additional documentation may be requested, and a
signature guarantee is always required, from corporations, executors,
administrators, trustees, guardians or associations. The signatures must be
guaranteed by a participant in the
A-18
<PAGE>
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 cetificate 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 Trust Fund, determined as set forth below under "Computation of
Redemption Price," as of the evaluation time stated under "Essential
Information," next following such tender, multiplied by the number of Units
being redeemed. Any Units redeemed shall be cancelled and any undivided
fractional interest 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 Trust Fund at the time of
redemption.
Under regulations issued by the Internal Revenue Service, the Trustee is
required to withhold a certain percentage of the principal amount of a Unit
redemption if the Trustee has not been furnished the redeeming Unitholder's
tax identification number in the manner required by such regulations. Any
amount so withheld is transmitted to the Internal Revenue Service and may be
recovered by the Unitholder only when filing a tax return. Under normal
circumstances the Trustee obtains the Unitholder's tax identification number
from the selling broker. However, any time a Unitholder elects to tender Units
for redemption, such Unitholder should make sure that the Trustee has been
provided a certified tax identification number in order to avoid this possible
"back-up withholding." In the event the Trustee has not been previously
provided such number, one must be provided at the time redemption is
requested.
Any amounts paid on redemption representing interest shall be withdrawn from
the Interest Account for such Trust Fund 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 Trust Fund. The Trustee is
empowered to sell Municipal Bonds for a Trust Fund in order to make funds
available for the redemption of Units of such Trust Fund. 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 the Trust Fund will be reduced.
The Trustee is irrevocably authorized in its discretion, if an Underwriter
does not elect to purchase any Unit tendered for redemption, in lieu of
redeeming such Units, to sell such Units in the over-the-counter market for
the account of tendering Unitholders at prices which will return to the
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. 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.
A-19
<PAGE>
COMPUTATION OF REDEMPTION PRICE. The Redemption Price for Units of each Trust
Fund is computed by the Evaluator as of the evaluation time stated under
"Essential Information" 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 the Trust Fund 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 each issue of the Municipal Bonds (including
"when issued" contracts, if any) held in the Trust Fund as determined by the
Evaluator on the basis of bid prices therefor; and (3) interest accrued and
unpaid on the Municipal Bonds in the Trust Fund as of the date of computation;
B. deducting therefrom (1) amounts representing any applicable taxes or
governmental charges payable out of the Trust Fund 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) an amount representing estimated
accrued expenses of the Trust Fund, including but not limited to 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 Trust Fund;
and
C. finally dividing the results of such computation by the number of Units of
the Trust Fund outstanding as of the date thereof.
UNITHOLDERS
OWNERSHIP OF UNITS. Ownership of Units of any Trust Fund will not be evidenced
by certificates unless a Unitholder, the Unitholder's registered broker/dealer
or the clearing agent for such broker/dealer makes a written request to the
Trustee. Certificates, if issued, will be so noted on the confirmation
statement sent to the Underwriter and broker. Non-receipt of such
certificate(s) must be reported to the Trustee within one year; otherwise, a
2% surety bond fee will be required for replacement.
Units are transferable by making a written request to the Trustee and, in the
case of Units evidenced by a certificate, by presenting and surrendering such
certificate to the Trustee properly endorsed or accompanied by a written
instrument or instruments of transfer which should be sent registered or
certified mail for the protection of 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 subject to the Trust's minimum investment
requirement of 100 Units or any whole Unit multiple thereof subject to any
minimum requirement established by the Sponsor from time to time. Any
certificate issued will be numbered serially for identification, issued in
fully registered form and will be transferable only on the books of the
Trustee. The Trustee may require a Unitholder to pay a reasonable fee, to be
determined in the sole discretion of the Trustee, for each certificate
re-issued or transferred and to pay any governmental charge that may be
imposed in connection with each such transfer or interchange. The Trustee at
the present time does not intend to charge for the normal transfer or
interchange of certificates. Destroyed, stolen, mutilated or lost certificates
will be replaced upon delivery to the Trustee of satisfactory indemnity
(generally amounting to 3% of the market value of the Units), affidavit of
loss, evidence of ownership and payment of expenses incurred.
A-20
<PAGE>
DISTRIBUTIONS TO UNITHOLDERS. Interest Distributions: Interest received by
each Trust Fund, 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 Trust Fund. All other receipts are credited
by the Trustee to a separate Principal Account for the Trust Fund. The Trustee
normally has no cash for distribution to Unitholders until it receives
interest payments on the Bonds in the Trust Fund. Since municipal interest
usually is paid semi-annually, during the initial months of the Trust, the
Interest Account of each Trust Fund, 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 Trust, the Trustee will commence
distributions, in part from funds advanced by the Trustee.
Thereafter, assuming the Trust Fund 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 amounts
advanced to a Trust Fund, the Trustee will normally distribute on each
Interest Distribution Date (the fifteenth of the month) or shortly thereafter
to Unitholders of record of such Trust Fund on the preceding Record Date
(which is the first day of each month). Unitholders of the Trust Funds will
receive an amount substantially equal to one-twelfth of such holders' pro rata
share of the estimated net annual interest income to the Interest Account of
such Trust Fund. 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 Trust Fund
sell or redeem all or a portion of their Units, they will be paid their
proportionate share of the accrued interest of such Trust Fund 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 Trust Funds at a low level, all Unitholders of record in such Trust
Fund on the first Record Date will receive 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 be a
full period, the first regular distributions may be 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 Trust Funds
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 Trust Fund 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 Trust Fund and available for
distribution may be slightly more or less than the interest distribution made.
In order to eliminate fluctuations in interest distributions resulting from
such variances, the Trustee is authorized by the Trust Agreements to advance
such amounts as may be necessary to provide interest distributions of
approximately equal amounts. The Trustee will be reimbursed, without interest,
for any such advances from funds available in the Interest Account for such
Trust Fund.
Principal Distributions. The Trustee will distribute on each Distribution Date
or shortly thereafter, to each Unitholder of record of the Trust Fund on 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 Trust Fund
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 $.001 per Unit.
A-21
<PAGE>
STATEMENTS TO UNITHOLDERS. With each distribution, the Trustee will furnish or
cause to be furnished to each Unitholder a statement of the amount of interest
and the amount of other receipts, if any, which are being distributed,
expressed in each case as a dollar amount per Unit.
The accounts of each Trust Fund are required to be audited annually, at the
Trust Fund'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 Trust Fund. The accountants' report will
be furnished by the Trustee to any Unitholder of such Trust Fund 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 Trust Fund a statement, covering the
calendar year, setting forth for the applicable Trust Fund:
A. As to the Interest Account:
1. The amount of interest received on the Municipal Bonds and the percentage
of such amount by states and territories in which the issuers of such Bonds
are located;
2. The amount paid from the Interest Account representing accrued interest of
any Units redeemed;
3. The deductions from the Interest Account for applicable taxes, if any, fees
and expenses (including auditing fees) of the Trustee, the Evaluator, and, if
any, of bond counsel;
4. Any amounts credited by the Trustee to the Reserve Account described under
"Expenses of the Trust";
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; and
B. As to the Principal Account:
1. The dates of the maturity, liquidation or redemption of any of the
Municipal Bonds and the net proceeds received therefrom excluding any portion
credited to the Interest Account;
2. The amount paid from the Principal Account representing the principal of
any Units redeemed;
3. The deductions from the Principal Account for payment of applicable taxes,
if any, fees and expenses (including auditing fees) of the Trustee, the
Evaluator, and, if any, of bond counsel;
4. The amount of when-issued interest treated as a return of capital, if any;
5. Any amounts credited by the Trustee to the Reserve Account described under
"Expenses of the Trust";
6. 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 the calendar year; and
C. The following information:
1. A list of the Municipal Bonds as of the last business day of such calendar
year;
2. The number of Units outstanding on the last business day of such calendar
year;
3. The Redemption Price based on the last evaluation made during such calendar
year;
4. The amount actually distributed during such calendar year from the Interest
and Principal Accounts separately stated, expressed both as total dollar
amounts and as dollar amounts per Unit outstanding on the Record Dates for
each such distribution.
A-22
<PAGE>
RIGHTS OF UNITHOLDERS. A Unitholder may at any time tender Units to the
Trustee for redemption. The death or incapacity of any Unitholder will not
operate to terminate a Trust or any Trust Fund 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 a Trust or any Trust
Fund.
No Unitholder shall have the right to control the operation and management of
any Trust Fund in any manner, except to vote with respect to the amendment of
the Trust Agreements or termination of any Trust Fund.
INVESTMENT SUPERVISION
The Sponsor may not alter the portfolios of the Trust Funds by the purchase,
sale or substitution of Municipal Bonds, except in the special circumstances
noted below and as indicated earlier under "Portfolios" regarding the
substitution of Replacement Bonds for any Failed Bonds. Thus, with the
exception of the redemption or maturity of Municipal Bonds in accordance with
their terms, the assets of the Trust Funds will remain unchanged under normal
circumstances.
The Sponsor may direct the Trustee to dispose of Municipal Bonds the value of
which has been affected by certain adverse events including institution of
certain legal proceedings or decline in price or the occurrence of other
market factors, including advance refunding, so that in the opinion of the
Sponsor the retention of such Bonds in a Trust Fund would be detrimental to
the interest of the Unitholders. The proceeds from any such sales, exclusive
of any portion which represents accrued interest, will be credited to the
Principal Account of such Trust Fund for distribution to the Unitholders.
The Sponsor is required to instruct the Trustee to reject any offer made by an
issuer of Muncipal Bonds to issue new obligations in exchange or substitution
for any of such 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 forseeable 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 Trust
Fund for the purpose of redeeming Units of such Trust Fund tendered for
redemption and the payment of expenses.
ADMINISTRATION OF THE TRUSTS
THE TRUSTEE. The Trustee, Investors Fiduciary Trust Company, is a trust
company specializing in investment related services, organized and existing
under the laws of Missouri, having its trust office at 127 West 10th Street,
Kansas City, Missouri 64105. The Trustee is subject to supervision and
examination by the Division of Finance of the State of Missouri and the
Federal Deposit Insurance Corporation. Investors Fiduciary Trust Company is
jointly owned by DST Systems, Inc. and Kemper Financial Services, Inc., an
affiliate of the Sponsor.
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 Trust Agreements, reference is made
to the material set forth under "Unitholders."
A-23
<PAGE>
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 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 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 Trust Fund. 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 Trust Funds.
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 60 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 30 days after notification,
the retiring Trustee may apply to a court of competent jurisdiction for the
appointment of a successor. In case the Trustee becomes incapable of acting or
is adjudged a bankrupt or is taken over by public authorities, the Sponsor may
remove the Trustee and appoint a successor trustee as provided in the Trust
Agreements. Notice of such removal and appointment shall be mailed to each
Unitholder by the Sponsor. Upon execution of a written acceptance of such
appointment by such successor trustee, all the rights, powers, duties and
obligations of the original Trustee shall vest in the successor. The Trustee
shall be a corporation organized under the laws of the United States, or any
state thereof, which is authorized under such laws to exercise trust powers.
The Trustee shall have at all times an aggregate capital, surplus and
undivided profits of not less than $5,000,000.
THE EVALUATOR. Kemper Unit Investment Trusts, a service of Kemper Securities,
Inc., the Sponsor, also serves as Evaluator. The Evaluator may resign or be
removed by the Trustee in which event the Trustee is to use its best efforts
to appoint a satisfactory successor. Such resignation or removal shall become
effective upon acceptance of appointment by the successor evaluator. If upon
resignation of the Evaluator no successor has accepted appointment within 30
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,
for both the initial offering period and secondary market transactions,
portfolio evaluations of the Bonds in the Trust Funds which are then reviewed
by the Evaluator. In the event the Sponsor is unable to obtain current
evaluations from Muller Data Corporation, it may make its own evaluations or
it may utilize the services of any other non-affiliated evaluator or
evaluators it deems appropriate.
AMENDMENT AND TERMINATION. The Trust Agreements may be amended by the Trustee
and the Sponsor without the consent of any of the Unitholders: (1) to cure any
ambiguity or to correct or supplement any provision which may be defective or
inconsistent; (2) to change any provision thereof as may be required by the
Securities and Exchange Commission or any successor governmental agency; or
(3) to make such provisions as shall not adversely affect the interests of the
Unitholders. The Trust Agreements with respect to the Trust Funds 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
A-24
<PAGE>
outstanding of such Trust Fund, provided that no such amendment or waiver will
reduce the interest 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 Trust Fund.
In no event shall any Trust Agreement be amended to increase the number of
Units of a Trust Fund issuable thereunder or to permit, except in accordance
with the provisions of such Trust Agreement, the acquisition of any Municipal
Bonds in addition to or in substitution for those initially deposited in a
Trust Fund. The Trustee shall promptly notify Unitholders of the substance of
any such amendment.
The Trust Agreements provide that the Trust Funds shall terminate upon the
maturity, redemption or other disposition of the last of the Municipal Bonds
held in a Trust Fund. If the value of a Trust Fund shall be less than the
applicable minimum value stated under "Essential Information" (20% of the
original principal amount of a Trust Fund), the Trustee may, in its
discretion, and shall, when so directed by the Sponsor, terminate the Trust
Fund. A Trust Fund may be terminated at any time by the holders of Units
representing 66 2/3% of the Units thereof then outstanding. In the event of
termination of a Trust Fund, written notice thereof will be sent by the
Trustee to all Unitholders of such Trust Fund. Within a reasonable period
after termination, the Trustee will sell any Municipal Bonds remaining in such
Trust Fund and, after paying all expenses and charges incurred by the Trust
Fund, 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 Trust Fund.
LIMITATIONS ON LIABILITY. The Sponsor: The Sponsor is liable for the
performance of its obligations arising from its responsibilities under the
Trust Agreements, but will be under no liability to the Unitholders for taking
any action or refraining from any action in good faith pursuant to the Trust
Agreements or for errors in judgment, except in cases of its own gross
negligence, bad faith or willful misconduct. The Sponsor shall not be liable
or responsible in any way for depreciation or loss incurred by reason of the
sale of any Municipal Bonds.
The Trustee: The Trust Agreements provide that the Trustee shall be under no
liability for any action taken in good faith in reliance upon prima facie
properly executed documents or for the disposition of monies, Municipal Bonds
or certificates except by reason of its own gross negligence, bad faith or
willful misconduct, nor shall the Trustee be liable or responsible in any way
for depreciation or loss incurred by reason of the sale by the Trustee of any
Municipal Bonds. In the event that the Sponsor shall fail to act, the Trustee
may act and shall not be liable for any such action taken by it in good faith.
The Trustee shall not be personally liable for any taxes or other governmental
charges imposed upon or in respect of the Municipal Bonds or upon the interest
thereon. In addition, the Trust Agreements contain other customary provisions
limiting the liability of the Trustee.
The Evaluator: The Trustee and Unitholders may rely on any evaluation
furnished by the Evaluator and shall have no responsibility for the accuracy
thereof. The Trust Agreements provide that the determinations made by the
Evaluator shall be made in good faith upon the basis of the best information
available to it, provided, however, that the Evaluator shall be under no
liability to the Trustee or Unitholders for errors in judgment, but shall be
liable only for its gross negligence, lack of good faith or willful
misconduct.
EXPENSES OF THE TRUSTS
The Sponsor will charge the Trust Funds a surveillance fee for services
performed for the Trust Funds in an amount not to exceed that amount set forth
in "Essential Information" 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
A-25
<PAGE>
Sponsor for providing such services. Such fee shall be based on the total
number of Units of the Trust Fund outstanding as of the January Record Date
for any annual period. The Sponsor will receive a portion of the sales
commissions paid in connection with the purchase of Units and will share in
profits, if any, related to the deposit of Municipal Bonds in the Trust Funds
(see "Underwriting"). The Sponsor and other Underwriters have borne all the
expenses of creating and establishing the Trust including the cost of the
initial preparation, printing and execution of the Prospectus, Trust
Agreements and certificates, legal and accounting expenses, advertising and
selling expenses, payment of closing fees, the expenses of the Trustee,
evaluation fees relating to the deposit and other out-of-pocket expenses.
The Trustee receives for its services fees set forth under "Essential
Information." The Trustee fee which is calculated monthly is based on the
largest aggregate principal amount of Municipal Bonds in the Trust Fund at any
time during the period. 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 trust procedures; however, the Trustee is also authorized
by the Trust Agreements to make from time to time certain non-interest bearing
advances to the Trust Funds. During the first year the Trustee has agreed to
lower its fees and absorb expenses by the amount set forth under "Essential
Information." The Trustee's fee will not be increased in future years in order
to make up this reduction in the Trustee's fee. The Trustee's fee is payable
on or before each Distribution Date.
For evaluation of Municipal Bonds in each Trust Fund, the Evaluator shall
receive a fee, payable monthly, calculated on the basis of that annual rate
set forth under "Essential Information," based upon the largest aggregate
principal amount of Municipal Bonds in such Trust Fund at any time during such
monthly period.
The Trustee's and Evaluator's fees are deducted first from the Interest
Account of the Trust Fund to the extent funds are available and then from the
Principal Account. 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 the Trust Funds:
(a) fees for the Trustee's extraordinary services; (b) expenses of the Trustee
(including legal and auditing expenses and insurance costs for Insured Trust
Funds, but not including any fees and expenses charged by any agent for
custody and safeguarding of Municipal Bonds) and of bond counsel, if any; (c)
various governmental charges; (d) expenses and costs of any action taken by
the Trustee to protect the Trust or any Trust Fund or the rights and interests
of the Unitholders; (e) indemnification of the Trustee for any loss, liability
or expense incurred by it in the administration of the Trust or any Trust Fund
not resulting from 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 Trust Funds. The fees and expenses set forth herein
are payable out of the appropriate Trust Fund and, when owing to the Trustee,
are secured by a lien on such Trust Fund. 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 the Trust Funds shall be deducted from the Interest
Account thereof, or, to the extent funds are not available in such Account,
from the Principal Accounts. The Trustee may withdraw from the Principal
Account or the Interest Account of any Trust Fund such amounts, if any, as it
deems necessary to establish a reserve for any taxes or other governmental
charges or other extraordinary expenses payable out of the Trust Fund. Amounts
so withdrawn shall be credited to a separate account maintained for the Trust
A-26
<PAGE>
Fund known as the Reserve Account and shall not be considered a part of the
Trust Fund when determining the value of the Units until such time as the
Trustee shall return all or any part of such amounts to the appropriate
account.
THE SPONSOR
The Sponsor, Kemper Unit Investment Trusts, with an office at 77 West Wacker
Drive, 5th Floor, Chicago, Illinois 60601, (800) 621-5024, is a service of
Kemper Securities, Inc., which is a wholly-owned subsidiary of Kemper
Financial Companies, Inc. which, in turn, is a wholly-owned subsidiary of
Kemper Corporation. The Sponsor acts as underwriter of a number of other
Kemper unit investment trusts and will act as underwriter of any other unit
investment trust products developed by the Sponsor in the future. As of April
30, 1993, the total stockholder's equity of Kemper Securities, Inc. was
$426,125,017 (unaudited).
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 Trust
Funds 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 Trust Funds. 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 Trust Funds. 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 have been passed upon by Chapman and Cutler, 111 West Monroe
Street, Chicago, Illinois 60603, as counsel for the Sponsor. Special counsel
for the Trust Funds for respective state tax matters are named in the
appropriate state tax sections of "Special Considerations and State Tax
Status."
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The statements of condition and the related municipal bond portfolios at the
Date of Deposit included in this Prospectus have been audited by Grant
Thornton, independent certified public accountants, as set forth in their
report in the Prospectus, and are included herein in reliance upon the
authority of said firm as experts in accounting and auditing.
A-27
<PAGE>
<TABLE>
<CAPTION>
CONTENTS PAGE
<S> <C>
SUMMARY......................................... 2
ESSENTIAL INFORMATION........................... 3
THE TRUST FUNDS................................. 5
General....................................... 5
Series Information............................ 6
Taxable Equivalent Estimated Current Return
Tables...................................... 6
Portfolios.................................... 9
Notes to Portfolios........................... 12
UNDERWRITING.................................... 13
REPORT OF INDEPENDENT CERTIFIED PUBLIC
ACCOUNTANTS................................... 15
STATEMENTS OF CONDITION......................... 16
SPECIAL CONSIDERATIONS AND STATE TAX
STATUS........................................ 17
FEDERAL TAX STATUS.............................. 31
ESTIMATED CASHFLOWS TO UNITHOLDERS.............. 34
DESCRIPTION OF MUNICIPAL BOND RATINGS........... A-1
PORTFOLIOS...................................... A-3
General Trust Information..................... A-5
INSURANCE ON THE PORTFOLIOS OF THE INSURED TRUST
FUNDS......................................... A-9
DISTRIBUTION REINVESTMENT....................... A-13
INTEREST, ESTIMATED LONG-TERM RETURN AND
ESTIMATED CURRENT RETURN...................... A-13
PUBLIC OFFERING OF UNITS........................ A-14
Public Offering Price......................... A-14
Purchased and Daily Accrued Interest.......... A-16
Comparison of Public Offering Price and
Redemption Price............................ A-16
Public Distribution of Units.................. A-16
Profits of Sponsor and Underwriters........... A-18
MARKET FOR UNITS................................ A-18
REDEMPTION...................................... A-18
Computation of Redemption Price............... A-20
UNITHOLDERS..................................... A-20
Ownership of Units............................ A-20
Distributions to Unitholders.................. A-21
Statements to Unitholders..................... A-22
Rights of Unitholders......................... A-23
INVESTMENT SUPERVISION.......................... A-23
ADMINISTRATION OF THE TRUSTS.................... A-23
The Trustee................................... A-23
The Evaluator................................. A-24
Amendment and Termination..................... A-24
Limitations on Liability...................... A-25
EXPENSES OF THE TRUSTS.......................... A-25
THE SPONSOR..................................... A-27
LEGAL OPINIONS.................................. A-27
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS........ A-27
</TABLE>
THIS PROSPECTUS DOES NOT CONTAIN ALL OF THE INFORMATION SET FORTH IN THE
REGISTRATION STATEMENT AND EXHIBITS RELATING THERETO, FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION, WASHINGTON, D.C. UNDER THE SECURITIES
ACT OF 1933 AND THE INVESTMENT COMPANY ACT OF 1940, AND TO WHICH REFERENCE
IS MADE.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND ANY INFORMATION OR
REPRESENTATION NOT CONTAINED HEREIN MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE TRUST, THE TRUSTEE, OR THE SPONSOR. THE TRUST IS
REGISTERED AS A UNIT INVESTMENT TRUST UNDER THE INVESTMENT COMPANY ACT OF
1940. SUCH REGISTRATION DOES NOT IMPLY THAT THE TRUST OR THE UNITS HAVE
BEEN GUARANTEED, SPONSORED, RECOMMENDED OR APPROVED BY THE UNITED STATES
OR ANY STATE OR ANY AGENCY OR OFFICER THEREOF.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF
AN OFFER TO BUY, SECURITIES IN ANY STATE TO ANY PERSON TO WHOM IT IS NOT
LAWFUL TO MAKE SUCH OFFER IN SUCH STATE.
KEMPER
DEFINED
FUNDS
TAX EXEMPT
PROSPECTUS
INSURED ARIZONA SERIES 3
INSURED CALIFORNIA SERIES 5
INSURED MICHIGAN SERIES 4
APRIL 6, 1994
KEMPER UNIT INVESTMENT TRUSTS
<PAGE>
This Registration Statement on Form S-6 comprises the following papers and
documents.
<TABLE>
<C> <S>
The facing sheet of Form S-6.
The cross-reference sheet.
The prospectus.
The signatures.
The following exhibits.
1.1.(a) Form of Trust Indenture and Agreement for the State Series.
1.1.1. Standard Terms and Conditions of Trust for the State Series. Reference
is made to Exhibit 1.1.1 to the Registration Statement on Form S-6
with respect to Kemper Defined Funds Series 13 (Registration No. 33-
52165) as filed on February 17, 1994.
1.2. Certificate of Incorporation of Kemper Securities, Inc. Reference is
made to Exhibit 1.2 to the Registration Statement on Form S-6, with
respect to Kemper Government Securities Trust (Registration No. 33-
26754) as filed on February 14, 1989 and Kemper Defined Funds Series 9
(Registration No. 33-56012) as filed on November 3, 1993.
1.3. By-laws of Kemper Securities, Inc. Reference is made to Exhibit 1.3 to
the Registration Statement on Form S-6, with respect to Kemper
Government Securities Trust (Registration No.
33-26754) as filed on February 14, 1989 and Kemper Defined Funds
Series 9 (Registration No. 33-56012) as filed on November 3, 1993.
2.1. Form of Certificate of Ownership (pages two to four, inclusive, of the
Standard Terms and Conditions of Trust included as Exhibit 1.1.1.).
3.1. Opinion of counsel to the Sponsor as to legality of the securities
being registered including a consent to the use of its name under the
headings "Federal Tax Status" and "Legal Opinions" in the Prospectus
and opinion of counsel as to the Arizona and Federal income tax status
of the securities being registered and certain Arizona tax matters.
3.2. Opinion and consent of special counsel to Insured California Series 5
for California tax matters.
3.3. Opinion and consent of special counsel to Insured Michigan Series 4
for Michigan tax matters.
4.1. Consent of Moody's Investors Service.
4.2. Consent of Muller Data Corporation.
4.3. Consent of Grant Thornton.
6.1. List of Directors and Officers. Reference is made to Exhibit 6.1 to
the Registration Statement on Form S-6, with respect to Kemper Tax-
Exempt Insured Income Trust, Multi-State Series 51 (Registration No.
33-48398) as filed on July 15, 1992.
7.1. Power of Attorney. Reference is made to Exhibit 7.1 to the
Registration Statement with respect to Kemper Tax-Exempt Insured
Income Trust, Series A-90 and Multi-State Series 65 (Registration No.
33-59086).
</TABLE>
S-1
<PAGE>
SIGNATURES
THE REGISTRANT, KEMPER DEFINED FUNDS SERIES 18 HEREBY IDENTIFIES SERIES A-62
AND MULTI-STATE SERIES 19 OF THE KEMPER TAX-EXEMPT INSURED INCOME TRUST AND
KEMPER DEFINED FUNDS INSURED NATIONAL SERIES 1 FOR PURPOSES OF THE
REPRESENTATIONS REQUIRED BY RULE 487 AND REPRESENTS THE FOLLOWING:
(1) THAT THE PORTFOLIO SECURITIES DEPOSITED IN THE SERIES AS TO THE
SECURITIES OF WHICH THIS REGISTRATION STATEMENT IS BEING FILED DO NOT
DIFFER MATERIALLY IN TYPE OR QUALITY FROM THOSE DEPOSITED IN SUCH PREVIOUS
SERIES;
(2) THAT, EXCEPT TO THE EXTENT NECESSARY TO IDENTIFY THE SPECIFIC
PORTFOLIO SECURITIES DEPOSITED IN, AND TO PROVIDE ESSENTIAL FINANCIAL
INFORMATION FOR, THE SERIES WITH RESPECT TO THE SECURITIES OF WHICH THIS
REGISTRATION STATEMENT IS BEING FILED, THIS REGISTRATION STATEMENT DOES NOT
CONTAIN DISCLOSURES THAT DIFFER IN ANY MATERIAL RESPECT FROM THOSE
CONTAINED IN THE REGISTRATION STATEMENTS FOR SUCH PREVIOUS SERIES AS TO
WHICH THE EFFECTIVE DATE WAS DETERMINED BY THE COMMISSION OR THE STAFF; AND
(3) THAT IT HAS COMPLIED WITH RULE 460 UNDER THE SECURITIES ACT OF 1933.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT,
KEMPER DEFINED FUNDS SERIES 18 HAS DULY CAUSED THIS AMENDMENT TO THE
REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO
DULY AUTHORIZED, IN THE CITY OF CHICAGO, AND STATE OF ILLINOIS, ON THE 5TH DAY
OF APRIL, 1994.
KEMPER DEFINED FUNDS SERIES 18
Registrant
By: KEMPER UNIT INVESTMENT TRUSTS
(a service of Kemper Securities,
Inc.)
Depositor
/s/ C. Perry Moore
By: _________________________________
C. Perry Moore
S-2
<PAGE>
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT TO
THE REGISTRATION STATEMENT HAS BEEN SIGNED BELOW ON APRIL 5, 1994 BY THE
FOLLOWING PERSONS, WHO CONSTITUTE A MAJORITY OF THE BOARD OF DIRECTORS OF
KEMPER SECURITIES, INC.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
James R. Boris
- -------------------------------------------
James R. Boris Chairman and Chief Executive Officer
Donald F. Eller
- -------------------------------------------
Donald F. Eller Senior Executive Vice President and
Director
Stanley R. Fallis
- -------------------------------------------
Stanley R. Fallis Senior Executive Vice President, Chief
Financial Officer and Director
Frank V. Geremia
- -------------------------------------------
Frank V. Geremia Senior Executive Vice President and
Director
David B. Mathis
- -------------------------------------------
David B. Mathis Director
Robert T. Jackson
- -------------------------------------------
Robert T. Jackson Director
Jay B. Walters
- -------------------------------------------
Jay B. Walters Senior Executive Vice President and
Director
Charles M. Kierscht
- -------------------------------------------
Charles M. Kierscht Director
Arthur J. McGivern
- -------------------------------------------
Arthur J. McGivern Director
</TABLE>
/s/ C. Perry Moore
_____________________________________
C. Perry Moore
C. PERRY MOORE SIGNS THIS DOCUMENT PURSUANT TO POWER OF ATTORNEY FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION WITH (A) AMENDMENT NO. 1 TO THE
REGISTRATION STATEMENT ON FORM S-6 FOR KEMPER TAX-EXEMPT INSURED INCOME TRUST,
SERIES A-70 AND MULTI-STATE SERIES 28 AND KEMPER TAX-EXEMPT INCOME TRUST,
MULTI-STATE SERIES 42 (REGISTRATION NO. 33-35425), (B) AMENDMENT NO. 1 TO THE
REGISTRATION STATEMENT ON FORM S-6 FOR KEMPER TAX-EXEMPT INSURED INCOME TRUST,
SERIES A-72 AND MULTI-STATE SERIES 30 (REGISTRATION NO. 33-37178), AND (C)
AMENDMENT NO. 1 TO THE REGISTRATION STATEMENT ON FORM S-6 FOR KEMPER TAX-EXEMPT
INSURED INCOME TRUST, MULTI-STATE SERIES 51 (REGISTRATION NO. 33-48398).
S-3
<PAGE>
EXHIBIT 1.1(a)
KEMPER DEFINED FUNDS SERIES 18
TRUST AGREEMENT
This Trust Agreement dated as of April 6, 1994 between Kemper Unit
Investment Trusts, a service of Kemper Securities, Inc., as Depositor, and
Investors Fiduciary Trust Company, as Trustee, sets forth certain provisions in
full and incorporates other provisions by reference to the document entitled
"Kemper Tax-Exempt Insured Income Trust, Multi-State Series 15 and Subsequent
Series, Standard Terms and Conditions of Trust, Effective April 19, 1989"
(herein called the "Standard Terms and Conditions of Trust"), and such
provisions as are set forth in full and such provisions as are incorporated by
reference constitute a single instrument.
WITNESSETH THAT:
In consideration of the premises and of the mutual agreements herein
contained, the Depositor and the Trustee agree as follows:
PART I
STANDARD TERMS AND CONDITIONS OF TRUST
Subject to the provisions of Part II hereof, all the provisions contained
in the Standard Terms and Conditions of Trust are herein incorporated by
reference in their entirety and shall be deemed to be a part of this instrument
as fully and to the same extent as though said provisions had been set forth in
this instrument.
PART II
SPECIAL TERMS AND CONDITIONS OF TRUST
The following special terms and conditions are hereby agreed to:
(a) The interest-bearing tax-exempt obligations listed in the Schedules
hereto have been deposited in trust under this Trust Agreement as indicated in
the Trust named on the attached Schedules.
(b) For the purposes of the definition of the term "Depositor" in Article
I, it is hereby specified that such term shall mean Kemper Unit Investment
Trusts, a service of Kemper Securities, Inc. or its successors or any successor
Depositor appointed.
<PAGE>
(c) For the purposes of the definition of the term "Unit" in Article I,
it is hereby specified that the fractional undivided interest in and ownership
of the Trust is the amount set forth in the section captioned "Essential
Information" in the final Prospectus of the Trust (the "Prospectus") contained
in Amendment No. 1 to the Trust's Registration Statement (Registration No. 33-
52981) as filed with the Securities and Exchange Commission on April 6, 1994.
(d) For purposes of the definition of the term "Fund" in Article I, it is
hereby specified that such term shall mean the term "Trust" as defined on page 5
of the Prospectus.
(e) For purposes of the definition of the term "Trust Fund" in Article I,
it is hereby specified that such term shall include the definition of the term
"Trust Fund" as set forth on page 5 of the Prospectus and specifically shall
include Insured Arizona Series 3, Insured California Series 5 and Insured
Michigan Series 4 (the "Insured State Trusts").
(f) The term "Record Date" shall mean the "Record Dates" set forth under
"Unitholders - Distributions to Unitholders" of the Prospectus.
(g) The terms "Interest Distribution Date" and "Principal Distribution
Date" shall mean the "Interest Distribution Dates" and "Principal Distribution
Dates" set forth under "Unitholders - Distributions to Unitholders" in the
Prospectus.
(h) The number of Units of the Trust referred to in Section 2.02 is as
set forth in the section captioned "Essential Information" in the Prospectus.
(i) As contemplated by the last paragraph of Section 3.04, an initial
distribution for the Trust will be made on the Distribution Date and in the
amount set forth in the section captioned "Unitholders - Distributions to
Unitholders" in the Prospectus to all holders of record on the Record Date set
forth thereunder, regardless of the payment option selected. Thereafter, the
amounts distributed shall be calculated in the manner set forth in Section 3.04.
(j) For the purposes of Section 4.03, the Evaluator shall receive for
evaluation of the Bonds in the Trust a fee, payable monthly, calculated on the
basis of an annual rate of $.30 per $1,000 principal amount of Bonds, based upon
the largest aggregate principal amount of Bonds in the Trust at any time during
such monthly period.
(k) For the purposes of Section 4.06, the Sponsor shall receive for
portfolio surveillance services a fee calculated on the basis of an annual rate
of
-2-
<PAGE>
$.20 per $1,000 principal amount of Bonds, based upon the largest aggregate
principal amount of Bonds in the Trust at any time during such monthly period.
(l) For the purposes of Section 8.01(g), the liquidation amount is hereby
specified as the amount set forth under "Essential Information - Minimum Value
of Trust under which Trust Agreement may be Terminated" in the Prospectus.
(m) For the purposes of Section 8.05, with the exception of the first
year, the compensation for the Trustee is hereby specified as the amount set
forth under "Essential Information". During the first year, the Trustee has
agreed to lower its fee and to the extent necessary assume and pay out of its
own funds expenses of the Trust by the amount set forth under "Essential
Information" in the Prospectus.
(n) Any monies held to purchase "when-issued" bonds will be held in non-
interest bearing accounts.
(o) The term "First Settlement Date" shall mean the "First Settlement
Date" as set forth under the section captioned "Essential Information" in the
Prospectus.
-3-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Trust Agreement to
be duly executed.
KEMPER SECURITIES, INC.
though its Kemper Unit Investment
Trusts Service
as Depositor
By C. Perry Moore
----------------------------------
Senior Vice President
INVESTORS FIDUCIARY TRUST
COMPANY
By Ron Puett
-----------------------------------
Operations Officer
<PAGE>
SCHEDULE A
Bonds Initially Deposited
Kemper Defined Funds Series 18
(Note: Incorporated herein and made a part hereof is the "Portfolio" as set
forth in the Prospectus.)
<PAGE>
EXHIBIT 3.1
CHAPMAN AND CUTLER
111 WEST MONROE STREET
CHICAGO, ILLINOIS 60603
April 6, 1994
Kemper Unit Investment Trusts,
a service of Kemper Securities, Inc.
77 West Wacker Drive, 5th Floor
Chicago, Illinois 60601
Re: Kemper Defined Funds Series 18
------------------------------
Gentlemen:
We have served as counsel for Kemper Unit Investment Trusts, a service of
Kemper Securities, Inc., as Sponsor and Depositor of Kemper Defined Funds Series
18 (the "Fund"), in connection with the preparation, execution and delivery of
the Trust Agreement dated the date of this opinion between Kemper Unit
Investment Trusts, as Depositor, and Investors Fiduciary Trust Company, as
Trustee, pursuant to which the Depositor has delivered to and deposited the
Bonds listed in the Schedule to the Trust Agreement with the Trustee and
pursuant to which the Trustee has issued to or on the order of the Depositor a
certificate or certificates representing all the Units of fractional undivided
interest in, and ownership of, the Fund, created under said Trust Agreement.
In connection therewith we have examined such pertinent records and
documents and matters of law as we have deemed necessary in order to enable us
to express the opinions hereinafter set forth.
Based upon the foregoing, we are of the opinion that:
1. The execution and delivery of the Trust Agreement and the execution
and issuance of certificates evidencing the Units of the Fund have been
duly authorized; and
2. The certificates evidencing the Units of the Fund, when duly
executed and delivered by the Depositor and the Trustee in accordance with
the aforementioned Trust Agreement, will constitute a valid and binding
obligation of the Fund and the Depositor in accordance with the terms
thereof.
<PAGE>
-2-
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement (File No. 33-52981) relating to the Units referred to
above and to the use of our name and to the reference to our firm in said
Registration Statement and in the related Prospectus.
Respectfully submitted,
CHAPMAN AND CUTLER
<PAGE>
CHAPMAN AND CUTLER
111 WEST MONROE STREET
CHICAGO, ILLINOIS 60603
April 6, 1994
Kemper Unit Investment Trusts
a service of Kemper Securities, Inc.
77 West Wacker Drive, 5th Floor
Chicago, Illinois 60601
Investors Fiduciary Trust Company
127 West 10th Street
Kansas City, Missouri 64405
Re: Kemper Defined Funds Series 18
------------------------------
Gentlemen:
We have acted as counsel for Kemper Unit Investment Trusts, Depositor of
Kemper Defined Funds Series 18 (the "Fund"), in connection with the issuance of
Units of fractional undivided interest in the Trusts of said Fund under the
Trust Agreement dated April 6, 1994 (the "Indenture") between Kemper Unit
Investment Trusts, as Depositor and Evaluator and Investors Fiduciary Trust
Company, as Trustee.
In this connection, we have examined the Registration Statement, the form
of Prospectus proposed to be filed with the Securities and Exchange Commission,
the Indenture and such other instruments and documents as we have deemed
pertinent.
Based upon the foregoing and upon an investigation of such matters of law
as we consider to be applicable, we are of the opinion that, under existing
Federal income tax law:
(i) Each Trust is not an association taxable as a corporation but will be
governed by the provisions of subchapter J (relating to trusts) of chapter 1,
Internal Revenue Code of 1986 (the "Code").
(ii) Each Certificateholder will be considered as owning a pro rata share
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, income of each Trust will be treated as income of each
Certificateholder of the respective Trust in the proportion described, and an
item of Trust income will have the same character in the hands of a
Certificateholder as it would have in the hands of the
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Trustee. Accordingly, to the extent that the income of a Trust consists of
interest and original issue discount excludable from gross income under Section
103 of the Code, such income will be excludable from Federal gross income of the
Certificateholders, except in the case of a Certificateholder who is a
substantial user (or a person related to such user) of a facility financed
through issuance of any industrial development bonds or certain private activity
bonds held by the respective Trust. In the case of such Certificateholder (and
no other) interest received with respect to his Units attributable to such
industrial development bonds or such private activity bonds is includable in his
gross income. In the case of certain corporations, interest on the Bonds is
included in computing the alternative minimum tax pursuant to Section 56(c) of
the Code, the environmental tax (the "Superfund Tax") imposed by Section 59A of
the Code, and the branch profits tax imposed by Section 884 of the Code with
respect to U.S. branches of foreign corporations.
(iii) Gain or loss will be recognized to a Certificateholder upon
redemption or sale of his Units. Such gain or loss is measured by comparing
the proceeds of such redemption or sale with the adjusted basis of the Units
represented by his Certificate. Before adjustment, such basis would normally
be cost if the Certificateholder had acquired his Units by purchase, plus his
aliquot share of advances by the Trustee to the Trust to pay interest on Bonds
delivered after the Certificateholder's settlement date to the extent that such
interest accrued on the Bonds during the period from the Certificateholder's
settlement date to the date such Bonds are delivered to the respective Trust,
but only to the extent that such advances are to be repaid to the Trustee out
of interest received by such Trust with respect to such Bonds. In addition,
such basis will be increased by the Certificateholder's aliquot share of the
accrued original issue discount with respect to each Bond held by the Fund with
respect to which there was an original issue discount at the time the Bond was
issued and reduced by the annual amortization of bond premium, if any, on Bonds
held by the Trust.
(iv) If the Trustee disposes of a Trust asset (whether by sale, payment
on maturity, redemption or otherwise) gain or loss is recognized to the
Certificateholder and the amount thereof is measured by comparing the
Certificateholder's aliquot share of the total proceeds from the transaction
with his basis for his fractional interest in the asset disposed of. Such
basis is ascertained by apportioning the tax basis for his Units among each of
the Trust assets (as of the date on which his Units were acquired) ratably
according to their values as of the valuation date nearest the date on which he
purchased such Units. A Certificateholder's basis in his Units and of his
fractional interest in each Trust asset must be reduced by the amount of his
aliquot share of interest received by the Trust, if any, on bonds delivered
after the Certificateholder's
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settlement date to the extent that such interest accrued on the Bonds during
the period from the Certificateholder's settlement date to the date such Bonds
are delivered to the Trust, must be reduced by the annual amortization of bond
premium, if any, on Bonds held by the Trust and must be increased by the
Certificateholder's share of the accrued original issue discount with respect
to each Bond which, at the time the Bond was issued, had original issue
discount.
(v) In the case of any Bond held by the Trust where the "stated redemption
price at maturity" exceeds the "issue price", such excess shall be original
issue discount. With respect to each Unitholder, upon the purchase of his Units
subsequent to the original issuance of Bonds held by the Trust, Section
1272(a)(7) of the Code provides for a reduction in the accrued "daily portion"
of such original issue discount upon the purchase of a Bond subsequent to the
Bond's original issue, under certain circumstances. In the case of any Bond
held by the Trust the interest on which is excludable from gross income under
Section 103 of the Code, any original issue discount which accrues with respect
thereto will be treated as interest which is excludable from gross income under
Section 103 of the Code.
(vi) Certain bonds in the portfolios of certain of the Trusts have been
insured by the issuers thereof against default in the prompt payment of
principal and interest. Insurance has been obtained for such bonds, or, in the
case of a commitment, the bonds will be ultimately insured under the terms of
such an insurance policy, which are designated as issuer insured bonds on the
portfolio pages of the respective Trusts in the prospectus for the Fund, by the
issuer of such bonds. Insurance obtained by the issuer is effective so long as
such bonds remain outstanding. For each of these bonds, we have been advised
that the aggregate principal amount of such bonds listed on the portfolio page
for the respective Trust was acquired by the applicable Trust and are part of
the series of such bonds listed on the portfolio page for the respective Trust
in the aggregate principal amount listed on the portfolio page for the
respective Trust. Based upon the assumption that the bonds acquired by the
applicable Trust are part of the series covered by an insurance policy or, in
the case of a commitment, will be ultimately insured under the terms of such an
insurance policy, it is our opinion that any amounts received by the applicable
Trust representing maturing interest on such bonds will be excludable from
federal gross income if, and to the same extent as, such interest would have
been so excludable if paid in normal course by the Issuer notwithstanding the
source of the payment is from policy proceeds. Paragraph (ii) of this opinion
is accordingly applicable to such payment.
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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 Bond, depending on the date the Bond was issued.
In addition, special rules apply if the purchase price of a Bond exceeds the
original issue price plus the amount of original issue discount which would have
previously accrued based upon its issue price (its "adjusted issue price"). The
application of these rules will also vary depending on the value of the bond on
the date a Certificateholder acquires his Units, and the price the
Certificateholder pays for his Units.
Because the Trusts do not include any "private activity" bonds within the
meaning of Section 57 (a)(5) of the Code issued on or after August 8, 1986, none
of the Trust Fund's interest income shall be treated as an item of tax
preference when computing the alternative minimum tax. In the case of
corporations, for taxable years beginning after December 31, 1986, the
alternative minimum tax and the Superfund Tax depend upon the corporation's
alternative minimum taxable income ("AMTI") which is the corporation's taxable
income with certain adjustments.
Pursuant to Section 56(c) of the Code, one of the adjustment items used in
computing AMTI and the Superfund Tax of a corporation (other than an S
Corporation, Regulated Investment Company, Real Estate Investment Trust or
REMIC) for taxable years beginning after 1989, is an amount equal to 75% of the
excess of such corporation's "adjusted current earnings" over an amount equal to
its AMTI (before such adjustment item and the alternative tax net operating loss
deduction). "Adjusted current earnings" includes all tax-exempt interest,
including interest on all Bonds in the Trust, and tax-exempt original issue
discount.
Effective for tax returns filed after December 31, 1987, all taxpayers are
required to disclose to the Internal Revenue Service the amount of tax-exempt
interest earned during the year.
Section 265 of the Code provides for a reduction in each taxable year of
100 percent of the otherwise deductible interest on indebtedness incurred or
continued by financial institutions, to which either Section 585 or Section 593
of the Code applies, to purchase or carry obligations acquired after August 7,
1986, the interest on which is exempt from Federal income taxes for such taxable
year. Under rules prescribed by Section 265, the amount of interest otherwise
deductible by such financial institutions in any taxable year which is deemed to
be attributable to tax-exempt obligations acquired after August 7, 1986, will be
the amount that bears the same ratio to the interest deduction otherwise
allowable (determined without regard to Section 265) to the taxpayer for the
taxable year as the taxpayer's average adjusted basis (within the meaning of
Section 1016) of tax-exempt obligations acquired after August 7, 1986, bears to
such average adjusted basis for all assets of the taxpayer, unless such
financial institution can otherwise establish, under regulations,
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to be prescribed by the Secretary of the Treasury, the amount of interest on
indebtedness incurred or continued to purchase or carry such obligations.
We have also examined the income tax law of the State of Arizona (the
"State"), which is based upon the Federal Law, to determine its applicability to
the Insured Arizona Trust (the "Arizona Trust") being created as part of the
Fund and to the holders of Units in the Arizona Trust who are residents of the
State ("Arizona Unitholders").
The assets of the Arizona Trust will consist of interest-bearing
obligations issued by or on behalf of the State, its political subdivisions and
authorities (the "Arizona Bonds"), and by or on behalf of the government of
Puerto Rico, the government of Guam, or the government of the Virgin Islands
(collectively the "Possession Bonds") (collectively the Arizona Bonds and
Possession Bonds shall be referred to herein as the "Bonds"), provided the
interest on such Bonds is exempt from State income taxes.
Although we express no opinion with respect thereto, in rendering the
opinion expressed herein, we have assumed that the Bonds were validly issued by
the respective issuers thereof.
Based on the foregoing, and review and consideration of existing State
laws, it is our opinion, and we herewith advise you, as follows:
(1) For State income tax purposes, each Unitholder will be treated as
the owner of a pro rata portion of the Trust, and the income of the Trust
will therefore be treated as the income of the Unitholder under State law.
(2) For State income tax purposes, interest on the Arizona Bonds and
the Possession Bonds which is excludable from Federal gross income and
which is exempt from State income taxes when received by the Trust, and
which would be excludable from Federal gross income and exempt from State
income taxes if received directly by a Unitholder, will retain its status
as tax-exempt interest when received by the Trust and distributed to the
Unitholders.
(3) To the extent that interest derived from the Trust by a Unitholder
with respect to the Arizona Bonds and Possession Bonds is excludable from
Federal gross income, such interest will not be subject to State income
taxes.
(4) Each Unitholder will realize taxable gain or loss for State income
tax purposes when Bonds held in the Trust are sold, exchanged, redeemed
prior to maturity or paid at maturity, or when the Unitholder redeems or
sells his Unit(s), 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,
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accruing on Bonds during the interval between the Unitholder's settlement date
and the date such Bonds are delivered to the Trust, if later .
(5) State law does not permit a deduction for interest paid or
incurred on indebtedness incurred or continued to purchase or carry Units
in the Trust, the interest on which is exempt from State income taxes.
(6) Neither the Bonds nor the Units will be subject to State property
taxes, sales taxes or use taxes.
(7) In the case of Trusts for which an insurance policy or policies
with respect to the payment of principal and interest on the Arizona Bonds
and Possession Bonds has been obtained by the Depositor, any proceeds paid
under such 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.
We have not examined any of the Bonds to be deposited and held in the Trust
or the proceedings for the issuance thereof or the opinions of bond counsel with
respect thereto, and therefore express no opinion as to the exemption from State
income taxes of interest on the Bonds if received directly by a Unitholder.
We also call attention to the fact that, under Section 265 of the Code,
interest on indebtedness incurred or continued to purchase or carry Units is not
deductible for Federal income tax purposes. Under rules used by the Internal
Revenue Service for determining when borrowed funds are considered used for the
purpose of purchasing or carrying particular assets, the purchase of Units may
be considered to have been made with borrowed funds even though the borrowed
funds are not directly traceable to the purchase of Units. However, these rules
generally do not apply to interest paid on indebtedness incurred for
expenditures of a personal nature such as a mortgage incurred to purchase or
improve a personal residence.
We have also examined the laws of the State of Missouri to determine their
applicability to the Fund. It is our opinion that under Missouri law, as
presently enacted and construed:
(i) Each Trust is not an association taxable as a corporation for
Missouri income tax purposes.
(ii) The Unitholders of each Trust will be treated as the owners of a
pro rata portion of each Trust and the income of each Trust will therefore be
treated as income of the Unitholders under Missouri law.
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EXHIBIT 3.2
ORRICK, HERRINGTON & SUTCLIFFE
Old Federal Reserve Bank Building
400 Sansome Street
San Francisco, California 94111
April 6, 1994
Investors Fiduciary Trust Company
127 West 10th Street
Kansas City, Missouri 64105
Re: Kemper Defined Funds Series 18
Insured California Series 5
Dear Sirs:
We have acted as special California counsel for Kemper Unit Investment
Trust, a Service of Kemper Securities, Inc., as Depositor of Kemper Defined
Funds Series 18--Insured California Series 5 (the "Fund"), in connection with
the issuance under the Trust Indenture and Agreement dated April 6, 1994,
between Kemper Unit Investment Trust, a Service of Kemper Securities, Inc., as
Depositor, and Investors Fiduciary Trust Company, as Trustee, of 327,512 Units
of fractional undivided interest in the Fund (the "Units") in exchange for
certain bonds, as well as "regular-way" and "when-issued" contracts for the
purchase of bonds (such bonds and contracts are hereinafter referred to
collectively as the "Securities").
In connection therewith, we have examined such corporate records,
certificates and other documents and such questions of law as we have deemed
necessary or appropriate for the purpose of this opinion, and, on the basis of
such examination, and upon existing provisions of the Revenue and Taxation Code
of the State of California, we are of the opinion that:
1. The Fund is not an association taxable as a corporation and the
income of the Fund will be treated as the income of the certificateholders
under the income tax laws of California.
2. Amounts treated as interest on the underlying securities which
are exempt from tax under California personal income tax and property tax
laws when received by the Fund will, under such laws, retain their status
as tax-exempt interest when distributed to certificateholders. However,
interest on the underlying securities attributed to a certificateholder
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.
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Investors Fiduciary Trust Company
April 6, 1994
Page 2
3. Under California income tax law, each certificateholder in the
Fund will have a taxable event when the Fund disposes of a security
(whether by sale, exchange, redemption, or payment at maturity) or when the
certificateholder redeems or sells Units. Because of the requirement that
tax cost basis be reduced to reflect amortization of bond premium, under
some circumstances a certificateholder may realize taxable gain when Units
are sold or redeemed for an amount equal to, or less than, their original
cost. The total tax cost of each Unit to a certificateholder is allocated
among each of the bond issues held in the Fund (in accordance with the
proportion of the Fund 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 cost of each bond issue. Certificateholders' bases in
their Units, and the bases for their fractional interest in each Fund
asset, may have to be adjusted for their pro rata share of accrued interest
received, if any, on securities delivered after the certificateholders'
respective settlement dates.
4. Under the California personal property tax laws, bonds (including
the Securities) or any interest therein is exempt from such tax.
5. Any proceeds paid under the insurance policy, if any, issued to
the Trustee of the Fund 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.
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 Fund 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.
Opinions relating to the validity of securities and the exemption of
interest thereon from State of California income tax are rendered by bond
counsel to the issuing authority at the time securities are issued and we have
relied solely upon such opinions, or as to
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Investors Fiduciary Trust Company
April 6, 1994
Page 3
securities not yet delivered, forms of such opinions contained in official
statements relating to such securities. Except in certain instances in which we
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, we have not made any review of proceedings relating to the issuance of
securities or the bases of bond counsels' opinion.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement (SEC No. 33-52981) relating to the Units referred to
above and to the use of our name and to the reference to our firm in said
Registration Statement and in the related Prospectus.
Very truly yours,
Orrick, Herrington & Sutcliffe
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EXHIBIT 3.3
Miller, Canfield, Paddock and Stone
1400 North Woodward Avenue, Suite 100
Bloomfield Hills, Michigan 48303-2014
April 6, 1994
Kemper Unit Investment Trusts, a service
of Kemper Securities Group, Inc.
77 West Wacker Drive
Chicago, Illinois 60601
Investors Fiduciary Trust Company
127 West 10th Street
Kansas City, Missouri 64105
Re: Kemper Defined Funds State File 18
Insured Michigan Series 4
Gentlemen:
We have acted as special Michigan counsel to you as Depositor and Trustee
of Kemper Defined Funds State File 18 -- Insured Michigan Series 4 (the "Insured
Michigan Trust") referred to above (the "Fund"). You have asked that we, acting
in such capacity, render an opinion to you with respect to certain matters
relating to the issuance of the units of fractional undivided interest in the
Fund (the "Units") pursuant to a Registration Statement on Form S-6 filed with
the Securities and Exchange Commission (the "Commission") under the Securities
Act of 1933, as amended (the "Registration Statement").
You have requested our opinion as to the applicability to the Insured
Michigan Series 4 (the "Michigan Trust") and the holders of Units (the
"Unitholders") , each of which Units represents the ownership of a specified
fractional undivided interest in the assets of the Michigan Trust, of the
Michigan Income Tax Act (M.C.L.A. (S)(S)206.1 et seq.; M.S.A. (S)(S)7.557(101)
et seq.) (the "Michigan Income Tax"), the City Income Tax Act (M.C.L.A.
(S)(S)141.501 et seq.; M.S.A. (S)(S)5.3194(1) et seq.) , which incorporates the
"Uniform City Income Tax ordinance," the First Class School District excise tax
upon income (M.C.L.A. (S)380.451; M.S.A. (S)(S)15.4451) (collectively, the
"income tax laws"), the Michigan Single Business Tax Act (M.C.L.A. (S)(S)208.1
et seq.; M.S.A. (S)(S)7.558(1) et seq.) (the "Single Business Tax") and the
Michigan Tax on ownership of Intangible Personal Property (M.C.L.A.
(S)(S)205.131 et seq.; M.S.A. (S)(S)7.556(1) et seq.) (the "Intangibles Tax").
You have also requested our opinion regarding the tax status of proceeds payable
from an insurance policy to be obtained by either the Fund or by the issuer of
the Bonds involved, guaranteeing prompt payment of principal and interest on all
Bonds in the portfolio of the Fund.
The Michigan Trust, its formation, its proposed method of operation, the
rights of owners of Certificates representing Units, the nature of such
ownership and the portfolio of
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Miller, Canfield, Paddock and Stone
April 6, 1994
Page 2
investments of the Michigan Trust are described and set forth in the Prospectus
dated April 6, 1994, filed with the Securities and Exchange Commission in
Registration No. 33-52981. In giving our opinion set forth hereunder, we have
relied upon the facts contained in such Registration Statement, including the
fact that, at the respective dates of issuance of the underlying Debt
Obligations, opinions of bond counsel to the respective Michigan authorities
issuing such Debt Obligations were given with respect to the validity of the
Debt obligations and the exemption of the same, and of the interest thereon,
from Michigan taxation.
Based on the above, it is our opinion that:
The Michigan Trust and the owners of Units will, in our opinion, be treated
for purposes of the Michigan income tax laws and the Single Business Tax in
substantially the same manner as they are for purposes of the Federal income tax
laws, as currently enacted. Accordingly, we have relied upon the opinion of
Messrs. Chapman and Cutler as to the applicability of Federal income tax under
the Internal Revenue Code of 1986, 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 Debt Obligations 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 Debt Obligation 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 Debt Obligation (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 Debt Obligations, 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 Commonwealth of Puerto
Rico, Guam or of the United States Virgin Islands.
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
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Miller, Canfield, Paddock and Stone
April 6, 1994
Page 3
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 Debt Obligations 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 Debt
Obligation (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
Fund, 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.
Chapman and Cutler of 111 West Monroe Street, Chicago, Illinois 60603, are
entitled to rely on this opinion as though it were addressed to them.
We also advise you that, 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 Debt obligation or when the
Unitholder redeems or sells a Unit, to the extent such transaction constitutes a
taxable event for Federal income tax purposes.
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Miller, Canfield, Paddock and Stone
April 6, 1994
Page 4
We hereby consent to the reference to Miller, Canfield, Paddock and Stone
under the heading "Michigan Tax Status" in the Prospectus relating to the
Michigan Trust which is part of the Registration Statement in Registration No.
33-52981 filed with the Securities and Exchange Commission under the Securities
Act of 1933, as amended, and to the filing of this opinion as an exhibit to said
registration statement.
Yours very truly,
MILLER, CANFIELD, PADDOCK AND STONE
<PAGE>
EXHIBIT 4.1
Consent of Moody's Investors Service
Laura Levenstein 99 Church Street
Vice President New York, NY 10007
Structured Ratings 212-553-0319
Public Finance Department
April 5, 1994
Mr. Mike Thoms
Kemper Securities Group, Inc.
Unit Investment Trust
77 West Wacker Drive-5th Floor
Chicago, IL 60601
Re: Kemper Defined Funds, Insured Arizona Series 3, Insured California
Series 5, Insured Michigan Series 4.
Dear Mr. Thoms:
Please be advised that once Moody's Investors Service has independently verified
the existence of insurance policies on all Bonds expected to be included in the
Trusts, we will assign Aaa ratings to the Units in the series of Trusts
described above. The ratings on the Units will reflect the portfolios of the
Trusts, which will be composed solely of securities covered by bond insurance
policies. The insurance companies issuing the policies are all rated Aaa by
Moody's.
Insurance guarantying the payments of principal and interest, when due, on the
Bonds in the portfolio of the Trust has been obtained from an insurance company
either by the Trust, by the Issuer of the Bonds involved, by a prior owner of
the Bonds or by the Sponsor prior to the deposit of such Bonds in the Trust. It
is important to note that the insurance relates only to the Bonds in the Trust
and does not directly insure the Units or assure payment of the market value
thereof. While as a result of such insurance the Units of the Trust will receive
a rating of "Aaa" by Moody's Investors Service, Moody's has indicated that
this rating is not a recommendation to buy, hold or sell Units. This rating
reflects Moody's determination that the Bonds in the portfolio of the Trust are
judged to be of the best quality. This rating does not reflect a determination
by Moody's that the Unitholder will receive all principal and interest payable
on such Bonds through their nominal maturity. This is due to the possibility
that the Trust may, for a variety of reasons, dispose of such Bonds, including
sales to meet redemptions, to pay expenses of the Trustee, to wind up the Trust
when the value of the Bonds in the Trust falls below a certain minimum amount
and for other reasons specified in the Indenture. Accordingly, while the "Aaa"
rating reflects that such Bonds in the portfolio carry the smallest degree of
credit risk and they are generally considered to be "gilt edged", this rating
does not assure a Unitholder that it will receive all principal and interest
payable on such Bonds through their nominal maturity.
<PAGE>
Page 2
This letter evidences our consent to the use of the name of Moody's Investors
Service in connection with the rating assigned to the Units in the registration
statement or prospectus relating to the Units or the Trusts. However, this
letter should not be construed as a consent by us, within the meaning of
Section 7 of the Securities Act of 1933, to the use of the name of Moody's
Investors Service in connection with the ratings assigned to the securities
contained in the Trust. You are hereby authorized to file a copy of this letter
with the Securities and Exchange Commission.
Please send us copies of the prospectus as soon as it is available, as well as
any mini-prospectus or other sales materials.
Please do not hesitate to call should you have any additional questions or
requests.
Sincerely,
Laura Levenstein
<PAGE>
Exhibit 4.2
Consent of Muller Data Corporation,
90 Fifth Avenue,
New York, New York 10011
Kemper Capital Markets, Inc.
Unit Investment Trusts
77 West Wacker Drive-5th Floor
Chicago, Illinois 60601-1994
RE: Kemper Defined Funds Insured Arizona Series 3
Kemper Defined Funds Insured California Series 5
Kemper Defined Funds Insured Michigan Series 4
Gentlemen:
We have examined Registration Statement File No. 33-52981 for the above
captioned trust. We hereby acknowledge that Muller Data Corporation is currently
acting as the evaluator for the trust. We hereby consent to the use in the
Registration Statement of the reference to Muller Data Corporation as evaluator.
In addition, we hereby confirm that the ratings indicated in the Registration
Statement for the respective bonds comprising the trust portfolio are the
ratings indicated in our Muniview data base as of the date of the Evaluation
Report.
You are hereby authorized to file a copy of this letter with the Securities and
Exchange Commission.
Sincerely,
/s/ Neil Edelstein
- ----------------------
Neil Edelstein,
Executive Vice President
NE/tg
<PAGE>
EXHIBIT 4.3
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS' CONSENT
-------------------------------------------------
We have issued our report dated April 6, 1994 on the statement of condition
and related bond portfolios of Kemper Defined Funds Series 18 (Insured Arizona
Series 3, Insured California Series 5 and Insured Michigan Series 4) as of April
6, 1994 contained in the Registration Statement on Form S-6 and in the
Prospectus. We consent to the use of our report in the Registration Statement
and in the Prospectus and to the use of our name as it appears under the caption
"Other Matters-Independent Certified Public Accountants".
GRANT THORNTON
Chicago, Illinois
April 6, 1994
