<PAGE>
KEMPER DEFINED FUNDS SERIES 25
(TAX-EXEMPT PORTFOLIO)
Insured National Series 13 (the "Insured National Trust") was formed for the
purpose of gaining interest income exempt from Federal income taxes while
conserving capital and diversifying risks by investing in an insured, fixed
portfolio consisting of obligations issued by or on behalf of states of the
United States or counties, municipalities, authorities or political
subdivisions thereof.
Insured California Series 10, Insured Missouri Series 2 and Insured New York
Series 5 (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 Trusts are not deposits or obligations of, or guaranteed by, any
bank, and Units are not federally insured or otherwise protected by the
Federal Deposit Insurance Corporation and involve investment risk including
loss of principal.
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-10 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.
- ------------------------------------------------------------------------------
SPONSOR: KEMPER UNIT INVESTMENT TRUSTS
a service of Kemper Securities, Inc.
- ------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
The investor is advised to read and retain this Prospectus for future
reference.
THE DATE OF THIS PROSPECTUS IS OCTOBER 12, 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.
RISK FACTORS. An investment in the Trusts should be made with an understanding
of the risks associated therewith, including, among other factors, the
inability of the issuer or an insurer to pay the principal of or interest on a
bond when due, volatile interest rates, early call provisions, and changes to
the tax status of the Municipal Bonds. See "Portfolios--Risk Factors" and
"Risk Factors" for each Trust.
2
<PAGE>
KEMPER DEFINED FUNDS SERIES 25
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 INSURED
NATIONAL CALIFORNIA MISSOURI NEW YORK
SERIES 13 SERIES 10 SERIES 2 SERIES 5
-------- -------- ------- -------
<S> <C> <C> <C> <C>
Public Offering Price per Unit (1)(2)................. $ 10.006 $ 9.769 $ 10.198 $ 9.502
Principal Amount of Municipal Bonds per Unit.......... $ 10.000 $ 10.000 $ 10.000 $ 10.000
Estimated Current Return based on Public Offering
Price (3)(4)(5)(7).................................. 6.02% 5.84% 5.72% 5.28%
Estimated Long-Term Return (3)(4)(5)(7)............... 6.08% 5.95% 5.79% 5.68%
Estimated Normal Annual Distribution per Unit (7)..... $ 0.60264 $ 0.57096 $ 0.58392 $ 0.50148
Principal Amount of Municipal Bonds................... $ 10,000,000 $ 3,060,000 $ 3,050,000 $ 3,120,000
Number of Units....................................... 1,000,000 306,000 305,000 312,000
Fractional Undivided Interest per Unit................ 1/1,000,000 1/306,000 1/305,000 1/312,000
Calculation of Public Offering Price--Less than 10,000
Units:
Aggregate Offering Price of Bonds................. $ 9,516,091 $ 2,842,771 $ 2,957,896 $ 2,840,283
Aggregate Offering Price of Bonds per Unit........ $ 9.516 $ 9.290 $ 9.698 $ 9.103
Purchased Interest (1)............................ $ 0.000 $ 0.000 $ 0.000 $ 0.000
Purchased Interest per Unit....................... $ 0.000 $ 0.000 $ 0.000 $ 0.000
Total Offering Price and Purchased Interest Per
Unit (1)...................................... $ 9.516 $ 9.290 $ 9.698 $ 9.103
Plus Sales Charge per Unit (9).................... $ 0.490 $ 0.479 $ 0.500 $ 0.399
Public Offering Price per Unit (1)(2)............... $ 10.006 $ 9.769 $ 10.198 $ 9.502
Redemption Price per Unit............................. $ 9.414 $ 9.175 $ 9.567 $ 9.012
Sponsor's Initial Repurchase Price per Unit........... $ 9.516 $ 9.290 $ 9.698 $ 9.103
Excess of Public Offering Price per Unit over
Redemption Price per Unit........................... $ 0.592 $ 0.594 $ 0.631 $ 0.490
Excess of Public Offering Price per Unit over
Sponsor's Initial Repurchase Price per Unit......... $ 0.490 $ 0.479 $ 0.500 $ 0.399
Calculation of Estimated Net Annual Interest Income
per Unit (7):
Estimated Annual Interest Income.................. $ 0.62603 $ 0.59592 $ 0.60984 $ 0.52524
Less: Estimated Annual Expense.................... $ 0.02333 $ 0.02496 $ 0.02607 $ 0.02380
---------- ---------- ---------- ----------
Estimated Net Annual Interest Income.............. $ 0.60270 $ 0.57096 $ 0.58377 $ 0.50144
Estimated Daily Rate of Net Interest Accrual per
Unit................................................ $ 0.001674 $ 0.001586 $ 0.001622 $ 0.001393
Minimum Principal Value of the Trust under which Trust
Agreement may be terminated......................... $ 2,000,000 $ 612,000 $ 610,000 $ 624,000
</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 INSURED
NATIONAL CALIFORNIA MISSOURI NEW YORK
SERIES 13 SERIES 10 SERIES 2 SERIES 5
<S> <C> <C> <C> <C>
-------------- -------------- -------------- --------------
Trustee's Annual Fee per $1,000 principal amount of
Municipal Bonds (6).................................... $1.590 $1.530 $1.540 $1.450
Reduction of Trustee's fee per Unit during the first year
(7).................................................... $0.00111 $0.00454 $0.00213 $0.00000
Estimated annual interest income per Unit during the first
year (7)............................................... $0.62492 $0.59138 $0.60771 $0.52524
Interest Payments (8):
First Payment per Unit, representing 12 days................ $0.02009 $0.01903 $0.01946 $0.01672
Estimated Normal Monthly Distribution per Unit.............. $0.05022 $0.04758 $0.04866 $0.04179
Estimated Normal Annual Distribution per Unit............... $0.60264 $0.57096 $0.58392 $0.50148
Sales Charge (9):
As a percentage of Public Offering Price per Unit........... 4.900% 4.900% 4.900% 4.200%
As a percentage of net amount invested...................... 5.149% 5.156% 5.156% 4.383%
As a percentage of net amount invested in earning assets.... 5.149% 5.156% 5.156% 4.383%
Date of Trust Agreements............................................... October 12, 1994
First Settlement Date.................................................. October 19, 1994
Mandatory Termination Date............................................. December 31, 2033
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 Principal
Amount of Municipal Bonds per Unit of $10.
(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 November 1, 1994, and the
distribution date is the fifteenth day of the month, commencing November
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 25 includes the following separate unit investment
trusts created by the Sponsor under the name Kemper Defined Funds: "Insured
National Series 13" (the "Insured National Trust"), "Insured California Series
10", "Insured Missouri Series 2" and "Insured New York Series 5" (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 National Trust was formed for the purpose of gaining interest
income free from Federal income taxes while conserving capital and
diversifying risks by investing in an insured, fixed portfolio consisting of
obligations issued by or on behalf of states of the United States or counties,
municipalities, authorities or political subdivisions thereof.
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 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 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." Offerees in the States of Indiana, Virginia and Washington may
only purchase Units of the Insured National Trust.
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.
- ---------------------------
* 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>
Unitholders 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."
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 INSURED
NATIONAL CALIFORNIA MISSOURI NEW YORK
SERIES 13 SERIES 10 SERIES 2 SERIES 5
<S> <C> <C> <C> <C>
---------- ---------- ---------- ----------
Number of Obligations...................................................... 12 8 7 8
Territorial Obligations (1)................................................
General Obligation Bonds (2)(4)............................................ 0 1 (13%) 1 (10%) 2 (34%)
Revenue Bonds (3)(4)....................................................... 12 (100%) 7 (87%) 6 (90%) 6 (66%)
Revenue Bond Concentrations (4):
Airport....................................................................
Correctional Facilities.................................................... 1 (10%)
Education.................................................................. 2 (15%) 1 (12%)
Electric Systems........................................................... 1 (25%)
Excise Tax Revenue.........................................................
Hospital................................................................... 3 (21%) 2 (30%) 2 (32%)
Housing.................................................................... 1 (10%) 1 (16%)
Lease Revenue.............................................................. 1 (21%) 2 (25%)
Port Authority.............................................................
Wastewater................................................................. 1 (10%)
Tax Allocation............................................................. 1 (13%)
Transportation............................................................. 1 (7%) 1 (3%)
Tollroad...................................................................
Utilities..................................................................
Water and Sewer............................................................ 3 (27%) 1 (8%) 1 (8%) 3 (35%)
Miscellaneous.............................................................. 1 (10%) 1 (5%)
Average life of the Municipal Bonds in the
Trust (5)................................................................ 29.1 26.1 23.8 14.9
Percentage of "when, as and if issued " or "delayed delivery" Bonds
purchased by the Trust................................................... 10% 33% 25% None
Syndication (6)............................................................ 0 0 0 0
</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 "Risk Factors 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--Risk Factors."
(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.
6
<PAGE>
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 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 $111,800. 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.
NATIONAL
<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 15 % 4.12% 4.71% 5.29% 5.88% 6.47% 7.06% 7.65%
22.75 - 55.10 38.00 - 91.85 28 4.86 5.56 6.25 6.94 7.64 8.33 9.03
55.10 - 115.00 91.85 - 140.00 31 5.07 5.80 6.52 7.25 7.97 8.70 9.42
115.00 - 250.00 140.00 - 250.00 36 5.47 6.25 7.03 7.81 8.59 9.38 10.16
Over 250.00 Over 250.00 39.6 5.79 6.62 7.45 8.28 9.11 9.93 10.76
</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 - 214.93 140.00 - 250.00 42.4 6.08 6.94 7.81 8.68 9.55 10.42 11.28
214.93 - 250.00 43.0 6.14 7.02 7.89 8.77 9.65 10.53 11.40
250.00 - 429.86 45.6 6.43 7.35 8.27 9.19 10.11 11.03 11.95
Over 250.00 Over 429.86 46.2 6.51 7.43 8.36 9.29 10.22 11.15 12.08
</TABLE>
- ------------
*The State tax rates assumed take into account recent adjustments 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>
MISSOURI
<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 19.4 % 4.34% 4.96% 5.58% 6.20% 6.82% 7.44% 8.06%
22.75 - 55.10 38.00 - 91.85 32.3 5.17 5.91 6.65 7.39 8.12 8.86 9.60
55.10 - 115.00 91.85 - 140.00 35.1 5.39 6.16 6.93 7.70 8.47 9.24 10.02
115.00 - 250.00 140.00 - 250.00 39.8 5.81 6.64 7.48 8.31 9.14 9.97 10.80
Over 250.00 Over 250.00 43.2 6.16 7.04 7.92 8.80 9.68 10.56 11.44
</TABLE>
- ------------
*Combined State and Federal tax bracket was computed by taking into account
the deductibility of State tax in determining Federal tax and the recently
enacted limitations on the deductibility of Federal tax in determining State
tax. Specifically, the deduction allowed for Federal income tax liability may
not exceed $5,000 and $10,000 for single and joint taxpayers respectively.
Accordingly, the combined tax bracket reflects the cross-deductibility of each
tax in determining the other only for levels of income corresponding to the
15% Federal tax bracket.
NEW YORK
<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 21.7 % 4.47% 5.11% 5.75% 6.39% 7.02% 7.66% 8.30%
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 36.4 5.50 6.29 7.08 7.86 8.65 9.43 10.22
115.00 - 250.00 140.00 - 250.00 41.0 5.93 6.78 7.63 8.47 9.32 10.17 11.02
Over 250.00 Over 250.00 44.4 6.29 7.19 8.09 8.99 9.89 10.79 11.69
</TABLE>
- ------------
*Combined Federal and State tax bracket was computed assuming that the
investor is not subject to local income taxes, such as New York City taxes.
Should a Unitholder reside in a locality which imposes an income tax, the
Unitholder's equivalent taxable estimated current return would be greater than
the equivalent taxable estimated current returns indicated in the table. The
table does not reflect the recent enactment of a New York State supplemental
income tax based upon a taxpayer's New York State taxable income and New York
State adjusted gross income. This supplemental tax results in an increased
marginal state income tax rate to the extent a taxpayer's New York State
adjusted gross income ranges between $100,000 and $150,000. In addition, the
table does not reflect the amendments to the New York State income tax law
that imposes limitations on the deductibility of itemized deductions. The
application of the New York State limitation on itemized deductions may result
in a higher combined Federal, State and local tax rate than indicated in the
table. The table assumes for this purpose that a taxpayer's New York State
adjusted income equals his Federal adjusted gross income.
NEW YORK STATE AND CITY
<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 25.3 % 4.69% 5.35% 6.02% 6.69% 7.36% 8.03% 8.70%
22.75 - 55.10 38.00 - 91.85 36.8 5.54 6.33 7.12 7.91 8.70 9.49 10.28
55.10 - 115.00 91.85 - 140.00 39.5 5.79 6.61 7.44 8.26 9.09 9.92 10.74
115.00 - 250.00 140.00 - 250.00 43.9 6.24 7.13 8.02 8.91 9.80 10.70 11.59
Over 250.00 Over 250.00 47.1 6.62 7.56 8.51 9.45 10.40 11.34 12.29
</TABLE>
- ------------
*Combined Federal, State and City tax bracket was computed assuming that the
investor is subject to New York City taxes. The table does not reflect the New
York State supplemental income tax based upon a taxpayer's New York State
taxable income and New York State adjusted gross income. This supplemental tax
results in an increased marginal State income tax rate to the extent a
taxpayer's New York State adjusted gross income ranges between $100,000 and
$150,000. In addition, the table does not reflect the amendments to the New
York State income tax law that impose limitations on the deductibility of
itemized deductions. The application of the New York State supplemental income
tax and limitation on itemized deductions may result in a higher combined
Federal, State and local tax rate than indicated in the table.
8
<PAGE>
<TABLE>
<S> <C>
KEMPER DEFINED FUNDS SERIES 25 INSURED NATIONAL SERIES 13
</TABLE>
PORTFOLIO
AS OF THE DATE OF DEPOSIT: OCTOBER 12, 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>
- ---------------------------------------------------------------------------------------------------------------
$ 1,000,000 Metropolitan Pier and Exposition Authority AAA 2003 @ 102 $ 986,550
(Illinois), McCormick Place Expansion Project 2023 @ 100 S.F.
Bonds, Series 1992A (FGIC Insured), 6.50% Due
06/15/2027
750,000 Regional Transportation Authority (Illinois), Cook, AAA 2002 @ 100 700,433
DuPage, Kane, Lake, McHenry, and Will Counties, 2016 @ 100 S.F.
General Obligation Bonds, Series 1992A (AMBAC
Insured), 6.125% Due 06/01/2022
1,000,000(S) Clarksville High School Building Corporation (Clark AAA 2005 @ 102 1,000,000
County, Indiana), First Mortgage Bonds, Series 1994 2014 @ 100 S.F.
(CGIC Insured), 6.65% Due 01/15/2017
500,000 Indiana Health Facility Financing Authority, Hospital AAA 2003 @ 102 455,535
Revenue Bonds (Lafayette Home Hospital Project), 2014 @ 100 S.F.
Series 1993 (MBIA Insured), 6.00% Due 08/01/2023
925,000 Massachusetts Water Resources Authority, General AAA 2004 @ 101.5 852,952
Revenue Bonds, 1994 Series A (MBIA Insured), 6.00% 2021 @ 100 S.F.
Due 08/01/2024
500,000 City of Farmington, New Mexico, Pollution Control AAA 2002 @ 102 485,635
Revenue Bonds, 1992 Series A (Public Service
Company of New Mexico San Juan and Four Corners
Projects)(AMBAC Insured), 6.375% Due 12/15/2022
750,000 Pottawatomie County Development Authority Water AAA 2003 @ 102 680,513
Revenue Bonds (Oklahoma), Series 1993 (North Deer 2016 @ 100 S.F.
Creek Reservoir Project)(AMBAC Insured), 5.90% Due
07/01/2026
825,000 Erie County Hospital Authority (Commonwealth of AAA 2002 @ 102 801,430
Pennsylvania), Hospital Revenue Bonds, Series A of 2014 @ 100 S.F.
1992 (Saint Vincent Health Center Project)(MBIA
Insured), 6.375% Due 07/01/2022
1,000,000 Providence Housing Development Corporation AAA 2004 @ 102 1,000,000
(Providence, Rhode Island), Mortgage Revenue
Refunding Bonds (FHA Insured Mortgage Loan-Barbara
Jordan Apartments Project), Series 1994A (MBIA
Insured), 6.75% Due 07/01/2025
750,000 Texas Health Facilities Development Corporation, AAA 2003 @ 102 712,103
Hospital Revenue Bonds (All Saints Episcopal 2013 @ 100 S.F.
Hospitals of Fort Worth Project), Series 1993B
(MBIA Insured), 6.25% Due 08/15/2022
1,000,000 Municipality of Metropolitan Seattle (Seattle, AAA 2003 @ 102 951,560
Washington), Sewer Revenue Bonds, Series W (MBIA 2024 @ 100 S.F.
Insured), 6.30% Due 01/01/2033
1,000,000 Washington Public Power Supply System, Nuclear AAA 2003 @ 102 889,380
Project No. 1 Refunding Revenue Bonds, Series 1993A 2014 @ 100 S.F.
(MBIA Insured), 5.70% Due 07/01/2017
----------- -----------
$ 10,000,000 $ 9,516,091
----------- -----------
----------- -----------
</TABLE>
- ------------
See "Notes to Portfolios."
9
<PAGE>
<TABLE>
<S> <C>
KEMPER DEFINED FUNDS SERIES 25 INSURED CALIFORNIA
SERIES 10
</TABLE>
PORTFOLIO
AS OF THE DATE OF DEPOSIT: OCTOBER 12, 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>
- ---------------------------------------------------------------------------------------------------------------
$ 650,000 Baldwin Park Financing Authority (California), 1994 AAA 2004 @ 102 $ 617,962
Lease Revenue Refunding Bonds (Community Center 2010 @ 100 S.F.
Project)(AMBAC Insured), 6.05% Due 08/01/2019
400,000 Brea Redevelopment Agency (Orange County, California), AAA 2003 @ 102 348,472
1993 Tax Allocation Refunding Bonds (Redevelopment 2014 @ 100 S.F.
Project AB)(MBIA Insured), 5.50% Due 08/01/2017
300,000 California Health Facilities Financing Authority, AAA 2004 @ 102 240,087
Insured Health Facility Refunding Revenue Bonds
(Catholic Healthcare West), 1994 Series B (AMBAC
Insured), 5.00% Due 07/01/2021
600,000(S) California Statewide Communities Development Authority, AAA 2004 @ 102 603,558
St. Joseph Health System Obligated Group (AMBAC 2016 @ 100 S.F.
Insured), 6.625% Due 07/01/2021
160,000 City of Oxnard Financing Authority (California), AAA 2003 @ 100 132,760
Wastewater Revenue Bonds, Series 1993 (FGIC Insured), 2015 @ 100 S.F.
5.25% Due 06/01/2020
300,000 Los Angeles County (California), Metropolitan AAA 2003 @ 102 267,777
Transportation Authority, Proposition A, Sales Tax 2014 @ 100 S.F.
Revenue Refunding Bonds, Series 1993-A (MBIA
Insured), 5.625% Due 07/01/2018
400,000(S) Pioneers Memorial Hospital District (Imperial County, AAA 2004 @ 102 400,000
California), 1994 General Obligation Bonds (AMBAC 2018 @ 100 S.F.
Insured), 6.50% Due 10/01/2024
250,000 Santa Clara Valley Water District (Santa Clara County, AAA 2004 @ 102 232,155
California), Refunding and Improvement Certificates
of Participation, Series 1994A (FGIC Insured), 6.00%
Due 02/01/2024
---------- ----------
$ 3,060,000 $ 2,842,771
---------- ----------
---------- ----------
</TABLE>
- ------------
See "Notes to Portfolios."
10
<PAGE>
<TABLE>
<S> <C>
KEMPER DEFINED FUNDS SERIES 25 INSURED MISSOURI
SERIES 2
</TABLE>
PORTFOLIO
AS OF THE DATE OF DEPOSIT: OCTOBER 12, 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 Liberty, Missouri, Waterworks Refunding and AAA 2002 @ 100 $ 251,540
Improvement Revenue Bonds, Series 1992B (MBIA 2009 @ 100 S.F.
Insured), 6.30% Due 10/01/2012
750,000(S) City of Sikeston, Missouri, Electric System Revenue AAA 2002 @ 102 740,213
Refunding Bonds, 1992 Series (MBIA Insured), 6.25% 2013 @ 100 S.F.
Due 06/01/2022
500,000 Health and Educational Facilities Authority of the AAA 2002 @ 102 491,230
State of Missouri, Health Facilities Refunding 2011 @ 100 S.F.
Revenue Bonds (SSM Health Care), Series 1992AA (MBIA
Insured), 6.25% Due 06/01/2016
500,000 Health and Educational Facilities Authority of the AAA 2002 @ 102 487,800
State of Missouri, Health Facilities Revenue Bonds 2013 @ 100 S.F.
(Health Midwest), Series 1992B (MBIA Insured), 6.25%
Due 02/15/2022
500,000 Kansas City Municipal Assistance Corporation, Leasehold AAA 2001 @ 100 478,035
Improvement Revenue Bonds (H. Roe Bartle Convention 2016 @ 100 S.F.
Center Project), Series 1991B (AMBAC Insured), 6.00%
Due 04/15/2020
300,000 St Louis County, Missouri, General Obligation Public AAA 2003 @ 100 274,125
Improvement and Refunding Bonds, Series B (MBIA 2011 @ 100 S.F.
Insured), 5.50% Due 02/01/2013
250,000 St. Louis Municipal Finance Corporation II, Leasehold AAA 2004 @ 102 234,953
Revenue Improvement Bonds (Civil Courts Building 2007 @ 100 S.F.
Project), Series 1994 (FGIC Insured), 5.75% Due
08/01/2013
---------- ----------
$ 3,050,000 $ 2,957,896
---------- ----------
---------- ----------
</TABLE>
- ------------
See "Notes to Portfolios."
11
<PAGE>
<TABLE>
<S> <C>
KEMPER DEFINED FUNDS SERIES 25 INSURED NEW YORK
SERIES 5
</TABLE>
PORTFOLIO
AS OF THE DATE OF DEPOSIT: OCTOBER 12, 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 Buffalo Sewer Authority (New York), Sewer System AAA 2003 @ 100 $ 460,840
Revenue Bonds, Series G (FGIC Insured),5.25% Due
07/01/2008
370,000 Dormitory Authority of the State of New York, New York AAA 2003 @ 102 330,873
University Insured Revenue Bonds,Series 1993A (MBIA
Insured),5.00% Due 07/01/2008
100,000 Metropolitan Transportation Authority (New York), AAA 2003 @ 101.5 88,576
Transit Facilities Revenue Bonds, Series N (FGIC
Insured), 5.00% Due 07/01/2008
100,000 New York City, Municipal Water Finance Authority, Water AAA 2004 @ 101 94,502
and Sewer System Revenue Bonds, Fiscal 1994 Series B
(AMBAC Insured), 5.375% Due 06/15/2007
500,000 State of New York Mortgage Agency, Homeowner Mortgage AAA 2004 @ 102 451,655
Revenue Bonds, Series 33 (AMBAC Insured), 5.30% Due
10/01/2012
500,000 Suffolk County Industrial Development Agency (Suffolk AAA 2004 @ 101 427,530
County, New York), Suffolk County Southwest Sewer
System Revenue Bonds, Series 1994 (FGIC
Insured),4.75% Due 02/01/2009
550,000 The City of New York, General Obligation Bonds, Fiscal AAA 2003 @ 101.5 519,882
1994 Series D (CGIC Insured), 5.75% Due 08/15/2010
500,000 Town of Islip, Suffolk County, New York, General AAA 2003 @ 102 466,425
Obligations (MBIA Insured),5.375% Due 08/15/2008
---------- ----------
$ 3,120,000 $ 2,840,283
---------- ----------
---------- ----------
</TABLE>
- ------------
See "Notes to Portfolios."
12
<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) This Bond was issued at an original issue discount. The tax effect of
Bonds issued at an original issue discount is described in "Federal Tax
Status."
(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 September 26, 1994 and October 11, 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 National Series 13................................ $ 9,466,832 $ 49,259 $ 626,031 $ 9,414,053
Insured California Series 10.............................. $ 2,829,677 $ 13,094 $ 182,350 $ 2,807,490
Insured Missouri Series 2................................. $ 2,934,040 $ 23,856 $ 186,000 $ 2,918,074
Insured New York Series 5................................. $ 2,819,125 $ 21,158 $ 163,875 $ 2,811,737
</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.
13
<PAGE>
UNDERWRITING
The Underwriters named below have severally purchased Units of the Trusts in
the following respective amounts:
<TABLE>
<CAPTION>
INSURED INSURED INSURED INSURED
NATIONAL CALIFORNIA MISSOURI NEW YORK
SERIES 13 SERIES 10 SERIES 2 SERIES 5
<S> <C> <C> <C> <C>
-------------- -------------- -------------- --------------
*Kemper Unit Investment Trusts 920,000 256,000 295,000 232,000
*Kemper Securities, Inc. 50,000 50,000 50,000
Advest, Inc., 10,000
Fidelity Capital Markets 10,000
Gruntal & Co., Inc. 10,000
Nathan & Lewis Securities, Inc. 10,000
Raffensperger, Hughes & Company, Inc. 10,000
Stifel Nicolaus & Co., Inc. 10,000 10,000
-------------- -------------- -------------- --------------
TOTAL UNITS: 1,000,000 306,000 305,000 312,000
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
</TABLE>
Underwriter Addresses:
*Kemper Unit Investment Trusts, a service of Kemper Securities, Inc., 77 West
Wacker Drive, 29th Floor, Chicago, IL 60601-1994
*Kemper Securities, Inc., 77 West Wacker Drive, 28th Floor, Chicago, IL
60601-1994
Advest, Inc., One Commerical Plaza, 280 Trumbull Street, Hartford, CT 06103
Fidelity Capital Markets, a division of National Financial Services
Corporation, 161 Devonshire Street, D4, Boston, MA 02110
Gruntal & Co., Inc., 14 Wall Street, 14th Floor, New York, NY 10005
Nathan & Lewis Securities, Inc., 119 West 40th Street, 21st Street, New York,
NY 10018
Raffensperger, Hughes & Co., Inc., 20 North Meridian Street, Indianapolis, IN
46204-3058
Stifel Nicolaus & Co., Inc., 500 North Broadway, St. Louis, MO 63102
- ---------------------------
*Kemper Corporation owns or has a controlling interest in Kemper Unit
Investment Trusts (the Trusts' 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 to 24,999 Units, $.22 plus 50% of
any net portfolio profit for those firms committing for 25,000 to 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 9.99 years for each Unit is
$.28 for those firms committing for 10,000 to 24,999 Units, $.28 plus 50% of
any net portfolio profits for those firms committing for 25,000 to 49,999
Units, $.29 plus 50% of any net portfolio profit for those firms committing
for 50,000 to 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 10 to 14.99
years for each Unit is $.30 for those firms committing for 10,000 to 24,999
Units, $.31 plus 50% of any net portfolio profits for those firms committing
for 25,000 to 49,999 Units, $.31 plus 50% of any net portfolio profit for
those firms committing for 50,000 to 99,999 Units and $.32 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
14
<PAGE>
weighted average maturity greater than 14.99 years for each Unit is $.36 for
10,000 to 24,999 Units, $.36 plus 50% of any net portfolio profit for those
firms committing for 25,000 to 49,999 Units, $.37 plus 50% of any net
portfolio profit for those firms committing for 50,000 to 99,999 Units and
$.38 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 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.
15
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
UNITHOLDERS
KEMPER DEFINED FUNDS SERIES 25:
We have audited the accompanying statements of condition and the related
portfolios of Kemper Defined Funds Series 25 (Insured National Series 13,
Insured California Series 10, Insured Missouri Series 2 and Insured New York
Series 5) as of October 12, 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 October 12, 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
25 (Insured National Series 13, Insured California Series 10, Insured Missouri
Series 2 and Insured New York Series 5) as of October 12, 1994, in conformity
with generally accepted accounting principles.
GRANT THORNTON
Chicago, Illinois
October 12, 1994
16
<PAGE>
KEMPER DEFINED FUNDS SERIES 25
STATEMENTS OF CONDITION
AT THE OPENING OF BUSINESS ON OCTOBER 12, 1994, THE DATE OF DEPOSIT
<TABLE>
<CAPTION>
INSURED INSURED INSURED INSURED
NATIONAL CALIFORNIA MISSOURI NEW YORK
SERIES 13 SERIES 10 SERIES 2 SERIES 5
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
INVESTMENT IN MUNICIPAL BONDS
Municipal Bonds deposited in the Trusts (1)(4)...... $ 0 $ 0 $ 0 $ 0
Contracts to purchase Municipal Bonds (1)(4)........ 9,516,091 2,842,771 2,957,896 2,840,283
Accrued Interest to First Settlement Date on
Municipal Bonds (1)(2)............................ 149,797 37,632 43,314 33,647
----------- ---------- ---------- ----------
Total............................................... $ 9,665,888 $ 2,880,403 $ 3,001,210 $ 2,873,930
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
Number of Units..................................... 1,000,000 306,000 305,000 312,000
LIABILITIES AND INTEREST OF UNITHOLDERS
Accrued Interest payable to Sponsor (1)(2).......... $ 149,797 $ 37,632 $ 43,314 $ 33,647
Interest of Unitholders--
Cost to investors (3)............................... 10,006,000 2,989,314 3,110,390 2,964,624
Less: Gross underwriting commission (3)......... 489,909 146,543 152,494 124,341
----------- ---------- ---------- ----------
Net interest to Unitholders (1)(2)(3)............... 9,516,091 2,842,771 2,957,896 2,840,283
----------- ---------- ---------- ----------
Total............................................... $ 9,665,888 $ 2,880,403 $ 3,001,210 $ 2,873,930
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
</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 $18,424,399 which has been deposited with the Trustee. Of this
amount, $18,157,041 relates to the offering price of Municipal Bonds to
be purchased and $267,538 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 or 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 may be payable by
investors and may be 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.
17
<PAGE>
RISK FACTORS AND STATE TAX STATUS
INSURED CALIFORNIA SERIES 10
RISK FACTORS
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 $662 billion in
1992, accounts for 13% of all personal income in the nation. Total employment
is almost 14 million, the majority of which is in the service, trade and
manufacturing sectors.
Reports issued by the State Department of Finance and other sources indicate
that the State's economy is suffering its worst recession since the 1930s,
with prospects for recovery slower than for the nation as a whole. The State
has lost over 800,000 jobs since the start of the recession in mid 1990 and
additional job losses are expected before an upturn begins. The largest job
losses have been in Southern California, led by declines in the aerospace and
construction industries. Weaknesses statewide occurred in manufacturing,
construction, services and trade and will be hurt in the next few years by
continued cuts in federal defense spending and base closures. Unemployment is
expected to remain well above the national average in 1994. The State's
economy is only expected to pull out of the recession slowly, following the
national recovery which has begun. Delay in recovery will exacerbate
shortfalls in State revenues.
Certain California Municipal Obligations may be obligations of issuers which
rely in whole or in part, directly or indirectly, on ad valorem property taxes
as a source of revenue. The taxing powers of California local governments and
districts are limited by Article XIIIA of the California Constitution, enacted
by the voters in 1978 and commonly known as "Proposition 13." Briefly, Article
XIIIA limits to 1% of full cash value the rate of ad valorem property taxes on
real property and generally restricts the reassessment of property to 2% per
year, except upon new construction or change of ownership (subject to a number
of exemptions). 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
18
<PAGE>
have been filed challenging the acquisition-based assessment system of
Proposition 13 and on June 18, 1992 the U.S. Supreme Court announced a
decision upholding Proposition 13.
Article XIIIA prohibits local governments from raising revenues through ad
valorem property taxes above the 1% limit; it also requires voters of any
governmental unit to give two-thirds approval to levy any "special tax." Court
decisions, however, allowed non-voter approved levy of "general taxes" which
were not dedicated to a specific use. In response to these decisions, the
voters of the State in 1986 adopted an initiative statute which imposed
significant new limits on the ability of local entities to raise or levy
general taxes, except by receiving majority local voter approval. Significant
elements of this initiative, "Proposition 62", have been overturned in recent
court cases. An initiative proposed to re-enact the provisions of Proposition
62 as a constitutional amendment was defeated by the voters in November 1990,
but such a proposal may be renewed in the future.
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 by Proposition 111 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 this condition may change over time. Local
governments may by voter approval exceed their spending limits for up to four
years.
During fiscal year 1986-87, State receipts from proceeds of taxes exceeded its
appropriations limit by $1.1 billion, which was returned to taxpayers. Since
that year, appropriations subject to limitation have been under the State
limit. State appropriations are expected to be $3.7 billion under the limit
for Fiscal Year 1993-94.
Because of the complex nature of Articles XIIIA and XIIIB of the California
Constitution, the ambiguities and possible inconsistencies in their terms, and
the impossibility of predicting future appropriations or changes in population
and cost of living, and the probability of continuing legal challenges, it is
not currently possible to determine fully the impact of Article XIIIA or
Article XIIIB on California Municipal Obligations or on the
19
<PAGE>
ability of the State or local governments to pay debt service on such
California Municipal Obligations. It is not presently possible to predict the
outcome of any pending litigation with respect to the ultimate scope, impact
or constitutionality of either Article XIIIA or Article XIIIB, or the impact
of any such determinations upon State agencies or local governments, or upon
their ability to pay debt service on their obligations. Future initiative or
legislative changes in laws or the California Constitution may also affect the
ability of the State or local issuers to repay their obligations.
As of April 1, 1994, the State had approximately $18.1 billion of general
obligation bonds outstanding, and $5.6 billion remained authorized but
unissued. In addition, at June 30, 1993, the State had lease-purchase
obligations, payable from the State's General Fund, of approximately $4.0
billion. Of the State's outstanding general obligation debt, 28% is presently
self-liquidating (for which program revenues are anticipated to be sufficient
to reimburse the General Fund for debt service payments). Four general
obligation bond propositions, totalling $5.9 billion, will be on the June 1994
ballot. In Fiscal Year 1992-93, debt service on general obligation bonds and
lease-purchase debt was approximately 4.1% of General Fund revenues. The State
has paid the principal of and interest on its general obligation bonds,
lease-purchase debt and short-term obligations when due.
The principal sources of General Fund revenues in 1992-93 were the California
personal income tax (44% of total revenues), the sales tax (38%), bank and
corporation taxes (12%), and the gross premium tax on insurance (3%). 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, California has budgeted to
maintain the Economic Uncertainties Fund at around 3% of General Fund
expenditures but essentially no reserve has been budgeted in 1992-93 or
1993-1994 because reserves have been reduced by the recession.
Throughout the 1980s, State spending increased rapidly as the State population
and economy also grew rapidly, including increased spending for many
assistance programs to local governments, which were constrained by
Proposition 13 and other laws. The largest State program is assistance to
local public school districts. In 1988, an initiative (Proposition 98) was
enacted which (subject to suspension by a two-thirds vote of the Legislature
and the Governor) guarantees local school districts and community college
districts a minimum share of State General Fund revenues (currently about
34%).
Since the start of the 1990-91 Fiscal Year, the State has faced adverse
economic, fiscal, and budget conditions. The economic recession seriously
affected State tax revenues. It also caused increased expenditures for health
and welfare programs. The State is also facing a structural imbalance in its
budget with the largest programs supported by the General Fund (education,
health, welfare and corrections) growing at rates significantly higher than
the growth rates for the principal revenue sources of the General Fund. As a
result, the State entered a period of budget imbalance, with expenditures
exceeding revenues for four of the five fiscal years through 1991-92.
As the State fell into a deep recession in the summer of 1990, the State
budget fell sharply out of balance in the 1990-91 and 1991-92 fiscal years,
despite significant expenditure cuts and tax increases. The State had
accumulated a $2.8 billion budget deficit by June 30, 1992. This deficit also
severely reduced the State's cash resources, so that it had to rely on
external borrowing in the short-term markets to meet its cash needs.
With the failure to enact a budget by July 1, 1992, the State had no legal
authority to pay many of its vendors until the budget was passed;
nevertheless, certain obligations (such as debt service, school
apportionments, welfare payments, and employee salaries) were payable because
of continuing or special appropriations, or
20
<PAGE>
court orders. However, the State Controller did not have enough cash to pay
all of these ongoing obligations as they came due, as well as valid
obligations incurred in the prior fiscal year.
Starting on July 1, 1992, the Controller was required to issue "registered
warrants" in lieu of normal warrants backed by cash to pay many State
obligations. Available cash was used to pay constitutionally mandated and
priority obligations. Between July 1 and September 3, 1992, the Controller
issued an aggregate of approximately $3.8 billion of registered warrants, all
of which were called for redemption by September 4, 1992 following enactment
of the 1992-93 Budget Act and issuance by the State of $3.3 billion of Interim
Notes.
The 1992-93 Budget Act, when finally adopted, was projected to eliminate the
State's accumulated deficit, with additional expenditure cuts and a $1.3
billion transfer of State education funding costs to local governments by
shifting local property taxes to school districts. However, as the recession
continued longer and deeper than expected, revenues once again were far below
projections, and only reached a level just equal to the amount of
expenditures. Thus, the State continued to carry its $2.8 billion budget
deficit at June 30, 1993.
The 1993-94 Budget Act was similar to the prior year, in reliance on
expenditure cuts and an additional $2.6 billion transfer of costs to local
government, particularly counties. A major feature of the budget was a two-
year plan to eliminate the accumulated deficit by borrowing into the 1994-95
fiscal year. With the recession still continuing longer than expected, the
1994-95 Governor's Budget now projects that in the 1993-94 Fiscal Year, the
General Fund will have $900 million less revenue and $800 million higher
expenditures than budgeted. As a result, revenues will only exceed
expenditures by about $400 million. If this projection is met, it will be the
first operating surplus in four years; however, some budget analysts outside
the Department of Finance project revenues in the balance of 1993-94 will not
even meet the revised, lower projection. In addition, the General Fund may
have some unplanned costs for relief related to the January 17, 1994
Northridge earthquake.
The State has implemented its short-term borrowing as part of the deficit
elimination plan, and has also borrowed additional sums to cover cash flow
shortfalls in the spring of 1994, for a total of $3.2 billion, coming due in
July and December, 1994. Repayment of these short-term notes will require
additional borrowing, as the State's cash position continues to be adversely
affected.
The Governor's 1994-95 Budget proposal recognizes the need to bridge a gap of
around $5 billion by June 30, 1995. Over $3.1 billion of this amount is being
requested from the federal government as increased aid, particularly for costs
associated with incarcerating, educating and providing health and welfare
services to undocumented immigrants. However, President Clinton has not
included these costs in his proposed Fiscal 1995 Budget. The rest of the
budget gap is proposed to be closed with expenditure cuts and projected $600
million of new revenue assuming the State wins a tax case presently pending in
the U.S. Supreme Court. Thus the State will once again face significant
uncertainties and very difficult choices in the 1994-95 budget, as tax
increases are unlikely and many cuts and budget adjustments have been made in
the past three years.
The State's severe financial difficulties for the current and upcoming budget
years will result in continued pressure upon various local governments,
particularly school districts and counties which depend on State aid. Despite
efforts in recent years to increase taxes and reduce governmental
expenditures, there can be no assurance that the State will not face budget
gaps in the future.
State general obligation bonds are currently rated "A1" by Moody's and "A" by
S&P. These ratings were recently reduced from "Aa" and "A+", respectively, due
to the State's inability to reduce its accumulated budget deficit, among a
number of other fiscal uncertainties. Both of these ratings were previously
reduced
21
<PAGE>
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.
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. Total local assistance (including public schools) accounted for
approximately 75% of General Fund expenditures, including the effect of
implementing reductions in certain aid reductions. To reduce State General
Fund support for school districts, the 1992-93 and 1993-94 Budget Acts caused
local governments to transfer $3.9 billion of property tax revenues to school
districts, representing loss of all of the post-Proposition 13 "bail-out" aid.
Local governments have in return received greater revenues and greater
flexibility to operate health and welfare programs. To the extent the State
should be constrained by its Article XIIIB appropriations limit, or its
obligation to conform to Proposition 98, or other fiscal considerations, the
absolute level, or the rate of growth, of State assistance to local
governments may be reduced. Any such reductions in State aid could compound
the serious fiscal constraints already experienced by many local governments,
particularly counties. The Richmond Unified School District (Contra Costa
County) entered bankruptcy proceedings in May 1991, but the proceedings have
been dismissed.
Assessment Bonds. California Municipal Obligations which are assessment bonds
may be adversely affected by a general decline in real estate values or a
slowdown in real estate sales activity. In many cases, such bonds are secured
by land which is undeveloped at the time of issuance but anticipated to be
developed within a few years after issuance. In the event of such reduction or
slowdown, such development may not occur or may be delayed, thereby increasing
the risk of a default on the bonds. Because the special assessments or taxes
securing these bonds are not the personal liability of the owners of the
property assessed, the lien on the property is the only security for the
bonds. Moreover, in most cases the issuer of these bonds is not required to
make payments on the bonds in the event of delinquency in the payment of
assessments or taxes, except from amounts, if any, in a reserve fund
established for the bonds.
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
22
<PAGE>
(including a brief period under bankruptcy court protection), the District
failed to make rental payments on this lease, resulting in a lawsuit by the
Trustee for the Certificate of Participation holders, in which the State was a
named defendant (on the grounds that it controlled the District's finances).
One of the defenses raised in answer to this lawsuit was the invalidity of the
original lease transaction. The trial court upheld the validity of the lease,
and the case has been settled. A judgment in a future case against the
position asserted by the Trustee in the Richmond case may have adverse
implications for lease transactions of a similar nature by other California
entities.
The repayment of industrial development securities secured by real property
may be affected by California laws limiting foreclosure rights of creditors.
Securities backed by health care and hospital revenues may be affected by
changes in State regulations governing cost reimbursements to health care
providers under Medi-Cal (the State's Medicaid program), including risks
related to the policy of awarding exclusive contracts to certain hospitals.
Limitations on ad valorem property taxes may particularly affect "tax
allocation" bonds issued by California redevelopment agencies. Such bonds are
secured solely by the increase in assessed valuation of a redevelopment
project area after the start of redevelopment activity. In the event that
assessed values in the redevelopment project decline (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 10, under existing law:
23
<PAGE>
Insured California Series 10 is not an association taxable as a
corporation and the income of Insured California Series 10 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 10 which are exempt from tax under California personal income tax
and property tax laws when received by Insured California Series 10 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 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 10 will have a taxable event when Insured California Series 10
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 10 to a Unitholder is allocated among each of the Bond
issues held in Insured California Series 10 (in accordance with the
proportion of Insured California Series 10 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 10 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 10) 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 10 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
24
<PAGE>
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 10, 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 10 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."
INSURED MISSOURI SERIES 2
RISK FACTORS
The following discussion regarding constitutional limitations and the economy
of the State of Missouri is included for the purpose of providing general
information that may or may not affect issuers of the Bonds in Missouri.
In November, 1981, the voters of Missouri adopted a tax limitation amendment
to the constitution of the State of Missouri (the "Amendment"). The Amendment
prohibits increases in local taxes, licenses, or fees by political
subdivisions without approval of the voters of such political subdivision. The
Amendment also limits the growth in revenues and expenditures of the State to
the rate of growth in the total personal income of the citizens of Missouri.
The limitation may be exceeded if the General Assembly declares an emergency
by a two-thirds vote.
Although the June 1993 revenue estimate has been revised downward by $27.5
million, the State budget remains balanced due primarily to delayed spending
for desegregation capital projects. The downward revision in revenues was
considered necessary because of weak economic performance to date, and more
importantly an economic outlook for the second half of the fiscal year which
projects slower growth than was anticipated in June 1992.
The economy of Missouri is diverse and includes manufacturing, retail and
wholesale trade, services, agriculture, tourism and mining. In recent years,
growth in the wholesale and retail trade has offset the more slowly growing
manufacturing and agricultural sectors of the economy. According to the United
States Bureau of Labor Statistics, the 1991 unemployment rate in Missouri was
6.6%, the 1992 rate was 5.7%, and the seasonally adjusted rate for March of
1993 was 6.7%. There can be no assurance that the general economic conditions
or the financial circumstances of Missouri or its political subdivisions will
not adversely affect the market value of the Bonds or the ability of the
obligor to pay debt service on such Bonds.
Currently, Moody's Investors Service rates Missouri general obligation bonds
"Aaa" and Standard & Poor's Corporation rates Missouri general obligation
bonds, "AAA". Although these ratings indicate that the State of Missouri is in
relatively good economic health, there can be, of course, no assurance that
this will continue or that particular bond issues may not be adversely
affected by changes in the State or local economic or political conditions.
25
<PAGE>
The foregoing information constitutes only a brief summary of some of the
general factors which may impact certain issuers of Bonds and does not purport
to be a complete or exhaustive description of all adverse conditions to which
the issuers of obligations held by Insured Missouri Series 2 are subject.
Additionally, many factors, including national economic, social and
environmental policies and conditions, which are not within the control of the
issuers of the Bonds, could affect or could have an adverse impact on the
financial condition of the State and various agencies and political
subdivisions located in the State. It is not possible to predict whether or to
what extent such factors or other factors may affect the issuers of the Bonds,
the market value or marketability of the Bonds or the ability of the
respective issuers of the Bonds acquired by the Insured Missouri Trust to pay
interest on or principal of the Bonds.
MISSOURI TAX STATUS
The assets of Insured Missouri Series 2 will consist of interest-bearing
obligations issued by or on behalf of the State of Missouri (the "State") or
counties, municipalities, authorities or political subdivisions thereof (the
"Missouri Bonds") or by the Commonwealth of Puerto Rico, Guam and the United
States Virgin Islands (the "Possession Bonds") (collectively, the "Bonds").
Neither the Sponsor nor its counsel have independently examined the Bonds to
be deposited in and held in the Trust. However, although no opinion is
expressed herein regarding such matters, it is assumed that: (i) the Bonds
were validly issued, (ii) the interest thereon is excludable from gross income
for federal income tax purposes and (iii) interest on the Missouri Bonds, if
received directly by a Unitholder, would be exempt from the Missouri income
tax applicable to individuals and corporations ("Missouri State Income Tax").
The opinion set forth below does not address the taxation of persons other
than full time residents of Missouri.
In the opinion of Chapman and Cutler, counsel to the Sponsor, under existing
law as of the date of this Prospectus and based upon the assumptions set forth
above:
(1) The Trust is not an association taxable as a corporation for
Missouri income tax purposes, and each Unitholder of the Trust will be
treated as the owner of a pro rata portion of the Trust and the income
of such portion of the Trust will be treated as the income of the
Unitholder for Missouri State Income Tax purposes.
(2) Interest paid and original issue discount, if any, on the Bonds
which would be exempt from the Missouri State Income Tax if received
directly by a Unitholder will be exempt from the Missouri State Income
Tax when received by the Trust and distributed to such Unitholder;
however, no opinion is expressed herein regarding taxation of interest
paid and original issue discount, if any, on the Bonds received by the
Trust and distributed to Unitholders under any other tax imposed
pursuant to Missouri law, including but not limited to the franchise
tax imposed on financial institutions pursuant to Chapter 148 of the
Missouri Statutes.
(3) To the extent that interest paid and original issue discount, if
any, derived from the Trust by a Unitholder with respect to Possession
Bonds is excludable from gross income for Federal income tax purposes
pursuant to 48 U.S.C. (S)745, 48 U.S.C. (S)1423a, and 48 U.S.C.
(S)1403, such interest paid and original issue discount, if any, will
not be subject to the Missouri State Income Tax; however, no opinion
is expressed herein regarding taxation of interest paid and original
issue discount, if any, on the Bonds received by the Trust and
distributed to Unitholders under any other tax imposed pursuant to
Missouri law, including but not limited to the franchise tax imposed
on financial institutions pursuant to Chapter 148 of the Missouri
Statutes.
(4) Each Unitholder of the Trust will recognize gain or loss for
Missouri State Income Tax purposes if the Trustee disposes of a bond
(whether by redemption, sale, or otherwise) or if the Unitholder
redeems or sells Units of the Trust to the extent that such a
transaction results in a recognized gain
26
<PAGE>
or loss to such Unitholder for Federal income tax purposes. Due to the
amortization of bond premium and other basis adjustments required by
the Internal Revenue Code, a Unitholder, under some circumstances, may
realize taxable gain when his or her Units are sold or redeemed for an
amount equal to their original cost.
(5) Any insurance proceeds paid under policies which represent maturing
interest on defaulted obligations which are excludable from gross
income for Federal income tax purposes will be excludable from the
Missouri State Income Tax to the same extent as such interest would
have been paid by the issuer of such Bonds held by the Trust; however,
no opinion is expressed herein regarding taxation of interest paid and
original issue discount, if any, on the Bonds received by the Trust
and distributed to Unitholders under any other tax imposed pursuant to
Missouri law, including but not limited to the franchise tax imposed
on financial institutions pursuant to Chapter 148 of the Missouri
Statutes.
(6) The Missouri State Income Tax does not permit a deduction of
interest paid or incurred on indebtedness incurred or continued to
purchase or carry Units in the Trust, the interest on which is exempt
from such Tax.
(7) The Trust will not be subject to the Kansas City, Missouri Earnings
and Profits Tax and each Unitholder's share of income of the Bonds
held by the Trust will not generally be subject to the Kansas City,
Missouri Earnings and Profits Tax or the City of St. Louis Earnings
Tax (except in the case of certain Unitholders, including
corporations, otherwise subject to the City of St. Louis Earnings
Tax).
For a discussion of Federal tax matters relating to distributions from the
Trust Fund, see "Federal Tax Status."
INSURED NEW YORK SERIES 5
RISK FACTORS
The portfolio of Insured New York Series 5 includes certain bonds issued by
New York State (the "State"), by its various public bodies (the "Agencies"),
and/or by other entities located within the State, including the City of New
York (the "City").
Some of the more significant events and conditions relating to the financial
situation in New York are summarized below. This section provides only a brief
summary of the complex factors affecting the financial situation in New York
and is derived from sources that are generally available to investors and is
believed to be accurate. It is based in part on Official Statements and
prospectuses issued by, and on other information reported by the State, the
City and their agencies in connection with the issuance of their respective
securities.
There can be no assurance that current or future statewide or regional
economic difficulties, and the resulting impact on State or local government
finances generally, will not adversely affect the market value of New York
Municipal Obligations held in the portfolio of the Fund or the ability of
particular obligors to make timely payments of debt service on (or relating
to) those obligations.
The State has historically been one of the wealthiest states in the nation.
For decades, however, the State economy has grown more slowly than that of the
nation as a whole, gradually eroding the State's relative economic affluence.
Statewide, urban centers have experienced significant changes involving
migration of the more affluent to the suburbs and an influx of generally less
affluent residents. Regionally, the older Northeast cities have suffered
because of the relative success that the South and the West have had in
27
<PAGE>
attracting people and business. The City has also had to face greater
competition as other major cities have developed financial and business
capabilities which make them less dependent on the specialized services
traditionally available almost exclusively in the City.
The State has for many years had a very high state and local tax burden
relative to other states. The burden of State and local taxation, in
combination with the many other causes of regional economic dislocation, has
contributed to the decisions of some businesses and individuals to relocate
outside, or not locate within, the State.
A national recession commenced in mid-1990. The downturn continued throughout
the State's 1990-91 fiscal year and was followed by a period of weak economic
growth during the 1991 calendar year. For calendar year 1992, the national
economy continued to recover, although at a rate below all post-war
recoveries. For calendar year 1993, the economy is expected to grow faster
than 1992, but still at a very moderate rate as compared to other recoveries.
The national recession has been more severe in the State because of factors
such as a significant retrenchment in the financial services industry,
cutbacks in defense spending, and an overbuilt real estate market.
1993-94 Fiscal Year. On April 5, 1993, the State Legislature approved a $32.08
billion budget. Following enactment of the budget the 1993-94 State Financial
Plan was formulated on April 16, 1993. This Plan projects General Fund
receipts and transfers from other funds at $32.367 billion and disbursements
and transfers to other funds at $32.300 billion. In comparison to the
Governor's recommended Executive Budget for the 1993-94 fiscal year, as
revised on February 18, 1993, the 1993-94 State Financial Plan reflects
increases in both receipts and disbursements in the General Fund of $811
million.
While a portion of the increased receipts was the result of a $487 million
increase in the State's 1992-93 positive year-end margin at March 31, 1993 to
$671 million, the balance of such increased receipts is based upon (i) a
projected $269 million increase in receipts resulting from improved 1992-93
results and the expectation of an improving economy, (ii) projected additional
payments of $200 million from the Federal government as reimbursements for
indigent medical care, (iii) the early payment of $50 million of personal tax
returns in 1992-93 which otherwise would have been paid in 1993-94; offset by
(iv) the State Legislature's failure to enact $195 million of additional
revenue-raising recommendations proposed by the Governor. There can be no
assurances that all of the projected receipts referred to above will be
received.
Despite the $811 million increase in disbursements included in the 1993-94
State Financial Plan, a reduction in aid to some local government units can be
expected. To offset a portion of such reductions, the 1993-94 State Financial
Plan contains a package of mandate relief, cost containment and other
proposals to reduce the costs of many programs for which local governments
provide funding. There can be no assurance, however, that localities that
suffer cuts will not be adversely affected, leading to further requests for
State financial assistance.
There can be no assurance that the State will not face substantial potential
budget gaps in the future resulting from a significant disparity between tax
revenues projected from a lower recurring receipts base and the spending
required to maintain State programs at current levels. To address any
potential budgetary imbalance, the State may need to take significant actions
to align recurring receipts and disbursements.
1992-93 Fiscal Year. Before giving effect to a 1992-93 year-end deposit to the
refund reserve account of $671 million, General Fund receipts in 1992-93 would
have been $716 million higher than originally projected. This year-end deposit
effectively reduced 1992-93 receipts by $671 million and made those receipts
available for 1993-94.
28
<PAGE>
The State's favorable performance primarily resulted from income tax
collections that were $700 million higher than projected which reflected both
stronger economic activity and tax-induced one-time acceleration of income
into 1992. In other areas larger than projected business tax collections and
unbudgeted receipts offset the loss of $200 million of anticipated Federal
reimbursement and losses of, or shortfalls in, other projected revenue
sources.
For 1992-93 disbursements and transfers to other funds (including the deposit
to the refund reserve account discussed above) totalled $30.829 billion, an
increase of $45 million above projections in April 1992.
Fiscal year 1992-93 was the first time in four years that the State did not
incur a cash-basis operating deficit in the General Fund requiring the
issuance of deficit notes or other bonds, spending cuts or other revenue
raising measures.
Indebtedness. As of March 31, 1993, the total amount of long-term State
general obligation debt authorized but unissued stood at $2.4 billion. As of
the same date, the State had approximately $5.4 billion in general obligation
bonds. The State issued $850 million in tax and revenue anticipation notes
("TRANS") on April 28, 1993. The State does not project the need to issue
additional TRANS during the State's 1993-94 fiscal year.
The State anticipates that its borrowings for capital purposes during the
State's 1993-94 fiscal year will consist of $460 million in general obligation
bonds and $140 million in new commercial paper issuances. In addition, the
State expects to issue $140 million in bonds for the purpose of redeeming
outstanding bond anticipation notes. The Legislature has authorized the
issuance of up to $85 million in certificates of participation during the
State's 1993-94 fiscal year for personal and real property acquisitions. The
projection of the State regarding its borrowings for the 1993-94 fiscal year
may change if actual receipts fall short of State projections or if other
circumstances require.
In June 1990, legislation was enacted creating the "New York Local Government
Assistance Corporation" ("LGAC"), a public benefit corporation empowered to
issue long-term obligations to fund certain payments to local governments
traditionally funded through the State's annual seasonal borrowing. To date,
LGAC has issued its bonds to provide net proceeds of $3.28 billion. LGAC has
been authorized to issue additional bonds to provide net proceeds of $703
million during the State's 1993-94 fiscal year.
The $850 million in TRANS issued by the State in April 1993 were rated
SP-1-Plus by S&P on April 26, 1993, and MIG-1 by Moody's on April 23, 1993,
which represents the highest ratings given by such agencies and the first time
the State's TRANS have received these ratings since its May 1989 TRANS
issuance. Both agencies cited the State's improved fiscal position as a
significant factor in the upgrading of the April 1993 TRANS.
Moody's rating of the State's general obligation bonds stood at A on April 23,
1993, and S&P's rating stood at A-with a stable outlook on April 26, 1993, an
improvement from S&P's negative outlook prior to April 1993. Previously,
Moody's lowered its rating to A on June 6, 1990, its rating having been A1
since May 27, 1986. S&P lowered its rating from A to A-on January 13, 1992.
S&P's previous ratings were A from March 1990 to January 1992, AA-from August
1987 to March 1990 and A+ from November 1982 to August 1987.
Moody's, in confirming its rating of the State's general obligation bonds, and
S&P, in improving its outlook on such bonds from negative to stable, noted the
State's improved fiscal condition and reasonable revenue assumptions contained
in the 1993-94 State budget.
New York City accounts for approximately 41% of the State's population and
personal income, and the City's financial health affects the State in numerous
ways.
29
<PAGE>
In February 1975, the New York State Urban Development Corporation ("UDC"),
which had approximately $1 billion of outstanding debt, defaulted on certain
of its short-term notes. Shortly after the UDC default, the City entered a
period of financial crisis. Both the State Legislature and the United States
Congress enacted legislation in response to this crisis. During 1975, the
State Legislature (i) created the Municipal Assistance Corporation ("MAC") to
assist with long-term financing for the City's short-term debt and other cash
requirements and (ii) created the State Financial Control Board (the "Control
Board") to review and approve the City's budgets and City four-year financial
plans (the financial plans also apply to certain City-related public agencies
(the "Covered Organizations")).
Over the past three years, the rate of economic growth in the City has slowed
substantially, and the City's economy is currently in recession. The City
projects and its current four-year financial plan assumes a recovery early in
the 1993 calendar year. The Mayor is responsible for preparing the City's
four-year financial plan, including the City's current financial plan. The
City Comptroller has issued reports concluding that the recession of the
City's economy will be more severe and last longer than is assumed in the
Financial Plan.
Fiscal Year 1993 and 1993-1996 Financial Plan. The City's 1993 fiscal year
results are projected to be balanced in accordance with generally accepted
accounting principles ("GAAP"). The City was required to close substantial
budget gaps in its 1990, 1991 and 1992 fiscal years in order to maintain
balanced operating results.
The City's modified 1993-1996 Financial Plan dated February 9, 1993 covering
fiscal years 1993-1996 projects budget gaps for 1994 through 1996. The Office
of the State Deputy Controller for the City of New York has estimated that
under the modified Financial Plan budget gaps will be $102 million for fiscal
year 1994, $196 million for fiscal year 1995 and $354 million for fiscal year
1996, primarily due to anticipated higher spending on labor costs.
However, the City's modified Plan is dependent upon a gap-closing program,
certain elements of which the staff of Control Board identified on March 25,
1993 to be at risk due to projected levels of State and Federal aid and
revenue and expenditures estimates which may not be achievable. The Control
Board indicated that the City's modified Financial Plan does not make progress
towards establishing a balanced budget process. The Control Board's report
identified budget gap risks of $1.0 billion, $1.9 billion, $2.3 billion and
$2.6 billion in fiscal years 1994 through 1997, respectively.
On June 3, 1993, the Mayor announced that State and federal aid for Fiscal
Year 1993-1994 would be $280 million less than projected and that in order to
balance the City's budget $176 million of previously announced contingent
budget cuts would be imposed. The Mayor indicated that further savings would
entail serious reductions in services. The State Comptroller on June 14, 1993
criticized efforts by the Mayor and City Council to balance the City's budget
which rely primarily on one-shot revenues. The State Comptroller added that
the City's budget should be based on "recurring revenues that fund recurring
expenditures."
Given the foregoing factors, there can be no assurance that the City will
continue to maintain a balanced budget, or that it can maintain a balanced
budget without additional tax or other revenue increases or reductions in City
services, which could adversely affect the City's economic base.
Pursuant to the laws of the State, the City prepares a four-year annual
financial plan, which is reviewed and revised on a quarterly basis and which
includes the City's capital, revenue and expense projections. The City is
required to submit its financial plans to review bodies, including the Control
Board. If the City were to experience certain adverse financial circumstances,
including the occurrence or the substantial likelihood and imminence of the
occurrence of an annual operating deficit of more than $100 million or the
loss of
30
<PAGE>
access to the public credit markets to satisfy the City's capital and seasonal
financing requirements, the Control Board would be required by State law to
exercise certain powers, including prior approval of City financial plans,
proposed borrowings and certain contracts.
The City depends on the State for State aid both to enable the City to balance
its budget and to meet its cash requirements. As a result of the national and
regional economic recession, the State's projections of tax revenues for its
1991 and 1992 fiscal years were substantially reduced. For its 1993 fiscal
year, the State, before taking any remedial action reflected in the State
budget enacted by the State Legislature on April 2, 1992 reported a potential
budget deficit of $4.8 billion. If the State experiences revenue shortfalls or
spending increases beyond its projections during its 1993 fiscal year or
subsequent years, such developments could result in reductions in projected
State aid to the City. In addition, there can be no assurance that State
budgets in future fiscal years will be adopted by the April 1 statutory
deadline and that there will not be adverse effects on the City's cash flow
and additional City expenditures as a result of such delays.
The City's projections set forth in the financial plan are based on various
assumptions and contingencies which are uncertain and which may not
materialize. Changes in major assumptions could significantly affect the
City's ability to balance its budget as required by State law and to meet its
annual cash flow and financing requirements. Such assumptions and
contingencies include the timing of any regional and local economic recovery,
the absence of wage increases in excess of the increases assumed in the
financial plan, employment growth, provision of State and Federal aid and
mandate relief, State legislative approval of future State budgets, levels of
education expenditures as may be required by State law, adoption of future
City budgets by the New York City Council, and approval by the Governor, the
State Legislature and the cooperation of MAC with respect to various other
actions proposed in the financial plan.
The City's ability to maintain a balanced operating budget is dependent on
whether it can implement necessary service and personnel reduction programs
successfully. As discussed above, the City must identify additional
expenditure reductions and revenue sources to achieve operating budgets for
fiscal years 1994 and thereafter. Any such proposed expenditure reductions
will be difficult to implement because of their size and the substantial
expenditure reductions already imposed on City operations in the past two
years.
Attaining a balanced budget is also dependent upon the City's ability to
market its securities successfully in the public credit markets. The City's
financing program for fiscal years 1993 through 1996 contemplates capital
spending of $15.7 billion of general obligation bonds primarily to reconstruct
and rehabilitate the City's infrastructure and physical assets and to make
capital investments. A significant portion of such bond financing is used to
reimburse the City's general fund for capital expenditures already incurred.
In addition, the City issues revenue and tax anticipation notes to finance its
seasonal working capital requirements. The terms and success of projected
public sales of City general obligation bonds and notes will be subject to
prevailing market conditions at the time of the sale, and no assurance can be
given that the credit markets will absorb the projected amounts of public bond
and note sales. In addition, future developments concerning the City and
public discussion of such developments, the City's future financial needs and
other issues may affect the market for outstanding City general obligation
bonds and notes. If the City were unable to sell its general obligation bonds
and notes, it would be prevented from meeting its planned operating and
capital expenditures.
The City Comptroller, the staff of the Control Board, the Office of the State
Deputy Comptroller for the City of New York (the "OSDC") and other agencies
and public officials have issued reports and made public statements which,
among other things, state that projected revenues may be less and future
expenditures may be greater than those forecast in the financial plan. In
addition, the Control Board and other agencies have questioned whether the
City has the capacity to generate sufficient revenues in the future to meet
the
31
<PAGE>
costs of its expenditure increases and to provide necessary services. It is
reasonable to expect that such reports and statements will continue to be
issued and to engender public comment.
Fiscal Years 1990, 1991 and 1992. The City achieved balanced operating results
as reported in accordance with GAAP for the 1992 fiscal year. During the 1990
and 1991 fiscal years, the City implemented various actions to offset a
projected budget deficit of $3.2 billion for the 1991 fiscal year, which
resulted from declines in City revenue sources and increased public assistance
needs due to the recession. Such actions included $822 million of tax
increases and substantial expenditure reductions.
The quarterly modification to the City's financial plan submitted to the
Control Board on May 7, 1992 (the "1992 Modification") projected a balanced
budget in accordance with GAAP for the 1992 fiscal year after taking into
account a discretionary transfer of $455 million to the 1993 fiscal year as
the result of a 1992 fiscal year surplus. In order to achieve a balanced
budget for the 1992 fiscal year, during the 1991 fiscal year, the City
proposed various actions for the 1992 fiscal year to close a projected gap of
$3.3 billion in the 1992 fiscal year.
On November 19, 1992, the City submitted to the Control Board the Financial
Plan for the 1993 through 1996 fiscal years, which is a modification to a
financial plan submitted to the Control Board on June 11, 1992 (the "June
Financial Plan"), and which relates to the City, the Board of Education
("BOE") and the City University of New York ("CUNY"). The 1993-1996 Financial
Plan projects revenues and expenditures of $29.9 billion each for the 1993
fiscal year balanced in accordance with GAAP.
During the 1992 fiscal year, the City proposed various actions to close a
previously projected gap of approximately $1.2 billion for the 1993 fiscal
year. The gap-closing actions for the 1993 fiscal year proposed during the
1992 fiscal year and outlined in the City's June Financial Plan included $489
million of discretionary transfers from the 1992 fiscal year. The 1993-1996
City Financial Plan includes additional gap-closing actions to offset an
additional potential $81 million budget gap.
The 1993-1996 Financial Plan also sets forth projections and outlines a
proposed gap-closing program for the 1994 through 1996 fiscal years to close
projected budget gaps of $1.7 billion, $2.0 billion and $2.6 billion,
respectively, in the 1994 through 1996 fiscal years. On February 9, 1993, the
City issued a modification to the 1993-1996 Financial Plan (the "February
Modification"). The February Modification projects budget gaps for fiscal
years 1994, 1995 and 1996 of $2.1 billion, $3.1 billion and $3.8 billion,
respectively.
Various actions proposed in the 1993-1996 Financial Plan are subject to
approval by the Governor and approval by the State Legislature, and the
proposed increase in Federal aid is subject to approval by Congress and the
President. The State Legislature has in the past failed to approve certain
proposals similar to those that the 1993-1996 Financial Plan assumes will be
approved by the State Legislature during the 1993 fiscal year. If these
actions cannot be implemented, the City will be required to take other actions
to decrease expenditures or increase revenues to maintain a balanced financial
plan.
On March 9, 1993, OSDC issued a report on the February Modification. The
report expressed concern that the budget gaps projected for fiscal years 1994
through 1996 are the largest the City has faced at this point in the financial
planning cycle in at least a decade, and concluded that the February
Modification represented a step backward in the City's efforts to bring
recurring revenues into line with recurring expenditures.
The City is a defendant in a significant number of lawsuits. Such litigation
includes, but is not limited to, actions commenced and claims asserted against
the City arising out of alleged constitutional violations, torts, breaches of
contracts and other violations of law and condemnation proceedings. While the
ultimate outcome and fiscal impact, if any, on the proceedings and claims are
not currently predictable, adverse
32
<PAGE>
determination in certain of them might have a material adverse effect upon the
City's ability to carry out its Financial Plan. As of June 30, 1992, legal
claims in excess of $341 billion were outstanding against the City for which
the City estimated its potential future liability to be $2.3 billion.
As of the date of this prospectus, Moody's rating of the City's general
obligation bonds stood at Baa1 and S&P's rating stood at A-. On February 11,
1991, Moody's had lowered its rating from A.
On June 30, 1993 in confirming the Baa1 rating, Moody's noted that:
The recent trend of declining reliance on [one-shot revenues] is notable,
and it is too early to predict that the increased reliance on one-shots
in the fiscal 1994 budget represents the beginning of a continuing upward
movement in the use of one-shots._._._. Moody's recognized in February of
1991, when the [C]ity's rating was lowered from A to Baa1, that the
[C]ity faced structural budgetary imbalances which were unlikely to be
cured in the near term. Moody's continues to expect the [C]ity's progress
toward achieving structural balance to be slow and uneven, but that the
[C]ity will be diligent and prudent in closing each year's gap, factors
which are consistent with the Baa1 rating level.
On March 30, 1993, S&P affirmed its rating with a negative outlook, stating
that:
The City's key credit factors are marked by a high and growing debt
burden, and taxation levels that are relatively high, but stable. The
City's economy is broad-based and diverse, but currently is in prolonged
recession, with slow growth prospects for the foreseeable future.
The rating outlook is negative, reflecting the continued fiscal pressure
facing the City, driven by continued weakness in the local economy,
rising spending pressures for education and labor costs of city
employees, and increasing costs associated with rising debt for capital
construction and repair.
The current financial plan for the City assumes substantial increases in
aid from national and state governments. Maintenance of the current
rating, and stabilization of the rating outlook, will depend on the
City's success in realizing budgetary aid from these governments, or
replacing those revenues with ongoing revenue-raising measures or
spending reductions under the City's control. However, increased reliance
on non-recurring budget balancing measures that would support current
spending, but defer budgetary gaps to future years, would be viewed by
S&P as detrimental to New York City's single-'A-' rating.
Previously, Moody's had raised its rating to A in May, 1988, to Baa1 in
December, 1985, to Baa in November, 1983 and to Ba1 in November, 1981. S&P had
raised its rating to A-in November, 1987, to BBB+ in July, 1985 and to BBB in
March, 1981.
On May 9, 1990, Moody's revised downward its rating on outstanding City
revenue anticipation notes from MIG-1 to MIG-2 and rated the $900 million
Notes then being sold MIG-2. On April 30, 1991 Moody's confirmed its MIG-2
rating for the outstanding revenue anticipation notes and for the $1.25
billion in notes then being sold. On April 29, 1991, S&P revised downward its
rating on City revenue anticipation notes from SP-1 to SP-2.
As of December 31, 1992, the City and MAC had, respectively, $20.3 billion and
$4.7 billion of outstanding net long-term indebtedness.
Certain Agencies of the State have faced substantial financial difficulties
which could adversely affect the ability of such Agencies to make payments of
interest on, and principal amounts of, their respective bonds. The
difficulties have in certain instances caused the State (under so-called
"moral obligation" provisions which are non-binding statutory provisions for
State appropriations to maintain various debt service reserve
33
<PAGE>
funds) to appropriate funds on behalf of the Agencies. Moreover, it is
expected that the problems faced by these Agencies will continue and will
require increasing amounts of State assistance in future years. Failure of the
State to appropriate necessary amounts or to take other action to permit those
Agencies having financial difficulties to meet their obligations could result
in a default by one or more of the Agencies. Such default, if it were to
occur, would be likely to have a significant adverse effect on investor
confidence in, and therefore the market price of, obligations of the
defaulting Agencies. In addition, any default in payment on any general
obligation of any Agency whose bonds contain a moral obligation provision
could constitute a failure of certain conditions that must be satisfied in
connection with Federal guarantees of City and MAC obligations and could thus
jeopardize the City's long-term financing plans.
As of September 30, 1992, the State reported that there were eighteen Agencies
that each had outstanding debt of $100 million or more. These eighteen
Agencies had an aggregate of $62.2 billion of outstanding debt, including
refunding bonds, of which, the State was obligated under lease-purchase,
contractual obligation or moral obligation provisions on $25.3 billion.
The State is a defendant in numerous legal proceedings pertaining to matters
incidental to the performance of routine governmental operations. Such
litigation includes, but is not limited to, claims asserted against the State
arising from alleged torts, alleged breaches of contracts, condemnation
proceedings and other alleged violations of State and Federal laws. Included
in the State's outstanding litigation are a number of cases challenging the
constitutionality or the adequacy and effectiveness of a variety of
significant social welfare programs primarily involving the State's mental
hygiene programs. Adverse judgments in these matters generally could result in
injunctive relief coupled with prospective changes in patient care which could
require substantial increased financing of the litigated programs in the
future.
The State is also engaged in a variety of claims wherein significant monetary
damages are sought. Actions commenced by several Indian nations claim that
significant amounts of land were unconstitutionally taken from the Indians in
violation of various treaties and agreements during the eighteenth and
nineteenth centuries. The claimants seek recovery of approximately six million
acres of land as well as compensatory and punitive damages.
The U.S. Supreme Court on March 30, 1993, referred to a Special Master for
determination of damages on an action by the State of Delaware to recover
certain unclaimed dividends, interest and other distributions made by issuers
of securities held by New York based-brokers incorporated in Delaware. (State
of Delaware v. State of New York.) The State had taken such unclaimed property
under its Abandoned Property Law. The State expects that it may pay a
significant amount in damages during fiscal year 1993-94 but it has indicated
that it has sufficient funds on hand to pay any such award, including funds
held in contingency reserves. The State's 1993-94 Financial Plan includes the
establishment of a $100 million contingency reserve fund which would be
available to fund such an award which some reports have estimated at $100-$800
million.
In Schulz v. State of New York, commenced May 24, 1993 ("Schulz 1993"),
petitioners have challenged the constitutionality of mass transportation
bonding programs of the New York State Thruway Authority and the Metropolitan
Transportation Authority. On May 24, 1993, the Supreme Court, Albany County,
temporarily enjoined the State from implementing those bonding programs. In
previous actions Mr. Schulz and others have challenged on similar grounds
bonding programs for the New York State Urban Development Corporation and the
New York Local Government Assistance Corporation. While there have been no
decisions on the merits in such previous actions, by an opinion dated May 11,
1993, the New York Court of Appeals held in a proceeding commenced on April
29, 1991 in the Supreme Court, Albany County
34
<PAGE>
(Schulz v. State of New York), that petitioners had standing as voters under
the State Constitution to bring such action.
Petitioners in Schulz 1993 have asserted that issuance of bonds by the two
Authorities is subject to approval by statewide referendum. At this time there
can be no forecast of the likelihood of success on the merits by the
petitioners, but a decision upholding this constitutional challenge could
restrict and limit the ability of the State and its instrumentalities to
borrow funds in the future. The State has not indicated that the temporary
injunction issued by the Supreme Court in this action will have any immediate
impact on its financial condition or interfere with projects requiring
immediate action.
Adverse developments in the foregoing proceedings or new proceedings could
adversely affect the financial condition of the State in the future.
Certain localities in addition to New York City could have financial problems
leading to requests for additional State assistance. Both the Revised
1992-1993 State Financial Plan and the recommended 1993-94 State Financial
Plan includes a significant reduction in State aid to localities in such
programs as revenue sharing and aid to education from projected base-line
growth in such programs. It is expected that such reductions will result in
the need for localities to reduce their spending or increase their revenues.
The potential impact on the State of such actions by localities is not
included in projections of State revenues and expenditures in the State's
1993-94 fiscal year.
Fiscal difficulties experienced by the City of Yonkers ("Yonkers") resulted in
the creation of the Financial Control Board for the City of Yonkers (the
"Yonkers Board") by the State in 1984. The Yonkers Board is charged with
oversight of the fiscal affairs of Yonkers. Future actions taken by the
Governor or the State Legislature to assist Yonkers could result in allocation
of State resources in amounts that cannot yet be determined.
Municipalities and school districts have engaged in substantial short-term and
long-term borrowings. In 1991, the total indebtedness of all localities in the
State was approximately $31.6 billion, of which $16.8 billion was debt of New
York City (excluding $6.7 billion in MAC debt). State law requires the
Comptroller to review and make recommendations concerning the budgets of those
local government units other than New York City authorized by State law to
issue debt to finance deficits during the period that such deficit financing
is outstanding. Fifteen localities had outstanding indebtedness for deficit
financing at the close of their fiscal year ending in 1991. In 1992, an
unusually large number of local government units requested authorization for
deficit financings. According to the Comptroller, ten local government units
have been authorized to issue deficit financing in the aggregate amount of
$131.1 million.
Certain proposed Federal expenditure reductions could reduce, or in some cases
eliminate, Federal funding of some local programs and accordingly might impose
substantial increased expenditure requirements on affected localities. If the
State, New York City or any of the Agencies were to suffer serious financial
difficulties jeopardizing their respective access to the public credit
markets, the marketability of notes and bonds issued by localities within the
State, including bonds in Insured New York Long-Intermediate Value Trust,
could be adversely affected. Localities also face anticipated and potential
problems resulting from certain pending litigation, judicial decisions, and
long-range economic trends. The longer-range potential problems of declining
urban population, increasing expenditures, and other economic trends could
adversely affect certain localities and require increasing State assistance in
the future.
35
<PAGE>
NEW YORK TAX STATUS
In the opinion of Tanner, Propp & Farber, special counsel to the Fund for New
York tax matters, under existing New York law:
Insured New York Series 5 is not an association taxable as a corporation and
the income of the Insured New York Series 5 will be treated as the income of
the Unitholders under the income tax laws of the State and City of New York.
Individuals who reside in New York State or City will not be subject to State
and City tax on interest income which is exempt from Federal income tax under
section 103 of the Internal Revenue Code of 1986 and derived from obligations
of New York State or a political subdivision thereof, although they will be
subject to New York State and City tax with respect to any gains realized when
such obligations are sold, redeemed or paid at maturity or when any such Units
are sold or redeemed.
For a discussion of Federal tax matters relating to distributions from the
Trust Fund, see "Federal Tax Status."
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 accrued original issue
discount, if any. 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.
Exemption of interest and accrued original issue discount on any
Municipal Bonds for Federal income tax purposes does not necessarily
result in tax-exemption under the laws of the several states as such laws
vary with respect to the taxation of such securities and in many states
all or part of such interest and accrued issue discount may be subject to
tax.
Each Unitholder is considered to be the owner of a pro rata portion of
each asset of the respective 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
36
<PAGE>
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 date the
Unitholders pay for their Units to the extent that such interest accrued
on such Bonds during the period from the Unitholder's settlement date to
the date such Bonds are delivered to a Trust 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 basis of each Unit and of each Municipal Bond which was issued
with original issue discount must be increased by the amount of the
accrued original issue discount and the basis of each Unit and of the
Unitholder's interest in each Municipal Bond which was acquired by such
Unitholder at a premium must be reduced by the annual amortization of
Municipal Bond premium. The tax cost reduction requirements of the Code
relating to amortization of bond premium may, under some circumstances,
result in the Unitholder realizing a taxable gain when his Units are sold
or redeemed for an amount equal to his original cost.
Any insurance proceeds paid under individual policies obtained by issuers
of Bonds which represent maturing interest on defaulted obligations held
by the Trustee will be excludable from Federal gross income if, and to
the same extent as, such interest would have been so excludable if paid
in the normal course by the issuer of the defaulted obligations provided
that, at the time such policies are purchased, the amounts paid for such
policies are reasonable, customary and consistent with the reasonable
expectation that the issuer of the obligations, rather than the insurer,
will pay debt service on the obligations.
Sections 1288 and 1272 of the Code provide a complex set of rules governing
the accrual of original issue discount. These rules provide that original
issue discount accrues either on the basis of a constant compound interest
rate or ratably over the term of the Municipal Bond, depending on the date the
Municipal Bond was issued. In addition, special rules apply if the purchase
price of a Municipal Bond exceeds the original issue price plus the amount of
original issue discount which would have previously accrued based upon its
issue price (its "adjusted issue price"). 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). 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. 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
37
<PAGE>
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 and tax-exempt original
issue discount. 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 or to purchase goods or services for personal
consumption). Also, under Section 265 of the Code, certain financial
institutions that acquire Units would generally not be able to deduct any of
the interest expense attributable to ownership of such Units. Investors with
questions regarding these issues should consult with their tax advisers.
In the case of certain Municipal Bonds in the Trust Funds, the opinions of
bond counsel indicate that interest on such Municipal Bonds received by a
"substantial user" of the facilities being financed with the proceeds of these
Municipal Bonds or persons related thereto, for periods while such Municipal
Bonds are held by such a user or related person, will not be excludable from
Federal gross income, although interest on such Municipal Bonds received by
others would be excludable from Federal gross income. "Substantial user" and
"related person" are defined under U.S. Treasury Regulations. Any person who
believes that he or she may be a "substantial user" or a "related person" as
so defined should contact his or her tax adviser.
In the case of corporations, the alternative tax rate applicable to long-term
capital gains is 35% effective for long-term capital gains realized in taxable
years beginning on or after January 1, 1993. For taxpayers other than
corporations, net capital gains are subject to a maximum marginal stated tax
rate of 28%. However, it should be noted that legislative proposals are
introduced from time to time that affect tax rates and could affect relative
differences at which ordinary income and capital gains are taxed. Under the
Code, taxpayers must disclose to the Internal Revenue Service the amount of
tax-exempt interest earned during the year.
Under existing law, the Trust Funds are not associations taxable as a
corporation and the income of the Trust Funds will be treated as the income of
the Unitholders under the income tax laws of the State of Missouri.
All statements of law in the Prospectus concerning exclusion from gross income
for Federal, state or other tax purposes are the opinions of counsel and are
to be so construed.
At the respective times of 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.
38
<PAGE>
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 or the adjusted base
amount must include 50% or 85%, respectively, of his or her Social Security
benefits in gross income whether or not he or she receives any tax-exempt
interest. A taxpayer whose modified adjusted gross income (after inclusion of
tax-exempt interest) does not exceed the base amount need not include any
Social Security benefits in gross income.
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.
39
<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 NATIONAL TRUST
- -------------------------
Monthly
- ---------
<TABLE>
<CAPTION>
ESTIMATED
ESTIMATED ESTIMATED PURCHASED ESTIMATED
INTEREST PRINCIPAL INTEREST TOTAL
DATES DISTRIBUTION DISTRIBUTION REBATE DISTRIBUTION
<S> <C> <C> <C> <C> <C>
- ------------------------------------------ ------------- ------------- ------------- -------------
Nov 15, 1994 $ 2.01 $ 2.01
Dec 15, 1994 to Jan 15, 2017 $ 5.02 $ 5.02
Feb 15, 2017 $ 4.75 $ 100.00 $ 104.75
Mar 15, 2017 to Jun 15, 2017 $ 4.48 $ 4.48
Jul 15, 2017 $ 4.48 $ 100.00 $ 104.48
Aug 15, 2017 to May 15, 2022 $ 4.02 $ 4.02
Jun 15, 2022 $ 4.02 $ 75.00 $ 79.02
Jul 15, 2022 $ 3.65 $ 82.50 $ 86.15
Aug 15, 2022 $ 3.23 $ 3.23
Sep 15, 2022 $ 3.03 $ 75.00 $ 78.03
Oct 15, 2022 to Dec 15, 2022 $ 2.85 $ 2.85
Jan 15, 2023 $ 2.72 $ 50.00 $ 52.72
Feb 15, 2023 to Jul 15, 2023 $ 2.59 $ 2.59
Aug 15, 2023 $ 2.59 $ 50.00 $ 52.59
Sep 15, 2023 to Jul 15, 2024 $ 2.35 $ 2.35
Aug 15, 2024 $ 2.35 $ 92.50 $ 94.85
Sep 15, 2024 to Jun 15, 2025 $ 1.90 $ 1.90
Jul 15, 2025 $ 1.90 $ 100.00 $ 101.90
Aug 15, 2025 to Jun 15, 2026 $ 1.36 $ 1.36
Jul 15, 2026 $ 1.36 $ 75.00 $ 76.36
Aug 15, 2026 to Jun 15, 2027 $ 1.00 $ 1.00
Jul 15, 2027 $ 0.73 $ 100.00 $ 100.73
Aug 15, 2027 to Dec 15, 2032 $ 0.47 $ 0.47
Jan 15, 2033 $ 0.47 $ 100.00 $ 100.47
</TABLE>
INSURED CALIFORNIA TRUST
- ---------------------------
Monthly
- ---------
<TABLE>
<CAPTION>
ESTIMATED
ESTIMATED ESTIMATED PURCHASED ESTIMATED
INTEREST PRINCIPAL INTEREST TOTAL
DATES DISTRIBUTION DISTRIBUTION REBATE DISTRIBUTION
<S> <C> <C> <C> <C> <C>
- ------------------------------------------ ------------- ------------- ------------- -------------
Nov 15, 1994 $ 1.90 $ 1.90
Dec 15, 1994 to Jun 15, 2004 $ 4.76 $ 4.76
Jul 15, 2004 $ 4.76 $ 200.00 $ 204.76
Aug 15, 2004 to Jul 15, 2017 $ 3.71 $ 3.71
Aug 15, 2017 $ 3.71 $ 130.72 $ 134.43
Sep 15, 2017 to Jun 15, 2018 $ 3.13 $ 3.13
Jul 15, 2018 $ 3.13 $ 98.04 $ 101.17
Aug 15, 2018 to Jul 15, 2019 $ 2.68 $ 2.68
Aug 15, 2019 $ 2.68 $ 212.42 $ 215.10
Sep 15, 2019 to May 15, 2020 $ 1.64 $ 1.64
Jun 15, 2020 $ 1.64 $ 52.29 $ 53.93
Jul 15, 2020 to Jun 15, 2021 $ 1.42 $ 1.42
Jul 15, 2021 $ 1.42 $ 98.04 $ 99.46
Aug 15, 2021 to Jan 15, 2024 $ 1.03 $ 1.03
Feb 15, 2024 $ 1.03 $ 81.70 $ 82.73
Mar 15, 2024 to Sep 15, 2024 $ 0.63 $ 0.63
Oct 15, 2024 $ 0.63 $ 130.72 $ 131.35
</TABLE>
40
<PAGE>
INSURED MISSOURI TRUST
- -------------------------
Monthly
- ---------
<TABLE>
<CAPTION>
ESTIMATED
ESTIMATED ESTIMATED PURCHASED ESTIMATED
INTEREST PRINCIPAL INTEREST TOTAL
DATES DISTRIBUTION DISTRIBUTION REBATE DISTRIBUTION
<S> <C> <C> <C> <C> <C>
- ------------------------------------------ ------------- ------------- ------------- -------------
Nov 15, 1994 $ 1.95 $ 1.95
Dec 15, 1994 to Sep 15, 2012 $ 4.86 $ 4.86
Oct 15, 2012 $ 4.86 $ 81.97 $ 86.83
Nov 15, 2012 to Jan 15, 2013 $ 4.45 $ 4.45
Feb 15, 2013 $ 4.45 $ 98.36 $ 102.81
Mar 15, 2013 to Jul 15, 2013 $ 4.01 $ 4.01
Aug 15, 2013 $ 4.01 $ 81.97 $ 85.98
Sep 15, 2013 to May 15, 2016 $ 3.63 $ 3.63
Jun 15, 2016 $ 3.63 $ 163.93 $ 167.56
Jul 15, 2016 to Apr 15, 2020 $ 2.80 $ 2.80
May 15, 2020 $ 2.39 $ 163.93 $ 166.32
Jun 15, 2020 to Feb 15, 2022 $ 2.01 $ 2.01
Mar 15, 2022 $ 1.58 $ 163.93 $ 165.51
Apr 15, 2022 to May 15, 2022 $ 1.18 $ 1.18
Jun 15, 2022 $ 1.18 $ 245.90 $ 247.08
</TABLE>
INSURED NEW YORK TRUST
- ---------------------------
Monthly
- ---------
<TABLE>
<CAPTION>
ESTIMATED
ESTIMATED ESTIMATED PURCHASED ESTIMATED
INTEREST PRINCIPAL INTEREST TOTAL
DATES DISTRIBUTION DISTRIBUTION REBATE DISTRIBUTION
<S> <C> <C> <C> <C> <C>
- ------------------------------------------ ------------- ------------- ------------- -------------
Nov 15, 1994 $ 1.67 $ 1.67
Dec 15, 1994 to Jun 15, 2007 $ 4.18 $ 4.18
Jul 15, 2007 $ 4.11 $ 32.05 $ 36.16
Aug 15, 2007 to Jun 15, 2008 $ 4.04 $ 4.04
Jul 15, 2008 $ 4.04 $ 310.90 $ 314.94
Aug 15, 2008 $ 2.76 $ 2.76
Sep 15, 2008 $ 2.40 $ 160.26 $ 162.66
Oct 15, 2008 to Jan 15, 2009 $ 2.06 $ 2.06
Feb 15, 2009 $ 2.06 $ 160.26 $ 162.32
Mar 15, 2009 to Aug 15, 2010 $ 1.45 $ 1.45
Sep 15, 2010 $ 1.03 $ 176.28 $ 177.31
Oct 15, 2010 to Sep 15, 2012 $ 0.63 $ 0.63
Oct 15, 2012 $ 0.63 $ 160.26 $ 160.89
</TABLE>
41
<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 (4) to "Essential Information." Unitholders 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
A-3
<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." For risks specific to the individual Trusts, see "Risk Factors" for
each Trust.
RISK FACTORS
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
A-5
<PAGE>
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 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.
A-6
<PAGE>
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. 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
A-7
<PAGE>
affected by the ability of the airlines to meet their obligations under the
use agreements. The air transport industry is experiencing significant
variations in earnings and traffic, due to increased competition, excess
capacity, increased costs, deregulation, traffic constraints and other
factors, and several airlines are experiencing severe financial difficulties.
The Sponsor cannot predict what effect these industry conditions may have on
airport revenues which are dependent for payment on the financial condition of
the airlines and their usage of the particular airport facility. Similarly,
payment on 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 Trusts may have been acquired at a market discount
from par value at maturity. The coupon interest rates on the discount bonds at
the time they were purchased and deposited in the Trusts were lower than the
current market interest rates for newly issued bonds of comparable rating and
type. If such interest rates for newly issued comparable bonds increase, the
market discount of previously issued bonds will become greater, and if such
interest rates for newly issued comparable bonds decline, the market discount
of previously issued bonds will be reduced, other things being equal.
Investors should also note that the value of bonds purchased at a market
discount will increase in value faster than bonds purchased at a
A-8
<PAGE>
market premium if interest rates decrease. Conversely, if interest rates
increase, the value of bonds purchased at a market discount will decrease
faster than bonds purchased at a market premium. In addition, if interest
rates rise, the prepayment risk of higher yielding, premium bonds and the
prepayment benefit for lower yielding, discount bonds will be reduced. A
discount bond held to maturity will have a larger portion of its total return
in the form of taxable income and capital gain and less in the form of
tax-exempt interest income than a comparable bond newly issued at current
market rates. See "Federal Tax Status." Market discount attributable to
interest changes does not indicate a lack of market confidence in the issue.
Neither the Sponsor nor the Trustee shall be liable in any way for any
default, failure or defect in any of the Municipal Bonds.
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 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
A-9
<PAGE>
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.
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 June 30, 1994, the total capital and
surplus of Financial Guaranty was approximately $850,000,000. 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 all 50 states and the District of Columbia.
The information relating to Financial Guaranty contained above has been
furnished by such corporation. The financial information contained herein with
respect to such corporation is unaudited but appears in reports or other
materials filed with state insurance regulatory authorities and is subject to
audit and review by such authorities. No representation is made herein as to
the accuracy or adequacy of such information or as to the absence of material
adverse changes in such information subsequent to the date thereof but the
Sponsor is not aware that the information herein is inaccurate or incomplete.
A-10
<PAGE>
AMBAC Indemnity Corporation. AMBAC Indemnity Corporation ("AMBAC") is a
Wisconsin-domiciled stock insurance company, regulated by the Office of the
Commissioner of Insurance of the State of Wisconsin, and licensed to do
business in 50 states, the District of Columbia and the Commonwealth of Puerto
Rico, with admitted assets (unaudited) of approximately $1,988,000,000 and
statutory capital (unaudited) of approximately $1,148,000,000 as of March 31,
1994. 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 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 June 30, 1994, MBIA had admitted assets of $3.3 billion (unaudited),
total liabilities of $2.2 billion (unaudited), and total capital and surplus
of $1.1 billion (unaudited) 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
A-11
<PAGE>
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.
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") 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 June 30, 1994, Capital Guaranty had more than $13.7 billion in net
exposure outstanding (excluding defeased issues). The total statutory
policyholders' surplus and contingency reserve of Capital Guaranty was
$89,917,075 (unaudited) and the total admitted assets were $286,825,253
(unaudited) as reported to the Insurance Department of the State of Maryland
as of June 30, 1994.
A-12
<PAGE>
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, Moody's
Investors Service, Inc. 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 agency. See "Description of Municipal Bond Ratings."
These ratings should not be construed as an approval of the offering of the
Units by Moody's Investors Service, Inc. 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.
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.
A-13
<PAGE>
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
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 Muller Data Corporation 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.
A-14
<PAGE>
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 9.99 10 TO 14.99
--------------------- --------------------- ---------------------
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..... 2.0 2.041 2.7 2.775 2.8 2.881
<CAPTION>
15 OR MORE
---------------------
PERCENT OF PERCENT OF
OFFERING NET AMOUNT
NUMBER OF UNITS PRICE INVESTED
--------- -----------
<S> <C> <C>
1 to 9,999 Units.......... 4.90 % 5.152 %
10,000 to 24,999 Units.... 4.50 4.712
25,000 to 49,999 Units.... 4.30 4.493
50,000 to 99,999 Units.... 3.50 3.627
100,000 or more Units..... 3.00 3.093
</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:
<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-15
<PAGE>
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 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
A-16
<PAGE>
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 the
Insured National Trust for sale in all states and Units of the Insured State
Trusts 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 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
A-17
<PAGE>
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 9.99 10 TO 14.99 15 OR MORE
------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NUMBER OF UNITS DISCOUNT PER UNIT
------------------------------------------------------
1 to 9,999 Units................................... $0.20 $0.27 $0.28 $0.32
10,000 to 24,999 Units............................. $0.19 $0.25 $0.27 $0.32
25,000 to 49,999 Units............................. $0.18 $0.23 $0.26 $0.32
50,000 to 99,999 Units............................. $0.17 $0.22 $0.25 $0.25
100,000 or more Units.............................. $0.11 $0.17 $0.18 $0.20
</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.
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
A-18
<PAGE>
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 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
A-19
<PAGE>
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.
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.
A-20
<PAGE>
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.
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
A-21
<PAGE>
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 $.10 per Unit.
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";
A-22
<PAGE>
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.
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.
A-23
<PAGE>
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."
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. The Sponsor may at any time remove the Trustee,
with or without cause, and appoint a successor trustee as provided in the
Trust Agreements. Notice of such removal and appointment shall be mailed to
each Unitholder by the Sponsor. Upon execution of a written acceptance of such
appointment by such successor trustee, all the rights, powers, duties and
obligations of the original Trustee
A-24
<PAGE>
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 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
A-25
<PAGE>
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 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
A-26
<PAGE>
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
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, 29th Floor, Chicago, Illinois 60601, (800) 621-5024, is a service of
Kemper Securities, Inc., which is a wholly-owned subsidiary of Kemper
Financial Companies, Inc. which, in turn, is a wholly-owned subsidiary of
Kemper Corporation. The Sponsor acts as underwriter of a number of other
Kemper unit investment trusts and will act as underwriter of any other unit
investment trust products developed by the Sponsor in the future. As of
January 31, 1994, the total stockholder's equity of Kemper Securities, Inc.
was $261,673,436 (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.
A-27
<PAGE>
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 "Risk Factors 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-28
<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...................................... 7
Portfolios.................................... 9
Notes to Portfolios........................... 13
UNDERWRITING.................................... 14
REPORT OF INDEPENDENT CERTIFIED PUBLIC
ACCOUNTANTS................................... 16
STATEMENTS OF CONDITION......................... 17
RISK FACTORS AND STATE TAX
STATUS........................................ 18
FEDERAL TAX STATUS.............................. 36
ESTIMATED CASHFLOWS TO UNITHOLDERS.............. 40
DESCRIPTION OF MUNICIPAL BOND RATINGS........... A-1
PORTFOLIOS...................................... A-3
General Trust Information..................... A-5
Risk Factors.................................. A-5
INSURANCE ON THE PORTFOLIOS OF THE INSURED TRUST
FUNDS......................................... A-10
DISTRIBUTION REINVESTMENT....................... A-13
INTEREST, ESTIMATED LONG-TERM RETURN AND
ESTIMATED CURRENT RETURN...................... A-14
PUBLIC OFFERING OF UNITS........................ A-14
Public Offering Price......................... A-14
Purchased and Daily Accrued Interest.......... A-17
Comparison of Public Offering Price and
Redemption Price............................ A-17
Public Distribution of Units.................. A-17
Profits of Sponsor and Underwriters........... A-18
MARKET FOR UNITS................................ A-18
REDEMPTION...................................... A-19
Computation of Redemption Price............... A-20
UNITHOLDERS..................................... A-21
Ownership of Units............................ A-21
Distributions to Unitholders.................. A-21
Statements to Unitholders..................... A-22
Rights of Unitholders......................... A-23
INVESTMENT SUPERVISION.......................... A-23
ADMINISTRATION OF THE TRUSTS.................... A-24
The Trustee................................... A-24
The Evaluator................................. A-25
Amendment and Termination..................... A-25
Limitations on Liability...................... A-25
EXPENSES OF THE TRUSTS.......................... A-26
THE SPONSOR..................................... A-27
LEGAL OPINIONS.................................. A-28
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS........ A-28
</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 NATIONAL SERIES 13
INSURED CALIFORNIA SERIES 10
INSURED MISSOURI SERIES 2
INSURED NEW YORK SERIES 5
OCTOBER 12, 1994
KEMPER UNIT INVESTMENT TRUSTS
